SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number: 1-8073
CV REIT, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-0950354
(State of Incorporation) (I.R.S. Employer Identification No.)
100 Century Boulevard, West Palm Beach, Florida 33417
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 561-640-3155
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common stock, par value New York Stock Exchange
$.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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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2
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, Dec.31,
ASSETS 1999 1998
-------- --------
Real estate - income producing,
net of accumulated depreciation .................. $172,950 $142,408
Real estate mortgage notes
receivable ....................................... 64,312 64,988
Investments in unconsolidated affiliates ........... 3,061 3,323
Cash and cash equivalents (includes
$882 and $930 restricted) ........................ 6,280 4,775
Other real estate (net of allowance
for losses of $2,401) ............................ 5,490 5,463
Other .............................................. 6,617 4,465
-------- --------
$258,710 $225,422
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings ....................................... $157,439 $121,933
Accounts payable and other
liabilities .................................... 5,977 6,282
-------- --------
Total liabilities ............................ 163,416 128,215
-------- --------
Minority interests in Operating
Partnership ...................................... 16,984 17,650
-------- --------
Stockholders' equity:
Common stock, $.01 par-shares authorized
20,000,000; outstanding 7,966,621 .............. 80 80
Additional paid-in capital ....................... 18,490 18,490
Retained earnings ................................ 59,740 60,987
-------- --------
Total stockholders' equity ................... 78,310 79,557
-------- --------
$258,710 $225,422
======== ========
See accompanying notes to consolidated financial statements.
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3
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- ----------- ----------- -----------
Revenues:
Rent ........................ $ 6,480 $ 3,743 $ 12,049 $ 6,537
Interest, principally from
mortgage notes ............ 2,008 2,250 4,021 4,704
--------- ----------- ----------- -----------
8,488 5,993 16,070 11,241
--------- ----------- ----------- -----------
Expenses:
Interest .................... 2,958 1,883 5,424 3,318
Operating ................... 1,873 1,120 3,581 1,974
General and administrative .. 495 369 875 718
Depreciation and amortization 1,040 585 1,913 1,029
--------- ----------- ----------- -----------
6,366 3,957 11,793 7,039
--------- ----------- ----------- -----------
2,122 2,036 4,277 4,202
Equity in income of unconsoli-
dated affiliates ............ (2) 122 15 253
Gain on sale of real estate ... -- 2,347 -- 2,347
Non-recurring professional fees (285) -- (285) --
Minority interests in income
of Operating Partnership .... (290) (825) (633) (1,245)
--------- ----------- ----------- -----------
Net income .................... $ 1,545 $ 3,680 $ 3,374 $ 5,557
========= =========== =========== ===========
Per common share:
Net income, basic and diluted $ .19 $ .46 $ .42 $ .70
========= =========== =========== ===========
Dividends declared .......... $ .29 $ .29 $ .58 $ .58
========= =========== =========== ===========
Average common shares
outstanding:
Basic ................... 7,966,621 7,966,621 7,966,621 7,966,621
========== =========== =========== ===========
Diluted ................. 7,966,621 7,966,621 7,966,621 7,969,844
========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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4
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(in thousands)
Balance at December 31, 1998 ............................... $ 60,987
Net income for the six months
ended June 30, 1999 ...................................... 3,374
Dividends declared ......................................... (4,621)
--------
Balance at June 30, 1999 ................................... $ 59,740
========
See accompanying notes to consolidated financial statements.
