<PAGE> 1
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, 1998
-------------------------------------
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 1-7859
- -------------------------------------------------------------------------------
IRT PROPERTY COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1366611
- -------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Galleria Parkway, Suite 1400
Atlanta, Georgia 30339
- -------------------------------- ---------------------------
(Address of principal (Zip Code)
executive offices)
(770) 955-4406
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 2, 1998
- ---------------------------- -------------------------------
Common Stock, $1 Par Value 33,251,763 Shares
<PAGE> 2
CERTAIN MATTERS DISCUSSED UNDER "ITEM 1. FINANCIAL STATEMENTS -- NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS" and "ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" CONTAIN
FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING,
WITHOUT LIMITATION, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, DISCUSSION AND
ANALYSIS OF THE FINANCIAL CONDITION AND LIQUIDITY OF THE COMPANY AND CERTAIN
OTHER MATTERS. READERS OF THIS REPORT SHOULD BE AWARE THAT THERE ARE VARIOUS
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT, WHICH INCLUDE, WITHOUT
LIMITATION, CHANGES IN TAX LAWS OR REGULATIONS; VACANCIES AND LEASE RENEWALS;
TENANT CLOSINGS; THE FINANCIAL CONDITION (INCLUDING POSSIBLE MERGERS OR
BANKRUPTCIES) OF TENANTS; COMPETITION; CHANGES IN NATIONAL AND LOCAL ECONOMIC
CONDITIONS, INCLUDING INTEREST RATES AND CREDIT AVAILABILITY, AND POSSIBLE
ENVIRONMENTAL LIABILITIES.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
IRT PROPERTY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
ASSETS
<S> <C> <C>
Real estate investments:
Rental properties, at cost $614,043,082 $537,160,220
Accumulated depreciation (71,628,286) (62,526,989)
----------- -----------
542,414,796 474,633,231
Net investment in direct financing leases 4,607,297 4,704,295
Investment in joint venture - 355,832
Mortgage loans, net 1,098,488 9,321,205
----------- -----------
Net real estate investments 548,120,581 489,014,563
Cash and cash equivalents 1,428,297 275,349
Accrued interest receivable 61,390 528,094
Prepaid expenses and other assets 10,424,861 8,334,792
----------- -----------
$560,035,129 $498,152,798
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable, net $ 82,511,462 $ 59,558,650
7.3% convertible subordinated debentures due August
15, 2003 23,275,000 28,453,000
7.45% senior notes due April 1, 2001, net 49,958,300 49,945,790
7.25% senior notes due August 15, 2007, net 74,621,925 74,589,975
Indebtedness to banks 43,000,000 14,400,000
Minority interest payable 7,846,068 495
Accrued interest on debentures 217,104 784,671
Accrued interest on senior notes 2,542,187 2,970,313
Accrued expenses and other liabilities 11,637,700 6,718,749
Deferred income taxes - 1,055,000
----------- -----------
Total liabilities 295,609,746 238,476,643
----------- -----------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock, $1 par value, authorized 75,000,000
shares; 33,251,763 shares issued and outstanding in
1998 and 32,385,664 shares in 1997 33,251,763 32,385,664
Preferred stock, $1 par value, authorized 10,000,000
shares; none issued - -
Additional paid-in capital 272,936,380 263,786,165
Deferred compensation (1,166,667) -
Stock loans (1,250,000) -
Cumulative distributions in excess of net earnings (39,346,093) (36,495,674)
----------- -----------
Total shareholders' equity 264,425,383 259,676,155
----------- -----------
$560,035,129 $498,152,798
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
3
<PAGE> 4
IRT PROPERTY COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three- and Nine-Month Periods Ended
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Income from rental properties $20,591,519 $16,713,767 $58,478,670 $48,255,149
Interest 98,456 344,613 327,788 1,067,157
Interest on direct financing leases 126,849 130,514 444,040 442,640
----------- ----------- ----------- -----------
20,816,824 17,188,894 59,250,498 49,764,946
----------- ----------- ----------- -----------
Income from unconsolidated joint venture - - 54,021 -
----------- ----------- ----------- -----------
Expenses:
Operating expenses of real estate investments 4,438,817 3,860,244 12,942,542 10,377,122
Interest on mortgages 1,481,177 1,345,460 4,036,268 4,987,793
Interest on debentures 424,769 539,499 1,320,506 1,812,441
Interest on 7.45% senior notes 935,420 935,420 2,806,260 2,806,260
Interest on 7.25% senior notes 1,370,025 685,013 4,110,075 685,013
Interest on indebtedness to banks 783,654 524,285 1,803,590 1,095,560
Depreciation 3,339,513 2,937,570 9,611,009 8,519,397
Amortization of debt costs 108,506 105,165 327,814 308,826
General & administrative 1,015,970 772,412 3,739,544 2,571,720
----------- ----------- ----------- -----------
13,897,851 11,705,068 40,697,608 33,164,132
----------- ----------- ----------- -----------
Earnings before gain on real
estate investments 6,918,973 5,483,826 18,606,911 16,600,814
Gain on real estate investments:
Gain on sales of property 469,016 - 1,213,090 -
