<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1998 or
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission file number 0-23065
BRADLEY OPERATING LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 04-3306041
(State of Organization) (I.R.S. Identification No.)
40 Skokie Blvd., Northbrook, Illinois 60062
(Address of Registrant's Principal Executive Offices)
Registrant's telephone number, including area code; (847) 272-9800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
1
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
ASSETS ------------- -------------
<S> <C> <C>
Real estate investments-at cost $904,704 $626,247
Accumulated depreciation and amortization (53,741) (40,574)
-------- --------
Net real estate investments 850,963 585,673
Real estate investments held for sale 49,476 52,692
Other assets:
Cash and cash equivalents 3,283 4,747
Rents and other receivables, net of allowance for doubtful accounts
of $3,486 for 1998 and $2,438 for 1997 13,349 13,038
Investment in partnership 13,260 -
Deferred charges, net and other assets 17,982 12,641
-------- --------
Total assets $948,313 $668,791
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage loans 97,640 51,227
Unsecured notes payable 199,527 99,783
Line of credit 153,400 151,700
Accounts payable, accrued expenses and other liabilities 32,893 25,361
-------- --------
Total liabilities 483,460 328,071
-------- --------
Minority interest 971 770
-------- --------
Partners' capital:
General partner, common 356,387 318,845
General partner, preferred (liquidation preference $25.00 per unit) 86,882 -
Limited partners 20,613 21,105
Total partners' capital -------- --------
463,882 339,950
-------- --------
Total liabilities and partners' capital $948,313 $668,791
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Income:
Rental income $33,305 $24,033 $92,642 $69,922
Other income 634 451 1,693 1,093
------- ------- ------ -------
33,939 24,484 94,335 71,015
------- ------- ------ -------
Expenses:
Operations, maintenance and management 4,510 3,479 13,286 10,478
Real estate taxes 5,665 4,025 16,441 13,652
Mortgage and other interest 7,424 4,362 19,567 11,593
General and administrative 1,952 1,310 4,733 3,287
Depreciation and amortization 5,752 4,244 16,346 12,099
------- ------- ------ -------
25,303 17,420 70,373 51,109
------- ------- ------ -------
Income before equity in earnings of partnership and
net gain on sale of properties 8,636 7,064 23,962 19,906
Equity in earnings of partnership 247 - 247 -
Net gain on sale of properties 30,555 - 29,680 1,773
------- ------- ------ -------
Income before allocation to minority interest 39,438 7,064 53,889 21,679
Income allocated to minority interest (334) (24) (420) (70)
------- ------- ------ -------
Net income 39,104 7,040 53,469 21,609
Preferred unit distributions (1,096) - (1,096) -
------- ------- ------- -------
Net income attributable to common unit holders $38,008 $ 7,040 $52,373 $21,609
======= ======= ======= =======
Basic net income per common unit $1.51 $0.31 $2.10 $0.97
======= ======= ======= =======
Diluted net income per common unit $1.43 $0.31 $2.07 $0.96
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
General General
Partner, Partner, Limited
common preferred Partners Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $318,845 $ - $21,105 $339,950
Net income 6,468 - 398 6,866
Distributions on common units (8,442) - (484) (8,926)
Capital contributions 8,586 - - 8,586
Reallocation of partners' capital (652) - 652 -
GP Units issued upon redemption of LP Units 2,585 - (2,585) -
-------- ------- ------- --------
Balance at March 31, 1998 327,390 - 19,086 346,476
Net income 7,106 - 393 7,499
Distributions on common units (8,468) - (483) (8,951)
Capital contributions 1,617 - - 1,617
Reallocation of partners' capital (39) - 39 -
GP Units issued upon redemption of LP Units 7 - (7) -
-------- ------- ------- --------
Balance at June 30, 1998 327,613 - 19,028 346,641
Net income 36,961 - 2,143 39,104
Distributions on common units (8,479) - (482) (8,961)
Distributions on preferred units (1,096) - - (1,096)
Capital contributions 1,312 86,882 - 88,194
Reallocation of partners' capital 48 - (48) -
GP Units issued upon redemption of LP Units 28 - (28) -
-------- ------- ------- --------
Balance at September 30, 1998 $356,387 $86,882 $20,613 $463,882
======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 53,469 $ 21,609
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 16,346 12,099
Equity in earnings of partnership (247) -
Amortization of debt premiums net of discounts (176) -
Net gain on sale of properties (29,680) (1,773)
Income allocated to minority interest 420 70
Changes in operating assets and liabilities, net of the effect of the
Mid-America acquisition:
Increase in rents and other receivables (1,878) (2,791)
Increase in accounts payable, accrued expenses and other liabilities 6,879 177
Increase in deferred charges (1,022) (1,722)
--------- --------
Net cash provided by operating activities 44,111 27,669
--------- --------
Cash flows from investing activities:
Expenditures for real estate investments (160,639) (76,599)
Cash used for purchase of Mid-America (28,578) -
Expenditures for capital improvements (7,110) (6,431)
Cash distributions from partnership 350 -
Net proceeds from sale of properties 83,959 17,260
--------- --------
Net cash used in investing activities (112,018) (65,770)
--------- --------
Cash flows from financing activities:
Borrowings from line of credit 216,750 78,300
Payments under line of credit (215,050) (20,000)
Proceeds from issuance of unsecured notes payable 99,051 -
Expenditures for financing costs (6,222) (391)
Pay-off of secured mortgage loans (10,031) -
Distributions paid to common unit holders (26,838) (22,704)
Distributions paid to minority interest holders (219) (89)
Distributions paid to preferred unit holders (1,751) -
Capital contributions 11,515 404
Principal payments on mortgage loans (762) (477)
--------- --------
Net cash provided by financing activities 66,443 35,043
--------- --------
Net decrease in cash and cash equivalents (1,464) (3,058)
Cash and cash equivalents:
Beginning of period 4,747 7,462
--------- --------
End of period $ 3,283 $ 4,404
========= ========
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 15,663 $ 11,613
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Bradley Operating Limited Partnership (the "Operating Partnership") is the
entity through which Bradley Real Estate, Inc. (the "Company" or "Bradley"), the
General Partner and owner of an approximate 95% economic interest in the
Operating Partnership, conducts substantially all of its business and owns
(either directly or through subsidiaries) substantially all of its assets. The
accompanying interim financial statements have been prepared by the Operating
Partnership, without audit, and in the opinion of management reflect all normal
recurring adjustments necessary for a fair presentation of results for the
unaudited interim periods presented. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. It
is suggested that these condensed financial statements be read in conjunction
with the financial statements and the notes thereto for the fiscal year ended
December 31, 1997.
