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 September 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number: 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
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 _____
Number of shares outstanding of the Registrant's Common Stock, par value $.01
per share, as of November 10, 1999: 7,966,621
<PAGE> 2
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Sep. 30, 1999 Dec. 31, 1998
ASSETS ------------- -------------
Real estate - income producing, net of
accumulated depreciation ........................... $173,743 $142,408
Real estate mortgage notes receivable ................ 63,915 64,988
Investments in unconsolidated affiliates ............. 3,448 3,323
Cash and cash equivalents (includes $886
and $930 restricted) ................................ 4,473 4,775
Other real estate (net of allowance for
losses of $2,401) ................................... 5,500 5,463
Receivables and accrued income ....................... 2,632 1,713
Prepaid expenses and other ........................... 4,701 2,752
-------- --------
$258,412 $225,422
======== --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings ......................................... $157,248 $121,933
Accounts payable and other liabilities ............. 6,444 6,282
-------- --------
Total liabilities .............................. 163,692 128,215
-------- -------
Minority interests in Operating Partnership .......... 16,894 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 .................................. 59,256 60,987
-------- --------
Total stockholders' equity ..................... 77,826 79,557
-------- --------
$258,412 $225,422
======== ========
See accompanying notes to consolidated financial statements.
<PAGE> 3
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Rent ........................ $ 6,572 $ 5,104 $ 18,621 $ 11,641
Interest, principally
from mortgage notes ........ 2,003 2,122 6,024 6,826
--------- --------- --------- ---------
8,575 7,226 24,645 18,467
--------- --------- --------- ---------
Expenses:
Interest .................... 3,074 2,507 8,498 5,825
Operating ................... 1,950 1,597 5,531 3,571
General and administrative .. 431 404 1,306 1,122
Depreciation and
amortization .............. 1,067 820 2,980 1,849
--------- --------- --------- ---------
6,522 5,328 18,315 12,367
--------- --------- --------- ---------
2,053 1,898 6,330 6,100
Equity in income of
unconsolidated affiliates ... 108 150 123 403
Gain on sale of real estate ... -- -- -- 2,347
Non-recurring items:
professional fees and
settlement of litigation .... -- (200) (285) (200)
Minority interests in income of
Operating Partnership ....... (335) (292) (968) (1,537)
--------- --------- --------- ---------
Net income .................... $ 1,826 $ 1,556 $ 5,200 $ 7,113
========= ========= ========= =========
Per common share:
Net income, basic and diluted $ .23 $ .20 $ .65 $ .89
========= ========= ========= =========
Dividends declared .......... $ .29 $ .29 $ .87 $ .87
========= ========= ========= =========
Average common shares
outstanding, basic
and diluted ............... 7,966,621 7,966,621 7,966,621 7,966,621
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
<PAGE> 4
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(in thousands)
Balance at December 31, 1998 ............................... $ 60,987
Net income for the nine months
ended September 30, 1999 ................................. 5,200
Dividends declared ......................................... (6,931)
--------
Balance at September 30, 1999 .............................. $ 59,256
========
See accompanying notes to consolidated financial statements.
<PAGE> 5
CV REIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 5,200 $ 7,113
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 2,980 1,849
Equity in depreciation and amortization of
unconsolidated affiliates .................... 131 128
Minority interests in income of
Operating Partnership ........................ 968 1,537
Gain on sale of real estate .................... -- (2,347)
Changes in assets and liabilities,
net of effects from acquisitions:
Increase in receivables, accrued
income, prepaid expenses and other ......... (1,671) (2,962)
(Decrease) increase in accounts
payable and other liabilities .............. (14) 675
-------- --------
Net cash provided by operating activities ............ 7,594 5,993
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of real estate ........................ (1,161) (21,126)
Capital improvements ............................... (1,259) (920)
Fundings on real estate mortgage notes ............. -- (5,190)
Collections on real estate mortgage notes .......... 1,073 17,268
Proceeds from the sale of real estate .............. -- 4,151
Other .............................................. (249) (164)
-------- --------
Net cash used in investing activities ................ (1,596) (5,981)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ........................... 24,858 7,650
Repayments of borrowings ........................... (22,380) (4,286)
Cash dividends paid ................................ (6,893) (6,934)
Distributions to minority interests ................ (1,295) (1,036)
Redemption of Operating Partnership units .......... (546) (3,631)
-------- --------
Net cash used in financing activities ................ (6,256) (8,237)
-------- --------
Net increase in unrestricted cash and
cash equivalents ................................... (258) (8,225)
Unrestricted cash and cash equivalents
at the beginning of the period ..................... 3,845 11,954
-------- --------
Unrestricted cash and cash equivalents
at the end of the period ........................... $ 3,587 $ 3,729
======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest ............................. $ 7,997 $ 5,367
======== ========
Acquisitions of real estate:
Fair value of assets acquired ...................... $(34,253) $(74,325)
Liabilities assumed or incurred .................... 33,092 53,049
Operating Partnership units issued ................. -- 150
-------- --------
Cash paid for acquisitions, net of
cash acquired ..................................... $ (1,161) $(21,126)
======== ========
See accompanying notes to consolidated financial statements.