----------- ----------- ----------- -----------
Earnings before minority interest
and extraordinary item 7,387,989 5,483,826 19,820,001 16,600,814
Minority interest of unitholders in
operating partnership (104,473) - (104,473) -
----------- ----------- ----------- -----------
Earnings before extraordinary item 7,283,516 5,483,826 19,715,528 16,600,814
Extraordinary item -
Loss on extinguishment of debt (57,003) - (57,003) -
----------- ----------- ----------- -----------
Net earnings $ 7,226,513 $ 5,483,826 $19,658,525 $16,600,814
=========== =========== =========== ===========
Per Share:
Earnings before extraordinary item - basic $ 0.22 $ 0.17 $ 0.60 $ 0.52
Extraordinary item - basic - - - -
Net earnings - basic $ 0.22 $ 0.17 $ 0.60 $ 0.52
Earnings before extraordinary item - diluted $ 0.22 $ 0.17 $ 0.60 $ 0.52
Extraordinary item - diluted - - - -
Net earnings - diluted $ 0.22 $ 0.17 $ 0.60 $ 0.52
Weighted average number of shares outstanding:
Basic 33,131,981 32,131,067 32,875,829 31,723,091
=========== =========== =========== ===========
Diluted 33,141,264 32,196,956 32,907,372 31,807,537
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 5
IRT PROPERTY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Additional Deferred Distributions Total
Common Paid-In Compensation/ in Excess of Shareholders'
Stock Capital Stock Loans Net Earnings Equity
----- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $25,807,302 $201,273,343 $ - $ (33,725,723) $ 193,354,922
Net earnings for period - - - 16,600,814 16,600,814
Cash dividends paid -
$.675 per share - - - (21,617,576) (21,617,576)
Issuance of shares under
Dividend Reinvestment
Plan, net 163,436 1,640,009 - - 1,803,445
Conversion of debentures, net 83,191 828,213 - - 911,404
Exercise of stock options, net 17,703 87,548 - - 105,251
Issuance of common stock, net 4,653,747 44,880,749 - - 49,534,496
Issuance of shares for the
acquisition of convertible
debentures, net 1,500,000 13,477,145 - - 14,977,145
----------- ------------ ----------- ------------- -------------
Balance at September 30, 1997 $32,225,379 $262,187,007 $ - $ (38,742,485) $ 255,669,901
=========== ============ =========== ============= =============
Balance at December 31, 1997 $32,385,664 $263,786,165 $ - $ (36,495,674) $ 259,676,155
Net earnings for period - - - 19,658,525 19,658,525
Cash dividends paid -
$.685 per share - - - (22,508,944) (22,508,944)
Issuance of shares under
Dividend Reinvestment
Plan, net 163,505 1,578,391 - - 1,741,896
Conversion of debentures, net 460,263 4,595,696 - - 5,055,959
Exercise of stock options, net 2,811 17,616 - - 20,427
Adjustments for minority
interest of operating
partnership units upon
issuance of additional units - 698,032 - - 698,032
Issuance of restricted stock to
employees 119,760 1,130,240 (1,250,000) - -
Deferred compensation - - 83,333 - 83,333
Issuance of shares subject to
employee loans 119,760 1,130,240 (1,250,000) - -
----------- ------------ ----------- ------------- -------------
Balance at September 30, 1998 $33,251,763 $272,936,380 $(2,416,667) $ (39,346,093) $ 264,425,383
=========== ============ =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
IRT PROPERTY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 19,658,525 $ 16,600,814
Adjustments to reconcile earnings to net cash from
operating activities:
Income from unconsolidated joint venture (54,021) -
Operating distributions from unconsolidated joint venture 54,021 -
Gain on sales of property (1,213,090) -
Extraordinary loss 57,003 -
Depreciation 9,611,009 8,519,397
Minority interest expense 104,473 -
Amortization of debt cost and discount 372,275 326,661
Amortization of capitalized leasing income 96,998 90,036
Amortization of deferred compensation 83,333 -
------------ ------------
28,770,526 25,536,908
Changes in accrued assets and liabilities:
Decrease in accrued interest on debentures (567,567) (2,069,397)
Increase (decrease) in accrued interest on 7.45% senior
notes (428,126) 931,250
Increase in accrued interest on 7.25% senior notes - 679,688
Increase in interest receivable, prepaid expenses and
other assets (2,417,746) (588,123)
Increase in accrued expenses and other liabilities 4,993,169 3,387,939
------------ ------------
Net cash flows from operating activities 30,350,256 27,878,265
------------ ------------
Cash flows from (used in) investing activities:
Proceeds from sale of property, net 5,782,542 -
Non-operating distributions from unconsolidated joint venture 355,832 -
Additions to real estate investments, net -
Acquisitions, expansions and renovations (35,384,663) (41,851,605)
Improvements (2,277,767) (1,444,026)
Foreclosures (12,616) -
Collections of mortgage loans, net 22,706 3,841,906
------------ ------------
Net cash flows used in investing activities (31,513,966) (39,453,725)
------------ ------------
Cash flows from (used in) financing activities:
Cash dividends paid, net (20,767,048) (19,814,131)
Issuance of common stock, net - 49,534,496
Exercise of stock options 20,427 105,251
Principal amortization of mortgage notes payable, net (787,202) (901,567)
Repayment of mortgage notes payable, net (9,092,919) (34,840,154)
