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, 1997
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 1-9079
U.S. RESTAURANT PROPERTIES MASTER LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 41-1541631
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5310 Harvest Hill Rd., Ste. 270, LB 168, Dallas, Texas 75230
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(Address principal executive offices, including zip code)
972 / 387-1487
------------------------
(Registrant's telephone number, including area code)
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 [ ]
Number of shares outstanding of each of the issuer's classes of common stock
as of November 10, 1997 (See explanatory note on next page): 12,658,113
Page 1 of 20
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EXPLANATORY NOTE
On October 15, 1997, U.S. Restaurant Properties Master L.P. (`USRP") converted
from a master limited partnership to a real estate investment trust. This
conversion was effected through the merger (the "Merger") of USRP Acquisition,
L.P. an indirectly wholly-owned Delaware limited partnership subsidiary of U.S.
Restaurant Properties, Inc. (the "REIT Corporation"), with and into U.S.
Restaurant Properties Master L.P. As a result of the Merger, all holders of
common units of beneficial interest in USRP became stockholders of the REIT
Corporation. Accordingly, information contained in this form 10-Q relating to
the equity ownership of USRP following October 15, 1997 is presented as
ownership of shares of common stock of the REIT Corporation. On October 20, 1997
the REIT declared a three-for-two stock split. All of the historical units and
per unit information has been restated to reflect this stock split.
Page 2 of 20
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U.S. RESTAURANT PROPERTIES MASTER LIMITED PARTNERSHIP
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996.......................... 4
Consolidated Statements of Income for the Three
months and Nine months ended September 30, 1997
and 1996 (unaudited)....................................... 5
Consolidated Statement of Partners' Capital for the
Nine months ended September 30, 1997 (unaudited)........... 6
Consolidated Statements of Cash Flows for the Nine months
ended September 30, 1997 and 1996 (unaudited).............. 7
Notes to Consolidated Financial Statements (unaudited)....... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................15
PART II. OTHER INFORMATION
Item 2 Changes in Securities........................................18
Item 4 Submission of Matters to a Vote of Security Holders..........18
Item 6. Exhibits and Reports on Form 8-K.............................19
Page 3 of 20
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED BALANCE SHEETS
($000's)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Cash and equivalents $ 1,666 $ 381
Receivables, net
(includes $624 and $188 from related parties) 2,682 2,117
Deferred rent receivable 1,556 536
Purchase deposits and escrows 2,234 908
Prepaid expenses 1,146 403
Notes receivable 2,153 1,308
Notes receivable - related parties 5,425 2,738
Mortgage loan receivables 5,986 -
Net investments in direct financing leases 14,902 17,105
Land 92,179 61,340
Buildings and leasehold improvements, net 168,542 75,339
Machinery and equipment, net 3,471 2,980
Intangibles, net 11,866 12,263
============ ============
$ 313,808 $ 177,418
============ ============
Liabilities
Accounts payable
(includes $712 and $416 due to the general partner) $ 4,628 $ 2,642
Deferred rent payable 113 55
Deferred gain on sale of property 803 590
Lines of credit 129,573 69,486
Notes payable 40,000 -
Capitalized lease obligations 222 362
------------ -----------
Total Liabilities 175,339 73,135
Partners' Capital
General partner's capital 1,055 1,163
Limited partner's capital 137,414 103,120
============ ===========
$ 313,808 $ 177,418
============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 4 of 20
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U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF INCOME
($000's, except per unit data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues from leased properties:
Rental income $ 9,163 $ 5,262 $ 22,850 $ 11,500
Interest income 237 74 514 127
Amortization of unearned income
on direct financing leases 375 486 1,232 1,512
----------- ----------- ---------- -----------
Total Revenues 9,775 5,822 24,596 13,139
Expenses:
Rent 684 549 1,873 1,446
Depreciation and amortization 2,618 1,218 5,984 2,593
Taxes, general, and administrative 1,091 756 3,078 1,607
Interest expense 2,958 709 6,661 1,719
----------- ----------- ---------- -----------
Total Expenses 7,351 3,232 17,596 7,365
----------- ------------ ---------- -----------
Income before unusual items 2,424 2,590 7,000 5,774
Gain on sale of property 183 - 450 -
REIT conversion costs (75) - (819) -
=========== ============ ========== ===========
Net income $ 2,532 $ 2,590 $ 6,631 $ 5,774
=========== ============ ========== ===========
Net income allocable to unitholders $ 2,482 $ 2,539 $ 6,499 $ 5,660
=========== ============ ========== ===========
Average number of outstanding units 12,544 10,449 11,611 8,744
=========== ============ ========== ===========
Net income per unit $ 0.20 $ 0.24 $ 0.56 $ 0.65
=========== ============ ========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 5 of 20
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U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
($000's) (Unaudited)
<TABLE>
<CAPTION>
General Limited
Units Partner Partners Total
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<S> <C> <C> <C> <C>
