<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:
SEPTEMBER 30, 1997 1-12244
EXCEL REALTY TRUST, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 33-0160389
(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
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable.
Class Outstanding at November 11, 1997
- ---------------------------- --------------------------------
Common stock, $.01 par value 20,985,630
<PAGE> 2
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
INDEX
FORM 10-Q
----------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1997 (Unaudited)
December 31, 1996 ................................................ 3
Consolidated Statements of Income
Three Months Ended September 30, 1997 (Unaudited)
Three Months Ended September 30, 1996 (Unaudited)
Nine Months Ended September 30, 1997 (Unaudited)
Nine Months Ended September 30, 1996 (Unaudited).................. 4
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1997 (Unaudited)
Nine Months Ended September 30, 1996 (Unaudited).................. 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 (Unaudited)
Nine Months Ended September 30, 1996 (Unaudited).................. 6
Notes to Consolidated Financial Statements (Unaudited)............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......22
PART II. OTHER INFORMATION ..................................................22
Item 6. Exhibits and Reports on Form 8-K.................................22
</TABLE>
2
<PAGE> 3
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate:
Land $ 248,425 $ 156,060
Buildings 504,583 323,418
Accumulated depreciation (30,831) (21,976)
--------- ---------
Net real estate 722,177 457,502
Cash 3,484 5,038
Escrow and other deposits 3,833 625
Accounts receivable, less allowance for bad debts of
$1,229 and $726 in 1997 and 1996, respectively 3,446 2,917
Notes receivable from affiliates 80,752 57,716
Notes receivable - other 17,590 26,026
Interest receivable 8,752 2,579
Loan acquisition costs 1,863 1,775
Other assets 3,778 4,450
--------- ---------
$ 845,675 $ 558,628
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 236,217 $ 157,716
Notes payable 40,546 81,032
Capital leases 26,656 --
Accounts payable and accrued liabilities 7,544 4,738
Deferred rental income 1,860 2,023
Other liabilities 1,099 465
--------- ---------
Total liabilities 313,922 245,974
--------- ---------
Minority interests in partnership 33,047 --
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
81/2% Series A Cumulative Convertible Preferred
stock, $0.01 par value, 10,000,000 shares authorized,
4,600,000 and 0 shares issued and outstanding in
1997 and 1996, respectively 46 --
Common stock, $0.01 par value, 100,000,000 shares authorized,
20,913,926 and 18,231,089 shares issued and outstanding
in 1997 and 1996, respectively 209 182
Additional paid-in capital 505,972 324,229
Accumulated distributions in excess of net income (7,521) (11,757)
--------- ---------
Total stockholders' equity 498,706 312,654
--------- ---------
$ 845,675 $ 558,628
========= =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE> 4
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 19,632 $12,609 $ 49,403 $ 36,293
Expense reimbursements 2,543 990 6,301 3,273
Interest 3,350 1,705 10,550 4,214
Other 1,835 602 4,771 1,909
-------- ------- -------- --------
Total revenue 27,360 15,906 71,025 45,689
-------- ------- -------- --------
Operating expenses:
Interest 5,877 4,886 15,712 14,497
Depreciation and amortization 3,163 1,894 7,921 5,552
Property taxes 1,482 669 3,599 2,031
Repairs and maintenance 1,243 390 2,948 1,435
Other property expenses 703 833 2,328 2,020
Master lease -- -- -- 351
General and administrative expenses 1,167 608 3,514 2,127
-------- ------- -------- --------
Total operating expenses 13,635 9,280 36,022 28,013
-------- ------- -------- --------
Income from operations before real estate sales,
minority interests and other items 13,725 6,626 35,003 17,676
Loss on sale of interest rate lock (896) -- (896) --
Gain (loss) on sale of real estate 160 273 453 (825)
Minority interests in income of partnership (343) -- (413) --
-------- ------- -------- --------
Net income $ 12,646 $ 6,899 $ 34,147 $ 16,851
======== ======= ======== ========
Net income per common share $ 0.48 $ 0.46 $ 1.41 $ 1.21
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
4
<PAGE> 5
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(IN THOUSANDS, EXCEPT NUMBER OF SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DISTRIBUTIONS TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN IN EXCESS OF STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL NET INCOME EQUITY
------ ------ ------ ------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997:
Balance at January 1, 1997 -- $-- 18,231,089 $182 $ 324,229 $(11,757) $ 312,654
Issuance of preferred stock 4,600,000 46 -- -- 114,954 -- 115,000
Issuance of common stock -- -- 2,682,837 27 73,946 -- 73,973
Selling expenses -- -- -- -- (7,157) -- (7,157)
Net income -- -- -- -- -- 34,147 34,147
Distributions declared -- -- -- -- -- (29,911) (29,911)
--------- --- ---------- ---- --------- -------- ---------
Balance at September 30, 1997 4,600,000 $46 20,913,926 $209 $ 505,972 $ (7,521) $ 498,706
========= === ========== ==== ========= ======== =========
NINE MONTHS ENDED SEPTEMBER 30, 1996:
Balance at January 1, 1996 -- $-- 13,171,353 $132 $ 218,531 $ (9,985) $ 208,678
Issuance of common stock -- -- 1,852,211 18 38,006 -- 38,024
Selling expenses -- -- -- -- (2,047) -- (2,047)
Net income -- -- -- -- -- 16,851 16,851
Distributions declared -- -- -- -- -- (18,660) (18,660)
--------- --- ---------- ---- --------- -------- ---------
Balance at September 30, 1996 -- $-- 15,023,564 $150 $ 254,490 $(11,794) $ 242,846
========= === ========== ==== ========= ======== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
5
<PAGE> 6
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 34,147 $ 16,851
Adjustments for noncash items:
Depreciation 7,913 5,549
Equity in earnings of affiliates (1,023) (975)
Minority interests in income of partnership 413 --
Loan costs written off 664 --
Amortized loan costs and leasing commissions 949 918
Provision for bad debts 632 659
(Gain) loss on sale of real estate (453) 825
Loss on sale of interest rate lock 896 --
Change in accounts receivable (795) (1,745)
Change in other assets (7,344) (1,447)
Change in accounts payable 1,637 (311)
Change in other liabilities 619 (277)
--------- --------
Net cash provided by operating activities 38,255 20,047
--------- --------
Cash flows from investing activities:
Real estate acquisitions and building improvements (110,843) (19,039)
Advances for notes receivable (49,403) (26,323)
Principal payments on notes receivable 11,270 1,759
Escrow deposits (3,141) 13,986
Proceeds from real estate sales 3,478 2,475
Other 355 753
--------- --------
Net cash used in investing activities (148,284) (26,389)
--------- --------
Cash flows from financing activities:
Issuance of stock 187,740 36,978
Selling and offering costs (7,157) (2,047)
Distributions paid (29,911) (18,660)
Distributions paid to minority interests (181) --
Proceeds from notes payable 112,546 26,833
Principal payments of mortgages and notes payable (152,334) (41,102)
Loan costs paid (1,332) (93)
Interest rate lock purchased (896) --
--------- --------
Net cash provided by financing activities 108,475 1,909
--------- --------
Net decrease in cash (1,554) (4,433)
Cash at January 1 5,038 9,812
--------- --------
Cash at September 30 $ 3,484 $ 5,379
========= ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
6
<PAGE> 7
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 normal recurring nature. Certain reclassifications have been made to
the consolidated financial statements for the periods ended September 30,
1996 and at December 31, 1996 in order to conform with the current period
presentation. These financial statements should be read in conjunction with
the consolidated financial statements and accompanying footnotes included
in the Company's December 31, 1996 Annual Report on Form 10-K, as amended.