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5
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 3,374 $ 5,557
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................... 1,913 1,029
Equity in depreciation and amortization of
unconsolidated affiliates ...................... 91 86
Minority interests in income of
Operating Partnership .......................... 633 1,245
Gain on sale of real estate ...................... -- (2,347)
Changes in assets and liabilities, net
of effects from acquisitions:
(Increase) decrease in other assets ......... (948) (2,163)
(Decrease) increase in accounts
payable and other liabilities ............ (379) 83
-------- --------
Net cash provided by operating activities .............. 4,684 3,490
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate .......................... (402) (17,127)
Capital improvements ................................. (974) (201)
Fundings on real estate mortgage notes ............... -- (5,190)
Collections on real estate mortgage notes ............ 676 16,764
Proceeds from the sale of real estate ................ -- 4,151
Other ................................................ 192 (96)
-------- --------
Net cash used in investing activities .................. (508) (1,699)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................. 24,858 7,650
Repayments of borrowings ............................. (21,438) (3,419)
Cash dividends paid .................................. (4,627) (4,624)
Distributions to minority interests .................. (870) (519)
Redemption of Operating Partnership units ............ (546) --
-------- --------
Net cash used in financing activities .................. (2,623) (912)
-------- --------
Net increase in unrestricted cash and
cash equivalents ..................................... 1,553 879
Unrestricted cash and cash equivalents at
beginning of the period .............................. 3,845 11,954
-------- --------
Unrestricted cash and cash equivalents at
end of the period .................................... $ 5,398 $ 12,833
======== ========
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6
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest ............................... $ 5,174 $ 3,054
======== ========
Acquisitions:
Fair value of assets acquired ........................ ($32,685) ($61,751)
Liabilities assumed or incurred ...................... 32,283 44,474
Operating Partnership units issued ................... -- 150
-------- --------
Cash paid for acquisitions, net of cash acquired ..... ($ 402) ($17,127)
======== ========
See accompanying notes to consolidated financial statements.
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7
CV REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization, Business and Basis of Presentation
Organization and Business
CV Reit, Inc. ("CV Reit") is a real estate investment trust ("REIT") which until
December 31, 1997, was principally engaged in investing in real estate mortgage
notes. Effective December 31, 1997, CV Reit and its subsidiaries converted to an
Umbrella Partnership REIT (UPREIT) structure as part of a series of transactions
which closed on that date and which included the following: (1) a newly created
Operating Partnership, Montgomery CV Realty L.P. (together with its wholly-owned
subsidiaries hereinafter collectively referred to as the "OP"), acquired 100% of
the ownership interests in ten commercial properties, and an approximately 95%
economic interest in Drexel Realty, Inc. ("Drexel"), a real estate management
and leasing company and (2) CV Reit and its subsidiaries transferred
substantially all of their net assets (or the economic benefit thereof) to the
OP. As a result, CV Reit, through a wholly-owned subsidiary, indirectly
currently owns 84.5% of the OP, is the OP's sole general partner and is a
self-administered, self-managed equity REIT. As of June 30, 1999, the OP owned
19 shopping centers and two office buildings, located in the Mid-Atlantic region
and Florida aggregating over 1.8 million square feet.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of CV
Reit and all subsidiaries ("the Company"), including the OP. The Company owns
99% of the non-voting common stock and a 95% economic interest in Drexel, and
owns 45%-50% interests in certain real estate partnerships, which are accounted
for on the equity method. Significant intercompany accounts and transactions
have been eliminated in consolidation.
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been consolidated or omitted pursuant to such rules
and regulations; however, the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1998.
The consolidated financial statements for the interim periods included herein,
which are unaudited, include, in the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
financial position and results of operations of the Company for the periods
presented. The results of operations for interim periods should not be
considered indicative of results to be expected for the full year.
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8
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported statements 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 period.
Actual revenues could differ from those estimates.
(2) Real Estate - Income Producing ("Real Estate")
(a) Real Estate is located in the Mid-Atlantic region and Florida and consists
of (in thousands):
June 30, Dec. 31,
1999 1998
--------- ---------
Shopping centers ..................................... $ 172,616 $ 140,212
Office buildings ..................................... 5,345 5,338
--------- ---------
Totals ............................................... 177,961 145,550
Less accumulated depreciation ........................ (5,011) (3,142)
--------- ---------
Net Real Estate ...................................... $ 172,950 $ 142,408
========= =========
(b) On March 31, 1999, the OP purchased an approximately 202,499 square foot
shopping center, located in New Jersey, for a purchase price of $24.6 million,
including transaction costs, substantially all of which was financed by mortgage
debt. The OP was required to deposit an additional $1 million with the lender in
connection with future capital improvements.
