FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended July 31, 1996 Commission File Number 1-6309
HRE PROPERTIES
(Exact Name of Registrant as Specified in Charter)
MASSACHUSETTS 04-2458042
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
321 Railroad Avenue, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 863-8200
The number of shares of Registrant's common shares outstanding as
of the close of period covered by this report: 5,347,287
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
THE SEC FORM 10-Q, FILED HEREWITH, CONTAINS 12 PAGES, NUMBERED
CONSECUTIVELY FROM 1 TO 12 INCLUSIVE, OF WHICH THIS PAGE IS 1.
INDEX
HRE PROPERTIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income--Three months ended July 31, 1996
and 1995,Nine months ended July 31, 1996 and 1995.
Consolidated Balance Sheets--July 31, 1996 and October 31,1995.
Consolidated Statements of Cash Flows--Nine months ended
July 31, 1996 and 1995.
Consolidated Statements of Shareholders' Equity--Nine months
ended July 31, 1996 and 1995.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Page 2 of 12
HRE PROPERTIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
July 31, October 31,
1996 1995
ASSETS
Real Estate Investments:
Properties owned -at cost, net of accumulated
depreciation and recoveries $88,735 $ 85,966
Properties available for sale - at cost, net of
accumulated depreciation and recoveries 41,207 46,212
Mortgage notes receivable 3,729 3,937
133,671 136,115
Cash and cash equivalents 5,084 7,097
Interest and rent receivable 2,787 2,691
Deferred charges, net of accumulated amortization 2,035 1,913
Other assets 1,225 1,283
$ 144,802 $149,099
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loans $ -- $ 2,500
Mortgage notes payable 51,430 57,212
Accounts payable and accrued expenses 1,054 1,014
Deferred trustees' fees 461 436
Other liabilities 1,102 1,355
54,047 62,517
Shareholders' Equity:
Preferred shares, without par value;
2,000,000 shares authorized; none issued -- --
Common shares, without par value; unlimited shares
authorized; 5,560,335 and 5,550,421 issued on
July 31, 1996 and October 31, 1995, respectively 124,054 123,844
Less 213,048 and 178,348 common shares held in
treasury,at cost,respectively (3,402) (2,861)
Distributions in excess of accumulated net income (29,897) (34,401)
90,755 86,582
$144,802 $149,099
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
Page 3 of 12
HRE PROPERTIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Nine months Ended Three Months Ended
July 31 July 31
1996 1995 1996 1995
Revenues:
Operating leases $16,971 $14,746 $5,611 $5,160
Financing leases 478 963 136 319
Interest and other 737 882 209 337
18,186 16,591 5,956 5,816
Operating Expenses:
Property expenses 6,562 5,803 2,029 1,948
Interest 3,783 3,887 1,178 1,375
Depreciation and amortization 3,802 3,532 1,278 1,203
General and administrative expenses 1,159 1,247 370 502
Trustees' fees and expenses 133 130 47 40
Writedown in carrying value
of investments -- 7,000 -- 7,000
15,439 21,599 4,902 12,068
Income (Loss) before Gains on
Sales of Properties 2,747 (5,008) 1,054 (6,252)
Gains on Sales of Properties 6,641 5,502 389 --
Net Income (Loss) $ 9,388 $ 494 $ 1,443 $(6,252)
Net Income (Loss) Per Common Share $ 1.74 $ .09 $ .26 $ (1.17)
Weighted Average Number of Common
Shares Outstanding 5,371 5,348 5,374 5,353
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Page 4 of 12
HRE PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months Ended July 31,
1996 1995
Operating Activities:
Net income $ 9,388 $ 494
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,802 3,620
Recovery of investment in properties
owned subject to financing leases 715 1,106
Minority interest in results of consolidated
joint venture -- 42
Gains on sales of properties (6,641) (5,502)
Writedown in carrying value of investments -- 7,000
(Increase) decrease in interest and rent receivable (96) 124
Increase (decrease) in accounts payable and accrued
expenses 65 77
(Increase) decrease in other assets and other
liabilities, net (196) (191)
Net Cash Provided by Operating Activities 7,037 6,770
Investing Activities:
Acquisitions of properties owned (881) (19,476)
Improvements to properties owned and deferred charges,
net (5,447) (1,760)
Proceeds from sales of mortgage notes receivable 143 3,400
Proceeds from sales of properties 10,567 --
Payments received on mortgage notes receivable 65 42
Miscellaneous -- --
Net Cash (Used in) Investing Activities 4,447 (17,794)
Financing Activities:
Proceeds from bank loan 5,250 --
Proceeds from mortgage notes 6,000 11,250
Dividends paid (4,884) (4,544)
Proceeds from sales of additional common shares 210 226
Purchase of common shares for treasury (541) --
Payments on mortgage notes payable and bank loans (19,532) (321)
Net Cash Provided by (Used in) Financing Activities (13,497) 6,611