ORGANIZATION
Excel Realty Trust, Inc. (the "Company") was formed in 1985 and is a
Maryland corporation. The Company is in the business of purchasing and
operating commercial real estate. The Company is operated as a
self-administered, self-managed real estate investment trust (REIT).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and all significantly owned
partnerships. All significant intercompany accounts and transactions have
been eliminated in consolidation.
On April 1, 1997 the Company began consolidating the accounts of Excel
Realty Partners, L.P., a Delaware limited partnership ("ERP"), when the
Company converted its loans into an equity investment in ERP. Prior to
April 1, 1997, the Company accounted for ERP on the equity method of
accounting (Note 4).
The Company uses the equity method to account for its investment in ERT
Development Corporation, a Delaware corporation ("EDV"). This investment
was recorded initially at cost and subsequently adjusted for net income
(loss) and contributions paid and distributions received (Note 4).
INCOME TAXES
The Company has elected to be treated as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended. Under these
provisions, the Company and its subsidiaries will not be subject to federal
income tax if 95% of its real estate investment trust taxable income
(before dividends paid deduction) is distributed to shareholders and
certain gross income, asset diversification, share ownership and disclosure
requirements are met. Accordingly, no provision for federal income taxes is
included in the accompanying consolidated financial statements.
REAL ESTATE
Land, buildings and building improvements, are recorded at cost.
Depreciation is computed using the straight-line method over estimated
useful lives of 40 years for buildings and 2 to 40 years for building
improvements. Expenditures for maintenance and repairs are charged to
expense as incurred and significant renovations are capitalized.
Continued 7
<PAGE> 8
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
The Company assesses whether there has been a permanent impairment in the
value of its real estate by considering factors such as expected future
operating income, trends and prospects, as well as the effects of demand,
competition and other economic factors. Such factors include a lessee's
ability to pay rent under the terms of the lease. If a property is leased
at a significantly lower rent, the Company may recognize a permanent
impairment loss if the value of the income stream is not considered
sufficient to recover its investment.
DEFERRED LEASING AND LOAN ACQUISITION COSTS
Costs incurred in obtaining tenant leases and long-term financing are
amortized to leasing commission expense and interest expense, respectively,
on the straight-line method over the terms of the related leases or debt
agreements.
REVENUE RECOGNITION
Base rental revenue is recognized on the straight-line basis, which
averages annual minimum rents over the terms of the leases. Certain of the
leases provide for additional rental revenue by way of percentage rents to
be paid based upon the level of sales achieved by the lessee. These
percentage rents are recorded on the accrual basis and are included on the
Consolidated Statements of Income in rental revenue. The leases also
typically provide for tenant reimbursement of common area maintenance and
other operating expenses which are included in the accompanying
Consolidated Statements of Income as expense reimbursements.
Revenue recognition of fees received for lease terminations are deferred
and amortized using the straight-line method over the estimated time to
re-lease or sell the related property.
NET INCOME PER COMMON SHARE
Net income per common share is based upon the weighted average number of
common shares and common share equivalents outstanding during each period.
Common share equivalents included in the computation represent shares
issuable upon assumed exercise of common stock options, warrants and other
convertible securities (including ERP limited partner units) which would
have a dilutive effect. The weighted average shares outstanding for the
nine months ended September 30, 1997 and 1996 were 19,959,620 and
13,923,783, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
Continued 8
<PAGE> 9
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
2. REAL ESTATE:
ACQUISITIONS
In the nine months ended September 30, 1997, the Company acquired 19
shopping centers located in California(11), Arizona (2), Georgia, Nevada,
North Carolina, Pennsylvania, and Tennessee. The Company also purchased 2
buildings leased to single tenants, Winn Dixie and Kmart, in Tennessee and
Florida, respectively, an out-parcel in Minnesota and the remaining 50%
interest of a property owned in Tennessee. The total cost of these 22
properties was approximately $187,663,000. The Company assumed mortgage
debt of $26,232,000 and capital leases of $26,656,000 in the above
transactions.
In October 1997, the Company purchased five shopping centers in exchange
for cash and two single-tenant properties owned by the Company. The
purchase price for the five properties was approximately $81,100,000. The
properties are located in Florida (2), Pennsylvania, South Carolina, and
Texas. The two properties that were sold in conjunction with the above
acquisitions were located in Missouri and Ohio with total sales proceeds
approximating $5,200,000. The Company also acquired an additional shopping
center in California in October 1997 for approximately $18,400,000 that is
encumbered by a $8,100,000 mortgage. The Company also issued 323,304 ERP
limited partnership units valued at $31.00 per unit as part of the
acquisition.
In 1996, the Company acquired three shopping centers in North Carolina and
two shopping centers in Georgia. The total cost of the five properties was
approximately $40,917,000 of which the Company assumed $25,417,000 in
mortgage debt. Also in 1996, the Company purchased two out-parcel pads for
approximately $945,000.
SALES
In the nine months ended September 30, 1997 and 1996, the Company sold two
single tenant properties in each period for proceeds of $3,294,000 and
$1,985,000, respectively. A net gain of $453,000 and a net loss of $825,000
were recognized on real estate sales in 1997 and 1996, respectively. In
October 1997, the Company sold two properties as described above.
REAL ESTATE UNDER CONSTRUCTION/ HELD FOR SALE
At September 30, 1997, the Company had one property with costs of
$7,971,000 under construction and one property with a book value of
$14,191,000 held for sale/redevelopment. Depreciation expense is not being
charged to the projects and costs related to the construction and sale are
being capitalized.
