UNITED STATES
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 #333-64391
Inland Retail Real Estate Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland #36-4246655
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2901 Butterfield Road, Oak Brook, Illinois 60523
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 630-218-8000
N/A
(Former name, former address and former fiscal
year, if changed since last report)
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
As of November 5, 1999, there were 4,527,275 Shares of Common Stock
outstanding.
-1-
PART I - Financial Information
Item 1. Consolidated Financial Statements
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Balance Sheet
September 30, 1999
(unaudited)
Assets
Investment Properties:
Land............................................ $ 25,449,042
Building and site improvements.................. 75,424,650
-------------
100,873,692
Less accumulated depreciation................... 477,379
-------------
Net investment properties......................... 100,396,313
Cash and cash equivalents......................... 2,834,411
Accounts and rents receivable..................... 378,822
Real estate tax and insurance escrow deposits..... 513,669
Furniture and equipment (net of accumulated
depreciation of $1,804)......................... 10,386
Loan fees (net of accumulated amortization of
$1,626)......................................... 129,724
Other assets...................................... 123,964
-------------
Total assets...................................... $104,387,289
=============
See accompanying notes to consolidated financial statements.
-2-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Balance Sheet
September 30, 1999
(unaudited)
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable................................ $ 37,177
Accrued offering costs due to Affiliates........ 1,299,512
Accrued offering costs due to non-affiliates.... 1,554,262
Accrued interest payable to non-affiliates...... 339,809
Accrued real estate taxes....................... 373,085
Distributions payable........................... 175,621
Security Deposits............................... 165,150
Mortgages payable............................... 73,614,927
Unearned income................................. 152,067
Other liabilities............................... 113,140
Due to Affiliates............................... 542,624
-------------
Total liabilities............................. 78,367,374
-------------
Minority interest in partnership................ 2,000
Stockholders' Equity:
Preferred Stock, $.01 par value, 10,000,000
shares authorized, none outstanding............ -
Common stock, $.01 par value, 100,000,000 Shares
authorized; 3,215,009 issued and outstanding.. 32,150
Additional paid-in capital (net of costs of
offering of $5,650,869, of which $3,235,221
was paid to Affiliates)........................ 26,458,891
Accumulated distributions in excess of
net income.................................... (473,126)
-------------
Total stockholders' equity.................... 26,017,915
-------------
Commitments and contingencies
Total liabilities and stockholders' equity........ $104,387,289
=============
See accompanying notes to consolidated financial statements.
-3-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statements of Operations
For the three and nine months ended September 30, 1999
(unaudited)
Three months Nine months
ended ended
September 30, September 30,
1999 1999
Income:
Rental income........................... $ 1,441,695 1,821,483
Additional rental income................ 278,656 505,354
Interest income......................... 63,166 98,758
Other income............................ 100 100
------------- -------------
1,783,617 2,425,695
------------- -------------
Expenses:
Professional services to Affiliates..... 1,913 12,155
Professional services to non-affiliates. 19,100 48,133
General and administrative expenses
to Affiliates......................... 12,319 52,505
General and administrative expenses to
non-affiliates........................ 12,097 51,801
Property operating expenses to
Affiliates............................ 83,464 92,822
Property operating expenses to
non-affiliates........................ 361,367 624,859
Mortgage interest to Affiliates......... 583 2,028
Mortgage interest to non-affiliates..... 810,089 965,335
Acquisition costs expensed.............. 13,838 25,281
Depreciation............................ 391,364 479,183
Amortization............................ 1,427 1,626
------------- -------------
1,707,561 2,355,728
------------- -------------
Net income................................ $ 76,056 69,967
============= =============
Net income per weighted average shares of
common stock outstanding, basic and
diluted (2,292,809 for the three
months ended September 30, 1999 and
1,289,409 for the nine months ended
September 30, 1999)..................... $ .03 .05
============= =============
See accompanying notes to consolidated financial statements.
-4-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Stockholders' Equity
September 30, 1999
(unaudited)
Accumulated
Additional Distributions
Common Paid-in in excess of
Stock Capital net income Total
Balance at
December 31, 1998......... $ 200 199,800 - 200,000
Net income.................. - - 69,967 69,967
Distributions declared
($.42 for the nine months
ended September 30, 1999
per weighted average shares
of common stock
outstanding).............. - - (543,093) (543,093)
Proceeds from Offering (net
of Offering costs of
$5,650,869)............... 31,950 26,259,091 - 26,291,041
---------- ----------- ------------ ------------
Balance September 30, 1999.. $ 32,150 26,458,891 (473,126) 26,017,915
========== =========== ============ ============
See accompanying notes to consolidated financial statements.