<PAGE> 6
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 September 30, 1999, the OP
owned 20 shopping centers and two office buildings, located in the Mid-Atlantic
region and Florida aggregating approximately 1.9 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 a
95% economic interest in Drexel but none of the voting stock, 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.
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. Accounts Receivable and
<PAGE> 7
Accrued Income
Accounts receivable primarily represent amounts due from tenants and accrued
interest receivable on mortgage notes receivable. In addition, accounts
receivable included $975,000 and $583,000 at September 30, 1999 and December 31,
1998, respectively, representing minimum rental income accrued on a
straight-line basis to be paid by tenants over the terms of the respective
leases.
(2) Real Estate - Income Producing ("Real Estate")
(a) Real Estate is located in the Mid-Atlantic region and Florida and consists
of (in thousands):
Sept. 30, Dec. 31,
1999 1998
--------- ---------
Land ..................................................... $ 18,302 $ 14,980
Shopping centers ......................................... 156,570 125,670
Office buildings ......................................... 4,925 4,900
--------- ---------
Totals ................................................... 179,797 145,550
Less accumulated depreciation ............................ (6,054) (3,142)
--------- ---------
Net Real Estate .......................................... $ 173,743 $ 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 $24.7 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 $6.9 million including
transaction costs, substantially all of which was financed by mortgage debt.
On September 17, 1999, the OP purchased an approximately 46,000 square foot
shopping center, located in Pennsylvania, for a purchase price of $1.6 million
including transaction costs, which consisted of $.8 million in cash and the
incurrence of $.8 million in 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 $21 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 $166.7 million, at September 30, 1999,
is pledged as collateral for borrowings (Note 4).
(3) Real Estate Mortgage Notes Receivable
At September 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 $39.1 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).
<PAGE> 8
(4) Borrowings
Borrowings consist of (in thousands):
Sep.30, 1999 Dec.31, 1998
------------ ------------
Mortgage notes payable through
September 2008, interest ranging
from 6.09% to 10.28%, collateralized
by Real Estate (Note 2) .............................. $ 78,960 $ 74,528
Mortgage notes payable through April
2001 under $100 million credit facility,
interest at one month LIBOR (5.40% at
September 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
$468,000 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
payment required through March 2007 .................. 28,502 30,455
$1 million revolving credit facility,
interest at one month LIBOR plus
1.8%, maturing June 2000, collateralized
by Real Estate ....................................... 750 --
-------- --------
Totals ................................................. $157,248 $121,933
======== ========
In March and May 1999, the Company entered into three interest rate swap
contracts with an aggregate notional amount of $28.7 million, which expire in
2004. The interest rate swaps have an effective interest rate of 6.63%.
(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):
<PAGE> 9
Income
Producing
Real Estate, Real
Principally Estate
Shopping Mortgage
Centers Notes Other Consolidated
---------- -------- ------ ------------
Quarter Ended September 30, 1999:
Rent revenues $ 6,554 $ - $ 18 $ 6,572
======= ======= ====== =======
Real estate net operating income $ 4,644 $ - $ (22) $ 4,622
Net interest income (expense) (2,209 1,099 39 (1,071)
------- ------- ------ -------
Net operating income after net
interest $ 2,435 $ 1,099 $ 17 $ 3,551
======= ======= ====== =======
FFO - OP $ 3,264
=======
Quarter Ended September 30, 1998:
Rent revenues $ 5,084 $ - $ 20 $ 5,104
======= ======= ====== =======
Real estate net operating income $ 3,489 $ - $ 18 $ 3,507
Net interest income (expense) (1,735) 1,257 93 (385)
------- ------- ------ -------
Net operating income after net
interest $ 1,754 $ 1,257 $ 111 $ 3,122
======= ======= ====== =======
FFO - OP $ 2,910
=======
Nine Months Ended September 30, 1999:
Rent revenues $18,564 $ - $ 57 $18,621
======= ======= ====== ========
Real estate net operating income $13,151 $ - $ (61) $13,090
Net interest income (expense) (6,056) 3,485 97 (2,474)
------- ------- ------ --------
Net operating income after net
interest $ 7,095 $ 3,485 $ 36 $ 10,616
======= ======= ====== ========
FFO - OP $ 9,554
=======
Nine Months Ended September 30, 1998:
Rent revenues $11,358 $ - $ 283 $11,641
======= ======= ====== =======
Real estate net operating income $ 7,930 $ - $ 140 $ 8,070
Net interest income (expense) (3,553) 4,218 336 1,001
------- ------- ------ -------
Net operating income after net
interest $ 4,377 $ 4,218 $ 476 $ 9,071
======= ======= ====== =======
FFO - OP $ 8,477
=======
At September 30, 1999:
Investment in real estate and real
estate mortgage notes $173,743(a) $63,915 $ 8,948 $246,606
======== ======= ======= ========
Borrowings $120,510 $36,738 $ - $157,248
======== ======= ======= ========
At September 30, 1998:
Investment in real estate and real
estate mortgage notes $141,958(a) $65,574 $ 8,760 $216,292
======== ======= ======= ========
Borrowings $ 91,050 $31,077 $ - $122,127
======== ======= ======= ========
(a) Includes $34,244 and $74,575 of additions during the nine months ended
September 30, 1999 and 1998.