ENVIRONMENTAL MATTERS
Soil and groundwater contamination exists at Carmen Plaza in Camarillo,
California, Cudahy Plaza in Cudahy, California, and Bristol Plaza in Santa
Ana, California. Environmental professionals retained by the Company
estimate that the total, cumulative cost of remediation for these
properties will be approximately $1.8 million to $5.5 million. In
connection with each of these properties, the Company has entered into a
remediation and indemnity agreement, which obligates the prior owner of the
properties (including in some cases, principals of the prior owner) to
perform the remediation and to indemnify the Company for any losses it may
suffer because of the contamination or remediation. Although there can be
no assurance that the remediation estimates of the environmental
professionals are accurate or that the prior owners will perform their
obligations under the remediation and indemnity agreements, the Company
does not expect the environmental conditions at these properties to have a
material adverse effect on the Company.
Continued 9
<PAGE> 10
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
3. NOTES RECEIVABLE:
The Company had the following notes receivable at September 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes from EDV, interest at 14% per annum, collateralized
by EDV assets. Due on demand. $ 80,752 $ 39,786
Notes from ERP, interest at 12% per annum, collateralized
by real estate. Converted to equity in April 1997 (Note 4). -- 17,930
Note from a development company, interest at 25% per annum,
payable in Canadian dollars. Due 2003. 11,622 9,504
Notes from development companies, interest from 10% to 14%
per annum. Maturity dates vary depending on the completion of
certain properties. 5,210 15,763
Other 758 759
--------- ---------
Total notes receivable $ 98,342 $ 83,742
========= ========
</TABLE>
Interest and principal payments from EDV are primarily received upon the
completion of development projects. Interest receivable from EDV was
$5,039,000 and $879,000 at September 30, 1997 and December 31, 1996,
respectively.
In 1996, the Company made a loan of $13,000,000 Canadian dollars to a
company which used the proceeds to acquire a 50% joint venture interest in
a mixed-use commercial building known as "Atrium on Bay" in Toronto,
Ontario, Canada. In 1997, the Company advanced an additional $3,050,000
Canadian dollars to acquire an adjacent land parcel and additional
development. The loan is collateralized by the Canadian company's interest
in the building.
In September 1997, the Company established $25,680,000 in Credit Facilities
to certain developers. The total outstanding amounts on the Credit
Facilities of $3,569,000 carry interest at 11% to 12%, are secured by real
estate, and are payable on the earlier of the sale of certain real estate
or seven years. In 1997, the Company recognized $720,000 in loan fees
related to the Credit Facilities.
4. INVESTMENTS:
EXCEL REALTY PARTNERS, L.P.
In 1995, ERP was formed to own and manage certain real estate properties.
The Company is the sole general partner of ERP. The general partner is
entitled to receive 99% of net income and gains before depreciation, if
any, after the limited partners receive their stipulated distributions. On
April 1, 1997, loans and related interest payable in the amount of
$23,427,000 from the Company to ERP were converted into limited partnership
interests in ERP. Upon this transaction, the Company began consolidating
the accounts of ERP which were previously accounted for on the equity
method. Properties held by ERP have been contributed to ERP in exchange for
limited partnership
Continued 10
<PAGE> 11
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
4. INVESTMENTS, CONTINUED:
units (which may be redeemed at stipulated prices for cash or the issuance
of Company common shares, at the Company's option) and cash. At September
30, 1997, there were 2,556,931 limited partner units outstanding of which
the Company owned 1,152,121 units. Quarterly distributions approximate
$687,000 for limited partner units held by third parties. In October 1997,
75,821 limited partner units were redeemed for cash.
PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following Company unaudited actual and pro forma condensed consolidated
balance sheets and income statements have been presented as if the Company
had converted its notes and related interest receivable from ERP on
December 31, 1996 and January 1, 1996, respectively. The unaudited pro
forma condensed consolidated financial statements are not necessarily
indicative of what the actual financial position would have been at
December 31, 1996, or what actual results of operations of the Company
would have been had the transaction actually occurred on January 1, 1996,
nor do they purport to represent the results of operations of the Company
for future periods.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------- --------
(ACTUAL) (PRO FORMA)
<S> <C> <C>
BALANCE SHEET
Net real estate assets $722,177 $537,485
Other assets 123,498 82,839
-------- --------
$845,675 $620,324
======== ========
Mortgages and notes payable $276,763 $293,375
Other liabilities 37,159 8,396
-------- --------
Total liabilities 313,922 301,771
Minority Interest 33,047 5,899
Stockholders' equity 498,706 312,654
-------- --------
$845,675 $620,324
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
(ACTUAL) (PRO FORMA) (PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Rental revenues and reimbursements $ 22,175 $ 15,717 $ 58,506 $ 44,181
Interest and other income 5,185 1,540 14,366 4,487
Depreciation and amortization (3,163) (2,140) (8,257) (6,124)
Property and other expenses (4,595) (2,897) (13,065) (8,697)
Interest expense (5,877) (5,703) (16,757) (16,403)
Loss on sale of interest rate lock (896) -- (896) --
Minority interest (343) (53) (446) (197)
Real estate sales 160 273 453 (825)
-------- -------- -------- --------
Net income $ 12,646 $ 6,737 $ 33,904 $ 16,422
======== ======== ======== ========
Net income per common share $ 0.48 $ 0.41 $ 1.35 $ 1.17
======== ======== ======== ========
</TABLE>
Continued 11
<PAGE> 12
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
4. INVESTMENTS, CONTINUED:
ERT DEVELOPMENT CORPORATION
In 1995, EDV was organized to acquire, develop, hold and sell real estate
in the short-term for capital gains and/or receive fee income. The Company
owns 100% of the outstanding preferred shares of EDV. The preferred shares
are entitled to receive dividends equal to 95% of net income from cash
flows, if any. Cash requirements to facilitate EDV's transactions have
primarily been obtained through borrowings from the Company. Summary
unaudited financial information for EDV is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------- -------
<S> <C> <C>
BALANCE SHEETS
Notes receivable from developers, interest at 10% to 20% $77,600 $39,000
Other assets 11,000 2,500
------- -------
Total assets $89,600 $41,500
======= =======
Notes payable to Excel Realty Trust, Inc. $80,700 $39,800
Other liabilities 7,100 1,500
------- -------
Total liabilities 87,800 41,300
Total stockholders' equity 800 200
------- -------
Total liabilities and stockholders' equity $88,600 $41,500
======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------- ------- -------- -------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Total revenues $ 4,700 $ 1,000 $ 11,900 $ 2,900
Interest expense to Excel Realty Trust, Inc. (2,400) (500) (6,100) (1,500)
Fees paid to Excel Realty Trust, Inc. (1,000) -- (3,000) (700)
Other expenses (1,200) (300) (2,100) (700)
------- ------- -------- -------
Net income $ 100 $ 200 $ 700 $ --
======= ======= ======== =======
</TABLE>
EDV's receivables include loans made to a joint venture partnership under a
loan commitment related to a retail development project in Florida. In
1997, the joint venture obtained a construction loan which is expected to
total $85,000,000 of which $30,000,000 is guaranteed by the Company. In
1996, EDV obtained a $8,500,000 line of credit from a financial institution
at an interest rate of 8.91%, all of which is available at September 30,
1997.