Interests in the Operating Partnership are evidenced by three classes of unit
holders, general partner "common" units owned by the Company as "GP Units," 8.4%
Series A Convertible Preferred units of limited partnership interest owned by
the general partner as "Preferred Units" (see Note 3) and limited partner
"common" units evidenced by "LP Units." The Partnership Agreement governing the
Operating Partnership contemplates that there will always be as many GP Units
and Preferred Units as there are shares of common stock and preferred stock of
the Company outstanding and that the Company will contribute to the Operating
Partnership the proceeds from all issues of common stock and preferred stock by
the Company. In addition, the holders of LP Units have the right, under certain
circumstances, to exchange their units for shares of common stock of the Company
on a one-for-one basis. Holders of GP Units and LP Units are referred to as
"common unit holders."
NOTE 2 - EARNINGS PER UNIT
Basic earnings per unit ("EPU") is computed by dividing income available to
common unit holders by the weighted average number of common units outstanding
for the period. Diluted EPU is computed by reflecting the potential dilution
that could occur if securities or other contracts to issue units were exercised
or converted into common units or resulted in the issuance of common units that
then shared in the earnings of the Operating Partnership. A reconciliation of
the numerator and denominator of the basic EPU computation to the numerator and
denominator of the diluted EPU computation, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Numerator Denominator Per unit Numerator Denominator Per unit
----------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPU:
Net income $52,373,000 24,996,108 $2.10 $21,609,000 22,372,142 $0.97
Effect of dilutive securities:
Dilutive options exercised - 48,338 - 31,527
Convertible preferred units 1,096,000 728,756 - -
----------- ---------- ----------- ----------
Diluted EPU:
Net income $53,469,000 25,773,202 $2.07 $21,609,000 22,403,669 $0.96
=========== ========== ===== =========== ========== =====
</TABLE>
For the nine months ended September 30, 1998 and 1997, options to purchase
153,500 shares of the Company's common stock at prices ranging from $21.25 to
$21.35 and 80,500 shares of common stock at prices ranging from $19.35 to $21.25
were outstanding during each of the respective periods but were not included in
the computation of diluted EPU because the options' exercise prices were greater
than the average market prices of the Company's common shares during those
periods.
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Numerator Denominator Per unit Numerator Denominator Per unit
----------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPU:
Net income $38,008,000 25,162,830 $1.51 $7,040,000 22,591,276 $0.31
Effect of dilutive securities:
Dilutive options exercised - 46,466 - 33,149
Convertible preferred units 1,096,000 2,162,504 - -
----------- ---------- ---------- -----------
Diluted EPU:
Net income $39,104,000 27,371,800 $1.43 $7,040,000 22,624,425 $0.31
=========== ========== ======== ========== =========== ========
</TABLE>
For the three months ended September 30, 1998 and 1997, options to purchase
153,500 shares of the Company's common stock at prices ranging from $21.25 to
$21.35 and 80,500 shares of common stock at prices ranging from $19.35 to $21.25
were outstanding during each of the respective quarters but were not included in
the computation of diluted EPU because the options' exercise prices were greater
than the average market prices of the Company's common shares during those
quarters.
NOTE 3 - MID-AMERICA MERGER AND ISSUANCE OF PREFERRED UNITS
On August 6, 1998, pursuant to an Agreement and Plan of Merger dated May 30,
1998, the Company completed the merger acquisition (the "Merger") of Mid-America
Realty Investments, Inc. ("Mid-America"). The Merger and the Merger Agreement
were approved by the stockholders of Mid-America at its special meeting of
stockholders held on August 5, 1998. Upon completion of the Merger, the Company
acquired Mid-America's 22 retail properties located primarily in the Midwest,
and succeeded to Mid-America's 50% general partner interest in Mid-America
Bethal Limited Partnership, a joint venture which owns two neighborhood shopping
centers and one enclosed mall.
Pursuant to the terms of the merger agreement each of the approximately
8,286,000 outstanding shares of Mid-America common stock were exchanged for 0.42
shares of a newly created 8.4% Series A Convertible Preferred Stock ("Series A
Preferred Stock"). The Series A Preferred Stock pays an annual dividend equal to
8.4% of the $25.00 liquidation preference and is convertible into shares of
Bradley's common stock at a conversion price of $24.49 per share, subject to
certain adjustments. At any time after five years, the Series A Preferred Stock
is redeemable at Bradley's option for $25.00 per share so long as the Bradley
common stock is trading at or above the conversion price. In connection with the
Merger, Bradley assumed all of Mid-America's outstanding liabilities and paid
certain transaction costs, making the total purchase price approximately $157
million. The merger was structured as a tax-free transaction and was treated as
a purchase for accounting purposes. Accordingly, the purchase price was
allocated to the assets purchased and the liabilities assumed based upon the
fair value at the date of acquisition. Following the Merger, the Company
contributed title to 15 of the properties it acquired from Mid-America and its
50% general partner interest in Mid-America Bethal Limited Partnership to the
Operating Partnership in exchange for approximately 3,480,210 Preferred Units
with substantially similar economic rights as the Series A Preferred Stock. The
Company holds title to the remaining seven properties acquired from Mid-America
and any proceeds therefrom for the benefit of the Operating Partnership. As a
consequence, the Operating Partnership has effectively acquired all of the
business and assets (subject to the liabilities) of Mid-America. The results of
operations of Mid-America have been included in the Operating Partnership's
consolidated financial statements from August 6, 1998.
The following table sets forth certain summary unaudited pro forma operating
data for the Operating Partnership as if the Merger had occurred as of January
1, 1998 and 1997 (dollars in thousands, except per unit data):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
Historical Pro Forma Historical Pro Forma
1998 1998 1997 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Total revenue $94,335 $107,756 $71,015 $88,433
Net income $52,373 $ 53,092 $21,609 $22,689
Basic net income per common unit $ 2.10 $ 2.12 $ 0.97 $ 1.01
Diluted net income per common unit $ 2.07 $ 2.05 $ 0.96 $ 1.01
</TABLE>
7
<PAGE>
The unaudited pro forma operating data is presented for comparative purposes
only and is not necessarily indicative of what the actual results of operations
would have been for the nine months ended September 30, 1998 and 1997, nor does
such data purport to represent the results to be achieved in future periods.
The Merger resulted in the following non-cash effect on the Operating
Partnership's consolidated balance sheet (dollars in thousands):
Assets acquired $(159,433)
Liabilities assumed 43,973
Preferred Units issued, net of costs 86,882
---------
Cash used for purchase of Mid-America $ (28,578)
=========
NOTE 4 - INVESTMENT IN PARTNERSHIP
In connection with the Merger acquisition of Mid-America, the Operating
Partnership succeeded to Mid-America's 50% general partner interest in Mid-
America Bethal Limited Partnership (renamed Bradley Bethal Limited Partnership),
a joint venture which owns two neighborhood shopping centers and one enclosed
mall. The enclosed mall is held for sale and is, therefore, not depreciated for
financial reporting purposes. In accordance with the purchase method of
accounting, the investment in the joint venture has been reflected on the
consolidated balance sheet of the Operating Partnership based upon the fair
value of the investment at the date of acquisition, and the Operating
Partnership's share of the results of operations of the Bethal partnership have
been included on the Operating Partnership's consolidated statement of income
from August 6, 1998. Summarized financial information for Bradley Bethal Limited
Partnership is as follows:
<TABLE>
<CAPTION>
Balance Sheet (dollars in thousands)
September 30, 1998
------------------
<S> <C>
Assets:
Cash $ 447
Real estate investments, net 25,549
Other assets 565
-------
Total assets $26,561
=======
Liabilities and Partners' Capital:
Accounts payable and other liabilities $ 41
Partners' capital 26,520
-------
Total liabilities and partners' capital $26,561
=======
Statement of Income (dollars in thousands)
For the period August 6, 1998
through September 30, 1998
-----------------------------
Total revenues $746
====
Net income $494
====
Equity in earnings of partnership $247
====
</TABLE>
NOTE 5 - SUPPLEMENTAL CASH FLOW DISCLOSURE
During the nine months ended September 30, 1998, 143,151 shares of the Company's
common stock were issued in exchange for an equivalent number of LP Units. Also
during the nine months ended September 30, 1998, the acquisitions of two
shopping centers included the aggregate assumption of $19,492,000 of non-
recourse mortgage indebtedness.