Balance at January 1, 1997 10,341 $ 1,163 $ 103,120 $ 104,283
Net income 132 6,499 6,631
Units issued for cash 1,510 25,775 25,775
Units issued for property 681 13,796 13,796
Cash distributions (240) (11,776) (12,016)
---------------------------------------------------------------
Balance at September 30, 1997 12,532 $ 1,055 $ 137,414 $ 138,469
===============================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 6 of 20
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U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------
1997 1996
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 6,631 $ 5,774
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 5,984 2,593
Amortization of deferred financing cost 245 102
Gain on sale of property (450) -
Increase in receivables, net (565) (174)
Increase in deferred rent receivable (1,020) (625)
Increase in prepaid expenses (743) (484)
Reduction in net investment in direct
financing leases 1,716 1,515
Increase in accounts payable 1,986 945
Increase in deferred rent payable 58 -
---------------- ----------------
7,211 3,872
---------------- ----------------
Cash provided by operating activities 13,842 9,646
Cash flows from investing activities:
Purchase deposits (paid) used (1,326) 1,241
Purchase of properties (116,870) (63,953)
Purchase of machinery and equipment (833) (2,943)
Proceeds from sale of properties 2,509 72
Increase in mortgage loan receivables (5,986) -
Increase in notes receivable (2,843) (1,001)
---------------- ----------------
Cash used in investing activities (125,349) (66,584)
</TABLE>
continued on next page
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 7 of 20
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($000's)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------
1997 1996
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Loan origination costs and other intangibles (914) (204)
Payments on capital lease obligations (140) (152)
Proceeds from line of credit 100,989 70,349
Repayments of line of credit (40,902) (45,265)
Proceeds from notes payable 40,000 -
Proceeds from issuance of units 25,775 40,203
Cash distributions (12,016) (7,981)
---------------- ----------------
Cash provided by financing activities 112,792 56,950
---------------- ----------------
Increase in cash and equivalents 1,285 12
Cash and equivalents at beginning of year 381 7
================ ================
Cash and equivalents at end of the quarter $ 1,666 $ 19
================ ================
Supplemental disclosure:
Interest paid during the quarter $ 6,112 $ 1,631
================ ================
Non-cash investing activities:
Fair value of units issued for property $ 13,796 $ 7,912
================ ================
Sale of property on direct financing lease $ - $ 225
================ ================
Note received on sale of property $ 689 $ 743
================ ================
Deferred gain on sale of property $ 213 $ 590
================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Page 8 of 20
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
* CONVERSION TO REIT - On October 15, 1997, U.S. Restaurant Properties Master
L.P. (`USRP") converted from a master limited partnership to a real estate
investment trust. This conversion was effected through the merger (the "Merger")
of USRP Acquisition, L.P. an indirectly wholly-owned Delaware limited
partnership subsidiary of U.S. Restaurant Properties, Inc. (the "REIT
Corporation"), with and into U.S. Restaurant Properties Master L.P. As a result
of the Merger, all holders of common units of beneficial interest in USRP became
stockholders of the REIT Corporation. Accordingly, information contained in this
form 10-Q relating to the equity ownership of USRP following October 15, 1997 is
presented as ownership of shares of common stock of the REIT Corporation. On
October 20, 1997 the REIT declared a three-for-two stock split. All of the
historical units and per unit information has been restated to reflect this
stock split.
In connection with the conversion to a REIT, the management contract between QSV
Properties, Inc. ("QSV") and USRP was terminated and QSV's partnership interests
in USRP were converted to 126,582 shares of common stock of the REIT and
1,148,418 units of U.S. Restaurant Properties Operating, L.P. ("OP"). An
additional 825,000 shares or its equivalent in OP units may be issued to QSV if
certain earnings targets are met by the year 2000. QSV is an entity that is
primarily owned by Mr. Robert J. Stetson and Mr. Fred H. Margolin.
* ORGANIZATION - U.S. Restaurant Properties Master L.P. (Partnership), formerly
Burger King Investors Master L.P., a Delaware limited partnership, was formed on
December 10, 1985. The Partnership, through its 99.01% limited partnership
interest in U.S. Restaurant Properties Operating Limited Partnership (Operating
Partnership), also a Delaware limited partnership, acquired from Burger King
Corporation (BKC) for $94,592,000 in February 1986 an interest in 128 restaurant
properties owned or leased by BKC and leased or subleased on a net lease basis
to BKC franchisees. The Partnership is the sole limited partner of the Operating
Partnership, and they are referred to collectively as the "Partnerships" or the
"Partnership." QSV Properties, Inc. (QSV), formerly U.S. Restaurant Properties,
Inc., the managing general partner, and BKC, the special general partner, were
both indirectly wholly-owned subsidiaries of Grand Metropolitan PLC prior to May
17, 1994, at which time QSV was sold to the current owners. On January 20, 1995,
the Partnership paid Burger King Corporation $16,000 for its 0.02% interest in
the Operating and Master Limited Partnership.