On May 18, 1999, the OP purchased an approximately 75,000 square foot shopping
center, located in Pennsylvania, for a purchase price of $6.8 million including
transaction costs, substantially all of which was financed by mortgage debt.
The acquisitions were accounted for as purchases; accordingly, the operating
results of the net assets acquired are included in the consolidated financial
statements from their respective purchase dates.
In addition, the OP has several pending acquisitions of shopping centers for an
aggregate purchase price of $24 million. See Management's Discussion and
Analysis of Results of Operations and Financial Condition - Liquidity and
Capital Resources - Acquisitions for a discussion of these potential
acquisitions.
(c) Real Estate with a net book value of $167.4 million, at June 30, 1999, is
pledged as collateral for borrowings (Note 4).
<PAGE>
9
(3) Real Estate Mortgage Notes Receivable
At June 30, 1999, the Company's real estate mortgage notes receivable consisted
of $24.8 million due from Hilcoast Development Corp. (the "Hilcoast Recreation
Note"), collateralized by first mortgages on the recreation facilities at the
Century Village at Pembroke Pines adult condominium community in southeast
Florida, and $39.5 million, collateralized by first mortgages on the recreation
facilities at the three previously completed Century Village communities in
southeast Florida (collectively, the "Recreation Notes"). The Hilcoast
Recreation Note provides for self-amortizing equal monthly principal and
interest payments due through July 31, 2023, bears interest at 11% per annum,
and may not be prepaid by Hilcoast without a prepayment penalty. The remaining
Recreation Notes principally provide for self-amortizing equal monthly principal
and interest payments due through 2012, with interest rates averaging 13% per
annum, and contain certain prepayment prohibitions. The Recreation Notes are
pledged as collateral for borrowings (Note 4).
(4) Borrowings
Borrowings consist of (in thousands):
June 30, Dec. 31,
1999 1998
Mortgage notes payable through September -------- --------
2008, interest ranging from 6.09% to
10.28%, collateralized by Real Estate
(Note 2) .................................................. $ 79,236 $ 74,528
Mortgage notes payable in November 2000 under
$100 million credit facility, interest at one
month LIBOR (5.24% at June 30, 1999) plus
1.75%, collateralized by Real Estate (Note 2)
and the Hilcoast Recreation Note (Note 3)
See Management's Discussion and Analysis of
Results of Operations and Financial Condition -
Liquidity and Capital Resources - Borrowings
for a description of the terms ............................. 49,036 16,950
Collateralized Mortgage Obligations, net of
unamortized discount of $496,000 and
$584,000 based on an effective interest
rate of 8.84%, collateralized by
certain of the Recreation Notes (Note 3),
quarterly self-amortizing principal
and interest payments required
through March 2007 ......................................... 29,167 30,455
-------- --------
Totals ............................................ $157,439 $121,933
======== ========
The Company has three interest rate swap contracts with an aggregate notional
amount of $28.7 million. Two of the contracts, which expire in March 2004, have
been outstanding since March 1999 and the third contract, which expires in May
2004, has been outstanding since May 1999. The interest rate swaps have an
effective interest rate of 6.63%.
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10
(5) Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", requires disclosure of financial and
descriptive information about the Company's reportable operating segments. The
operating segments presented are the segments of the Company for which separate
financial information is available and operating performance is evaluated
regularly by senior management in deciding how to allocate resources and in
assessing performance. The Company evaluates the performance of its operating
segments generally based on net operating income (before and after interest
expense) and Funds From Operations ("FFO" - see Management's Discussion and
Analysis of Results of Operations and Financial Condition for a definition of
FFO and a reconciliation of FFO to net income).