Continued 12
<PAGE> 13
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
5. MORTGAGES PAYABLE:
The Company had the following mortgages payable at September 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes at 3.80% to 10%, payable in installments through 2018
(monthly payments at September 30, 1997 of $2,243):
Insurance companies $117,764 $ 87,530
Banks 85,291 41,656
Private bonds 33,162 28,530
-------- --------
Total mortgages payable $236,217 $157,716
======== ========
</TABLE>
The principal payments required to be made on mortgages payable are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997, remaining three months $1,869
1998 9,436
1999 55,885
2000 23,437
2001 22,574
Thereafter 123,016
---------
$ 236,217
=========
</TABLE>
Mortgages of $60,146,000 are fully amortizing with no balloon payments with
the final monthly payments coming between the years 2004 and 2018, and
$56,735,000 of mortgage debt is subject to floating interest rates.
6. NOTES PAYABLE:
The Company had the following notes payable at September 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Unsecured credit agreement of $150,000, interest at
LIBOR + 1.20% (6.86% at September 30, 1997) $40,122 $67,000
Term loan secured by notes receivable. Repaid in 1997 -- 10,000
Line of credit payable to a financial institution,
Repaid in 1997 -- 3,923
Other 424 109
------- -------
Total notes payable $40,546 $81,032
======= =======
</TABLE>
Continued 13
<PAGE> 14
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
6. NOTES PAYABLE (CONTINUED):
The Company has a revolving credit facility of up to $150,000,000 in
unsecured advances from a group of seven banks. The facility expires
December 1999 and bears an interest rate based on the credit rating of the
Company. In August 1997, the Company received a prospective investment
credit rating of Baa3 and BBB- from Moody's Investors Service and Standard
and Poor's Corporation, respectively, on future senior debt securities
issued from the Company's $500 million shelf registration. Accordingly, the
interest rate on the credit facility is 1.2% over LIBOR. The Company has an
interest rate protection agreement through December 1997 which limits the
interest rate on $50 million of the outstanding balance under the Credit
Facility to 10%.
In July 1997, the Company bought an interest rate lock related to a
proposed Senior Note Offering. The interest rate lock was sold when the
Senior Note Offering was postponed until October 1997, and a Common Stock
Offering was completed instead. The Company recognized a $896,000 loss on
the sale.
In October 1997, the Company issued $75,000,000 of 6.875% Senior Notes due
2004 (the "Notes"). The effective rate on the Notes is 6.982% (6.875%
coupon at a 99.415% issue price). Interest on the Notes is payable
semi-annually in arrears on April 15 and October 15 of each year. Net
proceeds of $74,092,500 were used to pay down outstanding amounts on the
credit facility and for general corporate purposes.
7. CAPITAL LEASES:
In 1997, the Company acquired a leasehold interest in three shopping
centers in California ("Master Leased Centers") . The term of the leases
are thirty-four years and the initial monthly lease payment is $201,000. In
addition, the Company has purchased the option to acquire fee title to the
Master Leased Centers, exercisable at various times during the terms of the
respective leases. The owner of one of the Master Leased Centers has the
option to require the Company to purchase the property after the occurrence
of certain events.
8. STOCKHOLDERS' EQUITY:
EQUITY OFFERINGS
In July 1997, the Company issued 2,500,000 shares of common stock with a
market price of $28.00 per share for net proceeds of $26.6875 per share.
The proceeds of $66,700,000 were used to repay the Company's notes payable,
acquire properties and for general corporate purposes.
In February 1997, the Company issued 4,600,000 shares of 8 1/2% Series A
Cumulative Convertible Preferred Stock at $25.00 per share (the "Preferred
Shares"). The Preferred Shares are entitled to an annual distribution of
$2.125 per share and are convertible into common shares at a price of
$26.06 per share. Net proceeds of approximately $111,400,000 were used to
repay the Company's notes payable, purchase properties and for general
corporate purposes.
DISTRIBUTIONS
In July 1997, a distribution of $0.50 per share of common stock was paid.
In January and April 1997, the Company paid quarterly distributions of
$0.46 per share. Distributions of $0.32 and $0.53 ($2.125 per annum) were
paid in April and July 1997, respectively, on the Preferred Shares. In
January, April and July of 1996, quarterly distributions of $0.445, $0.445
and $0.46 per share, respectively, were paid. For the nine months ended
September 30, 1997 and 1996, approximately 0% and 10% of the distributions
received by shareholders, respectively, were considered to be a return of
capital for tax purposes.
Continued 14
<PAGE> 15
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
9. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest during the nine months ended September 30,
1997 and 1996 were $14,283,000 and $13,991,000, respectively. State income
taxes of $137,000 and $246,000 were paid in 1997 and 1996, respectively.
In the nine months ended September 30, 1997, the Company acquired real
estate of $84,415,000 without the use of cash by issuing $28,424,000 of ERP
limited partner units, assuming $26,656,000 of capitalized leases and
$26,232,000 of mortgages payable, and retiring notes receivable of
$3,103,000. On April 1, 1997, the Company began consolidating the accounts
of ERP when notes and related interest receivable in the amount of
$23,427,000 from the Company to ERP were converted into limited partnership
interests in ERP. Upon this transaction, ERP assets of $81,600,000
(including cash of $355,000) and liabilities of $52,263,000 (net of
payables to the Company) were consolidated with the Company's accounts.
Also in 1997, the Company redeemed $1,196,000 of ERP limited partnership
units by issuing common stock.
In 1996, the Company acquired real estate and interests in partnerships of
$26,380,000 without the use of cash. The Company assumed $25,490,000 of
mortgage debt and other liabilities and issued $890,000 of common stock.