Increase in mortgage notes payable, net 4,400,446 -
Increase (decrease) in bank indebtedness, net 28,600,000 (15,000,000)
Issuance of 7.25% senior notes, net - 73,824,000
Repurchase of 7.3% convertible subordinated debentures, net - (38,269,338)
Cash in lieu of fractional shares on conversion of debentures (43) (113)
Extraordinary item -
Loss on extinguishment of debt (57,003) -
------------ ------------
Net cash flows from financing activities 2,316,658 14,638,444
------------ ------------
Net increase in cash and cash equivalents 1,152,948 3,062,984
Cash and cash equivalents at beginning of period 275,349 3,174,342
------------ ------------
Cash and cash equivalents at end of period $ 1,428,297 $ 6,237,326
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE> 7
IRT PROPERTY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
Supplemental disclosures of cash flow information:
<S> <C> <C>
Cash paid during the period for interest related to:
Mortgage notes payable $ 3,943,614 $ 4,961,283
Convertible subordinated debentures 1,888,073 3,881,838
Senior notes 7,299,999 2,288,500
Indebtedness to banks 1,589,736 1,225,019
------------ ------------
Total cash paid during the period for interest $ 14,721,422 $ 12,356,640
============ ============
Supplemental schedule of noncash investing and
financing activities:
Acquisitions, expansions and renovations:
Cost of acquisitions, expansions and renovations $ 72,082,510 $ 49,894,296
Issuance of operating partnership units (8,364,914) -
Additions to mortgage notes payable (28,332,933) (8,042,691)
------------ ------------
Cash paid for acquisitions, expansions and
renovations of real estate investments $ 35,384,663 $ 41,851,605
============ ============
Foreclosure of mortgage loans:
Additions to properties $ 8,212,627 $ -
Basis in mortgage loans (8,200,011) -
------------ ------------
Cash paid for foreclosure of mortgage loans $ 12,616 $ -
============ ============
Conversion of debentures:
Debentures converted $ 5,178,000 $ 936,000
Associated unamortized debenture costs (121,998) (24,483)
Equity issued on conversion (5,055,959) (911,404)
------------ ------------
Cash paid in lieu of fractional shares $ 43 $ 113
============ ============
Repurchase of convertible debentures:
Convertible debentures repurchased $ - $ 54,799,000
Issuance of common stock, net of expense - (16,529,662)
------------ ------------
Cash paid for repurchase of convertible debentures $ - $ 38,269,338
============ ============
Issuance of common stock, net $ - $ 16,529,662
Associated unamortized debenture costs - (1,552,517)
------------ ------------
Net increase in shareholders' equity $ - $ 14,977,145
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
7
<PAGE> 8
IRT PROPERTY COMPANY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
1. Unaudited Financial Statements
These consolidated financial statements for interim periods are
unaudited and should be read in conjunction with the Company's Annual Report to
Shareholders for the year ended December 31, 1997. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary to a
fair presentation of the financial statements as of September 30, 1998 and 1997
have been recorded. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for future interim
periods or for the full year.
2. Formation of DownREIT
The Company has formed a Georgia limited partnership, IRT Partners L.P.
("LP"), to enhance its acquisition opportunities by offering potential sellers
the ability to engage in tax-deferred sales in exchange for Operating
Partnership Units ("OP Units") of LP which may be redeemable for shares of
Company common stock. The Company serves as general partner of LP and has
contributed 20 of its shopping centers and related assets and cash to LP in
exchange for OP Units and partnership interests. As a result, the Company and
one of its wholly-owned subsidiaries own approximately 92% of LP, which is
included in the Company's consolidated financial statements.
LP currently has several unaffiliated limited partners resulting from
the acquisition of three Florida properties by LP in August 1998. The
unaffiliated limited partners have the option to require LP to redeem their OP
Units at any time after one year, in which event LP has the option to purchase
the OP Units for cash or convert them into one share of the Company's common
stock for each OP Unit.
In connection with the Company's formation of LP and its proposed
operations, LP has guaranteed the Company's bank indebtedness and its senior
indebtedness.
8
<PAGE> 9
Condensed financial statements of LP are included as Exhibit 99 to this
Form 10-Q.
3. Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares outstanding during the period consistent with
the guidelines of Statement of Accounting Standards No. 128, "Earnings Per
Share." The effect on diluted earnings per share assuming conversion of the 7.3%
convertible subordinated debentures and convertible OP Units would be
anti-dilutive. Options issued to executives and directors with exercise prices
less than the average market price for the respective periods were considered
dilutive. There is no impact on basic or diluted earnings per share from the
extraordinary item.
