<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, 1999 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)
Maryland 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
--- ---
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS:
<S> <C> <C>
Real estate investments - at cost $977,930 $936,465
Accumulated depreciation and amortization (75,395) (59,196)
-------- --------
Net real estate investments 902,535 877,269
Real estate investments held for sale 30,138 46,492
Other assets:
Rents and other receivables, net of allowance for doubtful accounts
of $4,648 for 1999 and $4,078 for 1998 17,672 14,994
Investment in partnership - 13,249
Deferred charges, net and other assets 17,014 16,676
-------- --------
Total assets $967,359 $968,680
======== ========
LIABILITIES AND PARTNERS' CAPITAL:
Mortgage loans $101,353 $103,333
Unsecured notes payable 199,589 199,542
Line of credit 97,500 169,500
Accounts payable, accrued expenses and other liabilities 33,534 29,946
-------- --------
Total liabilities 431,976 502,321
-------- --------
Minority interest 903 954
-------- --------
Partner's Capital:
General partner, common; issued and outstanding 24,060,057 and
23,958,662 units at September 30, 1999 and December 31, 1998, respectively 354,649 357,108
General partner, Series A preferred (liquidation preference $25.00 per unit);
issued and outstanding 3,478,219 and 3,478,493 units at September 30, 1999
and December 31, 1998, respectively 86,802 86,809
Limited partners, common; issued and outstanding 1,328,705 and 1,441,678
units at September 30, 1999 and December 31, 1998, respectively 19,585 21,488
Limited partners, Series B preferred (liquidation preference $25.00 per unit);
issued and outstanding 2,000,000 units at September 30, 1999 49,100 -
Limited partners, Series C preferred (liquidation preference $25.00 per unit);
issued and outstanding 1,000,000 units at September 30, 1999 24,344 -
-------- --------
Total partners' capital 534,480 465,405
-------- --------
Total liabilities and partners' capital $967,359 $968,680
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Rental income $37,833 $33,305 $113,415 $92,642
Other income 582 634 1,911 1,693
------- ------- -------- -------
38,415 33,939 115,326 94,335
------- ------- ------- -------
EXPENSES:
Operations, maintenance and management 5,715 4,510 17,798 13,286
Real estate taxes 5,567 5,665 17,238 16,441
Mortgage and other interest 7,129 7,424 21,998 19,567
General and administrative 1,973 1,952 5,637 4,733
Depreciation and amortization 6,849 5,752 19,790 16,346
------- ----- ------ ------
27,233 25,303 82,461 70,373
------- ------ ------ ------
Income before equity in earnings of partnership and net gain on sale of
properties 11,182 8,636 32,865 23,962
Equity in earnings of partnership - 247 500 247
Net gain on sale of properties - 30,555 - 29,680
------- ------ ------ ------
Income before allocation to minority interest 11,182 39,438 33,365 53,889
Income allocated to minority interest (21) (334) (69) (420)
-------- ------- ------- -------
Net income 11,161 39,104 33,296 53,469
Preferred unit distributions (3,083) (1,096) (8,300) (1,096)
-------- ------- ------- -------
Net income attributable to common unit holders $ 8,078 $38,008 $ 24,996 $52,373
======= ======= ======== =======
Basic net income per common unit $ 0.32 $ 1.51 $ 0.98 $ 2.10
======= ======= ======== =======
Diluted net income per common unit $ 0.32 $ 1.43 $ 0.98 $ 2.07
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited Limited
General Partner, Limited Partners, Partners,
Partner, Series A Partners, Series B Series C
common preferred common preferred preferred Total
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $357,108 $86,809 $21,488 $ - $ - $465,405
Net income 8,002 1,826 480 456 - 10,764
Distributions on preferred units - (1,826) - (456) - (2,282)
Distributions on common units (9,123) - (533) - - (9,656)
Capital contributions 1,645 - - 49,100 - 50,745
Redemption of LP Units - - (833) - - (833)
Reallocation of partners' capital (145) - 145 - - -
GP Units issued upon redemption
of LP units 6 - (6) - - -
---------- --------- --------- ---------- --------- ---------
Balance at March 31, 1999 357,493 86,809 20,741 49,100 - 514,143
Net income 7,976 1,826 460 1,109 - 11,371
Distributions on preferred units - (1,826) - (1,109) - (2,935)
Distributions on common units (9,082) - (511) - - (9,593)
Redemption of LP Units - - (281) - - (281)
Other capital costs (40) - - - - (40)
Reallocation of partners' capital (49) - 49 - - -
---------- --------- --------- ---------- --------- ---------
Balance at June 30, 1999 356,298 86,809 20,458 49,100 - 512,665
Net income 7,680 1,826 398 1,109 148 11,161
Distributions on preferred units - (1,826) - (1,109) (148) (3,083)
Distributions on common units (9,114) - (492) - - (9,606)
Redemption of LP Units - - (1,038) - - (1,038)
Capital contributions 37 - - - 24,344 24,381
Preferred units converted to common units - (7) 7 - - -
Reallocation of partners' capital (252) - 252 - - -
---------- --------- --------- ---------- --------- ---------
Balance at September 30, 1999 $354,649 $86,802 $19,585 $ 49,100 $ 24,344 $534,480
========== ========= ========= ========== ========= =========
</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>
Nine months ended
September 30,
---------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 33,296 $ 53,469
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 19,790 16,346
Equity in earnings of partnership (500) (247)
Amortization of debt premiums, net of discounts (709) (176)
Net gain on sale of properties - (29,680)
Income allocated to minority interest 69 420
Change in operating assets and liabilities,
net of the effect of the Mid-America Acquisition in 1998:
(Increase) decrease in rents and other receivables 611 (1,878)
Increase in accounts payable, accrued expenses and other liabilities 2,128 6,879
Increase in deferred charges (2,934) (1,022)
--------- ---------
Net cash provided by operating activities 51,751 44,111
--------- ---------
Cash flows from investing activities:
Expenditures for real estate investments (21,971) (160,639)
Cash used for purchase of Mid-America - (28,578)
Expenditures for capital improvements (14,177) (7,110)
Net proceeds from sale of properties 16,899 83,959
Cash distributions from partnership 3,943 350
--------- ---------
Net cash used in investing activities (15,306) (112,018)
--------- ---------
Cash flows from financing activities:
Borrowings from line of credit 61,900 216,750
Payments under line of credit (133,900) (215,050)
Proceeds from issuance of unsecured notes payable - 99,051
Expenditures for financing costs (200) (6,222)
Principal payments on mortgage loans (1,224) (762)
Distributions paid to common unit holders (28,855) (26,838)
Distributions paid to minority interest (120) (219)
Distributions paid to preferred unit holders (8,300) (1,751)
Capital contributions 75,086 11,515
Payments to redeem limited partnership units (2,152) -
Pay-off of secured mortgage loans - (10,031)
Cash disbursed but not presented to bank 1,320 -
--------- ---------
Net cash provided by (used in) financing activities (36,445) 66,443
--------- ---------
Net decrease in cash and cash equivalents - (1,464)
Cash and cash equivalents:
Beginning of period - 4,747
--------- ---------
End of period $ - $ 3,283
========= =========
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 22,672 $ 15,663
========= =========
</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, 1999
(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 84% 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, 1998.