10. MINIMUM FUTURE RENTALS:
The Company leases its shopping centers and single-tenant buildings to
tenants under noncancellable operating leases generally requiring the
tenant to pay a minimum rent adjusted by either (i) fixed increases, (ii) a
percentage of gross sales, or (iii) a CPI index. The leases generally
either (i) require the tenant to pay all expenses of operating the property
such as insurance, property taxes, and structural repairs and maintenance,
or (ii) require the tenant to reimburse the Company for the tenant's share
of real estate taxes and other common area maintenance expenses.
Minimum future rental revenue for the next five years at September 30, 1997
subject to noncancellable operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997, remaining three months $ 19,261
1998 74,081
1999 68,684
2000 63,507
2001 57,604
Thereafter 455,295
</TABLE>
11. NEW PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share and
SFAS No. 129, Disclosure of Information about Capital Structure, which
become effective for periods after December 15, 1997 and SFAS No. 131,
Disclosures about Segments in an Enterprise and Related Information and
SFAS No. 130, Comprehensive Income, which become effective in 1998. The
Company has determined that the adoption of these SFASs will not have a
material effect on the consolidated financial statements.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NATURE OF BUSINESS
Excel Realty Trust, Inc. (the "Company") is a self-administered, self-managed
equity real estate investment trust ("REIT") which owns and manages commercial
retail income-producing properties primarily leased on a long-term basis. The
terms of such leases typically provide that the tenant is responsible for all
costs and expenses associated with the ongoing maintenance of the property,
including but not limited to property taxes, insurance and common area
maintenance. The majority of the single tenant property leases also require that
tenants pay for roof and structure repairs and maintenance. The properties are
generally either (i) neighborhood or community shopping centers, anchored by a
major retail discount department store and/or a major grocery chain store, or
(ii) single tenant properties leased to a major retail tenant.
The Company has operated and intends to operate in a manner to qualify as a REIT
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
As a REIT, the Company is not subject to federal income tax with respect to that
portion of its income which meets certain criteria and is distributed annually
to the stockholders.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto.
Comparison of the three months ended September 30, 1997 to the three months
ended September 30, 1996.
Rental revenue and expense reimbursements increased $8.6 million, or 63% to
$22.2 million in the three months ended September 30, 1997 from $13.6 million in
the three months ended September 30, 1996. This increase relates partially to
the consolidation of the operating partnership, Excel Realty Partners, L.P.
("ERP"). Had ERP been consolidated in 1996, rental revenue and expense
reimbursements would have increased by $2.1 million. Also, the Company has
acquired 22 properties in 1997 that contributed approximately $4.9 million
in revenues in the three months ended September 30, 1997, and a shopping mall in
December 1996 which contributed $1.6 million of revenues.
Interest income increased $1.7 million, or 100% to $3.4 million in 1997 from
$1.7 million in 1996. This increase is primarily related to additional notes
receivable issued during the period. The Company's outstanding notes receivable
were $98.3 million at September 30, 1997 compared to $47.4 million at September
30, 1996. Loans made to ERT Development Corporation ("EDV") to facilitate the
development of various projects increased by $65.6 million over the past twelve
months. On April 1, 1997, outstanding notes receivable from ERP were converted
into equity interests in ERP. The outstanding amount at September 30, 1996 from
ERP was $14.7 million.
Other income in the three months ended September 30, 1997 of $1.8 million
related primarily to EDV. The Company recognized $1.0 million in development
fees from EDV and $0.1 million as the Company's equity earnings in EDV.
Additionally, the Company recognized $0.7 million in loan fees from certain
developers. In the three months ended September 30, 1996, the Company recognized
$0.6 million in other income primarily related to its equity earnings in ERP,
which was accounted for on the equity method of accounting in 1996, and the
Company's equity earnings in EDV.
Interest expense increased $1.0 million or 20% to $5.9 million in 1997 from $4.9
million in 1996. The increase primarily relates to additional debt on property
acquisitions and the consolidation of ERP. The outstanding amount of mortgage
debt and capital leases were $263 million at September 30, 1997 compared to $144
million outstanding at September 30, 1996. The increase in interest expense was
partially offset by the decrease in the outstanding balance of notes payable to
$41 million at September 30, 1997 compared to $78 million outstanding at
September 30, 1996. The decrease in notes payable was partially a result of the
Company's common stock offering in July 1997 of which proceeds were partially
used to repay the outstanding notes payable balance.
Depreciation and amortization expenses increased $1.3 million or 68% in 1997
when compared to the three months ended September 30, 1996. This related to
buildings which increased from $278 million at September 30, 1996 to $505
million at September 30, 1997.
Property taxes, repairs and maintenance and other property expenses totaled $3.4
million in 1997 compared to $1.9 million in 1996. This increase primarily
relates to the inclusion of properties held by ERP and property acquisitions
made.
16
<PAGE> 17
The increase of $1.5 million is consistent with the increase of expense
reimbursement revenue of $1.5 million. The percentage of expenses recovered
increased in 1997 to 74% from 53% in 1996. General and administrative expenses
increased by $0.6 million in 1997 from 1996 which was an increase as a
percentage of total revenues from 3.8% to 4.3%.
In July 1997, the Company bought an interest rate lock related to a proposed
Senior Note Offering. The interest rate lock was sold when the Senior Note
Offering was postponed and a Common Stock Offering was completed instead. The
Company recognized a $0.9 million loss on the sale. The Company later issued its
senior notes at 6.875% (6.982% effective rate with a 99.415% issue price). The
interest rate lock that was sold had guaranteed the seven year Treasury note at
6.44% and had the Company issued the Notes in July, the interest rate on the
notes would have been 0.875% over the seven year Treasury note or 7.315%.
Net income increased $5.7 million, or 83% to $12.6 million, or $0.48 per share,
in the three months ended September 30, 1997 from $6.9 million, or $0.46 per
share in the three months ended September 30, 1996. Distributions per common
share increased to $0.50 for the three months ended September 30, 1997 from
$0.46 for the same period in 1996.
Comparison of the nine months ended September 30, 1997 to the nine months ended
September 30, 1996.
Rental revenue and expense reimbursements increased $16.1 million, or 41% to
$55.7 million in the nine months ended September 30, 1997 from $39.6 million in
the nine months ended September 30, 1996. This increase relates partially to the
consolidation of ERP on April 1, 1997. Had ERP been consolidated in 1996, rental
revenue and expense reimbursements would have been greater by $4.6 million.