9
<PAGE> 10
<TABLE>
<CAPTION>
Per-Share
Income Shares Amount
------ ------ ---------
<S> <C> <C> <C>
For the quarter ended September 30, 1998
Basic Earnings Per Share
Net Earnings available to shareholders $ 7,226,513 33,131,981 $0.22
=====
Effect of options and restricted
shares - 9,283
----------- ----------
Diluted Earnings per Share
Net Earnings available to shareholders $ 7,226,513 33,141,264 $0.22
=========== ========== =====
For the quarter ended September 30, 1997
Basic Earnings Per Share
Net Earnings available to shareholders $ 5,483,826 32,131,067 $0.17
=====
Effect of options and restricted
shares - 65,889
----------- ----------
Diluted Earnings per Share
Net Earnings available to shareholders $ 5,483,826 32,196,956 $0.17
=========== ========== =====
For the nine months ended September 30, 1998
Basic Earnings Per Share
Net Earnings available to shareholders $19,658,525 32,875,829 $0.60
=====
Effect of options and restricted
shares - 31,543
----------- ----------
Diluted Earnings per Share
Net Earnings available to shareholders $19,658,525 32,907,372 $0.60
=========== ========== =====
For the nine months ended September 30, 1997
Basic Earnings Per Share
Net Earnings available to shareholders $16,600,814 31,723,091 $0.52
=====
Effect of options and restricted
shares - 84,446
----------- ----------
Diluted Earnings per Share
Net Earnings available to shareholders $16,600,814 31,807,537 $0.52
=========== ========== =====
</TABLE>
10
<PAGE> 11
The Company adopted SFAS No. 128, "Earnings Per Share," effective
December 15, 1997. This accounting change had no effect on previously reported
earnings per share (EPS) data for the quarter and nine months ended September
30, 1997.
4. Rental Properties
On January 13, 1998, the Company acquired Town and Country Shopping
Center in Kissimmee, Florida for a total cost of $4,265,000, consisting of the
initial purchase price of $4,200,000 and approximately $65,000 of acquisition
costs. This acquisition was funded by the assumption of the $2,232,000 existing
mortgage debt and cash of $2,033,000.
On March 12, 1998, the Company acquired Spring Valley Commons in
Columbia, South Carolina for $6,104,000 cash, consisting of the initial purchase
price of $6,075,000 and approximately $29,000 of acquisition
costs.
On March 31, 1998, the Company acquired Daniel Village in Augusta,
Georgia for $12,245,000 cash, consisting of the initial purchase price of
$12,200,000 and approximately $45,000 of acquisition costs.
On June 11, 1998, the Company acquired Mableton Crossing Shopping Center
in Mableton, Georgia for $8,170,000 cash, consisting of the initial purchase
price of $8,150,000 and approximately $20,000 of
acquisition costs.
As of August 1, 1998, the Company acquired three shopping centers in
Florida through the use of OP Units in LP. The aggregate cost of these three
centers was $29,051,000, consisting of the initial purchase price aggregating
approximately $28,410,000 and approximately $641,000 of acquisition costs. This
acquisition was funded by the assumption of approximately $18,538,000 of
existing debt bearing interest at 9.1875%, $9,462,000 of OP Units valued at
$11.25 per unit, and $1,051,000 of cash. For financial reporting purposes, the
aggregate cost was adjusted to $29,581,000 due to the valuation of the mortgages
assumed at 8% and the valuation of the OP Units at the $10 market value of the
Company's common stock on the date of closing.
On August 25, 1998, the Company acquired Treasure Coast Shopping Center
in Vero Beach, Florida for a total cost of $11,094,000, consisting of the
initial purchase price of $10,744,000 and approximately $350,000 of acquisition
costs. This acquisition was funded by the assumption of approximately $5,937,000
of existing debt bearing interest at 8% and $5,157,000 of cash.
11
<PAGE> 12
Effective June 30, 1998, the Company sold its Ohio industrial facility
for $827,000. The Company received net cash proceeds from the sale of
approximately $825,000 and recognized a gain of approximately $744,000 for
financial reporting purposes.
On August 14, 1998, the Company sold Spanish Quarter Apartments, a
property acquired through foreclosure in February 1998, for approximately
$5,100,000. The Company received net cash proceeds from the sale of
approximately $4,806,000 and recognized a gain of approximately $469,000
for financial reporting purposes.
5. Investment in Joint Venture
IRT Capital Corporation ("IRTCC"), a taxable subsidiary of the Company,
was a 50% owner of a joint venture which purchased in 1996 a 1.31 acre parcel of
land located in Savannah, Georgia, for development or sale. During March 1998,
this parcel was sold for a total sales price of $465,000.
6. Mortgage Loans
On August 31, 1998, the Company obtained title to Walton Plaza through a
deed in lieu of foreclosure. Management believes the market value of the
property equals or exceeds the net carrying value of the wrap-around mortgage.
7. 7.3% Convertible Subordinated Debentures
During February and March 1998, $5,178,000 of the 7.3% convertible
subordinated debentures were converted into 460,263 shares of common
stock at $11.25 per share.
Based upon the $11.25 conversion price, 2,068,889 authorized but
unissued common shares have been reserved for possible issuance if the remaining
$23,275,000 of debentures outstanding September 30, 1998 are converted.
8. Deferred Compensation and Stock Loans
On June 18, 1998, 119,760 restricted shares of common stock (the
"Restricted Shares") were granted and 119,760 shares (the "Loan Shares") were
issued pursuant to loans made to certain Company officers as incentives for
future services. The Restricted Shares and the Loan Shares were valued at the
closing price of the Company's common stock on
June 18, 1998 of $10.437.
12
<PAGE> 13
The Restricted Shares vest in ten equal annual installments beginning on
January 31, 1999. Upon issuance, the $1,250,000 value of the Restricted Shares
was recorded in shareholders' equity both as shares issued and as a deferred
compensation offset. Such deferred compensation is being amortized ratably over
the ten-year vesting period.
The loans, aggregating $1,250,000, are secured by both the Loan Shares
and the Restricted Shares, carry a 7% annual interest rate, and are due the
earlier of July 1, 2008 or 90 days following the death, disability or
termination of employment of the officers.