Effective December 31, 1997, the Company became an equity REIT engaged in the
acquisition, leasing and management of neighborhood or community shopping
centers, located in Pennsylvania, New Jersey and Florida. Prior to 1998, the
Company's only principal business segment consisted of investments in real
estate mortgage notes. Although the Company no longer invests in new real estate
mortgage notes, it continues to hold its Recreation Notes (Note 3) and, as a
result, the following segment disclosure includes information on those
investments (in thousands):
Income
Producing
Real Estate, Real
Principally Estate
Shopping Mortgage
Centers Notes Other Consolidated
------- ------ ------ ---------
Quarter Ended June 30, 1999:
Rent revenues ....................... $ 6,461 $ -- $ 19 $ 6,480
======= ====== ==== =======
Real estate net operating
income ............................ $ 4,627 $ -- $(20) $ 4,607
Net interest income (expense) ....... (2,122) 1,140 32 (950)
------- ------ ---- -------
Net operating income after
net interest ...................... $ 2,505 $1,140 $ 12 $ 3,657
======= ====== ==== =======
FFO - OP ............................ $ 3,204
=======
Quarter Ended June 30, 1998:
Rent revenues ....................... $ 3,684 $ -- $ 59 $ 3,743
======= ====== ==== =======
Real estate net operating
income ............................ $ 2,602 $ -- $ 21 $ 2,623
Net interest income (expense) ....... (1,107) 1,426 48 367
------- ------ ---- -------
Net operating income after
net interest ...................... $ 1,495 $1,426 $ 69 $ 2,990
======= ====== ==== =======
FFO - OP ............................ $ 2,786
=======
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11
Income
Producing
Real Estate, Real
Principally Estate
Shopping Mortgage
Centers Notes Other Consolidated
--------- ------- ------ ----------
Six Months Ended June 30, 1999:
Rent revenues ......................... $ 12,011 $ -- $ 38 $ 12,049
======== ====== ==== ========
Real estate net operating
income .............................. $ 8,508 $ -- $(40) $ 8,468
Net interest income (expense) ......... (3,848) 2,387 58 (1,403)
-------- ------ ---- --------
Net operating income after net
interest ............................ $ 4,660 $2,387 $ 18 $ 7,065
======== ====== ==== ========
FFO - OP .............................. $ 6,291
========
At June 30, 1999:
Investment in real estate and
real estate mortgage notes ........... $172,950(a) $64,312 $ 8,551 $245,813
======== ======= ======= ========
Borrowings ............................ $120,036 $37,403 $ -- $157,439
======== ======= ======= ========
Six Months Ended June 30, 1998:
Rent revenues .......................... $ 6,274 $ -- $263 $6,537
======= ====== ==== ======
Real estate net operating
income ............................... $ 4,404 $ -- $159 $4,563
Net interest income (expense) .......... (1,819) 3,010 195 1,386
------- ------ ---- ------
Net operating income after net
interest ............................. $ 2,585 $3,010 $354 $5,949
======= ====== ==== ======
FFO - OP ............................... $5,570
======
At June 30, 1998:
Investment in real estate and
real estate mortgage notes ............ $129,612(a) $66,078 $ 8,738 $204,428
======== ======= ======= ========
Borrowings ............................. $ 82,882 $31,685 $ -- $114,567
======== ======= ======= ========
(a) Includes $32,411 and $61,406 of additions during the six months ended June
30, 1999 and 1998.
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12
(6) Redemption of Certain Minority Interests
During the quarter ended June 30, 1999, the OP redeemed 43,018 OP units for
approximately $546,000, resulting in an increase in CV Reit's indirect ownership
of the OP from 84.2% to 84.5%.
(7) Non-Recurring Professional Fees
During the quarter ended June 30, 1999, the Company expensed $285,000 of
professional fees as a result of the termination of negotiations related to a
proposed merger.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Net Income
Three Months Ended June 30, 1999 and 1998
For the quarter ended June 30, 1999, net income was $1,545,000 or $.19 per share
compared to $3,680,000 or $.46 per share for the same period of 1998.
Net income for the quarter ended June 30, 1998 includes a $2.3 million gain from
the sale of real estate.