Interests in the Operating Partnership are evidenced by five 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 "Series A Preferred Units," limited partner "common"
units evidenced by "LP Units," 8.875% Series B Cumulative Redeemable Perpetual
Preferred Units of limited partnership interest evidenced by "Series B Preferred
Units," and 8.875% Series C Cumulative Redeemable Perpetual Preferred Units of
limited partnership interest evidenced by "Series C Preferred Units." The
Partnership Agreement governing the Operating Partnership contemplates that the
number of outstanding GP Units will always equal the number of outstanding
shares of common stock of the Company outstanding and that the Company will
contribute to the Operating Partnership the proceeds from all issuances of
common stock and preferred stock by the Company in exchange for additional
units. The Partnership Agreement also contemplates that the number of Series A
Preferred Units will always equal the number of outstanding shares of Series A
Preferred Stock of 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." Holders of Series A Preferred Units,
Series B Preferred Units, and Series C Preferred Units are referred to as
"preferred unit holders."
NOTE 2 - EARNINGS PER COMMON UNIT
Basic earnings per common unit ("EPU") is computed by dividing net income
attributable 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>
Three months ended Nine months ended
September 30, September 30,
--------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
- ----------
Basic
Net income attributable to common unit holders $ 8,078,000 $38,008,000 $24,996,000 $52,373,000
========================================================
Diluted
Net income attributable to common unit holders $ 8,078,000 $38,008,000 $24,996,000 $52,373,000
Convertible preferred unit distributions - 1,096,000 - 1,096,000
--------------------------------------------------------
Adjusted net income $ 8,078,000 $39,104,000 $24,996,000 $53,469,000
========================================================
DENOMINATOR:
- ------------
Basic
Weighted average common units 25,420,698 25,162,830 25,435,168 24,996,108
========================================================
Diluted
Weighted average common units 25,420,698 25,162,830 25,435,168 24,996,108
Effect of dilutive securities:
Stock options 32,599 46,466 34,111 48,338
Convertible preferred units - 2,162,504 - 728,756
--------------------------------------------------------
Weighted average common units and assumed conversions 25,453,297 27,371,800 25,469,279 25,773,202
========================================================
</TABLE>
6
<PAGE>
For the nine months ended September 30, 1999 and 1998, options to purchase
603,500 shares of the Company's common stock at prices ranging from $19.90 to
$21.35 and 153,500 shares of common stock at prices ranging from $21.25 to
$21.35 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. For the nine months ended September 30, 1999, Series A
preferred unit distributions of $5,478,000 and the effect on the denominator of
the conversion of the convertible preferred units outstanding during the period
into 3,550,894 shares of common units were not included in the computation of
diluted EPU because the impact on basic EPU was anti-dilutive.
For the three months ended September 30, 1999 and 1998, options to purchase
651,800 shares of the Company's common stock at prices ranging from $20.25 to
$21.35 and 153,500 shares of the Company's common stock at prices ranging from
$21.25 to $21.35 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. For the three months ended September 30, 1999,
Series A preferred unit distributions of $1,826,000 and the effect on the
denominator of the conversion of the convertible preferred units outstanding
during the quarter into 3,550,860 shares of common units were not included in
the computation of diluted EPU because the impact on basic EPU was anti-
dilutive.
NOTE 3 - ACQUISITION AND DISPOSITION ACTIVITY
At September 30, 1999, the Operating Partnership was holding for sale three
enclosed malls, all acquired in connection with the merger acquisition of Mid-
America Realty Investments, Inc. ("Mid-America"). These dispositions are
expected to be completed during the fourth quarter of 1999, although there can
be no assurance that any such dispositions will occur. During the second
quarter, the Operating Partnership completed the sales of an additional three
properties, for an aggregate gross sales price of $17,325,000. These three
properties, all acquired in connection with the merger acquisition of Mid-
America, had been held for sale since the merger acquisition. Two of these
properties, Macon County Plaza and Town West Shopping Center, are shopping
centers located in the Southeast region of the United States and are not aligned
with the Operating Partnership's strategic market focus. The third property,
Monument Mall, is an enclosed mall and, like the three properties currently held
for sale, is not aligned with the Operating Partnership's strategic property
focus.
In connection with the merger acquisition of Mid-America, the Operating
Partnership acquired a 50% interest in a joint venture that owned two
neighborhood shopping centers and one enclosed mall. During the second quarter,
the joint venture sold Imperial Mall, the enclosed mall located in Hastings,
Nebraska, to the same buyer of Monument Mall for $12,100,000 including the
issuance of a $3,100,000 note at 9.0%, secured by a second deed of trust.
Subsequently, the Operating Partnership acquired the 50% non-owned portion of
the joint venture for a purchase price equal to $7,750,000 subject to customary
closing costs and pro-rations. As a result, the two neighborhood shopping
centers previously owned by the joint venture are now wholly-owned by the
Operating Partnership and are consolidated for financial reporting purposes.
During the second quarter of 1999, the Operating Partnership completed the
acquisitions of two shopping centers, Cherry Hill Marketplace and 30th Street
Plaza, located in Michigan and Ohio, respectively, aggregating approximately
264,000 square feet for a total purchase price of approximately $13,853,000. The
Operating Partnership acquired these shopping centers with the intention of
redeveloping them. The Operating Partnership expects to incur an additional $27
million for the redevelopment of these two shopping centers, as well as for two
other shopping centers in the portfolio under redevelopment, Prospect Plaza and
Commons of Chicago Ridge. All of these redevelopment projects are expected to be
substantially completed during the first half of 2000.
On October 1, 1999, the Operating Partnership acquired two newly developed
shopping centers located in Minnesota aggregating approximately 220,000 square
feet, for an aggregate purchase price of approximately $23,006,000. These
shopping centers were acquired under a co-development agreement with Oppidan
Center Development, LLC, whereby the Operating Partnership and Oppidan worked
together on all aspects of the development process and shared in the value
created from the new developments. The co-development agreement was terminated,
by mutual agreement, upon the completion of these acquisitions, as the Operating
Partnership is pursuing its own development initiatives.