9. Commitments and Contingencies
IRTCC has entered into a co-development agreement for the development of
a Kroger anchored shopping center in Decatur, Georgia. The project will be
developed in two phases totaling approximately 140,000 square feet, not
including two out parcels, at a total anticipated cost of approximately
$14,100,000. The venture may require the Company to purchase the shopping center
upon the completion of Phase I at cost or upon the completion of Phase II at the
greater of cost or a 10.75% capitalization rate.
The Company has entered into contracts to acquire ownership positions in
three shopping center investments valued at approximately $17,880,000. These
transactions are scheduled to close during the fourth quarter of 1998 if all
closing contingencies are met.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Material Changes in Financial Condition. During the nine months ended
September 30, 1998, the Company borrowed $28,600,000 under its unsecured
revolving term loan, received cash proceeds of approximately $5,783,000 on the
sale of two investments and the condemnation of a small strip of land and
received net proceeds of approximately $4,400,000 from the financing of Mableton
Crossing, a 1998 acquisition. It utilized funds of a) $71,459,000 for the
acquisition of eight shopping center investments, consisting of cash of
approximately $34,760,000, mortgage debt of approximately $28,334,000 secured by
five of the centers and $8,365,000 of operating partnership units, b) $2,224,000
to repay at maturity an 11% mortgage (discounted to 9.75% for financial
reporting purposes), c) $625,000 to make a scheduled principal payment under a
9% purchase-money mortgage, d) $3,526,000 to prepay two mortgage notes payable
bearing interest at 9.875%, e) $2,175,000 to prepay a 10.25% mortgage and
$543,000 to prepay an 8.25% mortgage. Additionally, $5,178,000 of the Company's
7.3% convertible subordinated debentures were converted into 460,263 shares of
common stock at $11.25 per share.
During the nine months ended September 30, 1997, the Company received
cash proceeds of approximately $49,534,000 from the issuance of 4,653,747 shares
of its common stock at $11.25 per share, net cash proceeds of approximately
$73,824,000 from the issuance of $75,000,000 of senior notes due August 15, 2007
and cash proceeds of approximately $3,587,000 from the prepayment of a mortgage
loan. It utilized funds of a) $54,799,000 to repurchase $54,799,000 of its 7.3%
convertible subordinated debentures due August 15, 2003, consisting of cash of
approximately $38,224,000 and the issuance of 1,500,000 shares of common stock,
valued for the purposes of the exchange at $11.05 per share, b) $49,895,000 for
the acquisition of six shopping center investments, consisting of cash of
approximately $41,852,000 and mortgage debt of approximately $8,043,000 secured
by two of the centers, c) $3,800,000 to repay a 9.75% mortgage at maturity, d)
$27,721,000 to repay at maturity three mortgage notes payable bearing interest
at 7.6%, e) $3,155,000 to repay a 9.375% mortgage at maturity, and f)
$15,000,000 to repay the outstanding balance of its unsecured revolving term
loan. Additionally, $936,000 of the Company's 7.3% convertible subordinated
debentures were converted into 83,191 shares of common stock at $11.25 per
share.
Material Changes in Results of Operations. Rental income related to the
Company's core portfolio of real estate investments decreased approximately
$75,000 during the quarter and increased approximately $594,000 during the nine
months ended September 30, 1998. These amounts are net of approximately $97,000
and $263,000 less income earned during the quarter and nine months,
respectively, due to lease rejections in
14
<PAGE> 15
1997 and 1998 by two tenants in bankruptcy. Additionally, rental income for the
quarter and nine months a) increased approximately $2,508,000 and $7,100,000,
respectively, as a result of the 16 shopping centers acquired in 1997 and 1998,
b) increased approximately $178,000 and $614,000, respectively, as a result of
the apartment investment obtained through foreclosure of the wrap-around
mortgage loan in February 1998 and the shopping center obtained through
foreclosure in August 1998, and c) decreased by approximately $378,000 and
$1,076,000, respectively, as a result of three investments sold in 1997 and
1998. The Company also recognized approximately $2,092,000 of income upon
termination of two anchor tenants' leases in connection with the redevelopment
of two centers one of which was acquired in December 1997.
Percentage rentals received from shopping center investments, excluding
percentage rentals received from the Wal-Mart investments classified as direct
financing leases, totaled approximately $118,000 and $138,000 during the
quarters and $717,000 and $598,000 during the nine months ended September 30,
1998 and 1997, respectively. Percentage rental income is recorded when earned
and collectibility is assured.
Interest income decreased approximately $234,000 and $668,000 for the
three and nine months ended September 30, 1998, respectively, due primarily to
the repayment of one purchase-money mortgage in September 1997 and the
foreclosure of two mortgage loans during the first and third quarters of 1998.
Additionally the Company earned approximately $3,000 and $53,000 less interest
on short-term money market investments for the quarter and nine months ended
September 30, 1998, respectively.
The increase in interest on direct financing leases resulted from an
increase in percentage rental from one of the Company's two Wal-Mart investments
accounted for as direct financing leases. Approximately $61,000 of percentage
rental was received in 1998 compared to approximately $49,000 in 1997.
Operating expenses related to the Company's core portfolio of real
estate investments decreased approximately $79,000 for the quarter and increased
approximately $859,000 for the nine months ended September 30, 1998.
