<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: Commission File Number:
JUNE 30, 1998 33-2320
------------- -------
EXCEL PROPERTIES, LTD.
----------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 87-0426335
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
16955 VIA DEL CAMPO, SUITE 110 SAN DIEGO, CALIFORNIA 92127
----------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (619) 485-9400
Securities registered pursuant to Section 12(b) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes [X] [No]
(2) Yes [X] [No]
<PAGE> 2
EXCEL PROPERTIES, LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Balance Sheets
June 30, 1998 (Unaudited)
December 31, 1997 .............................................. 3
Statements of Income
Three Months Ended June 30, 1998 (Unaudited)
Three Months Ended June 30, 1997 (Unaudited)
Six Months Ended June 30, 1998 (Unaudited)
Six Months Ended June 30, 1997 (Unaudited)...................... 4
Statements of Changes in Partners' Equity
Six Months Ended June 30, 1998 (Unaudited)
Six Months Ended June 30, 1997 (Unaudited)...................... 5
Statements of Cash Flows
Six Months Ended June 30, 1998 (Unaudited)
Six Months Ended June 30, 1997 (Unaudited)...................... 6
Notes to Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION..................................................... 12
</TABLE>
2
<PAGE> 3
EXCEL PROPERTIES, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
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<S> <C> <C>
ASSETS
Real estate:
Land $ 2,511,852 $ 2,728,464
Buildings 3,911,772 4,417,200
Less: accumulated depreciation (1,303,095) (1,367,861)
----------- -----------
Net real estate 5,120,529 5,777,803
Cash 1,128,552 444,616
Accounts receivable, less allowance for bad debts of
$2,524 and $236,017 in 1998 and 1997, respectively -- 19,897
Notes receivable 1,163,264 1,167,273
Interest receivable and other assets 5,830 5,814
----------- -----------
Total assets $ 7,418,175 $ 7,415,403
=========== -----------
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable:
Affiliates $ 732 $ 697
Other 1,525 2,139
Tenant security deposits -- 5,000
Property tax payable 3,616 19,089
Deferred rental income 15,010 10,408
----------- -----------
Total liabilities 20,883 37,333
----------- -----------
Partners' Equity:
General partner's equity 15,584 16,376
Limited partners' equity, 235,308 units
authorized, 135,299 units issued
and outstanding in 1998 and 1997,
respectively 7,381,708 7,361,694
----------- -----------
Total partners' equity 7,397,292 7,378,070
----------- -----------
Total liabilities and partners' equity $ 7,418,175 $ 7,415,403
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
3
<PAGE> 4
EXCEL PROPERTIES, LTD.
STATEMENTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Base rent $164,087 $216,397 $339,099 $430,027
Interest income 34,301 30,707 61,629 100,805
-------- -------- -------- --------
Total revenue 198,388 247,104 400,728 530,832
-------- -------- -------- --------
Expenses:
Depreciation 32,550 36,175 67,607 72,349
Bad debts 4,423 30,180 6,045 91,819
Office expenses 2,754 3,530 6,115 7,546
Administrative 2,700 2,700 5,400 5,400
Accounting and legal 2,385 37,273 7,305 42,455
Management fees 1,736 1,743 3,511 3,378
Other property expenses 617 -- 617 --
-------- -------- -------- --------
Total expenses 47,165 111,601 96,600 222,947
-------- -------- -------- --------
Income before real estate sales 151,223 135,503 304,128 307,885
Gain - sale of real estate 100,094 -- 100,094 --
-------- -------- -------- --------
Net income $251,317 $135,503 $404,222 $307,885
======== ======== ======== ========
Net income allocated to:
General partner $ 2,513 $ 1,355 $ 4,042 $ 3,079
Limited partners 248,804 134,148 400,180 304,806
-------- -------- -------- --------
Total $251,317 $135,503 $404,222 $307,885
======== ======== ======== ========
Net income per weighted average
limited partnership unit $ 1.84 $ 0.99 $ 2.96 $ 2.25
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE> 5
EXCEL PROPERTIES, LTD.