NOTE 6 - PROPERTY ACQUISITIONS AND DISPOSITIONS
During the first three quarters of 1998, in addition to the properties acquired
in connection with the Merger, the Operating Partnership completed the
acquisitions of nineteen shopping centers located in Illinois, Indiana, Kansas,
Kentucky, Michigan, Missouri, Ohio, and Wisconsin aggregating 2.6 million square
feet for a total purchase price of approximately $178.9 million, increasing the
total number of properties with ownership interests by the Operating Partnership
to 95, located in 16 states, aggregating over 15 million square feet of
8
<PAGE>
rentable space. The Operating Partnership has several additional property
acquisitions under contract; however, there can be no assurance that any such
property acquisitions will be completed.
In May 1998, the Operating Partnership sold a 46,000 square-foot property
located in Iowa for a net sales price of $1.9 million, resulting in a provision
for loss of $875,000 in the first quarter. On July 31, 1998, Bradley Financing
Partnership, of which the Operating Partnership owns a 99% general partner
interest and whose remaining 1% interest is owned by the Company, completed the
sale of One North State, a 640,000 square-foot mixed-use property located in the
"loop" area of downtown Chicago, Illinois for a net sales price of approximately
$82.1 million, resulting in a gain on sale of approximately $30.6 million for
financial reporting purposes. The net proceeds from the sales were used to
reduce outstanding borrowings under the line of credit.
NOTE 7 - REAL ESTATE INVESTMENTS HELD FOR SALE
As of September 30, 1998, the Operating Partnership was holding for sale seven
non-core properties, consisting of four enclosed malls and three community
shopping centers, all acquired in connection with the Merger acquisition of Mid-
America. The net book value of these properties, $49.5 million, has been
classified on the consolidated balance sheet as "Real estate investments held
for sale." The Operating Partnership expects to use the net proceeds from such
sale or sales to reduce outstanding indebtedness under the line of credit with
the expectation that the increased borrowing capacity under the line of credit
would be used to acquire additional shopping centers (or partial interests in
real estate assets through participation in joint venture transactions) within
the target market and that are more in keeping with the Operating Partnership's
grocery-anchored community shopping center focus. Properties held for sale are
not depreciated for financial reporting purposes.
NOTE 8 - ISSUANCE OF UNSECURED NOTES PAYABLE
On January 28, 1998, the Operating Partnership issued $100 million, 7.2% ten-
year unsecured Notes maturing January 15, 2008. The issue was rated "BBB-" by
Standard & Poor's Investment Services and "Baa3" by Moody's Investors Service.
The effective interest rate on the unsecured Notes is approximately 7.611%.
Proceeds from the offering were used to reduce outstanding borrowings under the
line of credit.
NOTE 9 - ISSUANCE OF THE COMPANY'S COMMON STOCK
On February 18, 1998, the Company issued 392,638 shares of common stock to a
unit investment trust at a price based upon the then market value of $20.375 per
share. Net proceeds from the offering of approximately $7.6 million were
contributed to the Operating Partnership and were used to reduce outstanding
borrowings under the line of credit. During 1998, the Company has also issued an
aggregate of 197,301 shares under its Dividend Reinvestment and Stock Purchase
Plan, providing net proceeds of approximately $4.0 million to the Operating
Partnership.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On August 6, 1998, pursuant to an Agreement and Plan of Merger dated May 30,
1998, the Company completed the merger acquisition (the "Merger") of Mid-America
Realty Investments, Inc. ("Mid-America"). The Merger and the Merger Agreement
were approved by the stockholders of Mid-America at its special meeting of
stockholders held on August 5, 1998. Upon completion of the Merger, the Company
acquired Mid-America's 22 retail properties located primarily in the Midwest,
and succeeded to Mid-America's 50% general partner interest in Mid-America
Bethal Limited Partnership, a joint venture which owns two neighborhood shopping
centers and one enclosed mall.
Pursuant to the terms of the merger agreement each of the approximately
8,286,000 outstanding shares of Mid-America common stock were exchanged for 0.42
shares of a newly created 8.4% Series A Convertible Preferred Stock ("Series A
Preferred Stock"). The Series A Preferred Stock pays an annual dividend equal to
8.4% of the $25.00 liquidation preference and is convertible into shares of
Bradley's common stock at a conversion price of $24.49 per share, subject to
certain adjustments.
Following the Merger, the Company contributed title to 15 of the properties it
acquired from Mid-America and its 50% general partner interest in Mid-America
Bethal Limited Partnership to the Operating Partnership in exchange for
approximately 3,480,210 Preferred Units with substantially similar economic
rights as the Series A Preferred Stock. The Company holds title to the remaining
seven properties acquired from Mid-America and any proceeds therefrom for the
benefit of the Operating Partnership. As a consequence, the Operating
Partnership has effectively acquired all of the business and assets (subject to
the liabilities) of Mid-America. Under the purchase method of accounting, the
results of operations of Mid-America have been included in the Company's
consolidated financial statements from the date of acquisition.
