<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:
MARCH 31, 1998 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 date.
Class Outstanding at May 13, 1998
Common Stock, $.01 par value 23,428,633
<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
March 31, 1998 (Unaudited)
December 31, 1997 .............................................................. 3
Consolidated Statements of Income
Three Months Ended March 31, 1998 (Unaudited)
Three Months Ended March 31, 1997 (Unaudited)................................... 4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 1998 (Unaudited)
Three Months Ended March 31, 1997 (Unaudited)................................... 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 (Unaudited)
Three Months Ended March 31, 1997 (Unaudited)................................... 6
Notes to Consolidated Financial Statements (Unaudited)............................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................... 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................................. 23
</TABLE>
2
<PAGE> 3
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- -----------
<S> <C> <C>
ASSETS
Real estate:
Land $ 313,731 $ 307,995
Buildings 601,521 617,523
Accumulated depreciation (33,602) (33,936)
----------- -----------
Net real estate 881,650 891,582
Cash 4,327 18,426
Escrow and other cash deposits 1,223 20,814
Accounts receivable, less allowance for bad debts of
$1,488 and $1,896 in 1998 and 1997, respectively 3,589 4,577
Notes receivable - affiliates 106,910 90,124
Notes receivable - other 29,794 27,953
Interest receivable 8,493 12,867
Loan acquisition costs 3,085 2,993
Other assets 4,792 6,861
----------- -----------
$ 1,043,863 $ 1,076,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 238,502 $ 243,664
Capital leases 26,850 26,850
Senior notes payable 75,000 75,000
Notes payable 22,386 168,894
Accounts payable and accrued liabilities 11,519 10,135
Deferred rental income 3,637 2,662
Other liabilities 4,717 4,490
----------- -----------
Total liabilities 382,611 531,695
----------- -----------
Minority interest in partnership 41,430 41,986
----------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, 4,600,000
shares designated as 8 1/2% Series A Cumulative Convertible Preferred,
2,126,380 and 4,600,000 shares outstanding in 1998 and 1997, respectively;
Depository shares of 6,300,000 each representing 1/10 of a share of 8 5/8%
Series B Cumulative Redeemable Preferred,
630,000 and 0 outstanding in 1998 and 1997, respectively 28 46
Common stock, $.01 par value, 100,000,000 shares authorized,
23,413,721 and 20,999,634 shares issued and outstanding
in 1998 and 1997, respectively 234 210
Additional paid-in capital 661,014 507,866
Accumulated distributions in excess of net income (41,454) (5,606)
----------- -----------
Total stockholders' equity 619,822 502,516
----------- -----------
$ 1,043,863 $ 1,076,197
=========== ===========
</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
MARCH 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Rental revenue $ 26,625 $ 13,046
Expense reimbursements 5,245 1,598
Interest 5,210 3,529
Other 132 2,031
-------- --------
Total revenue 37,212 20,204
-------- --------
Operating expenses:
Interest 7,824 4,321
Depreciation and amortization 4,150 2,110
Property taxes 2,993 863
Repairs and maintenance 1,853 744
Other property expenses 1,903 806
General and administrative 1,702 1,050
-------- --------
Total operating expenses 20,425 9,894
-------- --------
Income before real estate sales and
minority interest 16,787 10,310
Minority interest (405) --
Loss on sale of real estate (23) --
-------- --------
Net income $ 16,359 $ 10,310
======== ========
Basic net income per share $ 0.52 $ 0.48
======== ========
Diluted net income per share $ 0.49 $ 0.46
======== ========
</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 SHARES)
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- ------------------------------
NUMBER AMOUNT NUMBER AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998:
Balance at January 1, 1998 4,600,000 $ 46 20,999,634 $ 210
Issuance of preferred shares 630,000 6 -- --
Preferred stock converted to
common stock (2,473,620) (24) 2,373,006 24
Issuance of common stock -- -- 41,081 --
Selling expenses -- -- -- --
Net income -- -- -- --