The Partnership has established certain other wholly-owned operating entities
consisting of U.S. Restaurant Properties Business Trust I, U.S. Restaurant
Properties Business Trust II, Restaurant Acquisition Corporation, Restaurant
Renovations Partners L.P., U.S. Restaurant Properties West Virginia Partners
L.P., U.S. Restaurant Properties Carolina Ltd., U.S. Restaurant Properties
Lincoln, Ltd., U.S. Restaurant Properties Norman, Ltd., USRP (Dee Dee), LLC.,
USRP (Sybra), LLC. and USRP (Minnesota), LLC. Collectively, these entities, in
addition to the Partnerships are referred to as the "Company." All of these
entities are included in the consolidated financial statements.
The Partnership units outstanding as of September 30, 1997 and December 31, 1996
totaled 12,531,531 and 10,341,004, respectively.
Page 9 of 20
<PAGE>
QSV Properties, Inc. (formerly named U.S. Restaurant Properties, Inc.) has been
the Managing General Partner of the Partnership.
* ACCOUNTING POLICIES - A summary of accounting policies followed by the Company
is included in the 1996 Annual Report. The Company follows such policies in the
preparation of their interim reports.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP); however, this is not the basis
for reporting taxable income to unitholders. The financial statements reflect
the consolidated accounts of the Company after elimination of significant
inter-entity transactions.
No federal and in most cases no state income taxes are reflected in the
consolidated financial statements because partnerships are not taxable entities.
The partners are responsible for reporting their allocable shares of taxable
income or loss in their individual income tax returns. The REIT Corporation
intends to qualify as a REIT as defined under the Internal Revenue Code of 1986,
as amended, and this would make it a nontaxable entity for federal income tax
purposes.
The accompanying unaudited consolidated financial statements have been prepared
in conformity with GAAP and should be read in conjunction with the Registrant's
annual report on Form 10-K for the year ended December 31, 1996. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31, 1997.
Certain classifications for the nine month period ended September 30, 1996 were
changed to conform to the current period presentation.
The consolidated balance sheet as of September 30, 1997 and the other
consolidated financial statements for the three and nine months ended September
30, 1997 and 1996, are unaudited, but management of the Registrant believes that
all adjustments (consisting only of normal recurring accruals) necessary for a
fair statement of the Company's consolidated financial position, results of
operations and cash flows for the periods have been included therein.
* EARNINGS PER UNIT CALCULATION - Earnings per unit have been computed by
dividing net income allocable to unitholders by the weighted average number of
units or equivalents outstanding. Unit equivalents include the weighted average
number of assumed equivalent units outstanding from unit options and unit price
guarantees if dilutive using the treasury stock method.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," which is effective for periods ending after December 15, 1997, requires
that companies disclose basic earnings per share using only the weighted average
number of common shares outstanding during a period. Currently, unit equivalents
are included in this computation if they are material. Fully diluted earnings
per unit will continue to be calculated in a manner similar to the current
calculation. Compliance with SFAS No. 128 would result in earnings per unit for
the three months ended September 30, 1997 and 1996 to be $0.20 and $0.25,
respectively. The earnings per unit for the nine months ended September 30, 1997
and 1996 would be $0.57 and $0.66, respectively.
* RELATED PARTY TRANSACTIONS - The managing general partner, QSV Properties,
Inc., has been responsible for managing the business and affairs of the Company.
The Company pays the managing general partner a non-accountable annual allowance
(adjusted to reflect increases in the Consumer Price Index and additions to the
property portfolio), plus reimbursement of out-of-pocket costs incurred by
Page 10 of 20
<PAGE>
other parties for services rendered to the Partnerships. The allowance for the
three months ended September 30, 1997 was $722,000 compared to $395,000 for the
three months ended September 30, 1996 and the allowance for the nine months
ended September 30, 1997 was $1,695,000 compared to $853,000 for the nine months
ended September 30, 1996. The Company's accounts payable balance includes
$712,000 and $416,000 for this allowance as of September 30, 1997 and December
31, 1996, respectively. The managing general partner also receives a 1% finders
fee on all acquisitions, which amounted to $521,000 for the three months ended
September 30, 1997 compared to $40,000 for the three months ended September 30,
1996. For the nine months ended September 30, 1997 the 1% finders fee amounted
to $1,341,000 compared to $716,000 for the nine months ended September 30, 1996.
