<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 March 31, 1999 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934 for the transition period from to
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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
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS:
Real estate investments - at cost $939,398 $936,465
Accumulated depreciation and amortization (64,548) (59,196)
------------------ ------------------
Net real estate investments 874,850 877,269
Real estate investments held for sale 46,492 46,492
Other assets:
Cash and cash equivalents 109 -
Rents and other receivables, net of allowance for doubtful accounts
of $4,305 for 1999 and $4,078 for 1998 15,235 14,994
Investment in partnership 13,196 13,249
Deferred charges, net and other assets 16,678 16,676
------------------ ------------------
Total assets $966,560 $968,680
================== ==================
LIABILITIES AND PARTNERS' CAPITAL:
Mortgage loans $102,655 $103,333
Unsecured notes payable 199,557 199,542
Line of credit 119,500 169,500
Accounts payable, accrued expenses and other liabilities 29,768 29,946
------------------ ------------------
Total liabilities 451,480 502,321
------------------ ------------------
Minority interest 937 954
------------------ ------------------
Partners' capital:
General partner, common; issued and outstanding 24,055,952 and 23,958,662
units at March 31, 1999 and December 31, 1998, respectively 357,493 357,108
General partner, Series A preferred (liquidation preference $25.00 per unit);
issued and outstanding 3,478,471 and 3,478,493 units at March 31, 1999
and December 31, 1998, respectively 86,809 86,809
Limited partners, common; issued and outstanding 1,395,712 and 1,441,678
units at March 31, 1999 and December 31, 1998, respectively 20,741 21,488
Limited partners, Series B preferred (liquidation preference $25.00 per unit);
issued and outstanding 2,000,000 units at March 31, 1999 49,100 -
------------------ ------------------
Total partners' capital 514,143 465,405
------------------ ------------------
Total liabilities and partners' capital $966,560 $968,680
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
REVENUE:
Rental income $38,710 $28,736
Other income 643 619
-------------- --------------
39,353 29,355
-------------- --------------
EXPENSES:
Operations, maintenance and management 6,678 4,333
Real estate taxes 6,115 5,481
Mortgage and other interest 7,687 5,558
General and administrative 1,978 1,236
Depreciation and amortization 6,457 4,963
-------------- --------------
28,915 21,571
-------------- --------------
Income before equity in earnings of partnership and provision for loss on
real estate investment 10,438 7,784
Equity in earnings of partnership 347 -
Provision for loss on real estate investment - (875)
-------------- --------------
Income before allocation to minority interest 10,785 6,909
Income allocated to minority interest (21) (43)
-------------- --------------
Net income 10,764 6,866
Preferred unit distributions (2,282) -
-------------- --------------
Net income attributable to common unit holders $ 8,482 $ 6,866
============== ==============
Earnings per common unit:
Basic $0.33 $0.28
============== ==============
Diluted $0.33 $0.28
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Limited
General Partner, Limited Partners,
General Series A Partners, Series B
Partner, common preferred common preferred Total
------------------- ------------------ ------------------ ------------------ ----------
<S> <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
=================== ================== ================== ================== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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BRADLEY OPERATING LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,764 $ 6,866
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,457 4,963
Equity in earnings of partnership (347) -
Amortization of debt premiums, net of discounts (250) -
Provision for loss on real estate investment - 875
Income allocated to minority interest 21 43
Change in operating assets and liabilities:
Increase in rents and other receivables (241) (1,079)
Increase (decrease) in accounts payable, accrued expenses and other liabilities (1,010) 3,706
Increase in deferred charges (959) (20)
---------------- ----------------
Net cash provided by operating activities 14,435 15,354
---------------- ----------------
Cash flows from investing activities:
Expenditures for real estate investments (11) (34,392)
Expenditures for capital improvements (3,030) (3,128)
Cash distributions from partnership 400 -
---------------- ----------------
Net cash used in investing activities (2,641) (37,520)
---------------- ----------------
Cash flows from financing activities:
Borrowings from line of credit 17,500 44,000
Payments under line of credit (67,500) (116,600)
Proceeds from issuance of unsecured notes payable - 99,051
Expenditures for financing costs (41) (5,846)
Principal payments on mortgage loans (413) (261)
Distributions paid to common unit holders (9,656) (8,926)
Distributions paid to minority interest holders (38) (80)
Distributions paid to Series A preferred unit holders (1,826) -
Distributions paid to Series B preferred unit holders (456) -
Capital contributions from the Company's issuance of GP Units 1,645 8,586
Net proceeds from issuance of Series B preferred units 49,100 -
---------------- ----------------
Net cash provided by (used in) financing activities (11,685) 19,924
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 109 (2,242)
Cash and cash equivalents:
Beginning of period - 4,747
---------------- ----------------
End of period $ 109 $ 2,505
================ ================
Supplemental cash flow information:
Interest paid, net of amount capitalized $ 8,207 $ 2,281
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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BRADLEY OPERATING LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 87% 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 four 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" and 8.875% Series B Cumulative Redeemable
Perpetual Preferred Units of limited partnership interest evidenced by "Series B
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 and Series B 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 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 between basic and diluted weighted average common units
outstanding for each period is as follows:
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Basic
Weighted average common units 25,437,974 24,736,940
================= =================
Diluted
Weighted average common units 25,437,974 24,736,940
Effect of dilutive securities:
Stock options 31,294 54,379
----------------- -----------------
Weighted average common units and assumed conversions 25,469,268 24,791,319
================= =================
</TABLE>
For the quarter ended March 31, 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 3,550,913 common
units were not included in the computation of diluted EPU because the impact on
basic EPU was anti-dilutive. For the quarters ended March 31, 1999 and 1998,
options to purchase 650,800 shares of the Company's common stock at prices
ranging from $19.35 to $21.35 and 5,500 shares of common stock at a price of
$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.