Distributions -- -- -- --
---------- ---------- ---------- ----------
Balance at March 31, 1998 2,756,380 $ 28 23,413,721 $ 234
========== ========== ========== ==========
THREE MONTHS ENDED MARCH 31, 1997:
Balance at January 1, 1997 -- $ -- 18,231,089 $ 182
Issuance of preferred stock 4,600,000 46 -- --
Issuance of common stock -- -- 99,558 1
Selling expenses -- -- -- --
Net income -- -- -- --
Distributions -- -- -- --
---------- ---------- ---------- ----------
Balance at March 31, 1997 4,600,000 $ 46 18,330,647 $ 183
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL DISTRIBUTIONS TOTAL
PAID-IN IN EXCESS OF STOCKHOLDERS'
CAPITAL NET INCOME EQUITY
---------- ---------- ----------
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998:
Balance at January 1, 1998 $ 507,866 $ (5,606) $ 502,516
Issuance of preferred shares 157,494 -- 157,500
Preferred stock converted to
common stock -- -- --
Issuance of common stock 893 -- 893
Selling expenses (5,239) -- (5,239)
Net income -- 16,359 16,359
Distributions -- (52,207) (52,207)
---------- ---------- ----------
Balance at March 31, 1998 $ 661,014 $ (41,454) $ 619,822
========== ========== ==========
THREE MONTHS ENDED MARCH 31, 1997:
Balance at January 1, 1997 $ 324,229 $ (11,757) $ 312,654
Issuance of preferred stock 114,954 -- 115,000
Issuance of common stock 2,174 -- 2,175
Selling expenses (3,591) -- (3,591)
Net income -- 10,310 10,310
Distributions -- (8,386) (8,386)
---------- ---------- ----------
Balance at March 31, 1997 $ 437,766 $ (9,833) $ 428,162
========== ========== ==========
</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>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,359 $ 10,310
Adjustments to reconcile net income to net cash provided by operations:
Depreciation 4,145 2,109
Equity in affiliates 3,253 (173)
Provision for bad debts 469 298
Minority interest in income of partnership 405 --
Amortized loan costs and leasing commissions 258 442
Loss on sale of real estate 23 --
Changes in accounts receivable 519 (200)
Changes in other assets 2,708 (3,443)
Changes in accounts payable 1,603 (369)
Changes in other liabilities 1,203 (74)
--------- ---------
Net cash provided by operating activities 30,945 8,900
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and building improvements (54,708) (2,201)
Advances for notes receivable (42,887) (17,896)
Principal payments on notes receivable 11,338 11,029
Proceeds from real estate sales 372 --
Other (36) (389)
--------- ---------
Net cash used in investing activities (85,921) (9,457)
--------- ---------
Cash flows from financing activities:
Issuance of preferred stock 157,500 115,000
Principal payments of mortgages and notes payable (150,014) (98,719)
Proceeds from mortgages and notes payable 52,148 16,000
Distributions paid (12,945) (8,386)
Selling and offering costs (5,239) (3,591)
Issuance of common stock 785 964
Minority interest distributions (852) --
Loan costs paid (506) (181)
--------- ---------
Net cash provided by financing activities 40,877 21,087
--------- ---------
Net increase (decrease) in cash (14,099) 20,530
Cash at January 1 18,426 5,038
--------- ---------
Cash at March 31 $ 4,327 $ 25,568
========= =========
</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 three months ended March 31,
1997 and at December 31, 1997 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, 1997 Annual Report on Form 10-K.
ORGANIZATION
Excel Realty Trust, Inc. (the "Company") was formed in 1985 and
subsequently reincorporated as 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. The Company uses the equity method to account for its
investment in ERT Development Corporation ("EDV"), a Delaware corporation
(Note 4).
INCOME TAXES
The Company has elected to be treated as a real estate investment trust
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
----------
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 significantly lower rent, the Company may recognize a permanent
impairment loss if the income stream is not sufficient to recover its
investment.
DEFERRED LEASING AND LOAN ACQUISITION COSTS
Costs incurred in obtaining tenant leases and long-term financing are
amortized to other property 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.
NET INCOME PER COMMON SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share effective December 31, 1997.