STATEMENTS OF CHANGES IN PARTNERS' EQUITY - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Balance at January 1 $ 7,378,070 $ 9,619,405
Net income 404,222 307,885
Partner distributions (385,000) (2,400,001)
----------- -----------
Balance at June 30 $ 7,397,292 $ 7,527,289
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
<PAGE> 6
EXCEL PROPERTIES, LTD.
STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 404,222 $ 307,885
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 67,607 72,349
Allowance for doubtful accounts 6,045 91,817
Gain on sale of real estate (100,094) --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 13,852 (15,380)
Interest receivable (2,776) 37
Increase (decrease) in liabilities:
Accounts payable (11,279) 25,941
Property taxes payable (7,011) (5,334)
Deferred rental income 4,601 (26,891)
----------- -----------
Net cash provided by operating activities 375,167 450,424
----------- -----------
Cash flows from investing activities:
Proceeds from escrow deposits -- 963,968
Proceeds from real estate sales 689,760 --
Collection of notes receivable 4,009 3,670
----------- -----------
Net cash provided by investing activities 693,769 967,638
----------- -----------
Cash flows from financing activities:
Cash distributions (385,000) (2,400,001)
----------- -----------
Net cash used by financing activities (385,000) (2,400,001)
----------- -----------
Net increase (decrease) in cash 683,936 (981,939)
Cash at January 1 444,616 1,393,367
----------- -----------
Cash at June 30 $ 1,128,552 $ 411,428
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
6
<PAGE> 7
EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements reflect all adjustments of a recurring nature
which are, in the opinion of management, necessary for a fair
presentation of the financial statements. No adjustments were necessary
which were not of a recurring nature. These financial statements should
be read in conjunction with the financial statements and accompanying
footnotes included in the Partnership's December 31, 1997 Form 10-K.
ORGANIZATION
Excel Properties, Ltd. was formed in the State of California on
September 19, 1985, for the purpose of, but not limited to, acquiring
and operating commercial real estate.
REAL ESTATE
Land and buildings are recorded at cost. Buildings are depreciated using
the straight-line method over the tax life of 31.5 years. The tax life
does not differ materially from the economic useful life. Expenditures
for maintenance and repairs are charged to expense as incurred.
Significant renovations are capitalized. The cost and related
accumulated depreciation of real estate are removed from the accounts
upon disposition. Gains and losses arising from the dispositions are
reported as income or expense.
CASH DEPOSITS
At June 30, 1998, the carrying amount of the Partnership's cash deposits
total $1,128,552. The bank balances are $1,152,997 of which $200,000 is
covered by federal depository insurance.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE
There was no interest or taxes paid for the six months ended June 30,
1998 or 1997. Also, the Partnership had no noncash investing or
financing transactions for the six months ended June 30, 1998 or 1997.
INCOME TAXES
The Partnership is not liable for payment of any income taxes because as
a partnership, it is not subject to income taxes. The tax effects of its
activities accrue directly to the partners.
ACCOUNTS RECEIVABLE
All net accounts receivable are deemed to be collectible within the next
12 months.
Continued
7
<PAGE> 8
EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FINANCIAL STATEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
2. FEES PAID TO GENERAL PARTNER
The Partnership has paid the General Partner or its affiliates the
following fees for the six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Management fees $3,511 $3,378
Administrative fees 5,400 5,400
Accounting 3,240 3,302
</TABLE>
3. SALE OF PROPERTY
In 1998, the Partnership sold a building in Burnsville, Minnesota that
was on lease to Timberlodge Steakhouse. The sales price for the building
was $689,760. The Partnership recognized a gain of $100,094 on the sale.
In 1997, there were no property sales.
4. NOTES RECEIVABLE
The Partnership had the following notes receivable at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Note from the sale of land, interest at 10%. Due upon the $ 165,750 $ 165,750
occurrence of certain events.