-5-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Cash Flows
For the nine months ended September 30, 1999
(unaudited)
1999
Cash flows from operating activities:
Net income...................................... $ 69,967
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.................................. 479,183
Amortization.................................. 1,626
Straight line rental income................... (35,809)
Changes in assets and liabilities:
Accounts and rents receivable............... (343,013)
Other assets................................ (123,964)
Real estate tax and insurance escrows....... (513,669)
Accrued interest payable.................... 339,809
Accrued real estate taxes................... 373,085
Accounts payable............................ 37,177
Unearned income............................. 152,067
Other liabilities........................... 113,140
Security deposits........................... 165,150
-------------
Net cash provided by operating activities......... 714,749
-------------
Cash flows from investing activities:
Purchase of investment properties............... (27,208,723)
Furniture and equipment......................... (12,190)
-------------
Net cash used in investing activities............. (27,220,913)
-------------
Cash flows from financing activities:
Due to Affiliates............................... 542,624
Proceeds from offering.......................... 31,941,910
Payment of offering costs....................... (2,797,095)
Principal payments of debt...................... (50,042)
Loan fees....................................... (131,350)
Distributions paid.............................. (367,472)
-------------
Net cash provided by financing activities......... 29,138,575
-------------
Net increase in cash and cash equivalents......... 2,632,411
Cash and cash equivalents at December 31, 1998.... 202,000
-------------
Cash and cash equivalents at end of period........ $ 2,834,411
=============
See accompanying notes to consolidated financial statements.
-6-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Consolidated Statement of Cash Flows
(continued)
For the nine months ended September 30, 1999
(unaudited)
Supplemental schedule of noncash investing and financing activities:
Purchase of investment properties................. $ 100,873,692
Assumption of mortgage debt....................... 73,664,969
--------------
$ 27,208,723
==============
Distributions payable............................. $ 175,621
==============
Cash paid for interest............................ $ 819,383
==============
See accompanying notes to consolidated financial statements.
-7-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
September 30, 1999
(unaudited)
The accompanying consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
(1) Organization and Basis of Accounting
Inland Retail Real Estate Trust, Inc. (the "Company") was formed on September 3,
1998 to acquire and manage a diversified portfolio of real estate, primarily
multi-tenant shopping centers. It is anticipated that the Company will initially
focus on acquiring properties in the southeastern states, primarily Florida,
Georgia, North Carolina and South Carolina. The Company may also acquire
single-user retail properties in locations throughout the United States, certain
of which may be sale and leaseback transactions, net leased to creditworthy
tenants. Inland Retail Real Estate Advisory Services, Inc. (the "Advisor"), an
affiliate of the Company, is the advisor to the Company. On February 11, 1999,
the Company commenced an initial public offering ("Offering"), on a best efforts
basis of 50,000,000 Shares of common stock ("Shares") at $10 per Share and
4,000,000 Shares at $9.50 per Share which may be distributed pursuant to the
Company's Distribution Reinvestment Program ("DRP"). As of September 30, 1999,
the Company had received subscriptions for a total of 3,198,659 Shares. In
addition the Company has distributed 16,350 Shares pursuant to the Company's
DRP.
The Company intends to qualify as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended, for federal income tax purposes
commencing with the tax year ending December 31, 1999. If the Company qualifies
for taxation as a REIT, the Company generally will not be subject to federal
income tax to the extent it distributes its REIT taxable income to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax on its taxable income at
regular corporate tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and property and federal income and excise taxes on its undistributed income.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
-8-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
September 30, 1999
(unaudited)
Statement of Financial Accounting Standards No. 121 requires the Company to
record an impairment loss on its property to be held for investment whenever its
carrying value cannot be fully recovered through estimated undiscounted future
cash flows from operations and sale of properties. The amount of the impairment
loss to be recognized would be the difference between the property's carrying
value and the property's estimated fair value. As of September 30, 1999, the
Company does not believe any such impairment of its properties exists.
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents and are carried at cost, which
approximates market.
Depreciation expense is computed using the straight-line method. Buildings and
improvements are depreciated based upon estimated useful lives of 30 years for
the building and building improvements and 15 years for the site improvements.
Furniture and equipment is depreciated over five years.
Loan fees are amortized on a straight line basis over the life of the related
loans.
Offering costs are offset against the Stockholders' equity accounts and consist
principally of printing, selling and registration costs.
Rental income is recognized on a straight-line basis over the term of each
lease. The difference between rental income earned on a straight-line basis and
the cash rent due under the provisions of the lease agreements is recorded as
deferred rent receivable. The Company recognizes percentage rents as they are
received.
The Company believes that the interest rates associated with the mortgages
payable and notes payable to Affiliates approximate the market interest rates
for these types of debt instruments, and as such, the carrying amount of the
mortgages payable and notes payable to Affiliates approximate their fair value.
In the opinion of management, the financial statements contain all the
adjustments necessary, which are of a normal recurring nature, to present fairly
the financial position and results of operations for the period presented
herein. Results of interim periods are not necessarily indicative of results to
be expected for the year.
-9-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
September 30, 1999
(unaudited)
(2) Basis of Presentation
The accompanying Consolidated Balance Sheet includes the accounts of the
Company, as well as the accounts of the operating partnership, in which the
Company has an approximately 99% controlling general partner interest. The
Advisor owns the remaining approximately 1% limited partner common units in the
operating partnership for which it paid $2,000 and which is reflected as a
minority interest in the accompanying Consolidated Balance Sheet. The effect of
all significant intercompany transactions have been eliminated.