SFAS No. 128 requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the incremental
common shares issuable upon the conversion of convertible preferred stock
(using the "if converted" method), exercise of stock options and warrants
and potential conversion of ERP limited partner units. All prior period
earnings per share amounts have been restated to comply with SFAS No. 128
(Note 9).
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
----------
2. REAL ESTATE:
ACQUISITIONS
In the three months ended March 31, 1998, the Company acquired two shopping
centers and a parcel of land, all located in California. The total cost of
these three properties was approximately $54,100,000.
In the three months ended March 31, 1997, the Company acquired a shopping
center in Georgia and a building leased to a single tenant, Winn Dixie,
located in Tennessee. The total cost of these two properties was
approximately $5,600,000. No mortgage debt was assumed in these
transactions.
SALES
In 1998, the Company sold one single tenant property for $372,000 and
recognized a $23,000 loss on the sale. On March 31, 1998, ten single tenant
properties and one property held for sale owned by the Company were
spun-off to Excel Legacy Corporation ("Legacy") along with certain other
assets (Note 4). There were no real estate sales in 1997.
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.
The Company has identified asbestos minerals relating to spray-applied
fireproofing materials in Clearwater Mall in Clearwater, Florida which was
acquired by the Company in December 1997. Environmental professionals
retained by the Company estimate that the total cumulative cost of
remediation for this property will be approximately $3.2 million. The
estimated cost of this remediation, which was capitalized as part of the
acquisition price of this property, is included in other liabilities in the
Company's Consolidated Balance Sheets.
Continued
9
<PAGE> 10
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
3. NOTES RECEIVABLE:
The Company had the following notes receivable at March 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes from EDV, interest at 14% per annum, collateralized
by EDV assets. Due on demand $ 74,547 $ 90,124
Notes from Legacy, interest at 12% per annum, repaid in
April 19998(Note 4) 32,363 --
Notes from development companies, interest from 11% - 12%
per annum. Maturity dates vary based upon the completion
of certain properties 17,369 15,599
Note from a development company, interest at 25% compounded
monthly, payable in Canadian dollars. Due May 2003 11,322 11,235
Other 1,103 1,119
-------- --------
Total notes receivable $136,704 $118,077
======== ========
</TABLE>
Interest and principal payments from EDV are primarily received upon the
completion of development projects. Interest receivable from EDV was
$2,134,000 and $7,628,000 at March 31, 1998 and December 31, 1997,
respectively.
The Company has made loans totaling $16,050,000 Canadian dollars
($11,322,000 U.S. dollars at March 31, 1998) to a Canadian company which
used the proceeds to acquire a 50% joint venture interest in a mixed-use
commercial building known as "Atrium on Bay", and an adjacent land parcel
in Toronto, Canada. The loan is collateralized by the Canadian company's
interest in the building.
In 1997 the Company established $25,680,000 in credit facilities to certain
developers. The outstanding amounts on the credit facilities of $16,869,000
carry interest of 11% to 12%, are collateralized by real estate, and are
payable on the earlier of the sale of real estate or seven years.
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 have been contributed to ERP in exchange for limited
partnership 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
Continued
10
<PAGE> 11
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
4. INVESTMENTS, CONTINUED:
March 31, 1998, there were 2,828,790 limited partner units outstanding of
which the Company owned 1,152,121 units. Quarterly distributions
approximate $872,000 for limited partner units held by third parties.
PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following Company unaudited actual and pro forma condensed consolidated
income statements have been presented as if the Company had converted its
notes and related interest receivable from ERP on January 1, 1997. The
unaudited pro forma condensed consolidated income statements are not
necessarily indicative of what actual results of operations of the Company
would have been had the transaction actually occurred on January 1, 1997,
nor do they purport to represent the results of operations of the Company
for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
-------- --------
(ACTUAL) (PRO FORMA)
<S> <C> <C>
STATEMENTS OF INCOME
Rental revenues and reimbursements $ 31,870 $ 17,446
Interest and other income 5,342 4,605
Depreciation and amortization (4,150) (2,446)
Property and other expenses (8,451) (4,139)
Interest expense (7,824) (5,366)
Minority interest (405) (33)
Real estate sales (23) --
-------- --------
Net income $ 16,359 $ 10,067
======== ========
Basic net income per share $ 0.52 $ 0.47
======== ========
Diluted net income per share $ 0.49 $ 0.45
======== ========
</TABLE>
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 and are
expected to be paid 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:
<TABLE>
<CAPTION>
MARCH 31,DECEMBER 31,
------------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEETS
Notes receivable from developers, interest at 10% to 20% $ 53,400 $ 79,400
Net real estate and other assets 24,900 25,500
------------ ------------
Total assets $ 78,300 $ 104,900
============ ============
Notes payable to Excel Realty Trust, Inc. $ 74,500 $ 90,100
Other liabilities 3,500 11,200
------------ ------------
Total liabilities 78,000 101,300
Total stockholders' equity 300 3,600
------------ ------------
Total liabilities and stockholders' equity $ 78,300 $ 104,900
============ ============
</TABLE>
Continued
11
<PAGE> 12
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
4. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF INCOME
Total revenues $ 3,700 $ 3,500
Interest expense to Excel Realty Trust, Inc. (3,200) (1,600)
Development and other fees paid to Excel Realty Trust, Inc. (2,900) (1,900)
Other expenses (900) (200)
------- -------
Net loss $(3,300) $ (200)
======= =======
</TABLE>
EDV's receivables include loans of approximately $23,150,000 made to a
joint venture partnership under a loan commitment related to a retail
development project in Florida. The joint venture has a construction loan
which is expected to total approximately $100,000,000 of which $45,000,000
is guaranteed by the Company.
EXCEL LEGACY CORPORATION
In March 1998, the Company spun off Legacy, a newly-formed corporation
which was a wholly-owned subsidiary of the Company (the "Spin-off"). Legacy
was organized to create and realize value by identifying and making
opportunistic real estate investments which are not restricted by REIT tax
laws or influenced by the Company's objectives of increasing cash flows and
maintaining certain leverage ratios. Prior to the Spin-off, EDV transferred
four notes receivable, a land parcel, a leasehold interest in a parcel of
land, an office building, a single tenant building, and certain other
assets to the Company for a total consideration of approximately
$38,112,000 for which the Company reduced the note receivable from EDV. The
Company contributed to Legacy, the above assets from EDV, together with ten
single tenant properties owned by the Company with a book value of
approximately $45,747,000, certain other net assets of approximately
$1,158,000, and a property held for sale with a book value of $14,525,000,
in exchange for 23,412,580 common shares of Legacy, assumption of debt by
Legacy on the ten single tenant properties of approximately $33,878,000,
and issuance of a note payable from Legacy to the Company in the amount of
$26,402,000. This note was repaid in April 1998.
The Spin-off took place through a dividend distribution to the Company's
common stockholders, of all Legacy common stock (23,412,580 shares) held by
the Company. The distribution consisted of one share of Legacy common stock
for each share of the Company's common stock held on the record date of
March 2, 1998. No gain was recognized by the Company for book purposes on
the distribution of $39,262,000. For tax purposes, the Company recognized a
gain of $16,694,000 as the distribution was a taxable event and the assets
and liabilities were transferred at fair market value. The fair market
value of the distribution was approximately $55,956,000 or $2.39 per share.
Upon completion of the Spin-off, Legacy ceased to be a wholly-owned
subsidiary of the Company and began operating as an independent public
company.
Continued
12
<PAGE> 13
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
5. MORTGAGES PAYABLE :
The Company had the following mortgages payable at March 31, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes at 3% to 10%, payable in installments through
2021 (monthly payments at March 31, 1998 of $2,081),
collateralized by real estate and an assignment of rents:
Insurance companies $116,727 $125,377
Banks 107,647 77,467
Bonds 14,128 40,820
-------- --------
Total mortgages payable $238,502 $243,664
======== ========
</TABLE>
The principal payments required to be made on mortgages payable over the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998, remaining nine months $ 12,263
1999 49,672
2000 21,570
2001 20,555
2002 5,131
Thereafter 129,311
----------
$ 238,502
==========
</TABLE>
Mortgages of $28,661,000 are fully amortizing with the final monthly
payments to be made between the years 2004 and 2018.