6
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NOTE 3 - 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.
NOTE 4 - ACQUISITION AND DISPOSITION ACTIVITY
At March 31, 1999, the Operating Partnership was holding for sale six
properties, all acquired in connection with the merger acquisition of Mid-
America Realty Investments, Inc. ("Mid-America"). Four of these properties are
enclosed malls and are not aligned with the Operating Partnership's strategic
property focus. The remaining two shopping center properties are located in the
Southeast region of the United States and are not aligned with the Operating
Partnership's strategic market focus. Subsequent to quarter-end, the Operating
Partnership completed the sale of Monument Mall, an enclosed mall located in
Scottsbluff, Nebraska, to an independent third party for a sales price of
$11,900,000. The dispositions of the remaining properties are expected to be
completed during 1999, although there can be no assurance that any such
dispositions will occur.
In connection with the merger acquisition of Mid-America, the Operating
Partnership acquired a 50% interest in a joint venture that owns two
neighborhood shopping centers and one enclosed mall. Subsequent to quarter-end,
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.
NOTE 5 - ISSUANCE OF SERIES B PREFERRED UNITS
On February 23, 1999, the Operating Partnership completed a private placement of
2,000,000 units of its 8.875% Series B Cumulative Redeemable Perpetual Preferred
Units (the "Series B Preferred Units") to two institutional investors 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 B Cumulative Redeemable Perpetual Preferred Stock 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 B
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 $49.1 million were used to reduce outstanding borrowings under the
line of credit facility.
Holders of the Series B Preferred Units have the right to exchange Series B
Preferred Units for shares of Series B 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 B Preferred Units (i) at any time on or after
February 23, 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 B Preferred Units for federal income tax purposes.
NOTE 6 - SEGMENT REPORTING
As of March 31, 1999, the Operating Partnership owned interests in 98 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 the first quarter of 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 98 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
highly 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 revenues, net operating income and computation of FFO for the reportable
segments and for the Operating Partnership, and a reconciliation to net income
attributable to common unit holders, are as follows for each of the quarters
ended March 31, 1999 and 1998 (dollars in thousands):
7
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<TABLE>
<CAPTION>
Quarter Ended March 31,
-----------------------------------
1999 1998
-------------- ----------------
<S> <C> <C>
TOTAL PROPERTY REVENUE:
Mixed-use office property $ - $ 3,703
Shopping center properties 39,065 25,550
-------------- ----------------
39,065 29,253
-------------- ----------------
TOTAL PROPERTY OPERATING EXPENSES:
Mixed-use office property - 1,552
Shopping center properties 12,793 8,262
-------------- ----------------
12,793 9,814
-------------- ----------------
Net operating income 26,272 19,439
-------------- ----------------
NON-PROPERTY (INCOME) EXPENSES:
Other non-property income (288) (102)
Equity in earnings of partnership, excluding depreciation and amortization (390) -
Mortgage and other interest 7,687 5,558
General and administrative 1,978 1,236
Amortization of deferred finance and non-real estate related costs 279 241
Preferred unit distributions 2,282 -
Income allocated to minority interest 21 43
-------------- ----------------
11,569 6,976
-------------- ----------------
Funds from Operations $14,703 $12,463
============== ================
RECONCILIATION TO NET INCOME ATTRIBUTABLE TO COMMON UNIT
HOLDERS:
Funds from Operations $14,703 $12,463
Depreciation of real estate assets and amortization of tenant improvements (5,449) (3,931)
Amortization of deferred leasing commissions (431) (493)
Other amortization (298) (298)
Depreciation and amortization included in equity in earnings of partnership (43) -
Provision for loss on real estate investment - (875)
-------------- ----------------
Net income attributable to common unit holders $ 8,482 $ 6,866
============== ================
</TABLE>
8
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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 owns 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 goals 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 $875,000 reflected in the first
quarter of 1998.