(3) Transactions with Affiliates
As of September 30, 1999, the Company had incurred $5,650,869 of offering costs.
Pursuant to the terms of the Offering, the Advisor is required to pay
organizational and offering expenses (excluding sales commissions, the marketing
contribution and the due diligence expense allowance) in excess of 5.5% of the
gross proceeds of the Offering ("Gross Offering Proceeds") or all organization
and offering expenses (including selling commissions) which together exceed 15%
of Gross Offering Proceeds. As of September 30, 1999, offering costs did exceed
the 5.5% and 15% limitations, however the Company anticipates that these costs
will not exceed these limitations upon completion of the Offering. Any excess
amounts at the completion of the Offering will be reimbursed by the Advisor.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
Offering. In addition, an affiliate of the Advisor is entitled to receive
selling commissions, a marketing contribution and a due diligence expense
allowance from the Company in connection with the Offering.
The Advisor and its affiliates are entitled to reimbursement for salaries and
expenses of employees of the Advisor and its affiliates relating to the
administration of the Company. Such costs are included in professional services
to Affiliates and general and administrative expenses to Affiliates.
The Advisor has contributed $200,000 to the capital of the Company for which it
received 20,000 Shares.
-10-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
September 30, 1999
(unaudited)
The Advisor may receive an annual Advisor Asset Management Fee of not more than
1% of the Average Invested Assets, paid quarterly. For any year in which the
Company qualifies as a REIT, the Advisor must reimburse the Company: (i) to the
extent that the Advisor Asset Management Fee plus other operating expenses paid
during the previous calendar year exceed 2% of the Company's average invested
assets for the calendar year or 25% of the Company's Net Income for that
calendar year; and (ii) to the extent that stockholders have not received an
annual distribution equal to or greater than the 7% current return. For the
nine months ended September 30, 1999, the Company has neither paid nor accrued
such fees.
The property manager, an entity owned principally by individuals who are
affiliates of the Advisor, is entitled to receive property management fees for
management and leasing services. The Company incurred and paid property
management fees of $100,658 for the nine months ended September 30, 1999, of
which $92,822 were retained by that property manager. The balance was paid to
an unaffiliated property manager.
(4) Stock Option Plan and Soliciting Dealer Warrants
The Company adopted an Independent Director Stock Option Plan which, subject to
certain conditions, provides for the grant to each Independent Director of an
option to acquire 3,000 Shares following their becoming a Director and for the
grant of additional options to acquire 500 Shares on the date of each annual
stockholders' meeting commencing with the annual meeting in 2000 if the
Independent Director is a member of the board of directors on such date. The
options for the initial 3,000 Shares to be granted shall be exercisable as
follows: 1,000 Shares on the date of grant and 1,000 Shares on each of the first
and second anniversaries of the date of grant. The subsequent options will be
exercisable on the second anniversary of the date of grant. The initial options
will be exercisable at $9.05 per Share. The subsequent options will be
exercisable at the fair market value of a Share on the last business day
preceding the annual meeting of Stockholders, and shall be $9.05 per Share until
the earlier of the termination of the Offering or February 11, 2001. As of
September 30, 1999, no options had been issued.
In addition to sales commissions, soliciting dealers will also receive one
soliciting dealer warrant for each 25 Shares sold by such soliciting dealer
during the Offering, subject to state and federal securities laws and subject to
the issuance of a maximum of 2,000,000 soliciting dealers warrants to purchase
an equivalent number of Shares. The holder of a soliciting dealer warrant will
be entitled to purchase one Share from the Company at a price of $12 during the
period commencing one year from the date of the first issuance of any of the
soliciting dealer warrants and ending five years after February 11, 1999. As of
-11-
September 30, 1999, 126,544 warrants had been earned, however, no warrants had
been exercised.
-12-
<TABLE>
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
September 30, 1999
(unaudited)
<CAPTION>
(5) Investment Properties Gross amount at which carried
Initial Cost (A) at end of period
Net
Buildings Adjustments Buildings,
Date and Site to and Site
Acquired Land improvements Basis (B) Land improvements Total
-------- ------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Multi-tenant Retail
Lake Walden Square
Plant City, FL......... 05/1999 $ 3,006,662 11,532,321 26,223 3,006,662 11,558,544 14,565,206
Merchants Square
Zephyrhills, FL........ 06/1999 992,225 4,749,818 9,033 992,225 4,758,851 5,751,076
Town Center Commons
Kennesaw, GA........... 07/1999 3,293,792 6,362,589 22,369 3,293,792 6,384,958 9,678,750
Boynton Commons
Boynton Beach FL....... 07/1999 8,698,355 21,865,086 2,373 8,698,355 21,867,459 30,565,814
Lake Olympia Square (C)
Ocoee, FL.............. 09/1999 2,567,143 7,306,484 (7,310) 2,567,143 7,299,174 9,866,317
Bridgewater Marketplace
Orlando, FL............ 09/1999 788,108 5,223,392 16,185 788,108 5,239,577 6,027,685
Bartow Marketplace
Cartersville, GA....... 09/1999 6,102,757 18,308,271 7,816 6,102,757 18,316,087 24,418,844
------------- ------------- ------------ ------------- ------------- -------------
Totals $ 25,449,042 75,347,961 76,689 25,449,042 75,424,650 100,873,692
============= ============= ============ ============= ============= =============
(A) The initial cost to the Company, represents the original purchase price of the property from an
Affiliate of our Advisor, or an unaffiliated third party, including amounts incurred subsequent
to acquisition, which were contemplated at the time the property was acquired.