Net (Decrease) In Cash and Cash Equivalents (2,013) (4,413)
Cash and Cash Equivalents at Beginning of Period 7,097 8,738
Cash and Cash Equivalents at End of Period $ 5,084 $ 4,325
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 5 of 12
HRE PROPERTIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except shares and per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Shares
(Distributions
Treasury In Excess of
Outstanding Issued Shares, Accumulated
Number Amount at Cost Net Income) Total
Balances - October 31, 1994 5,341,696 $123,507 $(2,861) $(32,165) $ 88,481
Net Income -- -- -- 494 494
Cash dividends paid ($.85 per share) -- -- -- (4,544) (4,544)
Sale of additional common shares under
dividend reinvestment plan 14,087 194 -- -- 194
Common shares issued upon exercise of
stock options 6,668 32 -- -- 32
Balances - July 31, 1995 5,362,451 $123,733 $(2,861) $(36,215) $84,657
Balances - October 31, 1995 5,367,226 $123,844 $(2,861) $(34,401) $86,582
Net income -- -- -- 9,388 9,388
Cash dividends paid ($.91 per share) -- -- -- (4,884) (4,884)
Sale of additional common shares under
dividend reinvestment plan 14,761 210 -- -- 210
Purchases of common shares held in
treasury (34,700) -- (541) -- (541)
Balances - July 31, 1996 5,347,287 $124,054 $(3,402) $(29,897) $90,755
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Page 6 of 12
HRE PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
The accompanying unaudited consolidated financial statements
include the accounts of HRE Properties ("the Trust"), and a
joint venture in which the Trust has the ability to control
the affairs of the venture. All significant intercompany
transactions and balances have been eliminated. The
financial statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Certain information and
footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Results of operations for the three-month
and nine-month periods ended July 31, 1996 are not
necessarily indicative of the results that may be expected
for the year ending October 31, 1996. It is suggested that
these financial statements be read in conjunction with the
financial statements and notes thereto included in the
Trust's annual report for the fiscal year ended October 31,1995.
Sales of Property
In January 1996, the Trust sold a retail property for
$7,075,000 resulting in a gain on sale of property of $6,252,000.
In May 1996, the Trust sold an office building for
$3,550,000 resulting in a gain on sale of property of $389,000.
The Trust has contracted to sell one of its office building
investments for proceeds of approximately $8.6 million,
which amount approximates the property's net carrying amount at July 31, 1996.
Mortgage Notes Payable
In December 1995, the Trust repaid a 9.5% mortgage note
payable in the principal amount of $11,250,000, due in 2000,
from proceeds of a mortgage note in the principal amount of
$6,000,000, and borrowings under one of the Trust's existing
unsecured lines of credit.
Other Matters
In May 1996, the Trust's Board of Trustees authorized a
program to purchase up to one million of the Trust's common
shares over the next two to three years. The Trust expects
to use available cash or proceeds from the sales of
its non-core assets to finance the repurchase program.
The repurchase program is subject to
postponement or termination at any time in light of
prevailing market conditions and other factors. As of July
31, 1996, the Trust had repurchased 34,700 shares at an
aggregate cost of $557,000 under this program.
Page 7 of 12
Other Matters (Continued)
The Trust has commenced discussions with one of its tenants
to recover up to $6.2 million in unpaid additional
percentage rents including interest due the Trust, pursuant
to a long-term lease arrangement. The revenues are due as a
result of a provision of the lease which requires the tenant
to aggregate the sales of all its stores in a specified
radius when computing percentage rent. The tenant has
disputed the amount of unpaid rent. However, management
believes that the tenant's objections are without merit and
intends to vigorously pursue the claim.
In a prior year, as part of a real property transfer and
mortgage transaction, the Trust negotiated an option to
purchase a 117,500 square foot retail property in Georgia
upon the occurrence of certain events. The property is triple net leased
under a long-term lease arrangement.In fiscal 1996, the
Trust exercised its option for a purchase price of $1.00.
However, the property's owner of record ("Holder") has
contested the option and has commenced an action against the
Trust to declare the option unenforceable. The Trust has
counterclaimed and intends to vigorously pursue the litigation.
There is a $2 million mortgage lien recorded against the property,
the priority of which is being evaluated.