Additionally, during the quarter and nine months of 1998, operating expenses a)
increased approximately $761,000 and $1,927,000, respectively, as a result of
the 17 shopping centers acquired in 1997 and 1998, b) increased approximately
$116,000 and $325,000, respectively, as a result of the two mortgage loan
foreclosures in 1998, and c) decreased approximately $167,000 and $493,000,
respectively, as a result of three investments sold in 1997 and 1998.
15
<PAGE> 16
Interest expense on mortgages increased approximately $136,000 for the
quarter and decreased approximately $952,000 for the nine months ended September
30, 1998. During 1997 and 1998, the Company repaid an aggregate of $43,933,000
of mortgage debt at an average interest rate of 8.44%. Also during 1997 and
1998, the Company assumed or obtained approximately $44,377,000 of mortgage debt
on acquisitions at an average interest rate of 7.85%.
Interest on debentures decreased due to the repurchase of $54,799,000 of
the debentures in January 1997 and the conversion of $5,178,000 of the
debentures during the first quarter of 1998 and $1,653,000 during 1997.
The increase in interest on 7.25% senior notes is due to the issuance in
August 1997 of $75 million of 7.25% senior notes due August 2007.
Interest expense on bank indebtedness increased approximately $259,000
and $708,000 for the quarter and nine months ended September 30, 1998,
respectively, reflecting increased average borrowings at lower effective
interest rates. The Company had average borrowings under its revolving term loan
of $42,024,000 and $31,724,000 for the three and nine months ended September 30,
1998, respectively, at effective interest rates of 6.96% and 6.97%,
respectively, as compared to average borrowings of $27,108,000 and $17,663,000
at effective interest rates of 6.94% and 7.05% for the respective comparable
periods in 1997. In addition, the Company incurred commitment fees of
approximately $37,000 and $128,000 for the quarter and nine months ended
September 30, 1998, respectively, as compared to $43,000 and $151,000 for the
respective comparable periods in 1997.
The net increases in depreciation expense in 1998 were primarily due to
the 17 shopping center investments acquired during 1997 and 1998 and the two
mortgage loans foreclosed during 1998, partially offset by the three investments
sold during 1997 and 1998.
Effective January 1, 1998, the Company ceased capitalizing overhead
costs related to acquisitions in compliance with the policy issued by the
Emerging Issues Task Force. The Company capitalized approximately $255,000 of
acquisition overhead costs in 1997, of which $115,000 was in the third quarter
and $140,000 in the fourth quarter. This change, as well as increases in the
management staff and related employee benefits and expanded corporate insurance
coverage, resulted in increases in general and administrative expenses during
the quarter and nine months ended September 30, 1998. Additional factors
affecting the year-to-date increase in general and administrative expenses
included the write off of approximately $373,000 of diligence and other costs
related to merger
16
<PAGE> 17
negotiations that did not result in a transaction; the accrual of approximately
$497,000 of incentive compensation expense, $422,000 of which will be paid only
if certain per share funds from operations and shareholder return goals are
reached in 1998; and amortization of $83,000 of deferred compensation expense
associated with the restricted stock awards granted in June 1998. These
increases were partially offset by the allocation of management fees on the 17
centers acquired during 1997 and 1998, which resulted in decreases in general
and administrative expenses of approximately $150,000 and $277,000 for the
quarter and nine months ended September 30, 1998.
Funds from Operations. The Company defines funds from operations,
consistent with the NAREIT definition, as net earnings before gains (losses) on
real estate investments and extraordinary items plus depreciation and
amortization of capitalized leasing costs, adjusted for nonrecurring items.
Interest on debentures and amortization of convertible debenture costs and
amounts attributable to minority interests of OP Units are added to funds from
operations when assumed conversion of the debentures and the OP Units is
dilutive. Conversion of the debentures and the OP Units is dilutive and
therefore assumed for the quarters and nine months ended September 30, 1998 and
1997. Management believes funds from operations should be considered along with,
but not as an alternative to, net income as defined by generally accepted
accounting principles as a measure of the Company's operating performance. Funds
from operations does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs.