<PAGE> 10
(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 Items
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. During the quarter ended June 30, 1998, the Company recognized
a $2.3 million gain from the sale of real estate and during the quarter ended
September 30, 1998, the Company incurred a $200,000 charge from the settlement
of litigation.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net Income
Three Months Ended September 30, 1999 and 1998
For the quarter ended September 30, 1999, net income was $1,826,000 or $.23 per
share compared to $1,556,000 or $.20 per share for the same period of 1998.
During the quarter ended September 30, 1999, rent revenue, operating expenses
and interest expense increased by $1,468,000, $353,000 and $567,000,
respectively (a net increase of $548,000), primarily due to the acquisition of
six shopping centers since July 1998. The increase also reflects improved
operating results from existing centers, which experienced a $136,000 increase
in net rental income (rent revenue less operating expenses). We expect continued
increases in rent revenue, operating expenses and interest expense in the event
certain additional planned acquisitions are consummated (see Liquidity and
Capital Resources - Acquisitions).
Interest income decreased by $119,000 during the third quarter of 1999,
primarily attributable to lower interest earning cash and cash equivalent
balances. Our available cash has generally been utilized to acquire shopping
centers. Our Recreation Notes Receivable (Note 3) are long term and require
self-amortizing payments through 2023. Accordingly, interest income on those
notes is anticipated to decrease slightly each quarter due to scheduled
repayments.
Depreciation and amortization increased by $247,000 due to shopping center
acquisitions. We expect continued increases in depreciation and amortization in
the event certain additional planned acquisitions are consummated (see Liquidity
and Capital Resources - Acquisitions).
Net income for the quarter ended September 30, 1998 includes a $200,000
non-recurring charge from the settlement of litigation.
<PAGE> 11
Nine Months Ended September 30, 1999 and 1998
For the nine months ended September 30, 1999, net income was $5,200,000 or $.65
per share compared to $7,113,000 or $.89 per share for the same period of 1998.
Net income for the nine months ended September 30, 1998 includes a $2.3 million
gain from the sale of real estate.
During the nine months ended September 30, 1999, rent revenue, operating
expenses and interest expense increased by $6,980,000, $1,960,000, and
$2,673,000, respectively (a net increase of $2,347,000), primarily due to the
acquisition of ten shopping centers since the beginning of 1998. The increase
also reflects improved operating results from existing centers, which
experienced a $234,000 increase in net rental income (rent revenue less
operating expenses).
Interest income decreased by $802,000 during the nine months of 1999,
attributable to a reduction in the average balance of mortgage notes receivable
and cash and cash equivalent balances. The mortgage notes principally consisted
of a line of credit and certain other loans to Hilcoast Development Corp., which
matured and were repaid during 1998. Those repayments as well as available cash
balances have generally been utilized to acquire shopping centers.
General and administrative expenses increased by $184,000 during the nine months
ended September 30, 1999 primarily due to higher professional fees and
performance related bonuses.
Depreciation and amortization increased by $1,131,000 due to shopping center
acquisitions.
Equity in income of unconsolidated affiliates decreased by $280,000 principally
due to the decision by our management company (Drexel - Note 1) to concentrate
mainly on management, leasing and renovation of our Real Estate and acquisitions
of additional shopping centers. As a result, Drexel has terminated various
management contracts for properties owned by outside parties.
Net income for the nine months ended September 30, 1999 includes $285,000 of
professional fees expensed as a result of the termination of negotiations
related to a proposed merger. Net income for the prior nine month period
includes a $200,000 non-recurring charge from the settlement of litigation.