Throughout 1997, the Company acquired 25 shopping centers at an aggregate cost
of approximately $189.3 million, and completed the sales of four shopping
centers for net sales proceeds of approximately $25.3 million. During the first
three quarters of 1998, in addition to the properties acquired in connection
with the Merger, the Operating Partnership acquired 19 shopping centers at an
aggregate cost of approximately $178.9 million, and completed the sales of two
properties for net sales proceeds of approximately $83.9 million, consisting of
the following:
Acquisition and Disposition Activities:
<TABLE>
<CAPTION>
Acquisitions Date
------------------------------------- -----------------
<S> <C>
Kings Plaza, Richmond, IN February 13, 1998
Sagamore Park, West Lafayette, IN March 5, 1998
Oak Creek Centre, Oak Creek, WI March 13, 1998
Courtyard Shopping Center, Burton, MI March 31, 1998
Midtown Mall, Ashland, KY March 31, 1998
Redford Plaza, Redford, MI April 10, 1998
Butterfield Plaza, Libertyville, IL May 13, 1998
Camelot Center, Louisville, KY May 13, 1998
Dixie Plaza, Louisville, KY May 13, 1998
Plainview Village, Louisville, KY May 13, 1998
Bartonville Square, Peoria, IL May 28, 1998
Garden Plaza, Franklin, WI June 10, 1998
Fox River Plaza, Burlington, WI June 23, 1998
Lincoln Park Plaza, New Haven, IN June 26, 1998
Mid-America (25 properties) August 6, 1998
Midtown Plaza, Shawnee, KS August 19, 1998
Ellisville Square, Ellisville, MO August 21, 1998
Doubletree Plaza, Winfield, IN August 28, 1998
Clocktower Plaza, Lima, OH September 1, 1998
Salem Consumer Square, Dayton, OH September 4, 1998
Dispositions Date
------------------------------------ ------------------
Holiday Plaza, Cedar Falls, IA May 14, 1998
One North State, Chicago, IL July 31, 1998
</TABLE>
10
<PAGE>
For the nine months ended September 30, 1998, net income attributable to common
unit holders increased $30,764,000 from $21,609,000 in 1997 to $52,373,000 in
1998. For the three months ended September 30, 1998, net income attributable to
common unit holders increased $30,968,000 from $7,040,000 in 1997 to $38,008,000
in 1998. Results for the nine month period in 1998 included a net gain on sale
of properties of $29,680,000 compared with a net gain on the sale of properties
in 1997 of $1,773,000. Results for the three month period in 1998 included a
net gain on sale of properties of $30,555,000. Income before the net gain on
sale and before income allocated to minority interest, increased $4,303,000, or
22%, from $19,906,000 for the nine months ended September 30, 1997 to
$24,209,000 for the nine months ended September 30, 1998. Income before the net
gain on sale, and before income allocated to minority interest, increased
$1,819,000, or 26%, from $7,064,000 for the quarter ended September 30, 1997 to
$8,883,000 for the quarter ended September 30, 1998. Distributions on the newly
created Preferred Units for the period August 6, 1998 through September 30,
1998 amounted to $1,096,000. Basic net income per common unit increased from
$0.97 per unit for the nine months ended September 30, 1997 to $2.10 per unit
for the same period in 1998, and increased from $0.31 per unit for the quarter
ended September 30, 1997 to $1.51 per unit for the same period in 1998. The
computation of diluted net income per common unit resulted in a $0.08 per share
reduction in the Operating Partnership's basic net income per common unit from
$1.51 per unit to $1.43 per unit for the quarter ended September 30, 1998 but
had no effect on the Operating Partnership's basic net income per common unit
for the quarter ended September 30, 1997. The computation of diluted net income
per common unit resulted in a $0.03 reduction in the Operating Partnership's
basic net income per common unit from $2.10 to $2.07 for the nine months ended
September 30, 1998, and resulted in a $0.01 reduction from $0.97 per unit to
$0.96 per unit for the nine months ended September 30, 1997.
Results of operations for properties consolidated for financial reporting
purposes and held throughout both nine month periods ended September 30, 1998
and 1997 included 29 properties. Results of operations for properties
consolidated for financial reporting purposes and purchased or sold subsequent
to January 1, 1997 through September 30, 1998 included 69 properties.
Property Specific Revenues and Expenses (in thousands of dollars):
<TABLE>
<CAPTION>
Nine months ended
September 30, Properties
--------------------------- Acquisitions/ held both
1998 1997 Difference dispositions periods
------------ ------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Rental income $92,642 $69,922 $22,720 $22,535 $ 185
Operations, maintenance and
management 13,286 10,478 2,808 2,875 (67)
Real estate taxes 16,441 13,652 2,789 2,436 353
Depreciation and amortization 16,346 12,099 4,247 2,869 1,378
</TABLE>
Results of operations for properties consolidated for financial reporting
purposes and held throughout both three month periods ended September 30, 1998
and 1997 included 36 properties. Results of operations for properties
consolidated for financial reporting purposes and purchased or sold subsequent
to July 1, 1997 through September 30, 1998 included 62 properties.
<TABLE>
<CAPTION>
Three months ended
September 30, Properties
--------------------------- Acquisitions/ held both
1998 1997 Difference dispositions periods
------------ ------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Rental income $33,305 $24,033 $9,272 $9,135 $ 137
Operations, maintenance and
management 4,510 3,479 1,031 1,175 (144)
Real estate taxes 5,665 4,025 1,640 701 939
Depreciation and amortization 5,752 4,244 1,508 1,203 305
</TABLE>
Results attributable to acquisition and disposition activities:
Rental income increased from $69,922,000 in the first three quarters of 1997 to
$92,642,000 in the first three quarters of 1998, and from $24,033,000 for the
three months ended September 30, 1997 to $33,305,000 for the three months ended
September 30, 1998. Approximately $27,773,000 of the increase for the nine
month period was attributable to the Operating Partnership's acquisition
activities, partially offset by $5,238,000 attributable to disposition
activities, primarily One North State. Approximately $12,366,000 of the
increase for the three month period was attributable to the Operating
Partnership's acquisition activities, including $3,792,000 for properties
acquired in the Merger acquisition of Mid-America, partially offset by
$3,231,000 attributable to disposition activities.
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<PAGE>
Operations, maintenance and management expense increased from $10,478,000 in the
first three quarters of 1997 to $13,286,000 in the first three quarters of 1998.
Operations, maintenance and management expenses incurred for properties acquired
during the nine month period, net of such expenses eliminated for properties
disposed, of approximately $2,875,000 accounted for substantially all of the
increase. For the three month period ended September 30, 1998, operations,
maintenance and management expense increased $1,031,000 to $4,510,000 from
$3,479,000 for the same period in 1997, despite incurring a net increase of
approximately $1,175,000 due to acquisition and disposition activities.
Real estate taxes increased $2,789,000 from $13,652,000 in the first three
quarters of 1997 to $16,441,000 in the first three quarters of 1998. Real
estate taxes increased $1,640,000 from $4,025,000 for the three month period
ended September 30, 1997, to $5,665,000 for the same period in 1998.
Approximately $2,436,000 of the increase during the first three quarters of 1998
compared with 1997, and approximately $701,000 of the increase for the third
quarter of 1998 compared with the third quarter of 1997, was attributable to
acquisition and disposition activities.
Depreciation and amortization increased from $12,099,000 in the first three
quarters of 1997 to $16,346,000 in the first three quarters of 1998.
Approximately $2,869,000 of the increase was attributable to the Operating
Partnership's acquisition and disposition activities, and $1,378,000 was
attributable to properties held both periods. For the three month period ended
September 30, 1998, depreciation and amortization increased to $5,752,000 from
$4,244,000 for the same period in 1997, of which $1,203,000 resulted from
acquisition and disposition activities, and $305,000 was attributable to
properties held throughout both periods.