NOTE 4 - ISSUANCE OF SERIES C PREFERRED UNITS
On September 7, 1999, the Operating Partnership completed a private placement of
1,000,000 units of its 8.875% Series C Cumulative Redeemable Perpetual Preferred
Units (the "Series C Preferred Units") to an institutional investor at a price
of $25.00 per unit. The units are callable by the Operating Partnership after
five years at a redemption price equal to the redeemed holder's capital account
(initially $25.00 per unit), plus an amount equal to all accumulated, accrued
and unpaid distributions or dividends thereon to the date of redemption. In lieu
of cash, the Operating Partnership may elect to deliver shares of 8.875% Series
C Cumulative Redeemable Perpetual Preferred Stock (the "Series C Preferred
Shares") of the Company on a one-for-one basis, plus an amount equal to all
accumulated, accrued and unpaid distributions or dividends thereon to the date
of redemption. The Series C Preferred Units do not have a stated maturity and do
not include any mandatory redemption or sinking fund provisions. The net
proceeds from the issuance of approximately $24.3 million were used to reduce
outstanding borrowings under the line of credit facility.
7
<PAGE>
Holders of the Series C Preferred Units have the right to exchange Series C
Preferred Units for shares of Series C Preferred Shares on a one-for-one basis.
The exchange right is exercisable, in minimum amounts of 500,000 units, at the
option of holders of the Series C Preferred Units (i) at any time on or after
September 7, 2009, (ii) at any time if full quarterly distributions shall not
have been made for six quarters, whether or not consecutive, or (iii) upon the
occurrence of certain specified events related to the treatment of the Operating
Partnership or the Series C Preferred Units for federal income tax purposes.
NOTE 5 - SEGMENT REPORTING
As of September 30, 1999, the Operating Partnership owned 96 shopping centers
located primarily in the Midwest region of the United States. Such shopping
centers are typically anchored by grocery and drug stores complemented with
stores providing a wide range of other goods and services to shoppers. During
1998, the Operating Partnership also owned a mixed-use office property located
in downtown Chicago, Illinois, which was sold in July 1998. Because this
property required a different operating strategy and management expertise than
all other properties in the portfolio, it was considered a separate reportable
segment.
The Operating Partnership assesses and measures operating results on an
individual property basis for each of its 96 shopping centers without
differentiation, based on net operating income, and then converts such amounts
in the aggregate to a performance measure referred to as Funds from Operations
("FFO"). Since all of the Operating Partnership's shopping centers exhibit
similar economic characteristics, cater to the day-to-day living needs of their
respective surrounding communities, and offer similar degrees of risk and
opportunities for growth, the shopping centers have been aggregated and reported
as one operating segment.
The revenue and net operating income for the reportable segments and for the
Operating Partnership, the computation of FFO for the Operating Partnership, and
a reconciliation to net income attributable to common unit holders, are as
follows for each of the three and nine month periods ended September 30, 1999
and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
TOTAL PROPERTY REVENUE:
Mixed-use office property $ - $ 1,033 $ - $ 8,306
Shopping center properties 38,241 32,738 114,651 85,667
------- ------- -------- -------
38,241 33,771 114,651 93,973
------- ------- -------- -------
TOTAL PROPERTY OPERATING EXPENSES:
Mixed-use office property - 279 - 3,110
Shopping center properties 11,282 9,896 35,036 26,617
------- ------- ------- -------
11,282 10,175 35,036 29,727
------- ------- ------- -------
Net operating income 26,959 23,596 79,615 64,246
------- ------- ------- -------
NON-PROPERTY (INCOME) EXPENSES:
Other non-property income (174) (168) (675) (362)
Equity in earnings of partnership, excluding
depreciation and amortization - (274) (600) (274)
Mortgage and other interest 7,129 7,424 21,998 19,567
General and administrative 1,973 1,952 5,637 4,733
Amortization of deferred finance and non-real
estate related costs 283 225 842 692
Preferred unit distributions 3,083 1,096 8,300 1,096
Income allocated to minority interest 21 334 69 420
Gain on sale of properties allocated to
minority interest - (306) - (306)
-------- ------- ------- -------
12,315 10,283 35,571 25,566
-------- ------- ------- -------
Funds from Operations $14,644 $13,313 $44,044 $38,680
======== ======= ======= =======
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- ----------------------
1999 1998 1999 1998
--------- --------- -------- --------
RECONCILIATION TO NET INCOME
ATTRIBUTABLE TO COMMON UNIT HOLDERS:
<S> <C> <C> <C> <C>
Funds from Operations $14,644 $13,313 $ 44,044 $ 38,680
Depreciation of real estate assets and amortization
of tenant improvements (5,683) (4,939) (16,685) (13,185)
Amortization of deferred leasing commissions (684) (290) (1,468) (1,574)
Other amortization (199) (298) (795) (895)
Depreciation and amortization included in equity in
earnings of partnership - (27) (100) (27)
Gain on sale of properties allocated to minority interest - (306) - (306)
Net gain on sale of properties - 30,555 - 29,680
--------- --------- ---------- ----------
Net income attributable to common unit holders $ 8,078 $38,008 $ 24,996 $ 52,373
========= ========= ========== ==========
</TABLE>
NOTE 6 - SUPPLEMENTAL CASH FLOW DISCLOSURE
During the first quarter of 1999, 411 shares of the Company's common stock were
issued in exchange for an equivalent number of LP Units. During the second
quarter of 1999, the acquisition of the Operating Partnership's non-owned
portion of a joint venture resulted in a non-cash reclassification of investment
in partnership to real estate investments of $6,556,000 and a non-cash transfer
of a $3,100,000 note receivable.
9
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Throughout 1998, we acquired 44 shopping centers and a 50% interest in a joint
venture that owned two neighborhood shopping centers and one enclosed mall for
an aggregate cost of approximately $362 million. Of these acquisitions, we
acquired 22 of the shopping centers and the joint venture interest in connection
with the merger acquisition of Mid-America in August 1998. During the second and
third quarters of 1998, we also completed the sales of two properties that did
not meet our strategic focus for an aggregate net sales price of $84 million,
resulting in a net gain of $29.7 million. This gain is net of a provision for
loss on real estate investment of $0.9 million reflected in the first quarter of
1998.