6. 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 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. There are no principal payments due on the leases until
a Master Leased Center is acquired.
Continued
13
<PAGE> 14
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
7. NOTES PAYABLE:
The Company had the following notes payable at March 31, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Unsecured credit agreement of $250,000, interest
at LIBOR +1.20% (6.9% at March 31, 1998) $ 22,000 $148,572
Unsecured loan payable to a financial institution, interest
at 8.75% (encumbered by Legacy - Note 4) -- 19,926
Other 386 396
-------- --------
Total notes payable $ 22,386 $168,894
======== ========
</TABLE>
The Company has a two-year revolving credit facility of up to $250,000,000
in unsecured advances from a group of banks. The facility expires March 31,
2000 and bears an interest rate based upon the credit rating of the
Company. Based upon the Company's current investment credit rating of Baa3
and BBB- from Moody's Investor 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 guaranteed $5,000,000 related to a line of credit agreement
between a bank and a third party developer. The Company is entitled to 50%
of profits generated by certain projects related to this agreement.
8. SENIOR NOTES PAYABLE:
In 1997, the Company issued $75,000,000 of 6.875% Senior Notes due 2004
(the "Senior Notes"). The effective rate on the Senior Notes is 6.982%
(6.875% coupon with proceeds before the underwriting discount of
$74,561,000). Interest on the Notes is payable semi-annually in arrears on
April 15 and October 15 each year
9. CAPITAL STOCK:
EQUITY OFFERINGS
In January 1998, the Company issued 6,300,000 depositary shares each
representing 1/10 share of 8 5/8% Series B Cumulative Redeemable Preferred
Stock (the "Preferred B Shares"). The offering price was $25.00 per
depositary share with an annual dividend equal to $2.15625, payable
quarterly. Net proceeds from the offering totaled $152,538,000 and were
used primarily to repay outstanding amounts on the Company's credit
facility.
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
A Shares"). The Preferred A 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 $111,550,000 were used to
repay the Company's notes payable, purchase properties and for general
corporate purposes. In March 1998, 2,473,620 Preferred A Shares were
converted into common shares. There are 2,126,380 Preferred A Shares
outstanding at March 31, 1998.
Continued
14
<PAGE> 15
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
9. CAPITAL STOCK (CONTINUED):
DISTRIBUTIONS
In January 1998 and 1997, distributions of $0.50 and $0.46 per share,
respectively, were paid to common stockholders. In January 1998,
distributions of $0.53 per share were paid on the Preferred A shares. In
April 1998, $0.50 per share was paid to the common stockholders, $0.53 was
paid to the Preferred A shareholders, and $0.48 was paid to the Preferred B
shareholders. For both the three months ended March 31, 1998 and 1997, none
of the distributions received by common shareholders were considered to be
a return of capital for tax purposes. In March 1998, the Company
distributed the shares of Legacy with a per share book value and tax value
of $1.68 and $2.39, respectively.
EARNINGS PER SHARE (EPS)
In accordance with the disclosure requirements of SFAS No. 128 (Note 1), a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
BASIC EPS
NUMERATOR:
Net income $ 16,359 $ 10,310
Preferred dividends (5,072) (1,466)
-------- --------
$ 11,287 $ 8,844
======== ========
DENOMINATOR:
Weighted average of common shares outstanding 21,787 18,300
======== ========
EARNINGS PER SHARE: $ 0.52 $ 0.48
======== ========
DILUTED EPS
NUMERATOR:
Net income $ 16,359 $ 10,310
Preferred dividends (5,072) (1,466)
Adjustments for ERP third party units 405 (215)
-------- --------
Net income available to common shares $ 11,692 $ 8,629
======== ========
DENOMINATOR:
Weighted average of common shares outstanding 21,787 18,300
Effect of diluted securities:
Common stock options and warrants 413 168
ERP third party units 1,766 268
-------- --------
23,966 18,736
======== ========
EARNINGS PER SHARE: $ 0.49 $ 0.46
======== ========
</TABLE>
Continued
15
<PAGE> 16
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest during the three months ended March 31, 1998
and 1997 were approximately $6,376,000 and $3,964,000, respectively. State
income taxes of approximately $20,000 and $78,000 were paid in 1998 and
1997, respectively.