During the quarter ended June 30, 1999, rent revenue, operating expenses and
interest expense increased by $2,737,000, $753,000 and $1,075,000, respectively
(a net increase of $909,000), primarily due to the acquisition of nine shopping
centers since mid-1998 (the "Shopping Center Acquisitions"). The increase also
reflects improved operating results from existing centers which experienced a
$125,000 increase in net rental income (rent revenue less operating expenses).
We expect continued increases in rent revenue, operating expenses and interest
expense due to the acquisition of Cherry Square Shopping Center ("Cherry
Square"), a 75,000 square foot shopping center, on May 18, 1999, for a purchase
price of $6.8 million, including transaction costs, substantially all of which
was financed by mortgage debt, and in the event certain additional planned
acquisitions are consummated (see Liquidity and Capital Resources Acquisitions).
Interest income decreased by $242,000 during the second quarter of 1999,
primarily attributable to a reduction in the average balance of mortgage notes
receivable. These notes principally consisted of a line of credit and certain
other loans to Hilcoast which matured and were repaid during 1998. Our remaining
mortgage notes receivable are long term and require self-amortizing payments
through 2023. Accordingly, interest income is anticipated to continue to
decrease although to a lesser extent, due to scheduled repayments.
General and administrative expenses increased by $126,000 during the second
quarter of 1999 primarily due to higher legal and other professional fees.
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13
Depreciation and amortization increased by $455,000 due to the Shopping Center
Acquisitions. We expect continued increases in depreciation and amortization due
to the Cherry Square acquisition.
Net income for the quarter ended June 30, 1999 includes $285,000 of professional
fees expensed as a result of the termination of negotiations related to a
proposed merger.
Six Months Ended June 30, 1999 and 1998
For the six months ended June 30, 1999, net income was $3,374,000 or $.42 per
share compared to $5,557,000 or $.70 per share for the same period of 1998.
Net income for the six months ended June 30, 1998 includes a $2.3 million gain
from the sale of real estate.
During the six months ended June 30, 1999, rent revenue, operating expenses and
interest expense increased by $5,512,000, $1,607,000, and $2,106,000,
respectively (a net increase of $1,799,000), primarily due to the Shopping
Center Acquisitions. The increase also reflects improved operating results from
existing centers which experienced a $270,000 increase in net rental income
(rent revenue less operating expenses).
Interest income decreased by $683,000 during the first six months of 1999,
primarily attributable to a reduction in the average balance of mortgage notes
receivable. These notes principally consisted of a line of credit and certain
other loans to Hilcoast, which matured and were repaid during 1998. The average
interest rate on these notes approximated 10.4% and the repayments were
generally utilized to acquire shopping centers in 1998.
General and administrative expenses increased by $157,000 during the six months
ended June 30, 1999 primarily due to higher professional fees.
Depreciation and amortization increased by $884,000 due to the Shopping Center
Acquisitions.
Net income for the six months ended June 30, 1999 includes $285,000 of
professional fees expensed as a result of the termination of negotiations
related to a proposed merger.
Funds From Operations
Funds From Operations ("FFO"), as defined by the National Association of Real
Estate Investment Trusts (NAREIT), consists of net income (computed in
accordance with generally accepted accounting principles) before depreciation
and amortization of real property, certain non-recurring items, extraordinary
items, gains and losses on sales of real estate and income taxes.
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14
The following schedule reconciles FFO to net income (in thousands):
Three Six
Months Ended Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
------ ------- ------ -------
Net income ............................. $1,545 $ 3,680 $3,374 $ 5,557
Minority interests in income
of OP ................................ 290 825 633 1,245
Depreciation and amortization
of real property (including
unconsolidated affiliates ............ 1,084 628 1,999 1,115
Non-recurring professional fees ........ 285 -- 285 --
Gain on sale of real estate ............ -- (2,347) -- (2,347)
------ ------- ------ -------
FFO - OP ............................... $3,204 $ 2,786 $6,291 $ 5,570
====== ======= ====== =======
FFO - CV Reit (a) ...................... $2,698 $ 2,276 $5,297 $ 4,551
====== ======= ====== =======
- -------
(a) CV Reit's interests in the OP averaged 84.2% in 1999 and 81.7% in 1998.