(B) Adjustments to basis includes additions to investment properties and payments received under
master lease agreements. As part of several purchases, the Company will receive rent under
master lease agreements on the spaces currently vacant until the spaces are leased. GAAP
requires that as these payments are received, they be recorded as a reduction in the purchase
price of the properties rather than as rental income. The cumulative amount of such payments
was $51,853 as of September 30, 1999.
(C) When Lake Olympia Square was purchased by an affiliate of our Advisor, $234,145 was escrowed at
the closing. At the time of purchase by the Company, $89,400 of these funds remained available
to be used on a monthly basis to pay the principal portion of the debt service, through July,
2000. The net effect of this structure is that the Company will pay the interest portion of the
debt service over the next ten months. The cumulative amount received by the Company was
$10,189 as of September 30, 1999 which is reflected as an adjustment to the basis of the
property.
</TABLE>
-13-
-14-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
September 30, 1999
(unaudited)
(6) Operating Leases
Certain tenant leases contain provisions providing for stepped rent increases.
GAAP requires the Company to record rental income for the period of occupancy
using the effective monthly rent, which is the average monthly rent for the
entire period of occupancy during the term of the lease. The accompanying
consolidated financial statements include an increase of $35,809 for the nine
months ended September 30, 1999, of rental income for the period of occupancy
for which stepped rent increases apply and $35,809 in the related accounts and
rents receivable as of September 30, 1999. The Company anticipates collecting
these amounts over the terms of the related leases as scheduled rent payments
are made.
(7) Mortgages Payable
Mortgages payable consist of the following at September 30, 1999:
Current Current Balance at
Property as Interest Maturity Monthly September 30,
Collateral Rate Date Payment 1999
Mortgages payable to non-affiliates:
Lake Walden Square 7.63% 11/2007 $ 72,584 (a) $ 10,075,593
Merchants Square 7.50% 11/2008 30,066 (a) 4,270,811
Town Center Commons 7.00% 04/2000 (b) 2,508,000
7.15% 04/2006 (b) 4,750,000
Boynton Commons 7.21% 03/2000 (b) 7,797,580
7.15% 03/2006 (b) 15,125,000
Lake Olympia Square 8.25% 04/2007 50,978 (a) 5,932,943
Bridgewater Marketplace 7.13% 09/2000 (b) 1,792,500
7.13% 09/2006 (b) 2,987,500
Bartow Marketplace 6.88% 09/2000 (c) 4,900,000
6.88% 09/2004 (c) 13,475,000
-------------
$ 73,614,927
=============
(a) Payments are principal and interest.
(b) Payments are interest only. Payments on these mortgages are based on a
floating rate of 175 basis points over the 30-day LIBOR rate, which adjusts
monthly.
-15-
(c) Payments are interest only. Payments on this mortgage are based on a
floating rate of 150 basis points over the 30-day LIBOR rate, which adjusts
monthly.
-16-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
September 30, 1999
(unaudited)
(8) Segment Reporting
The Company owns and seeks to acquire multi-tenant retail centers, neighborhood
and community shopping centers in the Southeastern states, primarily Florida,
Georgia, North Carolina, and South Carolina. All of the Company's shopping
centers are located within these states. The Company's shopping centers are
typically anchored by grocery and drug stores complemented with additional
stores providing a wide range of other goods and services to shoppers.
The Company assesses and measures operating results on an individual property
basis for each of its properties based on net property operations. Since all
of the Company's properties 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
properties have been aggregated and reported as one operating segment.
The property revenues and net property operations of the reportable segments
are summarized in the following tables as of September 30, 1999, and for the
nine month period then ended, along with a reconciliation to net income.
Property asset information is as of September 30, 1999.
1999
Total property revenues......... $ 2,326,837
Total property operating
expenses...................... 717,681
Mortgage interest................ 967,363
-------------
Net property operations.......... 641,793
-------------
Interest income.................. 98,758
Other income..................... 100
Less non property expenses:
Professional services.......... 60,288
General and administrative..... 129,587
Depreciation and amortization.. 480,809
-------------
Net income....................... $ 69,967
=============
Net investment properties........ $100,396,313
=============
-17-
INLAND RETAIL REAL ESTATE TRUST, INC.
(a Maryland corporation)
Notes to Consolidated Financial Statements
(continued)
September 30, 1999
(unaudited)
(9) Earnings per Share
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed by reflecting the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company.