Results for properties fully operating throughout both periods:
On May 22, 1998, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ruled under Issue No. 98-9, Accounting for Contingent
Rent in Interim Financial Periods, that despite the fact that the achievement of
a future specified sales target of a lessee may be considered as probable and
reasonably estimable at some earlier point in the year, a lessor should defer
recognition of contingent rental income until such specified targets are met.
The pronouncement was effective May 23, 1998. Previously, the Operating
Partnership recognized percentage rental income each period based on reasonable
estimates of tenant sales. Largely due to the implementation of EITF No. 98-9,
percentage rental income for properties held throughout both nine and three
month periods ended September 30, 1998 decreased approximately $427,000 and
$416,000, respectively.
Although the increase in rental income for properties held throughout both nine
month periods ended September 30, 1998 and 1997 was less than 1% (including the
aforementioned reduction for percentage rental income), decreases in rental
income of $441,000 at Heritage Square, $422,000 at Sun Ray Shopping Center, and
$216,000 at High Point Centre were offset by increases of $529,000 at Westview
Center, $365,000 at Grandview Plaza, and $217,000 at Rivercrest Shopping Center.
The decrease at Heritage Square was caused by an expected vacancy of Montgomery
Ward in the first quarter of 1998, following the tenant's declaration of
bankruptcy in 1997. A 62,000 square-foot lease with Carson Pirie Scott was
signed in the third quarter of 1998, expected to commence in the second half of
1999, to replace approximately one half the space previously occupied by
Montgomery Ward. The decrease at Sun Ray Shopping Center was primarily due to a
$172,500 termination payment received in the second quarter of 1997 combined
with a reduction in real estate tax recoveries of $269,000 resulting from the
negotiation of real estate tax reductions of $369,000 compared with the prior
year. The decrease in rental income at High Point Centre was due to the
termination of a lease with T. J. Maxx in the second quarter of 1998. Increases
in real estate tax recoveries at Westview Center and Rivercrest Shopping Center
resulted from an increase in real estate taxes of $355,000 and $193,000,
respectively, due to the negotiation of tax reductions at these centers in the
prior year nine month period. The increase in rental income at Westview Center
is also attributable to a 60,000 square-foot lease with Waccamaw Pottery
commencing in the fourth quarter of 1997. The increase at Grandview Plaza was
primarily due to the commencement of a 30,000 square-foot lease with OfficeMax
in the fourth quarter of 1997.
For the three month period, the aforementioned decrease in percentage rental
income, and decreases in rental income at Heritage Square and High Point Centre
were more than offset by increases at Westview Center, Grandview Plaza, and
Rivercrest Shopping Center. However, an additional decrease during the three
month period at Har Mar Mall of $186,000, resulting from the expected vacancy of
HomePlace in August, which declared bankruptcy in January 1998, kept the
increase in rental income below 1%. While lease negotiations are ongoing for a
replacement tenant, a reduction in rental income at this property is expected in
future quarters. An increase in rental income is expected at the Commons of
Crystal Lake, where a 30,000 square-foot lease was signed with Toys 'R' Us in
the third quarter of 1998, expected to commence in the first quarter of 1999, to
occupy half of the space formerly occupied by Jewel, which had a grand opening
for their newly expanded 71,000 square-foot space at this center in the third
quarter of 1998. Rental income is expected to increase at Rollins Crossing due
to a 71,000 square-foot lease with Regal Cinema commencing in October 1998, and
at Sun Ray Shopping Center due to a newly signed lease for 26,000 square feet
with Bally's Total Fitness, expected to commence in the first half of 1999.
12
<PAGE>
The remaining increase in real estate taxes of $353,000, or 4%, for the nine
month period ended September 30, 1998, compared with the same period in 1997,
and $939,000, or 34%, for the three months ended September 30, 1998, compared
with the same period in 1997, was primarily attributable to the aforementioned
increases at Westview Center of $355,000 and $500,000 for the nine and three
month periods, respectively, and increases at Rivercrest Shopping Center of
$193,000 and $254,000 for the nine and three month periods, respectively, both
due to the negotiation of tax reductions at these centers in the third quarter
of 1997, partially offset by the aforementioned reduction of real estate taxes
at Sun Ray Shopping Center of $369,000 during the nine month period due to an
abatement received in the first quarter of 1998.
The remaining increases in depreciation and amortization of $1,378,000 and
$305,000 for the nine and three month periods, respectively, ended September 30,
1998, compared with the same periods in 1997, were primarily a result of new
construction and leasing at Grandview Plaza, Village Shopping Center, Westview
Center, and Har Mar Mall, combined with the write-off of costs in previous
quarters for HomePlace at Har Mar Mall and Montgomery Ward at Heritage Square.
Non-Property Specific Revenues and Expenses:
Other income increased from $1,093,000 in the first three quarters of 1997 to
$1,693,000 in the first three quarters of 1998, and from $451,000 for the three
months ended September 30, 1997 to $634,000 for the three months ended September
30, 1998. Other income contains both property specific and non-property
specific income; however, the increases are primarily attributable to property
specific sources, including, for the nine month period, an increase in sales tax
sharing revenue generated at Rollins Crossing and insurance proceeds in excess
of the net book value of assets destroyed and costs incurred for a fire at
Grandview Plaza in 1997, and, for both the nine and three month periods, other
income generated at Spring Mall, a shopping center acquired in December 1997, as
well as from various other shopping centers acquired during 1997 and 1998.
Mortgage and other interest expense increased to $19,567,000 for the nine months
ended September 30, 1998, from $11,593,000 during the same period in 1997, and
to $7,424,000 from $4,362,000 during the three month period ended September 30,
1998, compared with the same period in 1997. In November 1997, the Operating
Partnership prepaid a $100 million, 7.23% REMIC mortgage note primarily with the
proceeds of an offering of $100 million, 7% seven-year unsecured Notes due
November 15, 2004. Interest on the REMIC mortgage note for the nine and three
month periods of 1997 amounted to $5,425,000 and $1,808,000, respectively. In
addition, in January 1998, the Operating Partnership issued $100 million, 7.2%
ten-year unsecured Notes maturing January 15, 2008. Proceeds from the offering
were used to reduce outstanding borrowings under the line of credit, which had
been increased throughout the prior year primarily to fund acquisition activity.
Interest incurred on the unsecured Notes for the nine and three month periods of
1998 amounted to $10,530,000 and $3,701,000. A higher weighted average balance
outstanding on the line of credit during the first three quarters of 1998
compared with the first three quarters of 1997, partially offset by a lower
weighted average interest rate, resulted in increases in interest expense on the
line of credit of $1,091,000 and $235,000 for the nine and three month periods,
respectively. Mortgage debt assumed upon the acquisitions of Spring Mall,
Southgate Shopping Center, and Elk Park in December 1997, and Fox River Plaza in
June 1998, and Salem Consumer Square in September 1998, as well as eight
mortgage notes assumed in connection with the Merger acquisition of Mid-America
contributed to increases in interest expense of $1,725,000 and $917,000 for the
nine and three month periods, respectively. The Operating Partnership's
weighted average interest rate decreased to 7.21% for the third quarter of 1998
from 7.52% for the third quarter of 1997.