We believe that FFO is an appropriate measure of operating performance because
real estate depreciation and amortization charges are not meaningful in
evaluating the operating results of our properties and would distort the
comparative measurement of performance and are not relevant to ongoing
operations. However, 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 either net income as a measure of
our operating performance or to cash flows from operating activities as an
indicator of liquidity or cash available to fund all cash flow needs. In
addition, since other REITs may not calculate FFO in the same manner, FFO
presented herein may not be comparable to that reported by other REITs.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows
Net cash provided by operating activities, as reported in the Consolidated
Statements of Cash Flows, amounted to $4.7 million for the six months ended June
30, 1999 compared to $3.5 million for the same period in 1998. These amounts
generally reflect FFO and net changes in assets and liabilities.
Net cash used by investing activities for the six months ended June 30, 1999
decreased to $.5 million from $1.7 million for the same period in 1998. The 1999
amounts reflect $1 million of capital improvements partially offset by $.7
million of net collections on real estate mortgage notes receivable. The 1998
amounts principally consist of $17.1 million of cash required in connection with
the acquisition of four shopping centers in the first six months of 1998,
partially offset by $11.6 million of net collections on real estate mortgage
notes receivable and $4.2 million received from the sale of real estate.
<PAGE>
15
Net cash used in financing activities increased to $2.6 million for the six
months ended June 30, 1999 from $.9 million during the same period of 1998. The
1999 amounts principally consist of cash distributions of $4.6 million to
stockholders and $.9 million to minority interests, partially offset by $3.4
million of net proceeds from borrowings. The 1998 amounts consist of cash
distributions amounting to $4.6 million to stockholders and $.5 million to
minority interests, partially offset by $4.2 million of net proceeds from
borrowings.
Borrowings
At June 30, 1999, our borrowings increased to $157.4 million from $121.9 million
at December 31, 1998. The $35.5 million increase included $32.1 million borrowed
under the Line of Credit (see below) to finance two shopping center acquisitions
in 1999. Scheduled principal payments over the next five years are $82.8 million
with $74.6 million due thereafter.
Borrowings include $128.3 million, collateralized by a substantial portion of
our Real Estate and our Hilcoast Recreation Note, including $49 million under
the Line of Credit (see below). We expect to refinance certain of these
borrowings, at or prior to maturity, through new mortgage loans on Real Estate
including refinancing under the Line of Credit. The ability to do so, however,
is dependent upon various factors, including the income level of the properties,
interest rates and credit conditions within the commercial real estate market.
Accordingly, there can be no assurance that such refinancing can be achieved. As
a result of refinancing three mortgage loans in 1999, we have been able to
reduce the weighted average effective fixed interest rate on $23.5 million of
mortgage loans from 7.48% to 6.53%. We were also able to obtain an additional
$5.2 million in cash in connection with the refinancings.
The remaining $29.1 million of borrowings consists of Collateralized Mortgage
Obligations (the "CMO's") which are collateralized by $39.5 million of the
Recreation Notes and require self-amortizing principal and interest payments
through March 2007. During the term of the CMO's, the scheduled annual debt
service requirement approximates $5.2 million compared to annual principal and
interest payments scheduled to be received under the related Recreation Notes of
$6.5 million.
Effective March 31, 1998, we entered into an agreement with a financial
institution which provides us with a three year non-revolving line of credit for
up to $100 million (the "Line of Credit"). Advances under the Line of Credit:
(1) must be secured by assets based on specified aggregate loan to value and
debt service coverage ratios, (2) bear interest at an annual rate of one month
LIBOR plus 1.75% and (3) may be drawn only during the first two years of the
credit facility and must be repaid by certain dates during the third year.