During the second quarter of 1999, we completed the acquisitions of two shopping
centers for an aggregate purchase price of $13.9 million, and sold three
properties for an aggregate gross sales price of $17.3 million. During the
second quarter of 1999, we also acquired the 50% non-owned portion of the two
shopping centers held by the joint venture acquired in connection with the
merger acquisition of Mid-America. As a result, these two shopping centers are
consolidated for financial reporting purposes.
Differences in results of operations for the nine and three-month periods ended
September 30, 1999 compared with the same periods in 1998 were driven largely by
the acquisition activity. Differences in financial results for the nine and
three-month periods between 1999 and 1998 were also significantly affected by
the $30.6 million net gain on sale of properties during the third quarter of
1998. Income before the net gain on sale, and before income allocated to
minority interest, increased $9,156,000, or 38%, from $24,209,000 for the nine
months ended September 30, 1998 to $33,365,000 for the nine months ended
September 30, 1999. Income before the net gain on sale, and before income
allocated to minority interest, increased $2,299,000, or 26%, from $8,883,000
for the third quarter of 1998 to $11,182,000 for the third quarter of 1999.
Including the net gain on sale of properties in 1998, net income attributable to
common unit holders decreased $27,377,000 from $52,373,000 in the first nine
months of 1998 to $24,996,000 in the first nine months of 1999. Basic net income
per common unit decreased $1.12 per common unit from $2.10 per common unit in
the first nine months of 1998 to $0.98 per common unit in the first nine months
of 1999. For the quarter ended September 30, 1999, net income attributable to
common unit holders decreased $29,930,000 from $38,008,000 in the quarter ended
September 30, 1998 to $8,078,000 in the quarter ended September 30, 1999. Basic
net income per common unit decreased $1.19 per common unit from $1.51 per common
unit in the quarter ended September 30, 1998 to $0.32 per common unit in the
quarter ended September 30, 1999. The computation of diluted net income per
common unit resulted in a $0.03 reduction in basic net income per common unit
for the nine months ended September 30, 1998, from $2.10 per common unit to
$2.07 per common unit, and resulted in a $0.08 reduction in our basic net income
per common unit for the three months ended September 30, 1998, from $1.51 per
common unit to $1.43 per common unit. The computation of diluted net income per
common unit had no effect on basic net income per common unit for either the
nine month or three month period in 1999. Our results of operations for the
first nine months of 1998 and 1999 reflect 51 properties that were held both
nine-month periods and 50 properties that we purchased or sold between the two
periods. Our results of operations for the third quarter of 1998 and 1999
reflect 65 properties that were held both quarters and 36 properties that we
purchased or sold between the two periods.
Property Specific Revenues And Expenses (in thousands of dollars):
<TABLE>
<CAPTION>
Nine months ended
September 30, Properties
------------------------------ Acquisitions/ Held Both
1999 1998 Difference Dispositions Periods
------------- ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Rental income $113,415 $92,642 $20,773 $17,800 $2,973
Operations, maintenance and management 17,798 13,286 4,512 3,316 1,196
Real estate taxes 17,238 16,441 797 831 (34)
Depreciation and amortization 19,790 16,346 3,444 3,009 435
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30, Properties
------------------------------ Acquisitions/ Held Both
1999 1998 Difference Dispositions Periods
------------- ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Rental income $37,833 $33,305 $4,528 $2,909 $1,619
Operations, maintenance and management 5,715 4,510 1,205 688 517
Real estate taxes 5,567 5,665 (98) 67 (165)
Depreciation and amortization 6,849 5,752 1,097 519 578
</TABLE>
10
<PAGE>
Results attributable to acquisition and disposition activities:
Rental income increased from $92,642,000 in the first nine months of 1998 to
$113,415,000 in the first nine months of 1999 and from $33,305,000 in the third
quarter of 1998 to $37,833,000 in the third quarter of 1999. Approximately
$25,673,000 of the increase during the nine-month period was attributable to
acquisition activities, including $11,910,000 for properties acquired in
connection with the merger acquisition of Mid-America, partially offset by
$7,873,000 attributable to disposition activities, primarily One North State.
Approximately $4,575,000 of the increase during the three-month period was
attributable to acquisition activities, partially offset by $1,666,000
attributable to disposition activities, primarily One North State.
Operations, maintenance and management expense increased from $13,286,000 in the
first nine months of 1998 to $17,798,000 in the first nine months of 1999 and
from $4,510,000 in the third quarter of 1998 to $5,715,000 in the third quarter
of 1999. Approximately $3,316,000 of the increase during the nine-month period
was attributable to acquisition and disposition activities, including an
increase of $2,226,000 for properties acquired in connection with the merger
acquisition of Mid-America. For the three-month period, approximately $688,000
of the increase was attributable to acquisition and disposition activities.
Real estate taxes increased from $16,441,000 in the first nine months of 1998 to
$17,238,000 in the first nine months of 1999, but decreased from $5,665,000 in
the third quarter of 1998 to $5,567,000 in the third quarter of 1999. Real
estate taxes decreased $34,000 for properties held during both nine month
periods ended September 30, 1999 and 1998, and decreased $165,000 for properties
held during both three month periods ended September 30, 1999 and 1998. Real
estate taxes increased $831,000 for properties purchased, net of reductions for
properties sold, during the nine month periods ended September 30, 1999 and
1998, and increased $67,000 for properties purchased, net of reductions for
properties sold, during the three month periods ended September 30, 1999 and
1998.
Depreciation and amortization increased from $16,346,000 in the first nine
months of 1998 to $19,790,000 in the first nine months of 1999 and from
$5,752,000 in the third quarter of 1998 to $6,849,000 in the third quarter of
1999. Approximately $3,009,000 of the increase during the nine-month period was
attributable to acquisition and disposition activities, including an increase of
$1,097,000 for properties acquired in connection with the merger acquisition of
Mid-America. For the three-month period, approximately $519,000 of the increase
was attributable to acquisition and disposition activities.
Results for properties fully operating throughout both periods:
Several factors affected the comparability of results for properties fully
operating throughout both nine and three-month periods ended September 30, 1999
and 1998. Winter storms in the Midwest occurring during the first quarter of
1999 resulted in an increase in the level of snow removal expenses of
approximately $587,000 during the first nine months of 1999 compared with the
first nine months of 1998. This increase in operations, maintenance and
management expense was mitigated by the recoverability of such expenses through
operating expense reimbursements, which were $653,000 higher during the first
nine months of 1999 compared with the first nine months of 1998. Additionally,
two large tenants, Montgomery Ward at Heritage Square, and HomePlace at Har Mar
Mall, vacated their respective stores during 1998 after declaring bankruptcy in
July 1997 and January 1998, respectively. Rental income decreased from the first
nine months of 1998 at these two shopping centers by $471,000 and $573,000,
respectively. Rental income decreased $161,000 at Har Mar Mall during the third
quarter of 1999 compared with the third quarter of 1998. We are currently in
negotiations with a grocery anchor to replace the space vacated by HomePlace.