General and administrative expense increased from $3,287,000 during the nine
months ended September 30, 1997, to $4,733,000 during the nine months ended
September 30, 1998, and from $1,310,000 for the three months ended September 30,
1997, to $1,952,000 for the three months ended September 30, 1998. The
increases are primarily a result of the growth of the Operating Partnership,
including increases in salaries for additional personnel and franchise taxes and
related fees for a larger equity base and expanded geographic market. Further,
the increased focus on acquisition activity involves costs incurred in the
evaluation process which are non-recoverable and charged to general and
administrative expense in the case of acquisitions that are not consummated.
During the third quarter of 1998, several potential property acquisitions were
abandoned, resulting in a charge to general and administrative expense of
approximately $200,000. The potential acquisitions were abandoned as a result
of a softening in the equity capital markets and general decrease in liquidity
in the debt capital markets, as the Operating Partnership decided to reevaluate
the utilization of capital resources and protect its liquidity. Additionally,
the Operating Partnership had historically capitalized portions of salaries of
certain internal personnel dedicated to the acquisition of properties on a
successful efforts basis allocated to completed acquisitions. On March 19,
1998, the EITF ruled under Issue No. 97-11, Accounting for Internal Costs
Relating to Real Estate Property Acquisitions, that internal costs of
identifying and acquiring operating properties should be expensed as incurred.
The pronouncement was effective March 19, 1998.
The equity in earnings of partnership of $247,000 during the three and nine
month periods ended September 30, 1998, consists of the Operating Partnership's
50% general partner interest in Bradley Bethal Limited Partnership, a
partnership interest assumed in connection with the Merger acquisition of Mid-
America. The equity in earnings comprises 50% of the operations of the Bethal
partnership from the date of the Merger.
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<PAGE>
The income allocated to minority interest represents the net income allocated to
the Company's 1% ownership interest in Bradley Financing Partnership, a
partnership owning six properties (including One North State), of which the
Operating Partnership owns a 99% general partner interest and whose remaining 1%
interest is owned by the Company. The increase in the income allocated to
minority interest during the three and nine month periods ended September 30,
1998 compared with the same periods in 1997, is primarily attributable to the
allocation to the Company of its interest in the $30,555,000 net gain on the
sale of One North State in the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
The Operating Partnership funds operating expenses and distributions primarily
from operating cash flows, although its bank line of credit may also be used for
these purposes. The Operating Partnership funds acquisitions and capital
expenditures primarily from the line of credit and, to a lesser extent,
operating cash flows, as well as through the issuance of LP Units to
contributors of properties acquired. The Operating Partnership may also acquire
properties through capital contributions by the Company of proceeds from the
issuance by the Company of additional equity securities. Additionally, the
Operating Partnership may dispose of certain non-core properties, reinvesting
the proceeds from such dispositions into properties with better growth potential
and that are more consistent with the Operating Partnership's strategic focus.
In addition, the Operating Partnership may acquire partial interests in real
estate assets through participation in joint venture transactions.
The Operating Partnership focuses its investment activities on community and
neighborhood shopping centers primarily located in the Midwestern United States
anchored by regional and national grocery store chains. The Operating
Partnership will continue to seek acquisition opportunities of individual
properties and property portfolios and of private and public real estate
entities in both primary and secondary Midwest markets, where management can
utilize its extensive experience in shopping center renovation, expansion, re-
leasing and re-merchandising to achieve long-term cash flow growth and favorable
investment returns. Additionally, the Operating Partnership may engage in
development activities, either directly or through contractual relationships
with independent development companies, to develop community and neighborhood
shopping centers in selected Midwest markets, where value can be created from
new developments more effectively than from acquisitions of existing shopping
center properties.
As of September 30, 1998, financial liquidity was provided by $3,283,000 in cash
and cash equivalents and by the Operating Partnership's unused balance on the
line of credit of $46,600,000. Management is in the process of increasing the
availability on the line of credit to $250 million from $200 million, which is
expected to provide additional liquidity to the Operating Partnership. The
remaining terms under the line of credit, including interest rate clauses,
covenants, and the maturity date, are expected to remain substantially the same
as those under the current line of credit facility. In addition, the Company
has an effective "shelf" registration statement under which it may issue up to
$201,412,000 in equity securities and the Operating Partnership has an
additional "shelf" registration statement under which it may issue up to
$400,000,000 in unsecured, non-convertible investment grade debt securities.
The "shelf" registration statements provide the Company and the Operating
Partnership with the flexibility to issue additional equity or debt securities
from time to time when management determines that market conditions and the
opportunity to utilize the proceeds from the issuance of such securities are
favorable. During the third quarter of 1998, the Operating Partnership
implemented a Medium-Term Note Program providing the Operating Partnership with
the added flexibility of issuing Medium-Term Notes due nine months or more from
date of issue in small amounts in an aggregate principal amount of up to $150
million from time to time using the debt "shelf" registration in an efficient
and expeditious manner.
The mortgage debt outstanding at September 30, 1998 consisted of fixed-rate
notes totaling $97,640,000 with a weighted average interest rate of 7.52%
maturing at various dates through 2016. In September 1998, approximately
$10,031,000 of mortgage indebtedness, with an interest rate of 9.875%, was paid-
off upon maturity with cash provided by the line of credit. Short-term
liquidity requirements include debt service payments due within one year.
Scheduled principal amortization of mortgage debt totaled $762,000 during the
nine months ended September 30, 1998, with another $563,000 scheduled principal
amortization due for the remainder of the year. Management currently expects to
fund such debt service requirements with operating cash flow and the line of
credit.
Operating Activities
Net cash flows provided by operating activities increased to $44,111,000 during
the first three quarters of 1998, from $27,669,000 during the same period in
1997. The increase is primarily due to the growth of the Operating
Partnership's portfolio, from interests in 34 properties at January 1, 1997, to
95 properties at September 30, 1998.
Funds from operations ("FFO") increased $7,315,000, or 23% from $31,365,000 to
$38,680,000 for the nine months ended September 30, 1998, compared with the same
period in 1997, and $2,214,000, or 20%, from $11,099,000 to $13,313,000 for the
three
14
<PAGE>
months ended September 30, 1998, compared with the same period in 1997. The
Operating Partnership generally considers FFO to be a relevant and meaningful
supplemental measure of the performance of an equity REIT because it is
predicated on a cash flow analysis, contrasted with net income, a measure
predicated on generally accepted accounting principles which gives effect to
non-cash items such as depreciation. FFO, as defined by the National Association
of Real Estate Investment Trusts ("NAREIT"), and as followed by the Operating
Partnership, represents net income (computed in accordance with generally
accepted accounting principles), excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships. Adjustments for
unconsolidated partnerships are calculated to reflect FFO on the same basis. In
computing FFO, the Operating Partnership does not add back to net income the
amortization of costs incurred in connection with the Operating Partnership's
financing activities or depreciation of non-real estate assets, but does add
back to net income significant non-recurring events that materially distort the
comparative measurement of company performance over time. FFO does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles and should not be considered as an alternative to cash
flow as a measure of liquidity. Since the definition of FFO is a guideline,
computation of FFO may vary from one REIT to another. FFO is not necessarily
indicative of cash available to fund cash needs.