For the three months ended March 31, 1998, the Company spun-off certain
assets to Legacy in the form of a dividend and note receivable as described
in Note 4. Additionally, when Legacy ceased to be a wholly-owned subsidiary
of the Company, deposits and other assets of $19,926,000 and notes payable
of $19,926,000 were no longer consolidated with the Company accounts. Also
in 1998, 2,473,620 Preferred A Shares were converted into 2,373,006 of the
Company's common shares and $108,000 of ERP units were converted into the
Company's common shares.
In 1997, the Company acquired real estate of $2,055,000 without the use of
cash by retiring notes receivable. Also, limited partners of ERP converted
$1,196,000 of units into common shares of the Company.
11. MINIMUM FUTURE RENTALS:
The Company leases its shopping centers and single-tenant buildings to
tenants under noncancelable 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 for the commercial
real estate currently owned at March 31, 1998 and subject to noncancelable
operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1998, remaining nine months $ 73,330
1999 89,017
2000 82,347
2001 74,467
2002 66,891
Thereafter 565,270
</TABLE>
16
<PAGE> 17
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 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 March 31, 1998 to the three months ended
March 31, 1997.
Rental revenue and expense reimbursements increased $17.2 million, or 117% to
$31.9 million in the three months ended March 31, 1998 from $14.7 million in the
three months ended March 31, 1997. The increase is primarily due to the
Company's 30 properties acquired in 1997 that accounted for approximately $13.5
million in rental revenue and expense reimbursements. The 1998 operating results
also reflect the consolidation of the operating partnership, Excel Realty
Partners, L.P. ("ERP") . Had ERP been consolidated in the three months ended
March 31, 1997, rental revenues and expense reimbursements would have increased
by $2.8 million. Additionally, two shopping centers acquired in 1998 accounted
for $0.8 million. The remaining increase relates to a net increase in rents from
its existing properties net of five single tenant properties that were sold in
1997 and 1998.
Interest income increased $1.7 million, or 49% to $5.2 million in 1998 from $3.5
million in 1997. This increase is primarily related to additional notes
receivable issued during the period. The Company's outstanding notes receivable
were $136.7 million at March 31, 1998 compared to $89.3 million at March 31,
1997, an increase of $47.4 million or 53%. This increase includes a net increase
in loans of $20.2 million made to ERT Development Corporation ("EDV") to
facilitate the development of various development projects. Also, $32.4 million
of loans at March 31, 1998 were to Excel Legacy Corporation ("Legacy") relating
to the spin-off of certain assets and other advances.
Other income in the three months ended 1998 was $0.1 million that was primarily
related to a foreign currency exchange gain on a note receivable in Canadian
dollars. In 1998 the Company received development fees from EDV in the amount of
$2.9 million. This was offset by the equity loss from EDV of $3.3 million and
included in other property expenses. In the three months ended March 31, 1997
other income of $2.0 million related primarily to $1.9 million of development
fees that were received from EDV. This was offset by a $0.1 million foreign
currency exchange loss.
Interest expense increased $3.5 million or 81% to $7.8 million in 1998 from $4.3
million in 1997. The increase primarily relates to additional debt related to
property acquisitions, the consolidation of ERP and the issuance of $75.0
million senior notes in October 1997. The outstanding mortgages payable, capital
leases, senior notes and notes payable were $362.7 million at March 31, 1998
compared to $156.0 million at March 31, 1997.
17
<PAGE> 18
Depreciation and amortization expenses increased $2.0 million or 97% in 1998
when compared to the three months ended March 31, 1997. This primarily related
to the acquisition of buildings which increased from $312.8 million at March 31,
1997 to $601.5 million at March 31, 1998.