These fees were discontinued with the termination of the management contract
between QSV and USRP.
A note receivable of $279,000 is due from Arkansas Restaurants #10 L.P. at
September 30, 1997. The note receivable is due on September 30, 1998, and has an
interest rate of 9.0% per annum. The managing general partner of Arkansas
Restaurants #10 L.P. is owned by an officer of the managing general partner.
A note receivable balance of $920,000 is due from Southeast Fast-Food Partners,
L.P. (SFF). The notes receivable balance is represented by two separate notes
that are due on July 1, 1998 ($57,000) and July 1, 1999 ($863,000) and have an
interest rate of 9.0% per annum. In addition, a note receivable of $136,000 is
due from the owners of SFF. This note is due on July 1, 1999, and has an
interest rate of 9.0% per annum. The managing general partner of Southeast
Fast-Food Partners, L.P., is owned by an officer of the Partnership's managing
general partner.
During 1996, the Company agreed to make available to USRP Development Company a
revolving line of credit in the principal amount of $5,000,000, to be used
solely for paying for the acquisition and development of restaurant properties
which will be purchased by the Company upon completion of development. The line
of credit is secured by certain development properties and bears interest at an
annual rate of 9.0%. The line of credit is payable in monthly installments and
matures in October 2001. At September 30, 1997, the outstanding balance was
$4,071,000.
2. PROPERTY PURCHASES AND DISPOSITIONS - During the three months ended September
30, 1997, the Company completed the purchase of 71 restaurant properties for an
aggregate purchase price of $46,205,000, including the value of 502,827
Partnership Units issued as part of the aggregate purchase price. The 502,827
Partnership units have a guaranteed market value of $24.00 two years from the
date of the closing. The Partnership Units' market value on the closing date
equaled $20.83 per Partnership Unit. Seventeen restaurant properties were
purchased with a combination of cash and Partnership Units; and 54 restaurant
properties were purchased with only cash. The 71 restaurant properties include
13 Burger King's, 10 Ember's, five Taco Cabana's, four Boston Market's, four
Wendy's, four Schlotzsky's and 31 regional restaurant properties.
During the three months ended June 30, 1997, the Company completed the purchase
of 99 restaurant properties for an aggregate purchase price of $63,704,000. The
restaurant properties were purchased with only cash. The 99 restaurant
properties include 75 Arby's, five Schlotzsky's, four Pizza Hut's, two Popeye's,
two Carlos O'Kelly's, and 11 regional restaurant properties. Allocation of the
cost of the properties has been done on a preliminary basis and will be
finalized at year end. The Carlos O'Kelly's restaurant properties were acquired
from Carlos O'Kelly's, Inc. Carlos O'Kelly's, Inc. is owned by a director of the
Managing General Partner.
Page 11 of 20
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During the three months ended March 31, 1997, the Company completed the purchase
of 32 restaurant properties for an aggregate purchase price of $20,757,000,
including the value of 177,868 Partnership Units issued as part of the aggregate
purchase price. The 177,868 Partnership units have a guaranteed market value of
$16.87 on the second anniversary date of the closing. The Partnership Units'
market value on the closing date equaled $18.67 per Partnership Unit. Sixteen
restaurant properties were purchased with a combination of cash and Partnership
Units; and 16 restaurant properties were purchased with only cash. The 32
restaurant properties include 16 Bruegger's Bagel's, four Pizza Hut's, three
Schlotzsky's, two Arby's, and seven regional restaurant properties.
During the three months ended September 30, 1997, two restaurant properties were
sold for cash of $1,265,000, net of closing costs resulting in a gain of
$183,000. In addition, one restaurant property was sold for cash of $73,000, net
of closing costs and a note receivable of $689,000 which bears interest at 9.75%
with interest only payments due monthly through September 1, 2001 at which time
the entire unpaid principal balance is due. In accordance with Statement of
Financial Accounting Standards No. 66 "Accounting for Real Estate Sales" the
Company recorded a deferred gain of $213,000 as a result of the sale.
During the three months ended June 30, 1997, a restaurant property located in
Forest Park, OH was sold for $1,171,000, net of closing costs at a gain of
$266,000.
In the normal course of business, the Partnership may sign purchase agreements
to acquire restaurant properties. Such agreements become binding obligations
upon the completion of a due diligence period ranging usually from 15 - 30 days.
On September 30, 1997, earnest money purchase deposits amounting to $2,234,000
were on deposit for the purchase of 21 El Chico restaurant properties, five
Perkins restaurant properties, four Harrigan's restaurant properties, three Taco
Bell restaurant properties, three Schlotzsky's restaurant properties, and 24
other regional chain restaurant properties
3. MORTGAGE LOAN RECEIVABLES - During the three months ended September 30, 1997
the Company issued a note receivable of $6,000,000 secured by a first mortgage
on 14 properties located in Minnesota, Iowa and Wisconsin. This note has a fixed
interest rate of 11% and matures 15 years from the date of origination. At
September 30, 1997, this note balance was $5,986,000.