Results of operations for the first quarter of 1999 compared with the first
quarter of 1998 were driven in large part from the acquisition activity.
Including the provision for loss on real estate investment in 1998, net income
increased $1,616,000 from $6,866,000 in the first quarter of 1998 to $8,482,000
in the first quarter of 1999. Basic and diluted net income per common unit
increased $0.05 per common unit, or 18%, from $0.28 per common unit in the first
quarter of 1998 to $0.33 per common unit in the first quarter of 1999. Our
results of operations for the first quarter of 1998 and 1999 reflect 51
properties that were held both quarters and 46 properties that we purchased or
sold between the two periods.
Property Specific Revenues And Expenses (in thousands of dollars):
<TABLE>
<CAPTION>
Three months ended
March 31, Properties
----------------------------- Acquisitions/ Held Both
1999 1998 Difference Dispositions Periods
------------ ------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Rental income $38,710 $28,736 $9,974 $8,752 $1,222
Operations, maintenance and management $ 6,678 $ 4,333 $2,345 $1,645 $ 700
Real estate taxes $ 6,115 $ 5,481 $ 634 $ 345 $ 289
Depreciation and amortization $ 6,457 $ 4,963 $1,494 $1,322 $ 172
</TABLE>
Results attributable to acquisition and disposition activities:
Rental income increased from $28,736,000 in the first quarter of 1998 to
$38,710,000 in the first quarter of 1999. Approximately $12,553,000 of the
increase was attributable to acquisition activities, including $6,036,000 for
properties acquired in connection with the merger acquisition of Mid-America,
partially offset by $3,801,000 attributable to disposition activities, primarily
One North State.
Operations, maintenance and management expense increased from $4,333,000 in the
first quarter of 1998 to $6,678,000 in the first quarter of 1999. Approximately
$1,645,000 of the increase was attributable to acquisition and disposition
activities, including an increase of $1,136,000 for properties acquired in
connection with the merger acquisition of Mid-America.
Real estate taxes increased from $5,481,000 in the first quarter of 1998 to
$6,115,000 in the first quarter of 1999. Approximately $1,377,000 of the
increase was attributable to acquisition activities, including an increase of
$709,000 for properties acquired in connection with the merger acquisition of
Mid-America, partially offset by a decrease of $1,032,000 for properties sold,
primarily One North State.
Depreciation and amortization increased from $4,963,000 in the first quarter of
1998 to $6,457,000 in the first quarter of 1999. Approximately $1,322,000 of
the increase was attributable to acquisition and disposition activities,
including an increase of $454,000 for properties acquired in connection with the
merger acquisition of Mid-America.
Results for properties fully operating throughout both periods:
Several factors affected the comparability of results for properties fully
operating throughout both quarters ended March 31, 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 $631,000
compared with the first quarter of 1998. This increase in operations,
maintenance and management expense was mitigated by the recoverability of such
expenses through operating expense reimbursements, contributing $526,000 to an
increase in rental income. 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 quarter of 1998 at these
two shopping centers by $322,000 and $109,000, respectively. We expect a 62,000
9
<PAGE>
square-foot lease with Carson Pirie Scott to commence in the second half of
1999, which will replace approximately one half the space previously occupied by
Montgomery Ward. We are currently negotiating leases to replace the remaining
space previously occupied by Montgomery Ward and the space vacated by HomePlace.
Finally, the Operating Partnership, as well as most other real estate companies,
were 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 increased in 1999 by
$163,000.
We had a 5% increase in rental income for properties fully operating throughout
both quarters. In addition to the changes in rental income described above,
rental income increased $150,000 at Rollins Crossing and $85,000 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. Additionally, rental income
increased $156,000 at Sun Ray Shopping Center 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 $205,000
from the prior year. Rental income increased $96,000 at Brookdale Square
primarily due to the receipt of a termination fee from Brookdale Cinema and the
commencement of a 22,000 square-foot lease with Pep Boys.