However, we can give no assurance that this lease will come to fruition or, if
so, as to the terms of any such lease. At Heritage Square, a 62,000 square-foot
lease with Carson Pirie Scott commenced in the third quarter of 1999, which
replaces approximately one half the space previously occupied by Montgomery
Ward, resulting in an increase in rental income of $153,000 during the third
quarter of 1999 compared with the third quarter of 1998. During the third
quarter of 1999, we signed a 47,000 square-foot lease with HomeLife to occupy
the remaining vacancy of the former Montgomery Ward space. This lease is
expected to commence during the middle part of 2000, which is expected to
contribute to increases in rental income at this property.
Finally, our company, as well as most other real estate companies, was affected
by a consensus reached by the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board regarding the accounting for percentage
rents. On May 22, 1998, the EITF reached a consensus 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. Because
the majority of our retail tenant leases have sales years ending in December or
January, a substantial portion of percentage rental income from such leases is
now recognized in the first quarter, once it is determined that specified sales
targets have been achieved. Previously, we recognized percentage rental income
each period based on reasonable estimates of tenant sales. Largely due to the
implementation of EITF 98-9, therefore, percentage rental income for properties
held throughout both quarters ended September 30, 1999 and 1998 increased by
$348,000, since much of the percentage rent received during the third quarter of
1998 had been recognized in prior quarters. Percentage rental income for
properties held throughout both nine-month periods ended September 30, 1999 and
1998 increased by $162,000 due to the increase in percentage rents during the
first and third quarters of 1999 from the first and third quarters of 1998,
partially offset by a decrease in percentage rents during the second quarter of
1999 compared with the second quarter of 1998.
11
<PAGE>
In addition to the changes in rental income described above, during the first
nine months of 1999 compared with the first nine months of 1998, rental income
increased $384,000 at Rollins Crossing and $274,000 at Burning Tree Plaza, due
to a 71,000 square-foot lease with Regal Cinema at Rollins Crossing and a 24,000
square-foot lease with Dunham's Athleisure at Burning Tree Plaza, both
commencing in the fourth quarter of 1998. For the third quarter of 1999 rental
income for these shopping centers increased $114,000 and $94,000, respectively
from the third quarter of 1998. Rental income increased $142,000 at High Point
Centre during the first nine months of 1999 compared with the first nine months
of 1998, and $54,000 during the third quarter of 1999 compared with the third
quarter of 1998, due to the commencement of a 36,000 square-foot lease with
Babies `R Us during the first quarter of 1999. Rental income increased $245,000
at Commons of Crystal Lake during the first nine months of 1999 compared with
the first nine months of 1998, and $188,000 during the third quarter of 1999
compared with the third quarter of 1998 due to the commencement of a 28,000
square-foot lease with Marshalls commencing in the second quarter of 1999 and a
30,000 square-foot lease with Toys `R Us commencing in the third quarter of
1999. Rental income increased by $379,000 at Village Shopping Center during the
first nine months of 1999 compared with the first nine months of 1998 due to an
increase in occupancy during the second half of 1998. Rental income increased at
Crossroads Centre by $390,000 and $359,000 and at Terrace Mall by $527,000 and
$500,000 for the nine and three-month periods respectively, ended September 30,
1999, from the same periods in the prior year due to the receipt of termination
fees in the third quarter of 1999 from Walgreens at Crossroads Centre and a
vacant theater at Terrace Mall. Rental income increased $216,000 at Sun Ray
Shopping Center for the nine-month period of 1999 due to the commencement of a
26,000 square-foot lease with Bally's Total Fitness commencing during the third
quarter of 1999 and due to an increase in tax reimbursements primarily resulting
from a tax abatement received in the first quarter of 1998, contributing to an
increase in real estate taxes of $138,000 from the nine-month period in the
prior year. Rental income increased at Speedway Super Center by $672,000 for the
nine-month period ended September 30, 1999 from the same period in the prior
year due to the receipt of a termination fee from PetsMart in the second quarter
of 1999 and due to the commencement of several new leases.
During September 1999, we were notified that Hechinger Co., the operator of an
85,000 square-foot Home Quarters store at Grandview Plaza, would liquidate its
assets in order to pay off creditors. Hechinger Co. had previously filed for
protection under Chapter 11 of the bankruptcy code in June 1999; however, the
store at Grandview Plaza was not included on the initial list of store closures.
As a result of the liquidation, we expect the store to close and cease paying
rent during the fourth quarter of 1999. This tenant contributed approximately
$850,000 in total rental income on an annual basis, which we believe is at or
slightly above current market rates. While we are in preliminary discussions
with several retailers to replace this vacancy, we do not expect a new lease to
commence prior to the end of 2000, resulting in a decrease in rental income at
this center.
Non-Property Specific Revenues and Expenses:
Other income increased from $1,693,000 during the first nine months of 1998 to
$1,911,000 during the first nine months of 1999, and decreased from $634,000 for
the third quarter of 1998 to $582,000 for the third quarter of 1999. Other
income contains both property specific and non-property specific income;
however, the increase during the nine-month period is mostly attributable to
income generated from properties acquired during 1998, mainly from four enclosed
malls acquired in connection with the merger acquisition of Mid-America,
partially offset by a reduction in other income of $154,000 at Grandview Plaza
for insurance proceeds in excess of the net book value of assets destroyed and
costs incurred for a fire at Grandview Plaza in 1997 received and recognized in
the first quarter of 1998. Three of the enclosed malls are currently held for
sale and, if sold, will not contribute to other income in the future.