(10) Subsequent Events
On October 22, 1999, the Company exercised a one-time right to prepay, without
penalty, a portion of the outstanding principal indebtedness owed to First
Union National Bank and secured by a first mortgage on the Merchants Square
property. The Company paid $1,100,000 to First Union, reducing the outstanding
principal balance of the indebtedness to $3,167,437 and reducing the interest
rate from 7.5% per annum to 7.25% per annum. Payments of interest only at the
new rate will be due monthly commencing November 1, 1999 through and including
November 1, 2003. Starting on December 1, 2003, payments of principal and
interest, based on a 360 month amortization schedule, will be due monthly with
the entire outstanding balance due on November 1, 2008.
On October 26, 1999, the Company purchased a shopping center known as
Countryside Shopping Center by acquiring the interests of Inland Southeast
Investment Corporation and Inland Southeast Acquisition Corp., both of which
are affiliates of our Advisor, in Inland Southeast Countryside Limited
Partnership. The Inland Southeast Countryside Limited Partnership owns the
entire fee simple interest in Countryside Shopping Center. An Affiliate of
Inland Retail Real Estate Trust, Inc. purchased Countryside from an
unaffiliated third party (seller) on behalf of Inland Retail Real Estate Trust,
Inc. on March 31, 1998. Inland Retail Real Estate Trust, Inc. acquired
Countryside from this affiliate at their cost upon receipt of proceeds from an
equity offering. The Company purchased Countryside Shopping Center for
$8,595,602. As part of the acquisition, the Company assumed the outstanding
mortgage debt related to Countryside Shopping Center of approximately
$6,720,000. The assumed debt, which was modified October 26, 1999, has an
annual interest rate of 175 points over LIBOR (currently 7.13%).The property is
located in Naples, Florida and contains 73,965 gross leasable square feet. Its
tenants leasing more than 10% of the total square footage include Winn-Dixie
Stores, Inc., a supermarket, and Promedco of Southwest Florida, Inc., a medical
and health care center.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this quarterly report on
Form 10-Q constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, limitations on the area in which the
Company may acquire properties; risks associated with borrowings secured by the
Company's properties; competition for tenants and customers; federal, state or
local regulations; adverse changes in general economic or local conditions;
competition for property acquisitions with third parties that have greater
financial resources than the Company; inability of lessees to meet financial
obligations; uninsured losses; risks of failing to qualify as a REIT; and
potential conflicts of interest between the Company and its affiliates
including the Advisor. The abbreviations made in the Notes to Consolidated
Financial Statements are used in this Item 2.
Liquidity and Capital Resources
The Company was formed on September 3, 1998 to acquire and manage a diversified
portfolio of real estate, primarily multi-tenant shopping centers. It is
anticipated that the Company will initially focus on acquiring properties in
the southeastern states, primarily Florida, Georgia, North Carolina and South
Carolina. The Company may also acquire single-user retail properties in
locations throughout the United States, certain of which may be sale and
leaseback transactions, net leased to creditworthy tenants. On February 11,
1999, the Company commenced the Offering of 50,000,000 Shares at a price of $10
per Share and of 4,000,000 Shares at a price of $9.50 per Share which may be
distributed pursuant to the DRP. Inland Retail Real Estate Advisory Services,
Inc. is the Advisor to the Company. As of September 30, 1999, subscriptions
for a total of 3,198,659 Shares had been received from the public, which
includes 20,000 Shares issued to the Advisor. In addition the Company has
distributed 16,350 shares pursuant to the Company's DRP. The Advisor has
guaranteed payment of all public offering expenses (excluding selling
commissions, the marketing contribution and the due diligence expense
allowance) in excess of 5.5% of the Gross Offering Proceeds or all organization
and offering expenses (including such selling expenses) which together exceeds
15% of the Gross Offering Proceeds.
The Company will provide the following programs to facilitate investment in the
Shares and to provide limited liquidity for Stockholders until such time as a
market for the Shares develops:
-19-
The distribution reinvestment program will allow stockholders who purchase
Shares pursuant to the Offering to automatically reinvest distributions by
purchasing additional Shares from the Company. Such purchases will not be
subject to selling commissions or the marketing contribution and due diligence
expense allowance and will be sold at a price of $9.50 per Share.
The Share Repurchase Program will, subject to certain restrictions, provide
existing stockholders with limited, interim liquidity by enabling them to sell
Shares back to the Company. The prices at which Shares may be sold back to the
Company are as follows:
- During the Offering period at $9.05 per Share;
- During the 12 months following the end of the Offering period at $9.25 per
Share;
- During the next 12 months at $9.50 per Share;
- During the next 12 months at $9.75 per Share; and
- Thereafter, at the greater of: (i) $10 per Share; or (ii) a price equal to
10 times our "funds available for distribution" per weighted average Share
outstanding for the prior calendar year.
Shares purchased by the Company will not be available for resale.
Cash Flows From Operating Activities
Net cash provided by operating activities generated $1,257,373 for the nine
months ended September 30, 1999. This is due primarily to the operations of
the seven properties acquired during May, June, July and September, 1999.