Note from sale of building, receipts of $1,390 per month
at 9% interest. Secured by real estate. Currently due. 132,926 135,225
Note from sale of building, interest only receipts of $5,366 per month at
8.5% interest. Secured by real estate.
Due November 2003. 757,500 757,500
Note from sale of building, receipts of $1,004 per month
at 8% interest. Secured by real estate. Due December
2001. 107,088 108,798
---------- ----------
Total notes receivable $1,163,264 $1,167,273
========== ==========
</TABLE>
Continued
8
<PAGE> 9
EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
----------
5. MINIMUM FUTURE RENTALS
The Partnership leases single-tenant buildings to tenants under
noncancellable operating leases requiring the greater of fixed or
percentage rents. The leases are triple-net, requiring the tenant to pay
all expenses of operating the property such as insurance, property
taxes, repairs and utilities.
Minimum future rental revenue for the next five years for the commercial
real estate currently owned and subject to noncancellable operating
leases is as follows:
YEAR ENDING DECEMBER 31,
<TABLE>
<S> <C>
1998, remaining six months $ 319,790
1999 634,162
2000 569,276
2001 504,779
2002 413,004
Thereafter 1,084,022
</TABLE>
9
<PAGE> 10
EXCEL PROPERTIES, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
NATURE OF BUSINESS
Excel Properties, Ltd., a California limited partnership (the "Partnership"),
was organized to purchase commercial real estate properties for cash and to hold
these assets for long-term investment. The Partnership currently owns thirteen
properties. The general partners of the Partnership are Excel Realty Trust,
Inc., a Maryland corporation, and Gary B. Sabin, an individual. The Partnership
was formed on September 19, 1985, and will continue in existence until December
31, 2015, unless dissolved earlier.
Properties that have been acquired by the Partnership are subject to long-term
triple-net leases. Such leases require the lessee to pay the prescribed minimum
rental plus all costs and expenses associated with the operations and
maintenance of the property. These expenses include real property taxes,
property insurance, repairs and maintenance and similar expenses, the net effect
being that, under normal circumstances, no expenses will offset the rental
payment. Most of the leases also provide some form of inflation hedge which
calls for the minimum rent to be increased, based upon adjustments in the
consumer price index or fixed rent escalation.
Properties have been acquired free and clear of liens and encumbrances. The
Partnership may seek to finance one or more of the properties and distribute the
financing proceeds to the partners, but only if the financing proceeds equal or
exceed 100% of the Partnership's capital invested in the property or properties
(including a prorata amount of the Partnership's public offering unit selling
commissions and organization expenses). To date, no properties owned by the
Partnership have been the subject of any mortgage financing, therefore, at the
present time, all properties remain free and clear from any mortgage loan, lien
or encumbrance.
The principal investment objectives of the Partnership are to provide to its
limited partners: (1) preservation, protection and eventual return of the
investment, (2) distributions of cash from operations including property sales,
some of which may be a return of capital for tax purposes rather than taxable
income, (3) distributions of cash from financing the properties, and (4)
realization of long-term appreciation in value of the properties.
The general partners have selected properties they believe meet certain minimum
investment standards and that are most likely to accomplish the investment
objectives of the Partnership. Properties were acquired through arms-length
negotiations with third parties.
LIQUIDITY AND CAPITAL RESOURCES
As the Partnership has $1,128,552 in cash at June 30, 1998, with no debt on any
of the properties it owns, management believes that the Partnership liquidity
remains in a good position. In July 1998, the Partnership distributed
accumulated cash to the partners in the amount of $875,000. The Partnership has
no debt and approximately $39,000 a month from rental revenue, net of bad debts.
Management anticipates that rental revenue should be enough to cover any
Partnership expenses. Also, management does not expect the Partnership to incur
any significant operational expenses as most of the Partnership properties are
subject to triple-net leases.
Management anticipates that the Partnership's primary source of cash in 1998
will continue to come from rental of the real estate properties currently owned.