Also, the Company acquired properties in 1997 that contributed approximately
$6.9 million in revenues in the nine months ended September 30, 1997 and in
addition, acquired a shopping mall in December 1996 which contributed $4.4
million.
Interest income increased $6.4 million, or 152% to $10.6 million in 1997 from
$4.2 million in 1996. This increase is primarily related to additional notes
receivable issued during the period including an increase of $65.6 million over
the past twelve months related to loans made to EDV. Also, in the second quarter
of 1997, the Company reversed a reserve of $0.8 million related to a $11.6
million note. The $0.8 million was recognized as interest income and was made
due to increased leasing activity on the collateralized property and improved
market conditions. On April 1, 1997, outstanding note receivables from ERP were
converted into equity interests in ERP. Interest income of $0.5 million was
recognized in 1997 before the notes were converted, compared to $0.6 million in
1996.
Other income in the nine months ended September 30, 1997 of $4.8 million related
primarily to $3.0 million of development fees that were received from EDV.
Additionally, the Company recognized $0.7 million of loan fees from certain
developers. Finally, the Company's equity earnings in EDV amounted to $0.7
million and the equity earnings in ERP before consolidation amounted to $0.4
million. In the nine months ended September 30, 1996, the Company recognized
$1.9 million in other income primarily related to its equity interest in EDV and
ERP, and fees paid from EDV.
Interest expense increased $1.2 million or 8% to $15.7 million in 1997 from
$14.5 million in 1996. The increase primarily relates to additional debt on
property acquisitions and the consolidation of ERP. The outstanding amount of
mortgage debt and capital leases were $263 million at September 30, 1997
compared to $144 million outstanding at September 30, 1996. The increase in
interest expense was partially offset by the decrease in the outstanding balance
of notes payable to $41 million at September 30, 1997 compared to $78 million
outstanding at September 30, 1996. The decrease in notes payable during 1997 was
partially a result of the Company's preferred stock offering in February 1997
and the Company's common stock offering in July 1997 of which proceeds were
partially used to repay outstanding notes payable balances.
Depreciation and amortization expenses increased $2.4 million or 43% in 1997
when compared to the nine months ended September 30, 1996. This related
primarily to the increase in buildings from acquisitions made since September
30, 1996 and the consolidation of ERP.
Property taxes, repairs and maintenance, and other property expenses totaled
$8.9 million in 1997 compared to $5.5 million in 1996. This increase primarily
relates to the inclusion of properties held by ERP and property acquisitions.
The increase of $3.4 million is consistent with the increase of expense
reimbursement revenue of $3.0 million. The percentage of expenses recovered
increased in the nine months ended September 30, 1997 to 71% from 60% in 1996.
General and administrative expenses increased by $1.4 million in 1997 from 1996
which was a decrease as a percentage of total
17
<PAGE> 18
revenues from 4.9% to 4.6%.
The Company recognized a loss of $0.9 million related to the sale of an interest
rate lock as discussed above. Net income increased $17.2 million, or 102% to
$34.1 million, or $1.41 per share, in the nine months ended September 30, 1997
from $16.9 million, or $1.21 per share for the nine months ended September 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of capital to fund the
Company's ongoing operations. The Company's issuance of common and preferred
shares, use of the Company's credit facilities and long-term mortgage financing
have been the principal sources of capital required to fund its growth.
In order to continue to expand and develop its portfolio of properties and other
investments, the Company intends to finance future acquisitions and growth
through the most advantageous sources of capital available to the Company at the
time, which may include the sale of common stock, preferred stock or debt
securities through public offerings or private placements, the incurrence of
additional indebtedness through secured or unsecured borrowings and the
reinvestment of proceeds from the disposition of assets. In 1997, the Company
received an investment credit rating of Baa3 and BBB- from Moody's Investors
Service and Standard and Poor's Corporation, respectively, on future senior debt
securities issued from the Company's $500 million shelf registration. The
Company's financing strategy is to maintain a strong and flexible financial
position by (i) maintaining a prudent level of leverage, (ii) maintaining a
large pool of unencumbered properties, (iii) managing its variable rate
exposure, (iv) amortizing existing mortgages over the term of the leases for
such mortgaged properties, and (v) maintaining a conservative distribution
payout ratio.
The Company may seek variable rate financing from time to time if such financing
appears advantageous in light of then-prevailing market conditions. In such
case, the Company will consider hedging against interest rate risk through
interest rate protection agreements, interest rate swaps or other means.
In April 1997, the Company filed with the Securities and Exchange Commission a
$500,000,000 shelf registration statement. This registration statement was filed
for the availability of issuing in the future debt securities, preferred stock,
depositary shares, common stock or warrants. Currently, approximately
$355,000,000 is available to the Company on this registration statement.
In October 1997, the Company issued $75,000,000 of 6.875% Senior Notes due 2004
(the "Notes"). The effective interest rate on the Notes is 6.982% (6.875% coupon
at a 99.415% issue price). Interest on the Notes is payable semi-annually in
arrears on April 15 and October 15 of each year. Net proceeds of $74,092,500
were used to pay down outstanding amounts on the credit facility and for
corporate purposes.
In July 1997, the Company issued 2,500,000 shares of Common Stock with a market
price of $28.00 per share. The net proceeds after the underwriter discount was
$26.6875 per share or $66.7 million. The proceeds were used to repay outstanding
amounts on the Company's credit facility, acquire properties and for general
corporate purposes.
In February 1997, the Company issued 4,600,000 shares of 8 1/2% Series A
Cumulative Convertible Preferred Stock (the "Preferred Shares") at $25.00 per
share. The Preferred Shares have an annual distribution of $2.125 per share
payable quarterly. The Preferred Shares are convertible by the holder at any
time into shares of the Company's common stock at a conversion price of $26.06
per share. Net proceeds of approximately $111.4 million were used to repay the
Company's outstanding balance on its credit facility, purchase properties and
for general corporate purposes.
The Company has a two-year unsecured revolving credit facility for up to $150
million from a group of seven banks (the "Credit Facility") which carries an
interest rate of LIBOR plus 1.20%. The actual amount available to the Company is
dependent on certain covenants such as the value of unencumbered assets and
certain ratios. The facility expires December 1999. At November 10, 1997, there
was $65.6 million outstanding under the Credit Facility. The Company has an
interest rate protection agreement through December 1997 which limits the
interest rate on $50 million of the outstanding balance under the Credit
Facility to 10%.