4. REVOLVING CREDIT FACILITY - During 1997 the Company's line of credit was
increased to $110 million which matures on June 27, 1999 and provides that
borrowings thereunder bear interest at LIBOR plus 1.80 % per annum. There is an
unused line of credit fee of 0.25% per annum on the average daily excess of the
commitment amount over the aggregate unpaid balance of the revolving loan which
is charged and is payable on a quarterly basis. In addition to various reporting
requirements mandated under the secured loan agreement, the Company must also
maintain a tangible net worth, as defined in the loan document, in excess of
$85,000,000; maintain a combined GAAP Partner's Capital, as defined in the loan
document, of not less than $100,000,000; maintain a cash flow coverage ratio of
not less than 1 to 1 based upon a pro forma eight year bank debt amortization;
and maintain certain other financial covenants as defined in the loan agreement.
The Company's management believes it is in compliance with all loan provisions.
On September 30, 1997, the outstanding balance was $109,373,000 and the
available borrowing balance was $627,000.
On August 15, 1997, a wholly owned subsidiary of the Company entered into a
short term borrowing facility (the "Pacific Mutual Facility") of $30 million
which matures on May 20, 1998 and provides that borrowings thereunder bear
interest at LIBOR plus 2.30 % per annum. There is an unused fee of 1.0% per
annum on the unused commitment. The Pacific Mutual Facility is secured by the
pledge of
Page 12 of 20
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1,351,618 shares of common stock currently owned by the wholly owned subsidiary.
On September 30, 1997, the outstanding balance was $20,200,000 and the available
borrowing balance was $9,800,000. The collateral is pari passu with the
revolving credit facility.
5. NOTES PAYABLE - On February 26, 1997, the Company issued $40,000,000 in
privately placed debt which consists of $12,500,000 Series A Senior Secured
Guaranteed Notes with a 8.06% interest rate, having a due date of January 31,
2000; and $27,500,000 Series B Senior Secured Guaranteed Notes with a 8.30%
interest rate, having a due date of January 31, 2002. The debt and the revolving
credit facility are collateralized by substantially all the assets of the
Company.
6. REIT CONVERSION - On June 27, 1997 the limited partners voted in favor of a
conversion from a Master Limited Partnership to a self-advised real estate
investment trust (REIT). The actual conversion occurred on October 15, 1997. A
one-time charge of $744,000 was made during the second quarter of 1997. An
additional charge of $75,000 was made during the three months ended September
30, 1997. The master limited partnership was converted to a REIT on October 15,
1997 pursuant to the merger of a partnership subsidiary of the REIT with and
into the Partnership with the Partnership being the surviving entity. In
connection with conversion, shares of common stock of the REIT were issued to
unitholders and Operating Partnership units were issued to QSV which are
exchangeable for shares of REIT common stock on a one for one basis.
7. SUBSEQUENT EVENTS - On October 3, 1997, three Harrigan's restaurant
properties and one truck stop and convenience store were purchased for a total
purchase price of $4,987,500 in two separate transactions. These purchase prices
are exclusive of the 1% paid to the managing general partner and other closing
costs.
On October 7, 1997, the Company acquired raw land for a total purchase price of
$654,039 on which two Schlotzsky's restaurants are in the process of being
constructed. These purchase prices are exclusive of the 1% paid to the managing
general partner and other closing costs.
On October 8, 1997, the Company acquired raw land for a total purchase price of
$350,000 on which one Schlotzsky's restaurant is in the process of being
constructed. This purchase price is exclusive of the 1% paid to the managing
general partner and other closing costs.
On October 15, 1997, a wholly-owned subsidiary of the Company entered into a
short-term $20 million acquisition facility (the "Acquisition Facility") with PW
Real Estate Investments Inc., an affiliate of PaineWebber Incorporated, which is
secured by a first mortgage on each of the properties acquired with the
Acquisition Facility and by 1,725,997 shares of Common Stock currently owned by
such borrower subsidiary of the Company. The Acquisition Facility provides that
borrowings thereunder bear interest at LIBOR plus 2.30% per annum. It is
expected that the Acquisition Facility will be terminated upon the closing of
the Series A Preferred Stock offering described below.
On October 21, 1997, two Burger King restaurant properties were sold for
$1,525,000 in cash.
On October 28, 1997, a distribution of $0.3575 per common stock was declared.
The record date for such a distribution is December 5, 1997 and the distribution
date is December 12, 1997.