Cash Flows From Investing Activities
Cash flows used in investing activities were utilized primarily for the
purchase of seven properties.
Cash Flows From Financing Activities
For the nine months ended September 30, 1999, the Company generated $29,138,575
of cash flows from financing activities. This was due primarily to proceeds
raised of $31,941,910 from the sale of Shares for the nine months ended
September 30, 1999. The Company's cash flow from financing activities was
partially offset by an increase in the cash used to pay costs associated with
selling Shares for the nine months ended September 30, 1999. For the nine
months ended September 30, 1999, the Company paid offering costs totaling
$2,797,095. In addition, the Company also paid distributions for the nine
months ended September 30, 1999 of $367,472 and loan fees of $131,350 for the
nine months ended September 30, 1999.
The Advisor has guaranteed payment of all public offering expenses (excluding
selling commissions, the marketing contribution and the due diligence expense
allowance fee) in excess of 5.5% of the Gross Offering Proceeds or all
organization and offering expenses (including such selling expenses) which
together exceed 15% of the Gross Offering Proceeds. As of September 30, 1999,
organizational and offering costs totaling $5,650,869 did exceed these
limitations, however the Company anticipates that these costs will not exceed
-20-
these limitations upon completion of the Offering. Any excess amounts at the
completion of the Offering will be reimbursed by the Advisor.
-21-
Results of Operations
Through September 30, 1999, the Advisor had advanced a total of approximately
$2,853,000 to the Company for costs incurred with the Offering, all of which
remained unpaid.
Rental income, additional rental income, property operating expenses, mortgage
interest and depreciation are all a result of the operations from the seven
properties acquired during the second and third quarters of 1999.
Funds from Operations
One of the Company's objectives is to provide cash distributions to its
stockholders from cash generated by the Company's operations. Cash generated
from operations is not equivalent to the Company's net operating income as
determined under GAAP. Due to certain unique operating characteristics of real
estate companies, the National Association of Real Estate Investment Trusts
("NAREIT"), an industry trade group, has promulgated a standard known as "Funds
from Operations" or "FFO" for short, which it believes more accurately reflects
the operating performance of a REIT such as the Company. As defined by NAREIT,
FFO means net income computed in accordance with GAAP, less extraordinary,
unusual and non-recurring items, excluding gains (or losses) from debt
restructuring and sales of properties plus depreciation and amortization and
after adjustments for unconsolidated partnership and joint ventures in which
the REIT holds an interest. The Company has adopted the NAREIT definition for
computing FFO because management believes that, subject to the following
limitations, FFO provides a basis for comparing the performance and operations
of the Company to those of other REITs. The calculation of FFO may vary from
entity to entity since capitalization and expense policies tend to vary from
entity to entity. Items which are capitalized do not impact FFO, whereas items
that are expensed reduce FFO. Consequently, the presentation of FFO by the
Company may not be comparable to other similarly titled measures presented by
other REITs. FFO is not intended to be an alternative to "Net Income" as an
indicator of the Company's performance nor to "Cash Flows from Operating
Activities" as determined by GAAP as a measure of the Company's capacity to pay
distributions. FFO and funds available for distribution are calculated as
follows:
September 30,
1999
Net income.................................. $ 69,967
Depreciation................................ 479,183
------------
Funds from operations (1)................... 549,150
Principal amortization of debt.............. (50,042)
Deferred rent receivable (2)................ (35,809)
Payments received under master lease
agreements (4)............................. 62,042
Acquisition costs expensed (3).............. 25,281
------------
Funds available for distribution............ $ 550,622
============
-22-
(1) FFO does not represent cash generated from operating activities
calculated in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs. FFO should not be considered as an alternative
to net income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
(2) Certain tenant leases contain provisions providing for stepped rent
increases. GAAP requires the Company to record rental income for the period of
occupancy using the effective monthly rent, which is the average monthly rent
for the entire period of occupancy during the term of the lease.
(3) Acquisition costs expensed include certain costs and expenses relating
to the acquisition of properties. These costs are estimated to be up to .5% of
the Gross Offering Proceeds and are paid from the proceeds of the Offering.
(4) As part of several purchases, the Company receives rent under master lease
agreements on the spaces currently vacant until the spaces are leased. GAAP
requires that as these payments are received, they be recorded as a reduction in
the purchase price of the properties rather than as rental income. The
cumulative amount of such payments was $51,853 as of September 30, 1999.
When Lake Olympia Square was purchased by the Company, the Company received
escrowed funds of $89,400 to be used on a monthly basis to pay the principal
portion of the debt service, through July, 2000. The cumulative amount received
by the Company was $10,189 as of September 30, 1999 which was reflected as an
adjustment to the basis of the property.
The following table lists the approximate physical occupancy levels for the
Company's properties as of the end of each quarter during 1999. N/A indicates
the property was not owned by the Company at the end of the quarter.