17
<PAGE> 18
The following data is presented with respect to the calculation of funds
from operations under the NAREIT definition for the three- and nine-month
periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Earnings $ 7,226,513 $ 5,483,826 $19,658,525 $16,600,814
Gain on real estate
investments (469,016) - (1,213,090) -
Loss on extinguishment of
debt 57,003 - 57,003 -
Depreciation* 3,299,632 2,937,570 9,571,128 8,519,397
Amortization of
capitalized leasing
fees* 78,281 62,600 209,193 186,490
Amortization of
capitalized leasing
income 30,820 34,157 96,998 90,036
Nonrecurring merger
expenses - - 373,357 -
----------- ----------- ----------- -----------
Funds from operations 10,223,233 8,518,153 28,753,114 25,396,737
Interest on convertible
debentures 424,769 539,499 1,320,506 1,812,441
Amortization of
convertible debenture
costs 25,065 31,846 78,644 107,620
Amounts attributable to
minority interests 145,868 - 145,868 -
----------- ----------- ----------- -----------
Fully diluted funds from
operations $10,818,935 $ 9,089,498 $30,298,132 $27,316,798
=========== =========== =========== ===========
Fully diluted weighted
average shares 35,747,600 34,833,070 35,276,529 34,750,057
=========== =========== =========== ===========
</TABLE>
* Net of amounts attributable to minority interests
18
<PAGE> 19
Additional Information. The following data is presented with respect to
amounts incurred for improvements to the Company's real estate investments and
for leasing fees during the three- and nine-month periods ended September 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tenant Improvements:
Shopping Centers $209,396 $405,023 $ 781,183 $ 637,146
Industrial - 241 16,967 9,306
-------- -------- ---------- ----------
Total Tenant
Improvements 209,396 405,264 798,150 646,452
-------- -------- ---------- ----------
Capital Expenditures:
Shopping Centers 335,004 266,345 1,427,561 641,974
Apartment - 59,077 - 121,069
Industrial - 34,531 52,056 34,531
-------- -------- ---------- ----------
Total Capital
Expenditures 335,004 359,953 1,479,617 797,574
-------- -------- ---------- ----------
Total Improvements $544,400 $765,217 $2,277,767 $1,444,026
======== ======== ========== ==========
Leasing Fees $112,717 $ 61,651 $ 344,612 $ 180,809
======== ======== ========== ==========
</TABLE>
Proposed Tax Legislation. On February 2, 1998 the Clinton Administration
released the fiscal 1999 budget, which contains certain proposals that may
adversely affect REITs (the "Administration Proposals"). Under current law, the
Company cannot own more than 10% of the outstanding voting securities of any one
issuer and qualify for taxation as a REIT. The Administration Proposals include
a provision that would expand the ownership limitation from no more than 10% of
the voting securities of an issuer to no more than 10% of the vote or value of
all classes of the issuer's stock. The Administrative Proposals, however, will
not become effective until legislation is duly passed by Congress and signed by
the President. Consequently, it is impossible to determine at this time all of
the possible ramifications that may result from the legislation based on the
Administration Proposals. Management does not believe the Administration
Proposals will have a material adverse effect upon its operations although they
may restrict future non-qualified REIT activities, such as development for sale,
by IRT Capital Corporation.
19
<PAGE> 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
21. Company subsidiaries.
27. Financial Data Schedule (for S.E.C. use only).
99. Financial statements of IRT Partners L.P. as of and
for the period from inception (July 15, 1998) through
September 30, 1998.
(b) Reports on Form 8-K. The Company filed a Report on Form 8-K dated
September 9, 1998 relating to the formation of IRT Partners L.P. ("LP"), the
execution of guarantees by LP for the Company's bank and other senior
indebtedness, and the Company's Amended and Restated Loan Agreement with its
banks. No other reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
IRT PROPERTY COMPANY
Date: November 2, 1998 /s/ Thomas H. McAuley
---------------- ---------------------
Thomas H. McAuley
President & Chief Executive
Officer
Date: November 2, 1998 /s/ Mary M. Thomas
---------------- ------------------
Mary M. Thomas
Executive Vice President &
Chief Financial Officer
20
<PAGE> 1
Exhibit 21
COMPANY SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Year
Name Organization Incorporated
---- --------------- ------------
<S> <C> <C>
IRT Management Company Georgia 1990
VW Mall, Inc. Georgia 1994
IRT Alabama, Inc. Alabama 1997
IRT Capital Corporation Georgia 1996
IRT Partners L.P. Georgia 1998
</TABLE>
All are wholly-owned subsidiaries of the Company except IRT Capital
Corporation ("IRTCC") and IRT Partners L.P. ("LP"). The Company owns 96% of
IRTCC's non-voting common stock and 1% of its voting stock. The Company serves
as general partner of LP, and it and one of its wholly-owned subsidiaries owns
approximately 92% of LP.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IRT PROPERTY COMPANY AS OF AND FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,428
<SECURITIES> 0
<RECEIVABLES> 61
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,915
<PP&E> 614,043
<DEPRECIATION> 71,628
<TOTAL-ASSETS> 560,035
<CURRENT-LIABILITIES> 14,397
<BONDS> 273,367
0
0
<COMMON> 33,252
<OTHER-SE> 231,174
<TOTAL-LIABILITY-AND-EQUITY> 560,035
<SALES> 0
<TOTAL-REVENUES> 59,305
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 17,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,077
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,659
<EPS-PRIMARY> 0.60<F1>
<EPS-DILUTED> 0.60<F1>
<FN>
<F1>SFAS 128 HAD NO EFFECT ON EPS-PRIMARY FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1997. EPS DILUTED CALCULATED IN ACCORDANCE WITH SFAS 128 IS
EQUAL TO EPS-PRIMARY AS REPORTED IN THE PREVIOUS FINANCIAL DATA SCHEDULE.
ACCORDINGLY, NO RESTATED FINANCIAL DATA SCHEDULE IS FILED HEREIN.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99
IRT PARTNERS L.P.
CONDENSED BALANCE SHEET
September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Rental properties, at cost $133,322,078
Accumulated depreciation (18,307,446)
------------
115,014,632
Cash 634,427
Prepaid expenses and other assets 2,591,969
------------
$118,241,028
============
LIABILITIES & PARTNERS' CAPITAL
Liabilities:
Mortgage notes payable $ 26,067,157
Accrued expenses and other liabilities 2,829,130
------------
28,896,287
------------
Limited partners' capital interest
(779,385 OP Units), at redemption
value 7,774,365
------------
Commitments and contingencies
Partners' Capital:
General partner ( 97,880 units) 890,449
Limited partner (8,868,752 units) 80,679,927
------------
81,570,376
------------
$118,241,028
============
</TABLE>
The accompanying notes are an integral part of this
balance sheet.