On October 30, 1997, the REIT filed a prospectus supplement to issue 3,200,000
shares of Series A Cumulative Convertible Preferred Stock having a liquidation
preference of $25 per share.
On November 7, 1997, two Burger King restaurant properties were sold for
$1,080,000. The Company received cash of $108,000 and a note receivable of
$972,000.
Page 13 of 20
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8. Pro Forma (unaudited) - The following pro forma information was prepared by
adjusting the actual consolidated results of the Company for the nine month
periods ended September 30, 1997 and 1996 for the effects of:
a. the purchase of 202 restaurant properties on various dates from January
1 through September 30, 1997 for an aggregate purchase price of
$130,666,000 including the value of 680,696 Partnership units issued to
sellers; the loan of $6,000,000 on a secured mortgage; and the sale of
four restaurant properties for $3,217,000; and other related financing
transactions, including the sale of 1,509,831 Partnership units for
$25,775,000 on various dates through September 30, 1997
b. the purchase of 184 properties on various dates during 1996 and the
related financing transactions as if all such transactions had occurred
as of January 1, 1996. Interest expense for pro forma purposes was
calculated assuming a weighted average interest rate of 7.7% and 7.5 %
per annum for the nine month periods ended September 30, 1997 and 1996,
respectively, which approximates the rates the Company paid during such
periods.
These pro forma operating results are not necessarily indicative of what the
actual results of operations of the Company would have been assuming all of the
properties were acquired as of January 1, 1996 and do not purport to represent
the results of operations for future periods.
<TABLE>
<CAPTION>
Nine Months ended September 30,
---------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Total Revenues $ 31,394 $ 32,058
Expenses:
Rent 1,992 1,855
Depreciation and amortization 7,961 7,829
Taxes, general and administrative 3,642 3,186
Interest expense 9,836 9,719
------------ -------------
Total Expenses 23,431 22,589
------------ -------------
Income before unusual items 7,963 9,469
Gain on sale of property 450 -
REIT conversion costs (819) -
============ =============
Net income $ 7,594 $ 9,469
============ =============
Net income allocable to unitholders $ 7,444 $ 9,282
============ =============
Average number of outstanding units (Primary) 12,731 12,737
============ =============
Net income per unit $ 0.58 $ 0.73
============ =============
</TABLE>
Page 14 of 20
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS.
The Company owned 322 Properties prior to January 1, 1997. The Company acquired
202 Properties from January 1, 1997 to September 30, 1997, the operations of
which are included in the periods presented from their respective dates of
acquisition.
Revenues in the nine months ended September 30, 1997 totaled $24,596,000, an
increase of 87% when compared to the nine months ended September 30, 1996.
Revenues in the three months ended September 30, 1997 totaled $9,775,000, an
increase of 68% when compared to the three months ended September 30, 1996. The
increases were due primarily to increases in the number of Properties owned
during this period as compared to the same period in 1996. Through September 30,
1997, approximately 18% of the Company's rental revenues resulted from
percentage rents, down from 33% for the year ended December 31, 1996. Thus,
during the nine months ended September 30, 1997, the impact of fluctuations in
restaurant sales had a diminishing impact on total rental revenues.
General and administrative expenses for the nine months ended September 30, 1997
totaled $3,078,000, an increase of 92% when compared to the nine months ended
September 30, 1996. General and administrative expenses for the three months
ended September 30, 1997 totaled $1,091,000, an increase of 44% when compared to
the three months ended September 30, 1996. The increases were a result of the
costs of the increased infrastructure, including additional employees, required
by the Company to manage and maintain the Company's rate of growth, as well as
the increased management fee payable to the general partner of USRP and the
Operating Partnership as a result of increased acquisitions. Rent expense for
the nine months ended September 30, 1997 totaled $1,873,000, an increase of 30%
when compared to the nine months ended September 30, 1996. Rent expense for the
three months ended September 30, 1997 totaled $684,000, an increase of 25% when
compared to the three months ended September 30, 1996. The increases in rent
expense directly correlate to the property acquisitions.
Interest expense for the nine months ended September 30, 1997 totaled
$6,661,000, an increase of 287%, when compared to the nine months ended
September 30, 1996. Interest expense for the three months ended September 30,
1997 totaled $2,958,000, an increase of 300% when compared to the three months
ended September 30, 1996. The increases in interest expense directly correlate
to the additional property debt associated with the acquisitions.
Depreciation and amortization expense in the nine months ended September 30,
1997 totaled $5,984,000, an increase of 131% when compared to the nine months
ended September 30, 1996. Depreciation and amortization expense in the three
months ended September 30, 1997 totaled $2,618,000, an increase of 115% when
compared to the three months ended September 30, 1996. The increases in
depreciation and amortization expense directly correlate to the property
acquisitions.
Liquidity and Capital Resources.