Page 8 of 12
PART I - FINANCIAL INFORMATION (continued)
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources:
The Trust's liquidity and capital resources include its cash
and cash equivalents, funds available from bank borrowings
and long-term mortgage debt and sales of real estate
investments. The Trust meets its liquidity requirements
primarily by generating cash from the operations of its
properties, sale of real estate investments and collection
of principal and interest on its mortgage notes receivable.
Payments of expenses related to real estate operations,
capital improvement programs, debt service, management and
professional fees and dividend requirements place demands on
the Trust's liquidity.
The Trust believes that the financial resources currently
available to it are sufficient to meet all of its known
obligations and commitments and to make additional real
estate investments when appropriate opportunities arise. At
July 31, 1996, the Trust had cash and cash equivalents of
$5.1 million compared to $7.1 million at October 31, 1995.
The Trust also has $15 million in unsecured revolving lines
of credit with two major commercial banks. The credit lines
are available to finance the acquisition, management or
development of commercial real estate, refinance of
indebtedness and for working capital purposes. The
revolving credit lines expire in 1997 and outstanding
borrowings (None at July 31, 1996), may be repaid from
available cash, proceeds of debt refinancings or sales of
properties. The Trust may also request that the time for
repayment be extended by the banks. The Trust has recently
renewed its credit lines for another year on similar terms
and conditions.
Long-term debt consists of mortgage notes payable totalling
$51.4 million. The mortgage loans bear interest at fixed
rates that range from 7.5% to 9.75%. In December, 1995, the
Trust repaid a 9.5 % mortgage note payable in the principal
amount of $11,250,000 due in 2000, from proceeds of a
$6,000,000 mortgage note due in 2002 and $5,250,000 of
borrowings from one of the Trust's credit lines.
Approximately $9.5 million of mortgage loans mature in the
next twelve months. It is the Trust's intent to repay these
loans from available liquid assets or refinance the
indebtedness as they mature.
The Trust also invests in its existing properties and,
during fiscal 1996, spent approximately $5.4 million for
capital improvements and leasing costs, including $3.3
million to complete the construction of a tenant's retail
store at one of the Trust's properties. The Trust also
expects to make additional investments periodically. The
funds from such investments may come from existing liquid
assets, line of credit arrangements, proceeds from property
sales, financing of acquired or existing properties or the
sales of mortgage notes receivable. In fiscal 1996, the
Trust acquired the Alm shopping center in Phoenix, Arizona,
a 30,700 square foot retail property that is situated on
land adjacent to an 86,000 square foot retail property
currently owned by the Trust. The property was acquired at
a cost of $881,000.
In fiscal 1995, the Board of Trustees expanded and refined
the strategic objectives of the Trust to refocus the real
estate portfolio into one of self-managed retail properties
located in the Northeast and authorized a plan to sell the
non-core properties of the Trust in the normal course of
business over the next several years. The Trust believes
that economic conditions in the real estate markets where
the Trust's non-core properties are located have improved
and that opportunities to sell those properties over the
next several years have also improved. During the first
nine months of fiscal 1996, the Trust sold a non-core retail
property for $7,075,000 realizing a gain on sale of the
property of $6,252,000, and sold an office property for
$3.75 million realizing a gain on sale of the property of $389,000.
Page 9 of 12
At July 31, 1996, the non-core properties totalled nine
properties, having an aggregate net book value of
$41,207,000 and comprise all of the Trust's office (with the
exception of the Trust's headquarters), distribution and
service facilities, and certain retail properties located
outside of the Northeast region of the United States.
During fiscal 1996, the Trust contracted to sell its office
building in Denver, Colorado for approximately $8.6 million.
The closing, which is subject to certain conditions, is
scheduled in this fiscal year.
In May, 1996, the Trust's Board of Trustees authorized a
program to purchase up to one million of the Trust's common
shares over the next two to three years. The Trust expects
to use available cash or proceeds from the sales of
its non-core assets. The repurchase program is subject to
postponement or termination at any time in light of
prevailing market conditions and other factors.
Funds from Operations
Funds from operations (FFO) is defined as net income
(computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt
restructuring and sales of properties, plus depreciation and
amortization. The Trust believes the level of funds from
operations to be an appropriate supplemental financial
measure of its operating performance. Funds from operations
does not represent cash flows from operations as defined by
generally accepted accounting principles, is not indicative
that cash flows are adequate to fund all cash needs and is
not considered to be an alternative to net income as defined
by generally accepted accounting principles. In fiscal
1996, the Trust modified its definition of funds from
operations to conform to the definition of FFO recommended
by the National Association of Real Estate Investment Trusts
("NAREIT"). The Trust considers recoveries of investment in
properties owned subject to financing leases to be analogous
to amortization for purposes of calculating funds from
operations. In the nine-month period ended July 31, 1996,
funds from operations increased 11.1% to $6,970,000 from
$6,272,000 in the year ago period. The improvement in FFO in fiscal 1996 is
the result of, among other things, the positive effect of the Trust's
retail properties acquired in fiscal 1995 and recent leasing
at several of the Trust's properties.