Non-Property Specific Revenues and Expenses:
Other income increased from $619,000 during the quarter ended March 31, 1998 to
$643,000 during the quarter ended March 31, 1999, an increase of $24,000. Other
income contains both property specific and non-property specific income;
however, the increase is primarily attributable to property specific sources.
The increase in other income resulted from an increase in other property income
generated from properties acquired during 1998, primarily from four enclosed
malls acquired in connection with the merger acquisition of Mid-America,
partially offset by a reduction in other income of $166,000 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.
Mortgage and other interest expense increased to $7,687,000 for the quarter
ended March 31, 1999 from $5,558,000 during the same period in the prior year,
an increase of $2,129,000. 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 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 $835,000. A higher weighted
average balance outstanding on the line of credit during the first quarter of
1999 compared with the first quarter of 1998, partially offset by a lower
weighted average interest rate, resulted in an increase in interest expense on
the line of credit of $757,000. 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 in the first
quarter of 1998 amounted to $1,349,000 compared with $1,903,000 for the full
quarter in 1999, an increase of $554,000. Our total weighted average interest
rate decreased to 7.02% for the first quarter of 1999 from 7.41% for the first
quarter of 1998.
General and administrative expense increased from $1,236,000 during the quarter
ended March 31, 1998 to $1,978,000 during the quarter ended March 31, 1999, an
increase of $742,000. The increase primarily resulted from the growth of the
Operating Partnership, including increases in salaries for additional personnel,
and franchise taxes and related fees for a larger capital base and expanded
geographic market.
While the capital markets for REITs have continued to remain 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"). Although the spread between the interest rate currently
available under the line of credit facility and the rate associated with the
Series B Preferred Units is 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
10
<PAGE>
prospective acquisitions in our target markets and from shopping centers in our
core portfolio. Distributions on the Series B Preferred Units were $456,000
during the first quarter of 1999; on a going-forward basis, such distributions
are projected to be approximately $1.1 million for each full quarterly period
that the Series B Preferred Units are outstanding.
Distributions on the Series A Preferred Units issued in connection with the
merger acquisition of Mid-America in August 1998 were $1,826,000 during the
first quarter of 1999.
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 by the Company of proceeds from the
issuance by the Company 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 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 we anticipate that value can
be created from new developments more effectively than from acquisitions of
existing shopping center properties.
As of March 31, 1999, our financial liquidity was provided by $109,000 in cash
and cash equivalents and by the unused balance on our bank line of credit of
$130.5 million. As of March 31, 1999, we were holding for sale six properties
with an aggregate book value of $46.5 million. Subsequent to quarter-end, we
completed the sale of one of the enclosed malls, Monument Mall, located in
Scottsbluff, Nebraska, for a sales price of $11,900,000. Also subsequent to
quarter-end, our 50%-owned joint venture, Bradley Bethal Limited Partnership,
sold Imperial Mall, an enclosed mall located in Hastings, Nebraska, for
$12,100,000 including the issuance of a $3,100,000 note at 9.0%, secured by a
second deed of trust. We used the net proceeds from these transactions of
approximately $14.4 million to pay-down the line of credit and for general
corporate purposes. We expect to complete the sales of the remaining five
properties held for sale during 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 it 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. The Operating
Partnership has also implemented a Medium-Term Note program providing it with
the added flexibility of issuing Medium-Term Notes due nine months or more from
date of issue in varying 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.
Mortgage debt outstanding at March 31, 1999 consisted of fixed-rate notes
totaling $102.7 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 amortization of
mortgage debt totaled $413,000 during the quarter ended March 31, 1999, with
another $1.9 million scheduled principal payments 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.
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 of the Operating Partnership and equity
securities of the Company 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 decreased to $14,435,000 during
the first quarter of 1999, from $15,354,000 during the same period in 1998. The
decrease resulted from the payment of $8,207,000 in interest during the first
quarter of 1999 compared with $2,281,000 during the first quarter of 1998, an
increase of $5,926,000, despite an increase of only $2,129,000 in interest
expense to $7,687,000 from $5,558,000. This increase primarily resulted from
the payment of $3,600,000 during the first quarter of 1999 of a semi-
11
<PAGE>
annual interest payment due January 15, on $100 million of 7.2% ten-year
unsecured Notes, accrued in the prior year from the issuance date of January 28,
1998, but not paid. Excluding the semi-annual interest payment, cash provided by
operating activities increased $2,666,000. This increase is primarily due to the
growth of our portfolio, from 53 properties at January 1, 1998, to 98 properties
at March 31, 1999.