The Company's principal sources of liquidity are net cash provided by (i)
operations, primarily rental revenues generated from its real property
investments and (ii) financing activities. Cash generated by operations in
excess of operating needs is used to reduce amounts outstanding under the
Company's credit facilities instruments and to cover payments of quarterly
distributions to stockholders. Currently, the Company's primary source of
funding for acquisitions is the line of credit facility.
Page 15 of 20
<PAGE>
The Company requires cash in the short-term to make distributions to
stockholders, to fund limited capital expenditures relating to the improvement
of Properties and tenant improvements. The Company expects to meet its
short-term cash needs through undistributed net cash provided by operations and
its initial working capital reserves.
The Company's long -term cash needs include funds for property acquisitions,
scheduled debt maturities and renovations of Properties and other non-recurring
capital improvements. The Company anticipates meeting its future long-term
capital needs through the incurrence of additional debt financing secured by
individual properties or groups of properties, by unsecured private or public
debt offerings or by additional equity offerings, along with cash generated from
internal operations. The Company intends to incur additional borrowings for such
purposes in a manner consistent with its policy of maintaining a conservative
ratio of debt to total market capitalization of less than 50%.
As of September 30, 1997, the Company had approximately $109.4 million
outstanding under its $110 million credit facility ("Existing Credit Facility").
The Company may request advances under the Existing Credit Facility to finance
the acquisition and/or development of restaurant properties, to redevelop
restaurant properties and for working capital. The Existing Credit Facility
expires on June 27, 1999 and provides that borrowings thereunder bear interest
at LIBOR plus 1.80% per annum. At present the Company has $40 million of senior
secured guaranteed notes outstanding, consisting of a $12.5 million tranche
maturing on January 31, 2000 and a second $27.5 million tranche maturing on
January 31, 2002. As a result of the receipt of its investment grade debt
rating, the Company has initiated the procedures necessary to change these notes
from secured to unsecured status. On August 15, 1997, a wholly-owned subsidiary
of the Company entered into the Pacific Mutual Facility which is secured by
among other things, the pledge of 1,351,618 shares of common stock. At September
30, 1997, the amount due under the Pacific Mutual Facility was $20 million. On
October 15, 1997, a wholly-owned subsidiary of the Company entered into a
short-term $20 million acquisition facility (the "Acquisition Facility") with PW
Real Estate Investments Inc., an affiliate of Paine Webber Incorporated, which
is secured by a first mortgage on each of the properties acquired with the
Acquisition Facility and by 1,725,997 shares of Common Stock currently owned by
such borrower subsidiary of the Company. The Acquisition Facility provides that
borrowings thereunder bear interest at LIBOR plus 2.30% per annum. It is
expected that the Acquisition Facility will be terminated upon the closing of
the Series A Preferred Stock offering described below. The Company has entered
into an agreement in principle with a major international commercial bank to
provide a $175 million Unsecured Credit Facility. The Company anticipates that
the Unsecured Credit Facility will bear interest at a rate of LIBOR plus 1.05%
per annum. The Unsecured Credit Facility will replace the Existing Credit
Facility. On October 30, 1997, the Company filed a prospectus supplement to
issue 3,200,000 shares of Series A Cumulative Preferred Stock.
The Company believes that it will have sufficient capital resources to satisfy
its obligations during the next 12-month period. Thereafter, the Company expects
that future capital needs, including property acquisitions, will be met through
a combination of net cash provided by operations, borrowings and additional
equity issuances.
The Company paid distributions of $1.29 per share, and of $1.05 per share for
the year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively. Future distributions by the Company will be at the discretion of
the Board and will depend on actual results of operations, the financial
condition of the Company, capital requirements or other factors management deems
relevant.
Page 16 of 20
<PAGE>
FUNDS FROM OPERATIONS
FFO is computed as net income (loss) (computed in accordance with GAAP),
excluding the effects of direct financing leases and gains and losses from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and the deduction of preferred stock dividends. The Company
believes FFO is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating, financing and
investing activities, it provides investors with an understanding of the ability
of the Company to incur and service debt, and make capital expenditures. The
Company computes FFO in accordance with standards (see table and footnote below)
which may differ from the methodology for calculating FFO utilized by other
equity REITs and accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions. FFO for
the three month and nine months ended September 30, 1997 and 1996 are as follows
(unaudited).