Mortgage and other interest expense increased from $19,567,000 during the first
nine months of 1998 to $21,998,000 during the first nine months of 1999, and
decreased from $7,424,000 for the third quarter of 1998 to $7,129,000 for the
third quarter of 1999. Mortgage debt of $37,933,000 assumed in connection with
the merger acquisition of Mid-America, as well as $25,753,000 in mortgage
indebtedness assumed upon the acquisitions of three additional shopping centers
during 1998, partially offset by the repayment in the third quarter of 1998 of
mortgage notes secured by Richfield Hub and Hub West aggregating $10 million,
contributed to an increase in interest expense of $2,037,000 for the nine-month
period and $352,000 for the third quarter. A slightly higher weighted average
balance outstanding on the line of credit during the first nine months of 1999
compared with the first nine months of 1998, was more than offset by a lower
weighted average interest rate in 1999, resulting in a decrease in interest
expense of $128,000. A lower weighted average balance outstanding on the line of
credit during the third quarter of 1999 compared with the third quarter of 1998
resulting from repayments on the line of credit with proceeds from the issuance
of the Series B and C Preferred Units during 1999, combined with a slightly
lower weighted average interest rate, resulted in a decrease in interest expense
of $630,000 for the third quarter of 1999 compared with the third quarter of
1998. Additionally, our increased focus on development and redevelopment
initiatives which have been funded with the line of credit has resulted in a
higher amount of interest capitalized during 1999 compared with 1998. On January
28, 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 1997 primarily to fund acquisition activity. Interest incurred on
these unsecured Notes, and on $100 million, 7.0% seven-year unsecured Notes
issued in 1997, amounted to $10,530,000 in the first nine months of 1998
compared with $11,104,000 for the full nine months in 1999, an increase of
$574,000. Our total weighted average interest rate decreased to 7.18% for the
third quarter of 1999 from 7.21% for the third quarter of 1998.
12
<PAGE>
General and administrative expense increased from $4,733,000 during the first
nine months of 1998 to $5,637,000 during the first nine months of 1999, and from
$1,952,000 for the quarter ended September 30, 1998 to $1,973,000 for the
quarter ended September 30, 1999. The increase primarily resulted from our
growth, including increases in salaries for additional personnel, and franchise
taxes and fees related to having a larger equity base and expanded geographic
market.
While the capital markets for REITs have remained challenging, during February
1999, we took advantage of an opportunity to replace $50 million of short-term
floating rate debt under the line of credit with the issuance of 8.875% Series B
Cumulative Redeemable Perpetual Preferred Units (the "Series B Preferred
Units"). We took advantage of a similar opportunity during September 1999,
replacing $25 million of short-term floating rate debt under the line of credit
with the issuance of 8.875% Series C Cumulative Redeemable Perpetual Preferred
Units (the "Series C Preferred Units"). Although the spreads between the
interest rate currently available under the line of credit facility and the
rates associated with the Series B and C Preferred Units are dilutive in the
short-term, the infusion of such permanent capital reduced the amount of
outstanding indebtedness and increased the capacity under the line of credit,
providing us with additional flexibility to take advantage of the favorable
acquisition, development, and redevelopment opportunities we continue to
identify from both prospective acquisitions in our target markets and from
shopping centers in our core portfolio. Distributions on the Series B and C
Preferred Units were $2,822,000 during the first nine months of 1999, and
$1,257,000 during the third quarter of 1999; on a going-forward basis, such
distributions are projected to be approximately $1.7 million for each full
quarterly period that the Series B and C Preferred Units are outstanding.
Distributions on the Series A Convertible Preferred Stock issued in connection
with the merger acquisition of Mid-America in August 1998 were $5,478,000 for
the first nine months of 1999, and $1,826,000 during the third quarter of 1999,
compared with $1,096,000 during the nine and three month periods of 1998.
LIQUIDITY AND CAPITAL RESOURCES
General
We fund operating expenses and distributions primarily from operating cash
flows, although we may also use our bank line of credit for these purposes. We
fund 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. We may also acquire
properties through capital contributions of proceeds from the Company's issuance
of additional equity securities. Additionally, we 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 our strategic
focus. In addition, we may acquire partial interests in real estate assets
through participation in joint venture transactions.
We focus our investment activities on community and neighborhood shopping
centers, primarily located in the midwestern United States, anchored by regional
and national grocery store chains. We 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 we can utilize our extensive experience in shopping center renovation,
expansion, re-leasing and re-merchandising to achieve long-term cash flow growth
and favorable investment returns. Additionally, we expect to continue to engage
in development activities, both directly and through contractual relationships
with independent development companies, to develop community and neighborhood
shopping centers in selected Midwest markets where we anticipate that value can
be created from new developments more effectively than from acquisitions of
existing shopping center properties. We would also consider investment
opportunities in markets beyond the Midwest in the event such opportunities were
on a scale that enabled us to actively manage, lease, develop and redevelop
shopping centers consistent with our focus that create favorable investment
returns and increase value to our unit holders.
We consider our liquidity and ability to generate cash from operating and from
financing activities to be sufficient to meet our operating expense, development
costs, debt service and distribution requirements for at least a year. Despite a
current difficult capital markets environment for REITs, we also believe we have
sufficient liquidity and flexibility to be able to continue to take advantage of
favorable acquisition and development opportunities during the next year.
However the utilization of available liquidity for such opportunities will be
carefully calibrated to changing market conditions.
As of September 30, 1999, our financial liquidity was provided by the unused
balance on our bank line of credit of $152.5 million. Additionally, as of
September 30, 1999, we were holding for sale three properties with an aggregate
book value of $30.1 million. We expect to complete the sales of these properties
during the remainder of 1999, although we can give no assurance that any such
sales will occur. Proceeds received from a sale of any of such properties would
provide us with additional liquidity. In addition, the Company has an effective
"shelf" registration statement under which it may issue up to $201.4 million in
equity securities, and the Operating Partnership has an additional "shelf"
registration statement under which we may issue up to $400 million 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
we determine that market conditions and the opportunity to utilize the proceeds
from the issuance of such securities are favorable. We have also implemented a
Medium-Term Note program providing us with the added flexibility of issuing
Medium-Term Notes due nine months or more from date of issue in varying amounts
in
13
<PAGE>
an aggregate principal amount of up to $150 million from time to time using the
debt "shelf" registration in an efficient and expeditious manner.
Mortgage debt outstanding at September 30, 1999 consisted of fixed-rate notes
totaling $101.4 million with a weighted average interest rate of 7.51% maturing
at various dates through 2016. Short-term liquidity requirements include debt
service payments due within one year. Scheduled principal payments of mortgage
debt totaled $1,224,000 during the nine-month period ended September 30, 1999,
with another $0.6 million of scheduled principal amortization due for the
remainder of the year. We have no maturing debt until February 2000, when $6.0
million in mortgage debt becomes due, and December 2000, when the line of credit
expires. Additionally, we expect to incur approximately $27 million for the
redevelopment of four shopping centers, and continue to build a modest pipeline
of acquisition and development opportunities. While we currently expect to fund
short-term and long-term liquidity requirements primarily through a combination
of issuing additional investment grade unsecured debt securities and equity
securities and with borrowings under the bank line of credit, there can be no
assurance that we will be able to repay or refinance indebtedness on
commercially reasonable or any other terms.