The Partnership may also, from time to time, sell certain properties which would
provide cash for distribution. Management anticipates that rental revenue will
be sufficient to cover the operating expenses of the Partnership and allow for
cash distributions to be made to the limited partners. The Partnership has the
policy of paying quarterly distributions to the limited partners of the actual
cash earned by the Partnership in the preceding quarter. Therefore, if expenses
were to increase or revenue were to decrease, the Partnership would decrease the
quarterly distributions to the limited partners. Management expects that the
liquidity of the Partnership will change as properties are sold and/or excess
cash is distributed to the unit holders (partners).
Continued
10
<PAGE> 11
The Partnership has purchased its properties for all cash. To date, the
Partnership has not leveraged any of its properties.
The cash of the Partnership increased by $683,936 at June 30, 1998 when compared
to December 31, 1997. This increase was largely due to the receipt of $689,760
in May 1998 relating to the property sold in Burnsville, Minnesota.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the notes thereto.
Comparison of the three months ended June 30, 1998 to the three months ended
June 30, 1997
Base rent decreased $52,310 or 24% from the previous year. The decrease was
primarily due to the sale in August 1997 of a vacant building that was
previously leased to Ponderosa Restaurant, and to Toddle House Restaurant, which
is bankrupt and no longer being charged rents. These properties accounted for
approximately $38,358 of rents in the second quarter of 1997. In May 1998, the
sale of a property leased to Timberlodge accounted for approximately $12,080 of
rents in the second quarter of 1998 and $17,258 of rents in 1997.
Interest income increased $3,594 or 12% over 1997 due to larger cash balances in
1998 than 1997 from proceeds relating to property sales before the funds were
distributed to the partners.
In 1998, the company recognized a gain of $100,094 relating to the sale of a
building in Burnsville, Minnesota that was on lease to Timberlodge. There were
no property sales in the three months ended June 30, 1997.
Operating expenses decreased by $64,436 or 58% from the three months ended June
30, 1997 to the three months ended June 30, 1998. Bad debt expense decreased by
$25,757 or 85%. This decrease in bad debt expense relates to reserves for Toddle
House Restaurants, which is in Chapter 11 Bankruptcy, but was being charged
rents in 1997. Accounting and legal expenses decreased by $34,888 or 94%. This
decrease is primarily due to approximately $35,500 paid in legal fees in 1997
for Ponderosa Restaurant. No such legal expenses were incurred in 1998. Other
expenses and other income varied very little between the two accounting periods.
Comparison of the six months ended June 30, 1998 to the six months ended June
30, 1997
Base rent decreased $90,928 or 21% from the previous year. The decrease was
primarily due to the sale in August 1997 of a vacant building that was
previously leased to Ponderosa Restaurant and to Toddle House Restaurant, which
is bankrupt and no longer being charged rents. These properties accounted for
approximately $76,720 of rents in the first half of 1997. In May 1998, the sale
of a property leased to Timberlodge accounted for approximately $30,201 of rents
in the six months of 1998 and $34,515 of rents in 1997.
Operating expenses decreased by $126,347 or 57% from the six months ended June
30, 1997 to the six months ended June 30, 1998. The net decrease was primarily
due to the $85,774 or 93% decrease in bad debts expense and the $35,150 or 83%
decrease in accounting and legal expense. Bad debt expense relating to the
Ponderosa Restaurant and Toddle House totaled $91,819 in 1997. In 1997, the
partnership paid $35,366 in legal fees relating to Ponderosa Restaurant. Other
expenses and other income varied very little between the two accounting periods.
Management does not expect inflation to significantly impact the operations of
the Partnership due to the structure of its investment portfolio. The leases all
provide a minimum rental which the lessee is obligated to pay. Additionally,
most leases contain some form of inflation hedge which provides for the rent to
be increased. The rent increases may be in the form of scheduled fixed minimum
rent increases or Consumer Price Index adjustments. Since the triple-net leases
require the lessees to pay for all property operating expenses, the net effect
is that the income should increase as operating expenses increase due to
inflation.