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 2,532 $ 2,590 $ 6,631 $ 5,774
Add:
Direct financing lease principal
payments 586 515 1,716 1,515
Capital leases (41) (47) (140) (152)
Depreciation and amortization 2,618 1,218 5,984 2,593
Gain on sale of properties (183) - (450) -
REIT conversion costs 75 - 819 -
---------- ---------- ---------- ----------
Funds from operations $ 5,587 $ 4,276 $ 14,560 $ 9,730
========== ========== ========== ==========
</TABLE>
Page 17 of 20
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
c) Sales of unregistered securities by the Registrant for the periods
covered by this Form 10-Q are as follows:
Date Title of Security Amount
---- ----------------- ------
April 8, 1997 Partnership Unit 188,446
April 22, 1997 Partnership Unit 187,458
May 2, 1997 Partnership Unit 185,546
July 30, 1997 Partnership Unit 172,882
(a) The unregistered partnership units, as shown above, were sold to
Pacific Mutual Life Insurance Company (the "Purchaser"), a
California corporation under a Master Limited Partnership Purchase
Agreement dated April 7, 1997 between the Purchaser and the
Registrant.
(b) The unregistered units were sold to the Purchaser in cash
increments of $4,750,000. The number of units were determined by
taking an amount equal to 40% of the draw at a set price, which is
$24.00, and 60% of the draw at a formula price, which is equal to
94.50 % of the average unit price for last 10 trading days prior to
the purchase date.
(c) The unregistered units were sold pursuant to an exemption
provided by Rule 506 promulgated under the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) A special meeting of the limited partners of the Registrant was
held on June 27, 1997.
b)(1) The limited partners voted with respect to the proposed merger
of USRP Acquisition, L.P. with and into USRP.
For Against Abstain
--- ------- -------
5,853,358 110,765 54,650
(2) The limited partners voted with respect to the proposed amendment
to the partnership agreement of USRP to permit holders of units
exchange for shares of the REIT Corporation's common stock.
For Against Abstain
--- ------- -------
5,844,487 112,866 61,420
Page 18 of 20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) A report on Form 8-K dated May 7, 1997 was filed with the Securities
and Exchange Commission on August 21, 1997, reporting financial
information regarding the acquisition of restaurant properties.
b) 10.1 Note Purchase Agreement of U.S. Restaurant Properties Operating
L.P. dated as of January 31, 1997, filed as Exhibit 10.7 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference.
c) 11.1 Computation of Net Income per Unit
Page 19 of 20
<PAGE>
SIGNATURE
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.
U.S. RESTAURANT PROPERTIES MASTER L.P.
By QSV PROPERTIES, INC.
Managing General Partner
Dated: November 12, 1997 By /s/ Robert J. Stetson
----------------------------------
Robert J. Stetson
President, Chief Executive Officer
Page 20 of 20
Exhibit 11.1
U.S. RESTAURANT PROPERTIES MASTER L.P.
COMPUTATION OF NET INCOME PER UNIT
($000's, except per unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income $ 2,532 $ 2,590 $ 6,631 $ 5,774
Net income applicable to general partner (50) (51) (132) (114)
----------- ----------- ------------ -----------
Net income applicable to unitholders (1) $ 2,482 $ 2,539 $ 6,499 $ 5,660
=========== =========== ============ ===========
Net income per unit - Primary $ 0.20 $ 0.24 $ 0.56 $ 0.65
=========== =========== ============ ===========
Net income per unit - Fully Diluted (2) $ 0.20 $ 0.24 $ 0.56 $ 0.64
=========== =========== ============ ===========
Weighted average number of units outstanding Primary:
Weighted average number of units, excluding equivalents 12,286 10,236 11,371 8,550
Dilutive effect of outstanding options and guaranteed
stock 258 213 240 194
----------- ----------- ------------ -----------
Primary weighted average units outstanding 12,544 10,449 11,611 8,744
=========== =========== ============ ===========
Fully Diluted (2):
Weighted average units outstanding, excluding
equivalents 12,286 10,236 11,371 8,550
Dilutive effect of outstanding options and guaranteed
stock 273 237 273 238
----------- ----------- ------------ -----------
Fully diluted weighted average units outstanding 12,559 10,473 11,644 8,788
=========== =========== ============ ===========
</TABLE>
(1) Income allocable to unitholders represents 98.02 % of net income
(2) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 9083, although not required by APB Opinion No. 15,
because it results in dilution of less than three percent.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,666
<SECURITIES> 0
<RECEIVABLES> 2,819
<ALLOWANCES> 137
<INVENTORY> 0
<CURRENT-ASSETS> 9,284
<PP&E> 182,351
<DEPRECIATION> 10,338
<TOTAL-ASSETS> 313,808
<CURRENT-LIABILITIES> 4,741
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 313,808
<SALES> 0
<TOTAL-REVENUES> 24,596
<CGS> 0
<TOTAL-COSTS> 1,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,661
<INCOME-PRETAX> 7,496
<INCOME-TAX> 46
<INCOME-CONTINUING> 7,450
<DISCONTINUED> 0
<EXTRAORDINARY> 819
<CHANGES> 0
<NET-INCOME> 6,661
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