Property taxes, repairs and maintenance, and other property expenses totaled
$6.7 million in 1998 compared to $2.4 million in 1996. This increase primarily
relates to property acquisitions made in 1997 and 1998, in addition to the
consolidation of ERP. The increase in expenses was offset partially by an
increase in expense reimbursements of $3.6 million. General and administrative
expenses increased by $0.7 million in 1998 from 1997 which was an decrease as a
percentage of total revenues from 5.2% to 4.6%. This is partially attributable
to the consolidation of ERP whose total revenues were consolidated with the
Company accounts in 1998 and economies of scale achieved from the growth of the
Company from property acquisitions.
Net income increased $6.1 million, or 59% to $16.4 million in the three months
ended March 31, 1998 from $10.3 million for the three months ended March 31,
1997. Distributions per share increased to $0.50 for the three months ended
March 31, 1998 from $0.46 for the same period in 1997.
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 and Senior Notes, use of the Company's credit facility 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 investment grade credit ratings of Baa3 and BBB- from Moody's and
Standard and Poor's, respectively, on unsecured 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 property specific non-recourse mortgages over the term of
the anchor 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 Commission a $500 million shelf
registration statement. This registration statement was filed for the purpose of
issuing debt securities, preferred stock, depositary shares, common stock or
warrants. Currently, approximately $197.5 million is available to the Company on
this registration statement.
In January 1998, the Company issued 6,300,000 depositary shares each
representing 1/10 of a share of 8 5/8% Series B Cumulative Redeemable Preferred
Stock (the "Preferred B Shares"). The offering price was $25.00 per depositary
share with an annual dividend equal to $2.15625 per share, payable quarterly.
Net proceeds from the offering totaled approximately $152.5 million.
The Company also has outstanding 2,126,380 shares of 8 1/2% Series A Cumulative
Convertible Preferred Stock (the "Preferred A Shares"). The Preferred A Shares
have an annual distribution of $2.125 per share payable quarterly. The Preferred
A Shares are convertible by the holder at any time into shares of the Company's
common stock at a conversion price of $24.13 per share. On or after February 5,
2002, the Preferred A Shares are redeemable by the Company at $25.00 per share
in either shares of common stock or cash at the Company's election. The
Preferred A Shares rank senior to the Company's common stock
18
<PAGE> 19
and are on a parity with the Preferred B Shares with respect to the payment of
dividends and amounts payable upon liquidation, dissolution or winding down of
the Company. In March 1998, 2,473,620 Preferred A Shares were converted into
common shares. There and 2,126,380 Preferred A Shares outstanding at March 31,
1998.
In October 1997, the Company issued $75.0 million of 6.875% Senior Notes due
2004 (the " Senior Notes"). The effective interest rate on the Senior Notes is
6.982% (6.875% coupon with proceeds before underwriting discount of $74.6
million). Interest on the Senior Notes is payable semi-annually in arrears on
April 15 and October 15 of each year.
The Company has an unsecured revolving credit facility for up to $250.0 million
from a group of banks (the "Credit Facility") which carries an interest rate of
LIBOR plus 1.20%. The actual amount available to the Company is dependent on
covenants such as the value of unencumbered assets and certain ratios. The
Credit Facility expires March 2000. The outstanding balance at May 13, 1998 was
$7.6 million.
In 1995, EDV was organized to finance, 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 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 $45 million of an
$100 million construction loan related to a retail development project in
Orlando, Florida. The project is expected to be completed in August 1998.
In September 1997, the Company established $25.7 million in credit facilities to
certain developers. The total outstanding amounts on the credit facilities of
$16.9 million at March 31, 1998 carry interest at 11% to 12%, are collateralized
by real estate, and are payable on the earlier of the sale of certain real
estate or seven years. The Company has also guaranteed $5,000,000 related to a
line of credit agreement between a bank and a third party developer. The Company
is entitled to 50% of profits generated by certain projects related to this
agreement.