Operating Activities
Net cash flows provided by operating activities increased to $51,751,000 during
the first nine months of 1999, from $44,111,000 during the same period in 1998.
This increase is primarily due to the growth of our portfolio, from 53
properties at January 1, 1998 (95 properties at September 30, 1998), to 96
properties at September 30, 1999.
For the nine months ended September 30, 1999, funds from operations ("FFO")
increased $5,364,000, or 14%, from $38,680,000 for the nine months ended
September 30, 1998, to $44,044,000. For the three months ended September 30,
1999, FFO increased $1,331,000, or 10%, from $13,313,000 for the three months
ended September 30, 1998, to $14,644,000. 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.
We compute FFO in accordance with the March 1995 "White Paper" on FFO published
by the National Association of Real Estate Investment Trusts ("NAREIT"), as 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 preferred unit distributions and
adjustments for unconsolidated partnerships. Adjustments for unconsolidated
partnerships are computed to reflect FFO on the same basis. In computing FFO, we
do not add back to net income the amortization of costs incurred in connection
with our financing activities or depreciation of non-real estate assets. 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 NAREIT White Paper
provides guidelines only for computing FFO, the computation of FFO may vary from
one REIT or its operating partnership to another. FFO is not necessarily
indicative of cash available to fund cash needs.
Investing Activities
Net cash flows used in investing activities decreased to $15,306,000 during the
first nine months of 1999, from $112,018,000 during the same period in 1998.
During the first nine months of 1999, we completed the acquisitions of two
shopping centers located in Michigan and Ohio aggregating 264,000 square feet
for an aggregate purchase price of approximately $13,853,000, invested
approximately $4,944,000 in four redevelopment initiatives, and sold three
properties aggregating 434,000 square feet for an aggregate net sales price of
$16,899,000. During this period, we also acquired the 50% non-owned portion of
two shopping centers held by our joint venture acquired in connection with the
merger acquisition of Mid-America, for a purchase price of approximately
$7,750,000. The acquisition of the 50% non-owned portion of the joint venture
was completed after the joint venture sold an enclosed mall to a third party for
$12,100,000, including the assumption of a $3,100,000 note receivable. Cash
distributions received from the joint venture during the first nine months of
1999 amounted to $3,943,000.
During the first nine months of 1998, in addition to the properties acquired in
connection with the merger acquisition of Mid-America, we completed the
acquisitions of nineteen shopping centers located in the Midwest, aggregating
2.6 million square feet for a total purchase price of approximately
$178,900,000. During this period, we also completed the sales of a 640,000
square-foot mixed-use property located in 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 from financing activities decreased to a use of cash of
$36,445,000 during the first nine months of 1999 from a source of cash of
$66,443,000 during the same period in 1998. Distributions to common and
preferred unit holders, as well as to the minority interest, were $37,275,000 in
the first nine months of 1999, and $28,808,000 in the first nine months of 1998.
The two shopping centers acquired during the first nine months of 1999 were
acquired with cash provided by our line of credit. The merger acquisition of
Mid-America was financed through the issuance by the Company of approximately
3.5 million shares of Series A
14
<PAGE>
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 February 23, 1999, we issued two million 8.875% Series B Cumulative
Redeemable Perpetual Preferred Units to two institutional investors at a price
of $25.00 per unit. On September 7, 1999, we issued one million 8.875% Series C
Cumulative Redeemable Preferred Units to an institutional investor at a price of
$25.00 per unit. Net proceeds from the issuances of approximately $73.4 million
were used to reduce outstanding borrowings under the line of credit,
strengthening our capital structure, replacing floating rate debt with permanent
capital, and thereby adding liquidity, flexibility and additional capital to
fund our acquisition and development activities.
In the prior year period, we issued $100 million, 7.2% ten-year unsecured Notes
maturing January 15, 2008, and the Company issued 392,638 shares of common stock
to a unit investment trust, contributing the net proceeds of $7,489,000 to the
Operating Partnership. Proceeds from the offerings were used to reduce
outstanding borrowings under the line of credit.
Capital Strategy
We continue to identify favorable acquisition, development, and redevelopment
opportunities from both prospective acquisitions in our target markets and from
shopping centers in our core portfolio. We have expanded our internal
development capabilities to take advantage of such higher yielding investment
opportunities, which we expect to result in part from our existing relations
with the dominant grocery store operators in our Midwest markets. During the
third quarter of 1999, we continued the redevelopment of Prospect Plaza, located
in Gladstone, Missouri, acquired in December 1998, and of Cherry Hill
Marketplace located in Westland, Michigan, and 30th Street Plaza located in
Canton, Ohio, both of which were acquired during the second quarter of 1999. The
redevelopment of Prospect Plaza is expected to be complete in early 2000, with
the redevelopments of Cherry Hill Marketplace and 30th Street Plaza expected to
be substantially completed during the middle part of 2000. During the third
quarter of 1999, we continued our redevelopment of the Commons of Chicago Ridge,
a shopping center in our core portfolio located in metropolitan Chicago, and
broke ground on the new 112,000 square-foot Home Depot just after quarter-end.
These projects are the types of redevelopment investment opportunities upon
which we expect to continue to focus. The redevelopments will represent an
incremental investment of approximately $32 million, and are expected to
generate high returns on invested capital while adding substantial long-term
value to the centers. We also continue to establish a modest pipeline of
development opportunities and potential acquisitions of shopping centers where
we can use our redevelopment experience to create similar enhanced returns. We
expect to finance these acquisition, development, and redevelopment
opportunities with a combination of proceeds from the sale of non-core assets,
retained cash, external capital and possible joint ventures.
Year 2000 Issues
- ----------------
Many existing computer software programs and operating systems were designed
such that the year 1999 is the maximum date that they will be able to process
accurately. The failure of our computer software programs and operating systems
to process the change in calendar year from 1999 to 2000 may result in system
malfunctions or failures. In the conduct of our operations, we rely on equipment
manufacturers and commercial computer software primarily provided by independent
software vendors, and we have undertaken an assessment of our vulnerability to
the so-called "Year 2000 issue" with respect to our equipment and computer
systems.
We have undertaken a five-step program in order to achieve Year 2000 readiness,
including:
. Awareness - Education involving all levels of Bradley 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 we do 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
our 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 our systems
environment.