Additional provisions include a 1% commitment fee, a minimum net worth covenant
and cross-default and cross-collateralization requirements. Advances under the
Line of Credit are used to fund acquisitions, expansions, renovations, financing
and refinancing of real estate, including reimbursement of equity advances, and
require certain performance covenants. In March 1999, we pledged the Hilcoast
Recreation Note as collateral for future borrowings under an $18.5 million
promissory note (the "Pembroke Note") as part of the Line of Credit. As of June
30, 1999, we had borrowed $49 million under the Line of Credit including $8.2
million under the Pembroke Note.
<PAGE>
16
Capital Resources
Our operating funds are expected to be principally generated from rent revenue
from income producing properties and interest income on the Recreation Notes. We
believe that our operating funds will be sufficient in the foreseeable future to
fund operating and administrative expenses, interest expense, recurring capital
expenditures and distributions to stockholders in accordance with REIT
requirements. Sources of capital for non-recurring capital expenditures and
scheduled principal payments, including balloon payments, on outstanding
borrowings are expected to be obtained from property refinancing, scheduled
principal repayments on the Recreation Notes, sales of non-strategic other real
estate, the Line of Credit and/or potential debt or equity financing in the
public or private markets.
Acquisitions
During the six months ended June 30, 1999, we completed the acquisition of two
shopping centers for an aggregate purchase price of $31.2 million, including
transaction costs, substantially all of which was financed by mortgage debt. In
connection with the Lakewood acquisition, we were required to deposit an
additional $1 million with the lender in connection with future capital
improvements.
In addition, we have entered into conditional agreements to acquire four
shopping centers in Pennsylvania and New Jersey for an aggregate purchase price
of approximately $24 million. The acquisitions are subject to due diligence and
certain other conditions and there can be no assurance that they will be
consummated.
We are also in various stages of negotiating acquisitions of additional shopping
centers. However, there is no assurance that we will be able to complete any
such acquisition. In the event properties are acquired in the future, the OP may
issue additional OP units, pay cash, or a combination thereof. If cash payments
are required in excess of funds available under the Line of Credit, we may be
required to seek outside financing which may or may not be available.
Our policy is to acquire additional properties only if they are income producing
and any proposed acquisition requires a resolution by a majority of our Board of
Directors that the acquisition will not adversely affect our ability to pay a
quarterly dividend of at least 29 cents per share. Under the OP agreement, all
of the activities of the OP must generally be conducted with a view toward
enabling the OP to make quarterly distributions to all partners of at least 29
cents per OP unit and such additional amount, if required, to enable CV Reit to
pay a regular quarterly dividend of at least 29 cents per share to its
stockholders. As of June 30, 1999, there were 1,462,406 OP units held by
minority interests.
Inflation
During recent years, the rate of inflation has remained at a low level and had
minimal impact on our operating results.
Most of the tenant leases contain provisions designed to lessen the impact of
inflation. These provisions include escalation clauses which generally increase
rental rates annually based on cost of living indexes (or based on stated rental
increases which are currently higher than recent cost of living increases), and
percentage rentals based on tenant's gross sales, which generally increase as
prices rise. Many of the leases are for terms of less than ten years which
increases our ability to replace those leases which are below market rates with
new leases at higher base and/or percentage rentals. In addition, most of the
leases require the tenants to pay their proportionate share of increases in
operating expenses, including common area maintenance, real estate taxes and
insurance.
<PAGE>
17
However, in the event of significant inflation, our operating results could be
adversely affected if general and administrative expenses and interest expense
increase at a rate higher than rent income or if the increase in inflation
exceeds rent increases for certain tenant leases which provide for stated rent
increases (rather than based on cost of living indexes).
Year 2000 Issue
As many computer systems, software programs and other equipment with embedded
chips or processors (collectively, "Information Systems") use only two digits
rather than four to define the applicable year, they may be unable to process
accurately certain data, during or after the year 2000. As a result, business
and governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 ("Y2K") issue. The Y2K issue concerns not only
Information Systems used solely within a company but also concerns third
parties, such as customers, vendors and creditors, using information Systems
that may interact with or affect a company's operations.