In March 1998, the Company spun off Legacy, a newly-formed corporation which was
a wholly-owned subsidiary of the Company (the "Spin-off"). Legacy was organized
to create and realize value by identifying and making opportunistic real estate
investments which are not restricted by REIT tax laws or influenced by the
Company's objectives of increasing cash flows and maintaining certain leverage
ratios. Prior to the Spin-off, EDV transferred four notes receivable, a land
parcel, a leasehold interest in a parcel of land, an office building, a single
tenant building, and certain other assets to the Company for a total
consideration of approximately $38,112,000 for which the Company reduced the
note receivable from EDV. The Company contributed to Legacy, the above assets
from EDV, together with ten single tenant properties owned by the Company with a
book value of approximately $45,747,000, certain other net assets of
approximately $1,158,000, and a property held with a book value of $14,525,000,
in exchange for 23,412,580 common shares of Legacy, assumption of debt by Legacy
on the ten single tenant properties of approximately $33,878,000, and issuance
of a note payable from Legacy to the Company in the amount of $26,402,000.
The note payable to Legacy was repaid in April 1998.
The Spin-off took place through a dividend distribution to the Company's common
stockholders, of all Legacy common stock (23,412,580 shares) held by the
Company. The distribution consisted of one share of Legacy common stock for each
share of the Company's common stock held on the record date of March 2, 1998. No
gain was recognized by the Company for book purposes on the distribution of
$39,262,000. For tax purposes, the Company recognized a gain of $16,694,000 as
the distribution was a taxable event and the assets and liabilities were
transferred at fair market value. The fair market value of the distribution was
approximately $55,956,000 or $2.39 per share. Upon completion of the Spin-off,
Legacy ceased to be a wholly-owned subsidiary of the Company and began operating
as an independent public company.
The Company has elected to be taxed as a REIT 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
19
<PAGE> 20
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 sales (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. 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 March 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income $ 16,359 $ 10,310
Depreciation:
Buildings 3,916 1,981
Tenant improvements 150 88
From equity investments 48 3
Amortization (a):
Organization costs 4 1
Leasing commissions 61 49
Minority interest (b) 404 --
Preferred dividends (c) (3,051) --
Loan costs written off -- 75
(Gain) loss on sale of buildings:
Excel Realty Trust, Inc. 24 --
From equity investments (69) --
-------- --------
Funds from operations $ 17,846 $ 12,507
======== ========
Other Information:
Leasing commissions paid $ 204 $ 40
Tenant improvements paid 171 248
Building improvements paid
(Capitalized parking lots, roofs, etc.) 217 115
</TABLE>
(a) Only amortization of organizational costs are shown as amortization expense
in the Consolidated Statements of Income. Loan cost amortization and loan costs
written-off are classified as interest expense and leasing commission
amortization is classified as part of other operating expenses in the
Consolidated Statements of Income.
(b) These amounts relate to third party ERP units and other common stock
equivalents.
(c) These amounts relate to the Preferred B shares which are not convertible to
the Company's common stock.
ECONOMIC CONDITIONS
The majority of the Company's leases contain provisions deemed 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
20
<PAGE> 21
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 increase 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 types 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 may be deemed to be "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
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 Income from Real Property. Since substantially all of the
Company's income is derived from rental income 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 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. 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
21
<PAGE> 22
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.
Reliance on Major Tenants. As of March 31, 1998, the Company's two largest
tenants were Kmart Corporation and Wal-Mart Stores, Inc. whose scheduled ABR
accounted for approximately 11.1% and 9.5%, respectively, of the Company's total
scheduled ABR. 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.
Control by Directors and Executive Officers. As of March 31, 1998, directors and
executive officers of the Company beneficially owned approximately 10.9% of the
Company's common stock. Accordingly, such persons should continue to have
substantial influence over the Company and on the outcome of matters submitted
to the Company's stockholders for approval.
Year 2000. The Company currently uses Management Reports Inc. ("MRI") software
on a Novell local area network. The MRI software will require an upgrade to make
it year 2000 compliant, which the Company intends to install prior to December
31, 1999. The Company does not believe that additional costs associated with the
software upgrade and additional implementation and training costs will be
material to the Company's financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
22
<PAGE> 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated January 14, 1998, was filed with
the Commission regarding the Company's offering of 6,300,000
depositary shares each representing 1/10 of a share of 8 5/8% Series
B Cumulative Redeemable Preferred Stock.
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: May 13, 1998 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
23
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