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.
<PAGE> 12
The following schedule reconciles FFO to net income (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1999
---------------- -----------------
Net income ................................. $1,826 $1,556 $5,200 $ 7,113
Minority interests in income of OP ......... 335 292 968 1,537
Depreciation and amortization of real
property (including unconsolidated
affiliates) .............................. 1,103 862 3,101 1,974
Non-recurring items (Note 7) ............... -- 200 285 200
Gain on sale of real estate ................ -- -- -- (2,347)
------ ------ ------ -------
FFO - OP ................................... $3,264 $2,910 $9,554 $ 8,477
====== ====== ====== =======
FFO - CV Reit (a) .......................... $2,757 $2,448 $8,055 $ 6,999
====== ====== ====== =======
(a) CV Reit's interests in the OP averaged 84.5% and 84.3% for the three and
nine months of 1999, respectively and 84.2% and 82.5% for the three and nine
months of 1998, respectively.
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 $7.6 million for the nine months ended
September 30, 1999 compared to $6 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 nine months ended September 30,
1999 decreased to $1.6 million from $6 million for the same period in 1998. The
1999 amounts reflect $1.3 million of capital improvements and $1.2 million of
cash required in connection with the acquisitions of three shopping centers in
1999, partially offset by $1.1 million of collections on real estate mortgage
notes receivable. The 1998 amounts principally consist of $21.1 million of cash
required in connection with the acquisition of seven shopping centers in the
first nine months of 1998 and $.9 million of capital improvements, partially
offset by $12.1 million of net collections on real estate mortgage notes
receivable and $4.2 million received from the sale of real estate.
Net cash used in financing activities decreased to $6.3 million for the nine
months ended September 30, 1999 from $8.2 million during the same period of
1998. The 1999 amounts principally consist of cash distributions of $6.9 million
to stockholders and $1.3 million to minority interests, partially offset by $2.5
million of net proceeds from borrowings. The 1998 amounts consist of cash
distributions amounting to $6.9 million to stockholders and $1 million to
minority interests, and $3.6 million for the redemption of approximately 300,000
OP units, partially offset by $3.4 million of net proceeds from borrowings.
<PAGE> 13
Borrowings
At September 30, 1999, our borrowings increased to $157.2 million from $121.9
million at December 31, 1998. The $35.3 million increase included $32.8 million
borrowed principally under the Line of Credit (see below) to finance three
shopping center acquisitions in 1999. Scheduled principal payments over the next
five years are $82.6 million (including $22.7 million through December 31, 2000)
with $74.6 million due thereafter. Our borrowings are collateralized by a
substantial portion of our Real Estate and our Recreation Notes. We expect to
refinance certain of these borrowings, at or prior to maturity, through new
mortgage loans on Real Estate. 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.
Borrowings consist of $107.4 million of fixed rate indebtedness, with an average
interest rate of 7.71% at September 30, 1999, and $49.8 million of variable rate
indebtedness, principally under the Line of Credit (see below). The weighted
average interest rate of the variable rate indebtedness at September 30, 1999
was 7.15%. 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.
Under our three year non-revolving line of credit (the "Line of Credit") we can
borrow up to $100 million. 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 through March 31, 2000 and must be repaid by certain
dates during the twelve months ended March 31, 2001. 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. As of September 30, 1999, the unused facility amounted to
$51 million of which $10.3 million was available to be borrowed based on
collateral already pledged under the Line of Credit. We have an additional $1.2
million available principally under an unsecured credit facility.
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 nine months ended September 30, 1999, we completed the acquisition of
three shopping centers, located in Pennsylvania and New Jersey for an aggregate
purchase price of $33.2 million, including transaction costs, which consisted of
$1.2 million in cash and the incurrence of $32 million in liabilities,
substantially all of which was mortgage debt. In connection with one of the
acquisitions, we were required to deposit an additional $1 million with the
lender in connection with future capital improvements.
<PAGE> 14
In addition, we have entered into conditional agreements to acquire three
shopping centers in Pennsylvania and New Jersey for an aggregate purchase price
of approximately $21 million. The acquisitions are subject to due diligence and
certain other conditions and there can be no assurance that they will be
consummated. If consummated, we plan to finance substantially all of the
purchase prices.
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 September 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.
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.
<PAGE> 15
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.
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.
<PAGE>16
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.
PART II. Other Information
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, Sr.
November 12, 1999 _____________________________________
Louis P. Meshon Sr., President
/s/ Elaine Hauff
November 12, 1999 _____________________________________
Elaine Hauff, Vice President,
Treasurer and Principal Financial
and Accounting Officer
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