Investing Activities
Net cash flows from investing activities decreased to a use of cash of
$112,018,000 during the first three quarters of 1998, from a use of cash of
$65,770,000 during the same period of 1997.
During the first three quarters of 1998, in addition to the properties acquired
in connection with the Merger acquisition of Mid-America, the Operating
Partnership completed the acquisitions of nineteen shopping centers located in
Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Ohio and Wisconsin
aggregating 2.6 million square feet for a total purchase price of approximately
$178,900,000. Also, during the first three quarters of 1998, the Operating
Partnership completed the sales of a 640,000 square-foot mixed-use property
located in the "loop" area of downtown Chicago, Illinois for a net sales price
of approximately $82,090,000, and a 46,000 square-foot shopping center located
in Iowa, for a net sales price of approximately $1,869,000.
Financing Activities
Net cash flows provided by financing activities increased to $66,443,000 during
the first three quarters of 1998, from $35,043,000 during the same period in
1997. Distributions to common and preferred unit holders as well as to the
minority interest (treated as a reduction in cash flows from financing
activities in the Operating Partnership's financial statements) were $28,808,000
in the first three quarters of 1998, and $22,793,000 in the first three quarters
of 1997.
The Merger acquisition of Mid-America was financed through the issuance by the
Company of approximately 3.5 million shares of Series A Preferred Stock with a
$25.00 liquidation value, the assumption of Mid-America's liabilities including
approximately $66 million of debt of which $28 million was prepaid at close, and
the payment of certain transaction costs, followed by the contribution by the
Company to the Operating Partnership of the Company's interest in such assets
and liabilities in exchange for an equal number of Preferred Units with
substantially similar economic rights as the Series A Preferred Stock.
Of the nineteen additional shopping centers acquired during the first three
quarters of 1998, seventeen were acquired with cash from financing provided by
the unsecured bank line of credit. Two shopping centers were acquired with cash
provided by the unsecured bank line of credit and the assumption of $19,492,000
in non-recourse mortgage indebtedness.
On January 28, 1998, the Operating Partnership issued $100 million, 7.2% ten-
year unsecured Notes maturing January 15, 2008 from a "shelf" registration filed
in September 1997. The January issue was rated "BBB-" by Standard & Poor's
Investment Services ("Standard & Poor's") and "Baa3" by Moody's Investors
Service ("Moody's"). The effective interest rate on the unsecured Notes is
approximately 7.611%. Proceeds from the offering were used to reduce
outstanding borrowings under the line of credit.
On February 18, 1998, the Company issued 392,638 shares of common stock to a
unit investment trust at a price based upon the then market value of $20.375 per
share from a "shelf" registration filed in May 1997. During 1998, the Company
has also issued an aggregate of 197,301 shares under its Dividend Reinvestment
and Stock Purchase Plan. Net proceeds from these issuances of approximately
$7,600,000 and $4,022,000, respectively, were contributed to the Operating
Partnership and were used to reduce outstanding borrowings under the line of
credit.
Capital Strategy
As of September 30, 1998, the Operating Partnership was holding for sale seven
non-core properties, consisting of four enclosed malls and three community
shopping centers, all acquired in connection with the Merger acquisition of Mid-
America. The net book value of
15
<PAGE>
these properties, $49.5 million, has been classified on the consolidated balance
sheet as "Real estate investments held for sale." The Operating Partnership
expects to use the net proceeds from such sale or sales to reduce outstanding
indebtedness under the line of credit with the expectation that the increased
borrowing capacity under the line of credit would be used to acquire additional
shopping centers (or partial interests in real estate assets through
participation in joint venture transactions) within the target market and that
are more in keeping with the Operating Partnership's grocery-anchored community
shopping center focus. Although the spread between the yield generated by the
four enclosed malls and the immediate and ultimate redeployment of the sales
proceeds may be dilutive to earnings in the near term, management believes the
proceeds can be better invested in properties with higher growth potential and
risk adjusted returns.
Management believes that the Operating Partnership's recent growth and operating
performance have enhanced its and the Company's ability to further raise both
equity and debt capital in the public markets at such time as management
determines that market conditions and the opportunity to utilize the proceeds
for the issuance of securities are favorable. As indicated above, the Operating
Partnership has positioned itself to take advantage of favorable opportunities
by increasing the dollar amount of debt securities that it may issue pursuant to
a "shelf" registration statement and by implementing a Medium-Term Note Program
providing the Operating Partnership with the added flexibility of issuing
Medium-Term Notes due nine months or more from date of issue in small amounts
in an aggregate principal amount of up to $150 million from time to time using
the debt "shelf" registration in an efficient and expeditious manner. However, a
recent softening in the equity capital markets and general reduction in
liquidity in the debt capital markets has limited the Company's and the
Operating Partnership's ability to raise new capital from external sources. As a
result, the Operating Partnership is evaluating various joint venture
alternatives in order to conserve liquidity while taking advantage of favorable
investment opportunities and alternative sources of investment capital. In
addition, the Operating Partnership is seeking to increase the availability
under its line of credit from $200 to $250 million, further increasing its
liquidity which the Operating Partnership believes is prudent given the
difficult capital markets environment. The Company and the Operating Partnership
will continue to judiciously use their flexibility in evaluating investment
opportunities in order to maximize value to their share owners and partners.
Year 2000 Issues
The statements under this caption include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
Many existing computer software programs and operating systems were designed
such that the year 1999 is the latest year for which many computer systems will
be able to process dates accurately. In the conduct of its own operations, the
Operating Partnership relies on equipment manufacturers and commercial computer
software primarily provided by independent software vendors, and has undertaken
an assessment of its vulnerability to the so-called "Year 2000 issue" with
respect to its equipment and computer systems.
The Operating Partnership has undertaken a five-step program in order to achieve
Year 2000 readiness including:
. Awareness - Education involving all levels of Operating Partnership
personnel regarding Year 2000 implications.
. Inventory - Creating a checklist and conducting surveys to identify Year
2000 compliance issues in all systems, including both mechanical and
information systems. The surveys were also designed to identify critical
outside parties such as banks, tenants, suppliers and other parties with
whom the Operating Partnership does a significant amount of business, for
purposes of determining potential exposure in the event such parties are
not Year 2000 compliant.
. Assessment - Based upon the results of the inventory and surveys, assessing
the nature of identified Year 2000 issues and developing strategies to
bring the Operating Partnership's systems into substantial compliance with
respect to Year 2000.
. Correction and Testing - Implementing the strategy developed during the
assessment phase.
. Implementation - Incorporating repaired or replaced systems into the
Operating Partnership's systems environment.