Results of Operations
Revenues
Total revenues increased 9.6% to $18,186,000 in the first
nine months of fiscal 1996. Operating lease revenues
increased by $2,225,000 or 15% primarily from the additional
rents of two retail properties located in Danbury,
Connecticut and Carmel, New York acquired in
fiscal 1995, and new leasing at several of the Trust's owned
properties. The Danbury property, known as Danbury Square,
was acquired by the Trust in January 1995 and the Carmel
property was acquired in October 1995. When adjusted to exclude
properties acquired and sold in 1995 and 1996, rental income increased
by 10.1% in fiscal 1996. The Trust's portfolio was 95% leased at July 31, 1996.
Finance lease income decreased in fiscal 1996 from the sale in fiscal 1995
of four distribution properties which were accounted for as
direct finance leases.
As of July 31, 1996, four tenants occupying space
at several of the Trust's retail properties have filed for
bankruptcy protection. The Trust has reviewed each
situation and has developed responses to assist in
containing any short-term rental losses from these bankruptcies.
Page 10 of 12
In one instance, the former parent of the tenant and assignor continues
on the lease In another situation, the Trust recently purchased the
property anticipating a vacancy resulting from the tenant's
bankruptcy. A third tenant has historically reported good
store sales and currently pays a modest rent. While the
Trust cannot predict the ultimate outcomes of these matters,
it will continue to monitor events. In the last instance,
the tenant filed for liquidation and recently assigned
its lease to a regional retailer who will continue to lease
the space.
Expenses
Total expenses amounted to $15,439,000 in the Trust's
first nine-months of fiscal 1996 compared to $21,599,000 for
the same period last year. Fiscal 1995 expenses include a non-cash
charge of $7,000,000 to write-down the carrying values
of two of the non-core properties held available for sale to their
estimated net realizable values. Property expenses totalled $6,562,000
for the first nine months of fiscal 1996, compared to
$5,803,000 for the same period in 1995. For properties
owned during both 1996 and 1995 expenses in fiscal 1996
increased by 3% principally from higher snow removal costs and
other maintenance costs. Property expenses for the Trust's
properties acquired in fiscal 1995 increased expenses by
$570,000 in fiscal 1996.
Interest expense decreased from the repayment of a 9.5%
mortgage note payable in the amount of $11,250,000 in
December, 1995 from proceeds of a $6,000,000 mortgage note
and borrowings from the Trust's credit lines at a lower interest rate.
The credit lines were repaid during fiscal 1996 from proceeds of sales
of properties.
General and administrative expenses decreased in fiscal 1996 principally from
the absence of rental expense incurred under a lease agreement which expired
in December 1995 for the Trust's former executive office space. The Trust
currently occupies space in one of its office properties.
Page 11 of 12
Item 6 Exhibits and Reports on Form 8-K
Reports on Form 8-K
No reports on Form 8-K were filed by the
Registrant during the three-month period ended
July 31, 1996.
Exhibits
S I G N A T U R E S
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.
HRE PROPERTIES
(Registrant)
By: /s/
James R. Moore
Executive Vice President/
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
By: /s/
Charles J. Urstadt
Chairman, President and
Chief Executive Officer
Dated: September 12, 1996
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> JUL-31-1996
<CASH> 5084000
<SECURITIES> 0
<RECEIVABLES> 2787000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 159020000<F1>
<DEPRECIATION> 29078000
<TOTAL-ASSETS> 144802000
<CURRENT-LIABILITIES> 2617000
<BONDS> 51430000
<COMMON> 120652000
0
0
<OTHER-SE> (29897000)
<TOTAL-LIABILITY-AND-EQUITY> 144802000
<SALES> 0
<TOTAL-REVENUES> 18186000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11656000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3783000
<INCOME-PRETAX> 2747000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2747000
<DISCONTINUED> 0
<EXTRAORDINARY> 6641000<F2>
<CHANGES> 0
<NET-INCOME> 9388000
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
<FN>
<F1>This item consists of Real Estate Investments Owned
<F2>This item consists of Gains on Sales of Properties
</FN>
</TABLE>