1999
at at at at
Properties 03/31 06/30 09/30 12/31
Lake Walden Square N/A 93% 93%
Plant City, FL
Merchants Square N/A 100% 100%
Zephyrhills, FL
Town Center Commons N/A N/A 100%
Kennesaw, GA
Boynton Commons N/A N/A 95%
Boynton Beach, FL
Lake Olympia Square N/A N/A 96%
Ocoee, FL
Bridgewater Marketplace N/A N/A 97%
Orlando, FL
-23-
Bartow Marketplace N/A N/A 100%
Cartersville, GA
-24-
Year 2000 Issues
General
Many computer operating systems and software applications were designed such
that the year 1999 is the maximum date that can be processed accurately. In
conducting business, the Company relies on computers and operating systems
provided by equipment manufacturers, and also on application software developed
internally and, to a limited extent, by outside software vendors. The Company
has assessed its vulnerability to the so-called "Year-2000 Issue" with respect
to its equipment and computer systems.
State of Readiness
The Company has identified the following three areas for "Year-2000" compliance
efforts:
Business Computer Systems: The majority of the Company's information technology
systems were developed internally and include accounting, lease management,
investment portfolio tracking, and tax return preparation. The Company has
rights to the source code for these applications and employs programmers who are
knowledgeable regarding these systems. The Company has conducted tests of its
internal systems to determine year 2000 compliance, and these tests have
demonstrated that the Company should not experience any significant adverse
effects to its business as a result of the Year-2000 Issue. The Company does
not anticipate any material costs relating to its business computer systems
regarding year 2000 compliance since the Company's critical hardware and
software systems use four digits to represent the applicable year. Therefore,
the Company is not currently planning any independent testing of its critical
systems; however, should additional facts present themselves that would make it
prudent for the Company to have independent testing conducted, the Company will
do so. The Company does use various computers, so-called "PC's", that may run
software that may not use four digits to represent the applicable year. The
Company has tested the PC hardware to determine year 2000 compliance, and the
results of these tests have demonstrated that the Company should not experience
any significant adverse effects to its business as a result of the Year-2000
Issue. It should be noted that such PC's are incidental to the Company's
critical systems.
Tenants and Suppliers: The Company has surveyed proposed tenants, suppliers and
other parties with whom the Company intends to do a significant amount of
business to identify the Company's potential exposure in the event such parties
are not year 2000 compliant. The survey consists of a questionnaire sent to the
significant tenants and suppliers of the properties acquired by the Company. The
Company continues to review the responses received to such questionnaires.
Since this method involves parties over which the Company has no control, such
as public utility companies, it is difficult, at best, to judge the status of
the outside companies' year 2000 compliance. The Company will be working
closely with all suppliers of goods and services in an effort to minimize the
impact of the failure of any supplier to become year 2000 compliant by December
31, 1999. Currently, the Company is not aware of any material impact on its
business, operations or financial condition due to year 2000 non-compliance by
any one of the Company's proposed tenants or suppliers.
-25-
Non-Information Technology Systems: In the operation of its properties, the
Company will acquire equipment with embedded technology such as
microcontrollers, which operate heating, ventilation, and air conditioning
systems, fire alarms, security systems, telephones and other equipment utilizing
time-sensitive technology. The Company has evaluated its potential exposure and
costs if such non-information technology systems are not year 2000 compliant and
does not expect any costs or exposure to be material.
Year 2000 Costs
As of September 30, 1999, the Company's Advisor and its affiliates estimate that
costs to achieve year 2000 compliance will not exceed $100,000 for all such
affiliates. However, as of September 30, 1999, the Company's Advisor and its
affiliates anticipate that only approximately 3% of these costs will be directly
allocated to and paid by the Company. The balance of the year 2000 compliance
costs, approximately 97%, will be paid by the Advisor and its affiliates.
Total year 2000 compliance costs are not expected to be material.
Year 2000 Risks
The most reasonable likely worst case scenario for the Company with respect to
the year 2000 non-compliance of its business computer systems would be the
inability to access information which could result in the failure to issue
financial reports. The most reasonable likely worst case scenario for the
Company with respect to year 2000 non-compliance of its tenants is failure to
receive rental income which could result in the Company being unable to meet
cash requirements for monthly expenses and distributions. However, the Company
is permitted to borrow funds to meet distribution requirements. The most
reasonable likely worst case scenario for the Company with respect to the year
2000 non-compliance of its suppliers is the failure to supply necessary
utilities; including, but not limited to heating, as a result of a
malfunctioning of non-information technology systems in some of the Company's
properties.
Contingency Plan
The Company has formulated a contingency plan which will include printing copies
of all computer records during December 1999 to ensure that such records are not
lost in the event that the Company's internal computer systems become
inoperative due to year 2000 non-compliance.
-26-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily as a result of its
long-term debt used to maintain liquidity and fund capital expenditures and
expansion of the Company's real estate investment portfolio and operations. The
Company's interest rate risk management objectives are to limit the impact of
interest rate changes on earnings and cash flows and to lower its overall
borrowing costs. To achieve its objectives the Company borrows primarily at
fixed rates or at floating rates with the option to fix the rate at a later date
and may enter into derivative financial instruments such as interest rate swaps,
caps and treasury locks in order to mitigate its interest rate risk on related
financial instruments. The Company does not enter into derivative or interest
rate transactions for speculative purposes.