The program, which is ongoing, has yielded the following conclusions:
With respect to its potential exposure to information technology systems,
including the Operating Partnership's accounting and lease management systems,
the Operating Partnership believes that such commercial software is either Year
2000 compliant or expected to be Year 2000 compliant no later than December 31,
1998. The assessment was based upon formal and informal communications with
software vendors and literature supplied with certain software. The Operating
Partnership has incurred minimal costs associated with bringing its information
technology systems to be Year 2000 compliant, and based on communications with
software providers, the Operating Partnership does not expect to incur
significant costs to become fully Year 2000 compliant itself.
16
<PAGE>
In the operation of its properties, the Operating Partnership has acquired
equipment with embedded technology such as microcontrollers which operate
heating, ventilation and air conditioning systems ("HVAC"), fire alarms,
security systems, telephones and other equipment utilizing time-sensitive
technology. The Operating Partnership has substantially completed its evaluation
of its potential exposure to such non-information technology systems and does
not expect to incur significant costs to become Year 2000 compliant.
The Operating Partnership is in the process of surveying tenants, suppliers and
other parties with whom the Operating Partnership does a significant amount of
business to identify the potential exposure in the event such parties are not
Year 2000 compliant in a timely manner. At this time, the Operating Partnership
is not aware of any party that is anticipating a material Year 2000 compliance
issue. Although the investigations and assessments of possible Year 2000 issues
are in a preliminary stage, the Operating Partnership does not anticipate a
material impact on its business, operations or financial condition even if one
or more parties is not Year 2000 compliant in a timely manner due to the number
and nature of the Operating Partnership's diverse tenant base, and because the
Operating Partnership does not rely on a concentration of suppliers and other
parties to conduct its business.
Although the Operating Partnership is aware that it may not, in fact, be Year
2000 compliant upon the year 2000, at this time the Operating Partnership has
not adopted a contingency plan for the conduct of its own operations because the
Operating Partnership expects to be Year 2000 compliant in advance of the year
2000. However, the Operating Partnership will continue to monitor its progress
and state of readiness, and will be prepared to adopt a contingency plan with
respect to areas in which evidence arises that it may not become Year 2000
compliant in sufficient time. With respect to its tenants, suppliers and other
parties with whom the Operating Partnership conducts business, the Operating
Partnership does not yet have sufficient information to identify the types of
problems it may encounter in the event these third parties are not Year 2000
complaint. As information is obtained that may indicate such parties may not
become Year 2000 compliant in sufficient time, the Operating Partnership is
prepared to develop appropriate contingency plans, if the effect of such non-
compliance is anticipated to have a significant effect on the Operating
Partnership.
FORWARD-LOOKING STATEMENTS
Statements made or incorporated in this Form 10-Q include "forward-looking"
statements. Forward-looking statements include, without limitation, statements
containing the words "anticipates", "believes", "expects", "intends", "future",
and words of similar import which express management's belief, expectations or
intentions regarding the Operating Partnership's future performance or future
events or trends. Reliance should not be placed on forward-looking statements
because they involve known and unknown risks, uncertainties and other factors,
which may cause actual results, performance or achievements of the Operating
Partnership to differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking statements. Certain
factors that might cause such a difference include, but are not limited to, the
following: Real estate investment considerations, such as the effect of economic
and other conditions in general and in the Midwestern United States in
particular; the financial viability of the Operating Partnership's tenants; the
continuing availability of retail center acquisitions and development
opportunities in the Midwest on favorable terms; the availability of equity and
debt capital in the public markets; the need to renew leases or relet space upon
the expiration of current leases; and the financial flexibility to refinance
debt obligations when due.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
In connection with the Merger, the Company issued approximately
3,480,210 shares of 8.4% Series A Preferred Stock, as to which
the Company filed a Form 8-A registration statement dated July 9,
1998 under Section 12(b) of the Securities Exchange Act of 1934
("1934 Act") and whose terms are described in the Company's
Registration Statement on Form S-4 (Registration No. 333-57125)
filed under the Securities Act of 1933 on June 18, 1998, which
description is incorporated herein by reference. Except to the
extent the Company is required by the terms of the Series A
Preferred Stock to make periodic or liquidating distributions
with respect to the Series A Preferred Stock prior to making
periodic or liquidating distributions with respect to Common
Stock, the issuance of the Series A Preferred Stock does not
materially limit or qualify the rights of holders of Common Stock
(the Company believing that the voting rights and conversion
rights of the Series A Preferred stock do not limit or qualify
rights of holders of Common Stock). Following the Merger, the
Company contributed title to 15 of the properties it acquired
from Mid-America and its 50% general partner interest in Mid-
America Bethal Limited Partnership to the Operating Partnership
in exchange for approximately 3,480,210 Preferred Units with
substantially similar economic rights as the Series A Preferred
Stock. These Preferred Units have not been registered under the
1934 Act and, except to the extent the Operating Partnership is
required to make periodic or liquidating distributions with
respect to the Preferred Units prior to making periodic or
liquidating distributions with respect to the common LP Units,
the issuance of the Preferred Units does not materially limit or
qualify the rights of holders of common LP Units.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The following Form 8-K Reports were filed by the registrant
during the period July 1, 1998 through September 30, 1998:
1) July 31, 1998 (filed August 11, 1998), reporting in Item 2.
and in Item 7., the consummation of the merger acquisition
of Mid-America Realty Investments, Inc. and the disposition
of One North State property.
2) September 28, 1998 (filed September 29, 1998), reporting in
Item 5., the filing by the Operating Partnership a
Prospectus Supplement to the Partnership's Prospectus dated
May 14, 1998, for the commencement of a Medium-Term Note
Program which provides that the Operating Partnership may
offer and sell from time to time its Medium-Term Notes due
nine months or more from date of issue in an aggregate
principal amount of up to $150 million.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: November 13, 1998
Bradley Operating Limited Partnership
Registrant
By: /s/ Thomas P. D'Arcy
-------------------------------------
Thomas P. D'Arcy
Chairman and CEO
By: /s/ Irving E. Lingo, Jr.
-------------------------------------
Irving E. Lingo, Jr.
Chief Financial Officer
19
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,283
<SECURITIES> 0
<RECEIVABLES> 16,835
<ALLOWANCES> 3,486
<INVENTORY> 0
<CURRENT-ASSETS> 34,614
<PP&E> 954,180
<DEPRECIATION> 53,741
<TOTAL-ASSETS> 948,313
<CURRENT-LIABILITIES> 32,893
<BONDS> 450,567
0
0
<COMMON> 0
<OTHER-SE> 464,853
<TOTAL-LIABILITY-AND-EQUITY> 948,313
<SALES> 33,939
<TOTAL-REVENUES> 33,939
<CGS> 0
<TOTAL-COSTS> 10,175
<OTHER-EXPENSES> 7,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,424
<INCOME-PRETAX> 38,008
<INCOME-TAX> 0
<INCOME-CONTINUING> 38,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,008
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.43
</TABLE>