In 1995, the Company formed ERP to own and manage certain real estate properties
and on April 1, 1997, the Company began consolidating the accounts of ERP. At
September 30, 1997, there were 1,404,810 limited partner units of ERP held by
third parties. The units are due quarterly distributions which range from $0.43
to $0.50 and are redeemable by
18
<PAGE> 19
cash or common stock of the Company at certain dates. The Company may, from time
to time, contribute additional capital to ERP to facilitate property
acquisitions, capital improvements or other events which may require capital in
excess of ERP's operations. In October 1997, an additional 323,304 units were
issued in conjunction with a property acquisition. Also in October 1997, 75,821
units were redeemed for cash.
In 1995, EDV was organized to acquire, develop, hold and sell real estate in the
short-term for capital gains and/or receive fee income. The Company owns 100% of
the outstanding preferred shares of EDV. The preferred shares are entitled to
receive dividends equal to 95% of net income from cash flows, if any. Cash
requirements to facilitate EDV's transactions have primarily been obtained
through borrowings from the Company and are expected to continue in the future.
Interest and principal payments are repaid to the Company as excess cash is
available which is primarily expected to occur when development projects are
completed and sold. The Company has guaranteed $30 million of an $85 million
construction loan related to a retail development project in Orlando, Florida.
This project is expected to be completed in March 1998.
In September 1997, the Board of Directors of the Company authorized management
to examine the feasibility of a spin-off of a newly-formed company. The spin-off
would involve (i) the transfer from the Company and EDV, certain properties and
loans on development projects currently held by them which are not long-term
REIT properties, to the newly-formed company in exchange for notes receivable
and stock of the new company, and (ii) the distribution of such shares to the
common stockholders of the Company. Although this transaction is being
considered by the Company, there can be no assurance that it will take place or
whether the final terms of any such transaction will be as discussed above.
In September 1997, the Company established $25,680,000 in credit facilities to
certain developers. The total outstanding amounts on the credit facilities of
$3,569,000 carry interest at 11% to 12%, are secured by real estate, and are
payable on the earlier of the sale of certain real estate or seven years. In
1997, the Company recognized $720,000 in loan fees related to the credit
facilities.
The Company has elected REIT status for federal income tax purposes and must
distribute at least 95% of its taxable income to its stockholders in order to
avoid income taxes. Although the Company receives most of its rental payments on
a monthly basis, it intends to make quarterly distribution payments. Amounts
accumulated for distributions will be invested by the Company in short-term
marketable instruments including deposits at commercial banks, money market
accounts, certificates of deposit, U.S. government securities or other liquid
investments (including GNMA, FNMA, and FHLMC mortgage-backed securities) as the
Board of Directors deems appropriate.
The Company calculates funds from operations ("FFO") as net income before gain
or loss on real estate (net of gain or loss on sales of undepreciated property),
plus depreciation on real estate, amortization, amortized leasing commission
costs, loan costs written off and other non-recurring items. The Company also
adds back minority interest relating to common share equivalents. FFO does not
represent cash flows from operations as defined by generally accepted accounting
principles and may not be comparable to other similarly titled measures of other
REITs. The Company believes however, that to facilitate a clear understanding of
its operating results, FFO should be examined in conjunction with its net income
as reductions for certain items are not meaningful in evaluating
income-producing real estate, which historically has not depreciated. The
following information is included to show the items included in the Company's
FFO for the three months ended September 30, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Net income $ 12,646 $ 6,899
Depreciation:
Buildings 2,988 1,761
Tenant improvements 110 90
From equity investments 22 3
Amortization (1):
Organization costs 4 1
Leasing commissions 57 39
Minority interest 344 --
Loss on sale of interest rate lock 896 --
Gain related to sale of undepreciated real estate -- 352
Gain on sale of buildings (160) (273)
-------- -------
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C>
Funds from operations $ 16,907 $ 8,872
======== =======
Other Information:
Leasing commissions paid $ 90 $ 63
Tenant improvements paid 259 124
Building improvements paid
(Parking lots, roofs, etc.) 277 62
</TABLE>
(1) Only amortization of organization costs is shown as amortization expense in
the Consolidated Statements of Income. Leasing commission amortization is
classified as other operating expenses in the Consolidated Statements of Income.
ECONOMIC CONDITIONS
The majority of the Company's leases contain provisions designed to mitigate the
adverse impact of inflation. Such provisions include clauses enabling the
Company to receive percentage rents which generally increase as prices rise,
and/or escalation clauses which are typically related to increases in the
consumer price index or similar inflation indices. In addition, the Company
believes that many of its existing lease rates are below current market levels
for comparable space and that upon renewal or re-rental such rates may be
increased to current market rates. This belief is based upon an analysis of
relevant market conditions, including a comparison of comparable market rental
rates, and upon the fact that many of such leases have been in place for a
number of years and may not contain escalation clauses sufficient to match the
increases in market rental rates over such time. Most of the Company's leases
require the tenant to pay its share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
In addition, the Company periodically evaluates its exposure to interest rate
fluctuations, and may enter into interest rate protection agreements which
mitigate, but do not eliminate, the effect of changes in interest rates on its
floating rate loans.
Many regions of the United States, including regions in which the Company owns
property, may experience economic recessions. Such recessions, or other adverse
changes in general or local economic conditions, could result in the inability
of some existing tenants of the Company to meet their lease obligations and
could otherwise adversely affect the Company's ability to attract or retain
tenants. The Company's shopping centers are typically anchored by discount
department stores, supermarkets and drug stores which usually offer day-to-day
necessities rather than high priced luxury items. These type of tenants, in the
experience of the Company, generally continue to maintain their volume of sales
despite a slowdown in economic conditions.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Form 10-Q that are not historical fact 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 Company to be materially different from historical results or
from any results expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include, but are not limited to, the
following risks:
Economic Performance and Value of Centers 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 a reduction 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. In recent years, there has been a
proliferation of new retailers and a growing consumer preference for
value-oriented shopping alternatives that have, among other factors, heightened
competitive pressures. In certain areas of the country, there may also be an
oversupply of retail space. As a consequence, many companies in all sectors of
the retailing industry have encountered significant financial difficulties. A
substantial portion of the Company's income is derived from rental revenues from
retailers in neighborhood and community shopping centers. Accordingly, no
assurance can be given that the Company's financial results will not be
adversely affected by these developments in the retail industry.