The Company's interest rate risk is monitored using a variety of techniques.
The table below presents the principal amounts and weighted average interest
rates by year of expected maturity to evaluate the expected cash flows and
sensitivity to interest rate changes.
1999 2000 2001 2002 2003
Fixed rate debt... 115,833 274,689 298,189 322,679 349,187
Weighted average
interest rate on
maturing debt... - - - - -
Variable rate debt - 16,998,080 - - -
Weighted average
interest rate on
maturing debt... - 7.10% - - -
The fair value of the Company's debt approximates its carrying amount.
-27-
PART II - Other Information
Items 1, 3, 4 and 5 are omitted because of the absence of conditions under which
they are required.
Item 2. Changes in Securities and Use of Proceeds
(d) (1) The effective date of the 1933 Act registration statement for the
Company is February 11, 1999. The SEC file number assigned to the
registration statement for the Company is 333-64391.
(2) February 11, 1999 is the date the offering of Shares of common stock
of the Company commenced.
(3) Not applicable
(4) (i) The offering has not terminated.
(ii) Inland Securities Corporation, the Dealer Manager, is the
managing underwriter of the offering.
(iii) The following classes of securities of the Company have been
registered:
Common Stock, $.01 par value per Share, 50,000,000 Shares to
be issued on a best efforts basis, 4,000,000 Shares to be
issued pursuant to the Dividend Reinvestment Plan, and
2,000,000 Shares to be issued pursuant to the exercise of
Soliciting Dealer Warrants
Soliciting Dealer Warrants
(iv) (a) See (4) (iii) above for the number of Shares of the Company
registered
(b) The aggregate price of the offering amount registered is
$538,000,000 (not including the price of the Shares that may
be issued pursuant to the Soliciting Dealer Warrants)
(c) The amount sold as of the date of this report is 4,527,011.
(d) The aggregate offering price of the amount sold as of the
date of this report is $45,253,478.
-28-
(v) From the effective date of the registration statement (i.e.
February 11, 1999) to September 30, 1999, (the "Cumulative
Period"), the amount of expenses incurred for the Company's
account in connection with the issuance and distribution of the
registered securities is set forth in the following table:
E=Estimated
Type of Expense Amount A=Actual
Underwriting discounts and
commissions.............. $ 2,800,971 A
Finders fees............... -
Expenses paid to or for
underwriters............. -
Other expenses to
affiliates............... 434,250
Other expenses to
non-affiliates........... 2,415,648 A
-------------
Total expenses............. $ 5,650,869
The underwriting discounts and commissions, and the expenses
paid to or for underwriters, were paid to Inland Securities
Corporation, the Dealer Manager of the offering, which is an
affiliate of the Advisor. Inland Securities Corporation
reallowed all or a portion of the commissions and expenses to
Soliciting Dealers.
Total expenses above include $2,853,774 which were unpaid at
September 30, 1999.
(vi) The net offering proceeds to the Company for the Cumulative
Period, after deducting the total cash expenses described in (4)
(v) above, are $29,088,136.
(vii) For the Cumulative Period, the use of the net offering proceeds
stated in (4) (vi) above is set forth in the following table:
E=Estimated
Use of Proceeds Amount A=Actual
Construction of plant,
building and facilities.. $ -
Purchases of real estate... 27,208,723 A
Acquisition of other
businesses............... -
Repayment of indebtedness.. -
Working capital............ 1,879,413
Temporary investments...... -
Other uses................. -
Of the purchases of real estate amount, $10,502,117 was paid to
affiliates of the Advisor in connection with acquisition of
properties from such affiliates.
-29-
(viii) Not applicable
-30-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by the Securities and Exchange Commission Regulations
S-K. Item 601.
The following documents are incorporated by reference:
Registration Statement on Form S-11 and related exhibits, as amended,
File No. 333-64391, filed under the Securities Act of 1933.
The following document is filed with this document:
(27) Financial Data Schedule
(b) Report on Form 8-K/A dated May 3, 1999
Item 7. Financial Statements and Exhibits
Report on Form 8-K dated July 1, 1999
Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
Report on Form 8-K dated July 27, 1999
Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements and Exhibits
Report on Form 8-K dated August 11, 1999
Item 5. Other Events
Report on Form 8-K dated September 1, 1999
Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
Report on Form 8-K/A dated September 1, 1999
Item 7. Financial Statements and Exhibits
Report on Form 8-K dated September 30, 1999
Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
Item 7. Financial Statements and Exhibits
-31-
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 thereunto duly authorized.
INLAND RETAIL REAL ESTATE TRUST, INC.
/S/ ROBERT D. PARKS
By: Robert D. Parks
Chairman and Chief Executive Officer
Date: November 15, 1999
/S/ BARRY L. LAZARUS
By: Barry L. Lazarus
President and Chief Operating Officer
Treasurer and Chief Financial Officer
Date: November 15, 1999
-32-
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