Our State of Readiness
We have implemented a Y2K readiness program with the objective of having all of
our significant Information Systems functioning properly with respect to Y2K
before January 1, 2000. The first component of our readiness program was to
identify our internal Information Systems that are susceptible to system
failures or processing errors as a result of the Y2K issue. This effort is
substantially complete and any issues that arose have been identified and
corrected where necessary.
As to the second component of the Y2K readiness program, we have identified our
significant tenants, vendors and creditors that are believed, at this time, to
be critical to business operations subsequent to January 1, 2000. Through the
use of questionnaires, interviews, on-site visits and other available means we
have ascertained that we have no significant exposure to Y2K problems at this
time. However, there can be no assurance that the Information Systems provided
by or utilized by other companies which affect their operations will be timely
converted in such a way as to allow them to continue normal business operations
or furnish products, services or data to us without disruption.
Risks
If needed remediations and conversions to the Information Systems are not made
on a timely basis by our materially-significant customers or vendors, we could
be affected by business disruption, operational problems, financial loss, legal
liability to third parties and similar risks, any of which could have a material
adverse effect on our operations, liquidity or financial condition. Factors
which could cause material differences in results, many of which are outside our
control, include, but are not limited to, the accuracy of representations by
manufacturers of our Information Systems that their products are Y2K complaint,
the ability of our tenants and vendors to identify and resolve their own Y2K
issues and our ability to respond to unforeseen Y2K complications.
<PAGE>
18
Y2K Costs
Our total cost of these Y2K compliance activities is not expected to exceed
$25,000. The costs and time necessary to complete the Y2K modification and
testing processes are based on our best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no assurance that these estimates will be achieved and actual
results could differ from the estimates. Our Y2K readiness program is an ongoing
process and the estimates of costs and completion dates for various components
of the Y2K readiness program described above are subject to change.
Forward Looking Information: Certain Cautionary Statements
Certain statements contained in "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and elsewhere in this Form 10-Q, that are
not related to historical results, are forward looking statements, such as
anticipated liquidity and capital resources, completion of potential
acquisitions and collectibility of real estate mortgage notes receivable. The
matters referred to in forward looking statements are based on assumptions of
future events which may not prove to be accurate and which could be affected by
the risks and uncertainties involved in our business; accordingly, actual
results may differ materially from those projected and implied in the forward
looking statements. These risks and uncertainties include, but are not limited
to, the effect of conditions in the commercial real estate market and the
economy in general, the level and volatility of interest rates, the impact of
current or pending legislation and regulation, as well as certain other risks
described in the Form 10-Q. Subsequent written and oral forward looking
statements attributable to our company or persons acting on its behalf are
expressly qualified in their entirety by cautionary statements in this paragraph
and elsewhere described in this Form 10-Q and in other reports we filed with the
Securities and Exchange Commission.
<PAGE>
19
PART II. Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on June 7, 1999. At
that meeting the stockholders elected two directors, who were elected by the
following vote: Milton S. Schneider - Votes For: 7,143,211; Votes Withheld:
17,246; and Alan L. Shulman - Votes For: 7,143,220; Votes Withheld: 17,237.
In addition, the stockholders were asked to ratify BDO Seidman, LLP as the
Company's independent auditiors for the Company's fiscal year ending December
31, 1999. The number of votes were as follows: For: 7,082,166; Against: 21,113;
Abstain: 57,178.
Item 6 - Exhibits and Reports on Form 8-K:
Exhibits:
27 Financial Data Schedule
Reports on Form 8-K:
NONE
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.
CV REIT, INC.
-------------------------------------
(Registrant)
/s/ Louis P. Meshon
August 9, 1999 _____________________________________
Louis P. Meshon Sr., President
/s/ Elaine Hauff
August 9, 1999 _____________________________________
Elaine Hauff, Vice President,
Treasurer and Principal Financial
and Accounting Officer
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