Dependence on Rental Revenue from Real Property. Since substantially all of the
Company's income is derived from rental revenue from real property, the
Company's income and funds for distribution would be adversely affected if a
significant number of the Company's tenants were unable to meet their
obligations to the Company or if the Company
20
<PAGE> 21
were unable to lease a significant amount of space in its properties 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 Company 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 Company to
vary its portfolio promptly in response to changes in economic or other
conditions. In addition, mortgage payments and, to the extent the properties are
not subject to triple net leases, certain significant expenditures such as real
estate taxes and maintenance costs, are generally not reduced when circumstances
cause a reduction in income from the investment, and should such events occur,
the Company's income and funds for distribution would be adversely affected. A
portion of the Company's properties are mortgaged to secure payment of
indebtedness, and if the Company were unable to meet its mortgage payments, a
loss could be sustained as a result of foreclosure on such properties by the
mortgagee.
Risk of Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major
tenant or a number of smaller tenants may have an adverse impact on the
properties affected and on the income produced by such properties. 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
Company, the tenant must cure all defaults under the lease and provide the
Company with adequate assurance of its future performance under the lease. If
the tenant rejects the lease, the Company'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).
Environmental Risks. Under various federal, state and local laws, ordinances and
regulations, the Company 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 Company
knew of, or was responsible for, the presence of such hazardous or toxic
substances.
Soil and groundwater contamination exists at Carmen Plaza in Camarillo,
California, Cudahy Plaza in Cudahy, California, and Bristol Plaza in Santa Ana,
California. With regard to Carmen Plaza, the primary contaminants of concern are
perchloroethylene ("PCE") associated with operations of an on-site dry cleaner,
methyl tertiary butyl ether ("MTBE") from an unknown source and petroleum
hydrocarbons associated with operations of an on-site auto repair facility. With
regard to Cudahy Plaza, the primary contaminants of concern are PCE associated
with operations of a former on-site dry cleaner and petroleum hydrocarbons
associated with operations of an existing on-site auto repair facility. With
regard to Bristol Plaza, the primary contaminants of concern are PCE and
trichloroethylene ("TCE") associated with operations of an on-site dry cleaner
and petroleum hydrocarbons associated with operations of an on-site auto repair
facility. Environmental professionals retained by the Company estimate that the
total, cumulative cost of remediation for these properties will be approximately
$1.8 million to $5.5 million. In connection with each of these properties, the
Company has entered into a remediation and indemnity agreement, which obligates
the prior owner of the properties (including in some cases, principals of the
prior owner) to perform the remediation and to indemnify the Company for any
losses it may suffer because of the contamination or remediation. Although there
can be no assurance that the remediation estimates of the environmental
professional are accurate or that the prior owners will perform their
obligations under the remediation and indemnity agreements, the Company does not
expect the environmental conditions at these properties to have a material
adverse effect on the Company.
Reliance on Major Tenants. As of September 30, 1997, the Company's two largest
tenants were Wal-Mart Stores, Inc. and Kmart Corporation which accounted for
approximately 8% and 7%, respectively, of the Company's total revenue as of such
date. The financial position of the Company and its ability to make
distributions may be adversely affected by financial difficulties experienced by
either of such tenants, or any other major tenant of the Company, including a
bankruptcy, insolvency or general downturn in business of any such tenant, or in
the event any such tenant does not renew its leases as they expire. In that
regard, Kmart has experienced flat or declining earnings in recent periods and
had announced plans to eliminate a significant number of jobs and close certain
of its existing stores.
Control by Directors and Executive Officers. Directors and executive officers of
the Company have substantial influence
21
<PAGE> 22
over the Company and on the outcome of matters submitted to the Company's
stockholders for approval.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 have been omitted since no events occurred with respect
to these items.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings Per Common Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated July 3, 1997, was filed with the
Commission regarding the Company's acquisition of interests in nine
shopping centers from entities owned or controlled by Albert B.
Glickman (includes historical and pro forma financial information).
A Current Report on Form 8-K, dated July 3, 1997 was filed with the
Commission regarding the Company's Second Supplemental Indenture
between Excel Realty Trust, Inc. and State Street Bank and Trust
Company of California, N.A., as Trustee.
A Current Report on Form 8-K, dated July 17, 1997, was filed with the
Commission regarding the Company's Underwriting Agreement between
Excel Realty Trust, Inc. and Solomon Brothers Inc.
A Current Report on Form 8-K, dated September 18, 1997 was filed with
the Commission regarding the Company's Revolving Credit Agreement
among Excel Realty Trust, Inc., BankBoston, N.A., the other banks
party to the Agreement, and BankBoston, N.A., as agent.
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: November 11, 1997 EXCEL REALTY TRUST, INC.
------------------------
(Registrant)
By: /s/ Gary B. Sabin
----------------------------
Gary B. Sabin, President
By: /s/ David A. Lund
----------------------------
David A. Lund, Principal
Financial Officer
22
<PAGE> 1
Exhibit 11.1
COMPUTATION OF PER COMMON SHARE NET INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Earnings per share - Primary:
Weighted average of common
shares outstanding: 20,463,124 15,001,295 19,033,322 13,877,824
Common share equivalent;
options and warrants: 308,996 50,187 233,653 45,959
Common share equivalents; Excel
Realty Partners, L.P. units: 1,404,810 -- 692,645 --
------------ ----------- ------------ -----------
Weighted average of common
shares and common share
equivalents outstanding: 22,176,930 15,051,482 19,959,620 13,923,783
============ =========== ============ ===========
Net income: $ 12,646,000 $ 6,899,000 $ 34,147,000 $16,851,000
Preferred stock distribution paid: (2,444,000) -- (6,354,000) --
Adjustments to net income for
common share equivalents 343,000 -- 413,000 --
------------ ----------- ------------ -----------
Adjusted net income for per share
calculation: $ 10,545,000 $ 6,899,000 $ 28,206,000 $16,851,000
============ =========== ============ ===========
Net income per share $ 0.48 $ 0.46 $ 1.41 $ 1.21
============ =========== ============ ===========
</TABLE>
Note: The fully dilutive calculation for earnings per share is not significantly
different from the primary calculation above.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,484,000
<SECURITIES> 0
<RECEIVABLES> 4,675,000
<ALLOWANCES> (1,229,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 753,008,000
<DEPRECIATION> (30,831,000)
<TOTAL-ASSETS> 845,675,000
<CURRENT-LIABILITIES> 0
<BONDS> 303,419,000
0
46,000
<COMMON> 209,000
<OTHER-SE> 498,451,000
<TOTAL-LIABILITY-AND-EQUITY> 845,675,000
<SALES> 0
<TOTAL-REVENUES> 27,360,000
<CGS> 0
<TOTAL-COSTS> 13,635,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 632,000
<INTEREST-EXPENSE> 5,877,000
<INCOME-PRETAX> 12,646,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,646,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,646,000
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