15
<PAGE>
The program, which is ongoing, has yielded the following conclusions:
With respect to our potential exposure to information technology systems,
including our accounting and lease management systems, we believe that such
commercial software is Year 2000 ready. This assessment is based upon
installation and testing of upgraded software provided by software vendors, as
well as formal and informal communications with software vendors and literature
supplied with certain software.
In the operation of our properties, we have 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. We have evaluated the
potential exposure to such non-information technology systems and believe that
such equipment is Year 2000 ready. This assessment is based upon formal and
informal communications with software vendors, literature supplied with the
software, literature supplied in connection with maintenance contracts, and test
evaluations of the software and equipment.
We have incurred less than $50,000 to bring our information technology systems
and equipment with embedded time-sensitive technology Year 2000 ready, and do
not expect to incur more the $10,000 to continue to monitor our Year 2000
readiness.
The failure of our tenants' or suppliers' computer software programs and
operating systems to process the change in calendar year from 1999 to 2000 may
also result in system malfunctions or failures. Such an occurrence would
potentially affect the ability of the affected tenant or supplier to operate its
business and thereby raise adequate revenue to meet its contractual obligations
to us. As a result, we may not receive revenue or services we had otherwise
expected to receive pursuant to existing leases and contracts. We have completed
an inventory of the tenants, suppliers and other parties with whom we do a
significant amount of business and have conducted surveys of such parties to
identify the potential exposure in the event they are not Year 2000 ready in a
timely manner. Based on the responses received, we are not aware of any party
that is anticipating a material Year 2000 readiness issue. Although the
investigations and assessments of possible Year 2000 issues are still ongoing,
we do not anticipate a material impact on our business, operations or financial
condition even if one or more parties is not Year 2000 ready in a timely manner,
because the number and nature of our tenant base are diverse, and because we do
not rely on a concentration of suppliers and other parties to conduct our
business.
Although we are aware that we may not, in fact, be Year 2000 ready upon the year
2000, at this time we have not adopted a contingency plan for the conduct of our
own operations because we expect to be Year 2000 ready in advance of 2000.
However, we will continue to monitor our progress and state of readiness, and
will be prepared to adopt a contingency plan with respect to areas in which
evidence arises that we may not become Year 2000 ready in sufficient time. It is
possible that an aggregation of tenants, suppliers, and other parties who
experience Year 2000 related system malfunctions or failures may have a material
impact on our business, operations, and financial condition. Although we believe
that we will be able to adopt appropriate contingency plans to deal with any
Year 2000 readiness issue that any other party, excluding public utilities, with
whom we have significant relationships may experience as we continue our Year
2000 assessment and testing, we cannot be certain at this time that such
contingency plans will be effective in limiting the harm caused by such third
parties' system malfunctions and failures.
The reasonably likely worst case scenario that could affect our operations would
be a widespread prolonged power failure affecting a substantial portion of the
midwestern states in which our shopping centers are located. In the event of
such a widespread prolonged power failure, a significant number of tenants may
not be able to operate their stores and, as a result, their ability to pay rent
could be substantially impaired. We are not aware of an economically feasible
contingency plan which could be implemented to prevent such a power failure from
having a material adverse effect on our operations.
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 our belief, expectations or intentions
regarding our future performance or future events or trends. We caution you
that, while forward-looking statements reflect our good faith beliefs, they are
not guarantees of future performance and involve known and unknown risks,
uncertainties and other factors, which may cause actual results, performance or
achievements to differ materially from anticipated future results, performance
or achievements expressed or implied by such forward-looking statements as a
result of factors outside of our control. 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 our tenants; the continuing availability of retail center
acquisitions, development and redevelopment opportunities in the Midwest on
favorable terms; expected property dispositions may be delayed or terminated;
the availability of equity and debt capital in the public markets; the fact that
returns from development, redevelopment and acquisition activity may not be at
expected levels; inherent risks in ongoing redevelopment and development
projects including, but not limited to, cost overruns resulting from weather
delays, changes in the nature and scope of redevelopment and development
efforts, and market factors involved in the pricing of material and labor; the
need to renew leases or relet space upon the expiration of current leases; and
the financial flexibility to refinance debt
16
<PAGE>
obligations when due. The statements made under the caption "Risk Factors"
included in the Company's Form 10-K for 1998 are incorporated herein by
reference.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
On September 7, 1999, the Operating Partnership issued 1,000,000 of
its 8.875% Series C Cumulative Redeemable Perpetual Preferred Units
(the "Series C Preferred Units") to an institutional investor at a
price of $25.00 per unit, resulting in net proceeds to the Operating
Partnership of approximately $24.3 million. On or after September 7,
2004, the Operating Partnership may redeem the Series C Preferred
Units at its option, in whole or in part, at any time for cash at a
redemption price equal to the redeemed holder's capital account
(initially $25.00 per unit), plus an amount equal to all accumulated,
accrued and unpaid distributions or dividends thereon to the date of
redemption. In lieu of cash, the Operating Partnership may elect to
deliver shares of 8.875% Series C Cumulative Redeemable Perpetual
Preferred Stock of the Company (the "Series C Preferred Shares") on a
one-for-one basis, plus an amount equal to all accumulated, accrued
and unpaid distributions or dividends thereon to the date of
redemption. The Series C Preferred Units do not include any mandatory
redemption or sinking fund provisions.
Holders of the Series C Preferred Units have the right to exchange
Series C Preferred Units for shares of Series C Preferred Shares on a
one-for-one basis. The exchange right is exercisable, in minimum
amounts of 500,000 units, at the option of holders of the Series C
Preferred Units (i) at any time on or after September 7, 2009, (ii)
at any time if full quarterly distributions shall not have been made
for six quarters, whether or not consecutive, or (iii) upon the
occurrence of certain specified events related to the treatment of
the Operating Partnership or the Series C Preferred Units for federal
income tax purposes. The Series C Preferred Units were issued in
reliance on an exemption from registration under Section 4(2) of the
Securities Act, and the rules and regulations promulgated thereunder.
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 was filed during the period July 1, 1999
through September 30, 1999:
1) Form 8-K filed September 8, 1999 (earliest event September 7,
1999), reporting in Item 5., the issuance by Bradley Operating
Limited Partnership of 1,000,000 units of 8.875% Series C
Cumulative Redeemable Perpetual Preferred Units to an
institutional investor at a price of $25.00 per unit.
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 12, 1999
Bradley Operating Limited Partnership
Registrant
By: \s\Thomas P. D'Arcy
--------------------
Thomas P. D'Arcy
President and CEO
By: \s\Irving E. Lingo, Jr.
------------------------
Irving E. Lingo, Jr.
Chief Financial Officer
19
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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0
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