1
<PAGE> 2
IRT PARTNERS L.P.
CONDENSED STATEMENT OF EARNINGS
For the Period from Inception (July 15, 1998)
through September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
Income from rental properties $ 2,844,738
-----------
Expenses:
Operating expenses of rental properties 759,641
Interest on mortgages 316,126
Depreciation 488,681
General and administrative 912
-----------
1,565,360
-----------
Net earnings $ 1,279,378
===========
</TABLE>
The accompanying notes are an integral
part of this financial statement.
2
<PAGE> 3
IRT PARTNERS L.P.
STATEMENT OF CASH FLOWS
For the Period from Inception (July 15, 1998) through September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings $ 1,279,378
Adjustments to reconcile earnings to net cash from
operating activities:
Depreciation 488,681
-----------
1,768,059
Changes in accrued assets and liabilities:
Increase in prepaid expenses and other assets (169,765)
Increase in accrued expenses and other liabilities 624,972
-----------
Net cash flows from operating activities 2,223,266
-----------
Cash flows used in investing activities:
Acquisitions (315,276)
Improvements (203,129)
-----------
Net cash flows used in investing activities (518,405)
-----------
Cash flows used in financing activities:
Principal amortization of mortgage notes payable, net (34,215)
Net advances to parent company (1,036,219)
-----------
Net cash flows used in financing activities (1,070,434)
-----------
Net increase in cash and cash equivalents 634,427
Cash and cash equivalents at beginning of period -
-----------
Cash and cash equivalents at end of period $ 634,427
===========
</TABLE>
The accompanying notes are an integral part
of this financial statement.
3
<PAGE> 4
IRT PARTNERS L.P.
STATEMENT OF CASH FLOWS
For the Period from Inception (July 15, 1998) through September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest related to:
Mortgage notes payable $ 142,345
============
Supplemental schedule of noncash investing and
financing activities:
Acquisitions:
Rental properties $115,300,184
Other assets and liabilities, net (818,172)
Issuance of operating partnership units (88,065,364)
Additions to mortgage notes payable (26,101,372)
------------
Cash paid for acquisitions $ 315,276
============
Distributions:
Distributions paid $ 735,524
Issuance of operating partnership units (735,524)
------------
Cash paid for distributions $ -
============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
4
<PAGE> 5
IRT PARTNERS L.P.
Notes to Financial Statements
September 30, 1998
1. Unaudited Financial Statements
These financial statements for interim periods are unaudited. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to a fair presentation of the financial statements as of
September 30, 1998 have been recorded. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
future interim periods or for a full year.
2. Formation
IRT Partners L.P. ("LP") is a Georgia limited partnership formed July
15, 1998 in order to enhance acquisition opportunities by offering potential
sellers the ability to engage in tax-deferred sales in exchange for Operating
Partnership Units ("OP Units") of LP which may be redeemable for shares of
common stock of IRT Property Company ("IRT"). IRT serves as general partner of
LP and, as of August 1, 1998, contributed 20 of its shopping centers and
related assets and cash to LP in exchange for Operating Partnership Units ("OP
Units") and partnership interests. As a result, IRT and one of its wholly-owned
subsidiaries own approximately 92% of LP.
LP currently has several unaffiliated limited partners resulting from
the acquisition of three Florida properties by LP in August 1998. The
unaffiliated limited partners have the option to require LP to redeem their OP
Units at any time after one year, in which event LP has the option to purchase
the OP Units for cash or convert them into one share of IRT's common stock for
each OP Unit.
3. Rental Properties
The 20 shopping centers contributed by IRT as of August 1, 1998 are
located in North Carolina and Tennessee and are carried at the historical cost
of IRT.
As of August 1, 1998, LP acquired three shopping centers in Florida
through the use of OP Units. The aggregate cost of these three centers was
$29,051,000, consisting of the initial purchase price aggregating approximately
$28,410,000 and approximately $641,000 of acquisition costs.
5
<PAGE> 6
This acquisition was funded by the assumption of approximately $18,538,000 of
existing debt bearing interest at 9.1875%, $9,462,000 of OP Units valued at
$11.25 per unit, and $1,051,000 of cash which was contributed by IRT for OP
Units valued at $11.25 per unit. For financial reporting purposes, the aggregate
cost was adjusted to $29,581,000 due to the valuation of the mortgages assumed
at 8% and the valuation of the OP Units at the $10 market value of IRT's common
stock on the date of closing.
On August 25, 1998, LP acquired Treasure Coast Shopping Center in Vero
Beach, Florida for a total cost of $11,094,000, consisting of the initial
purchase price of $10,744,000 and approximately $350,000 of acquisition costs.
This acquisition was funded by the assumption of approximately $5,937,000 of
existing debt bearing interest at 8% and $5,157,000 of cash obtained through the
issuance of OP Units to IRT valued at $11.25 per unit.
4. Commitments and Contingencies
In connection with the formation of LP and its proposed operations, LP
has guaranteed the bank indebtedness and senior indebtedness of IRT.
6