Continued
11
<PAGE> 12
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Form 10-Q that are not historical fact and constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results of the Partnership to be materially different from historical results or
from any results expressed or implied by such forward-looking statements. Such
risk, uncertainties and other factors include, but are not limited to, the
following risks:
Economic Performance and Value of Properties Dependent on Many Factors. Real
property investments are subject to varying degrees of risk. The economic
performance and values of real estate can be affected by many factors, including
changes in the national, regional and local economic climates, local conditions
such as an oversupply of space or reductions in demand for real estate in the
area, the attractiveness of the properties to tenants, competition from other
available space, the ability of the owner to provide adequate maintenance and
insurance and increased operating costs.
Dependence on Rental Revenue from Real Property. Since substantially all of the
Partnership's income is derived from rental revenue from real property, the
Partnership's income and funds for distribution would be adversely affected if a
significant number of the Partnership's tenants were unable to meet their
obligations to the Partnership or if the Partnership were unable to lease a
significant amount of space in its buildings on economically favorable lease
terms. There can be no assurance that any tenant whose lease expires in the
future will renew such lease or that the Partnership will be able to re-lease
space on economically advantageous terms.
Illiquidity of Real Estate Investments. Equity real estate investments are
relatively illiquid and therefore tend to limit the ability of the Partnership
to vary its portfolio promptly in response to changes in economic or other
conditions.
Risk of Bankruptcy of Tenants. The bankruptcy or insolvency of a tenant would
have an adverse impact on the property affected and on the income produced by
such property. Under bankruptcy law, a tenant has the option of assuming
(continuing) or rejecting (terminating) any unexpired lease. If the tenant
assumes its lease with the Partnership, the tenant must cure all defaults under
the lease and provide the Partnership with adequate assurance of its future
performance under the lease. If the tenant rejects the lease, the Partnership's
claim for breach of the lease would (absent collateral securing the claim) be
treated as a general unsecured claim. The amount of the claim would be capped at
the amount owed for unpaid pre-petition lease payments unrelated to the
rejection, plus the greater of one years' lease payments or 15% of the remaining
lease payments payable under the lease (but not to exceed the amount of three
years' lease payments). At June 30, 1998, the Company had one tenant under
bankruptcy. The Company is attempting to sell or lease this property.
Environmental Risks. Under various federal, state and local laws, ordinances and
regulations, the Partnership may be considered an owner or operator of real
property or may have arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property or
disposed of by it, as well as certain other potential costs which could relate
to hazardous or toxic substances (including governmental fines and injuries to
persons and property). Such liability may be imposed whether or not the
Partnership knew of, or was responsible for, the presence of such hazardous
toxic substances.
PART II. OTHER INFORMATION
Items 1 through 5 have been omitted since no events occurred with respect to
these items.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
The Partnership filed no reports on Form 8-K during the quarter
ended June 30, 1998.
Continued
12
<PAGE> 13
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.
Dated: August 11, 1998 EXCEL PROPERTIES, LTD.
(Registrant)
Excel Realty Trust, Inc.
(General Partner)
By: /s/ Gary B. Sabin
---------------------------------
Gary B. Sabin, President
By: /s/ David A. Lund
---------------------------------
David A. Lund, Principal
Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,128,552
<SECURITIES> 0
<RECEIVABLES> 1,171,618
<ALLOWANCES> (2,524)
<INVENTORY> 0
<CURRENT-ASSETS> 2,297,646
<PP&E> 6,423,624
<DEPRECIATION> (1,303,095)
<TOTAL-ASSETS> 7,418,175
<CURRENT-LIABILITIES> 20,883
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 7,397,292
<TOTAL-LIABILITY-AND-EQUITY> 7,418,175
<SALES> 0
<TOTAL-REVENUES> 400,728
<CGS> 0
<TOTAL-COSTS> 67,607
<OTHER-EXPENSES> 22,948
<LOSS-PROVISION> 6,045
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 404,222
<EPS-PRIMARY> 2.96
<EPS-DILUTED> 0
</TABLE>