For the three months ended March 31, 1999, funds from operations ("FFO")
increased $2,240,000, or 18%, from $12,463,000 to $14,703,000. 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 share
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 from investing activities increased to a use of cash of
$2,641,000 during the first quarter of 1999, from a use of cash of $37,520,000
during the same period of 1998. No acquisitions were completed the first
quarter of 1999, compared with the first quarter of 1998, when we completed the
acquisitions of five shopping centers located in Indiana, Kentucky, Michigan,
and Wisconsin aggregating 602,000 square feet for a total purchase price of
approximately $33,500,000.
Financing Activities
Net cash flows provided by financing activities decreased to a use of cash of
$11,685,000 during the first quarter of 1999 from a source of cash of
$19,924,000 during the same period in 1998. Distributions to common and
preferred unit holders, as well as to the minority interest, were $11,976,000 in
the first quarter of 1999, and $9,006,000 in the first quarter of 1998.
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. Net proceeds from the issuance of approximately $49.1
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
first quarter of 1999, we completed the necessary leasing transactions to
commence our planned redevelopment of the Commons of Chicago Ridge, a shopping
center in our core portfolio located in metropolitan Chicago. Chicago Ridge is
the type of redevelopment investment opportunity upon which we will continue to
focus. The redevelopment will represent an investment of approximately $9.5
million, and is expected to generate a high return on invested capital while
adding substantial long-term value to an existing center. We also continue to
establish a pipeline of development opportunities and potential acquisitions of
shopping centers where our redevelopment experience can 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.
As of March 31, 1999, we were holding for sale six non-core properties,
consisting of four enclosed malls and two community shopping centers, all
acquired in connection with the merger acquisition of Mid-America. Subsequent to
quarter-end, we completed the sale of one of the enclosed malls, Monument Mall,
located in Scottsbluff, Nebraska, for a sales price of $11.9 million. Although
there can be no assurance that any additional sales will be completed, we expect
to complete the sales of the remaining properties during 1999, utilizing the
proceeds to reduce outstanding indebtedness under the line of credit with the
expectation that the increased borrowing capacity would
12
<PAGE>
be used to acquire or develop additional shopping centers within our target
market that are more in keeping with our grocery-anchored community shopping
center focus, and that generate higher investment returns in challenging capital
markets.
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.
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. We have incurred minimal costs associated with
bringing our information technology systems to be Year 2000 ready.
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 substantially
completed our evaluation of the potential exposure to such non-information
technology systems and do not expect to incur more than $50,000 to become Year
2000 ready. We expect to be Year 2000 ready before June 30, 1999. 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.
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 are in the process of surveying such parties
to identify the potential exposure in the event they are not Year 2000 ready in
a timely manner. We expect to have responses from such parties by May 1999.
However, at this time, 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
13
<PAGE>
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 and development opportunities in the Midwest on favorable terms;
the availability of equity and debt capital in the public markets; the fact that
returns from development and acquisition activity may not be at expected levels;
the need to renew leases or relet space upon the expiration of current leases;
and the financial flexibility to refinance debt obligations when due. The
statements made under the caption "Risk Factors" included in the Operating
Partnership's Form 10-K for 1998 are incorporated herein by reference.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
On February 23, 1999, the Operating Partnership issued 2,000,000 of
its 8.875% Series B Cumulative Redeemable Perpetual Preferred Units
(the "Series B Preferred Units") to an institutional investor at a
price of $25.00 per unit, resulting in net proceeds to the Operating
Partnership of approximately $49.1 million. On or after February 23,
2004, the Operating Partnership may redeem the Series B 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 B Cumulative Redeemable Perpetual
Preferred Stock of the Company (the "Series B 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 B Preferred Units do not include any mandatory
redemption or sinking fund provisions.
Holders of the Series B Preferred Units have the right to exchange
Series B Preferred Units for shares of Series B 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 B
Preferred Units (i) at any time on or after February 23, 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 B Preferred Units for federal income tax
purposes. The Series B 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 January 1, 1999
through March 31, 1999:
Form 8-K filed March 3, 1999 (earliest event February 23, 1999),
reporting in Item 5., the issuance by Bradley Operating Limited
Partnership of 2,000,000 units of 8.875% Series B Cumulative
Redeemable Perpetual Preferred Units to two institutional
investors at a price of $25.00 per unit.
15
<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: May 13, 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
16
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