<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: Commission File Number:
JUNE 30, 1998 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 August 13, 1998
- ---------------------------- ------------------------------
Common stock, $.01 par value 23,440,338
<PAGE> 2
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
INDEX
FORM 10-Q
----------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1998 (Unaudited)
December 31, 1997 ................................................................................ 3
Consolidated Statements of Income
Three Months Ended June 30, 1998 (Unaudited)
Three Months Ended June 30, 1997 (Unaudited)
Six Months Ended June 30, 1998 (Unaudited)
Six Months Ended June 30, 1997 (Unaudited)........................................................ 4
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1998 (Unaudited)
Six Months Ended June 30, 1997 (Unaudited)........................................................ 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 (Unaudited)
Six Months Ended June 30, 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........................................24
PART II. OTHER INFORMATION ....................................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...............................................24
Item 6. Exhibits and Reports on Form 8-K..................................................................24
</TABLE>
2
<PAGE> 3
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
------------ ------------
<S> <C> <C>
ASSETS
Real estate:
Land $ 319,839 $ 307,995
Buildings 619,738 617,523
Accumulated depreciation (37,444) (33,936)
------------ ------------
Net real estate 902,133 891,582
Cash 63,472 18,426
Escrow and other cash deposits 3,478 20,814
Accounts receivable, less allowance for bad debts of
$1,612 and $1,896 in 1998 and 1997, respectively 2,974 4,577
Notes receivable from affiliates 66,616 90,124
Notes receivable - other 30,975 27,953
Interest receivable 9,052 12,867
Loan acquisition costs 2,912 2,993
Other assets 5,711 6,861
------------ ------------
$ 1,087,323 $ 1,076,197
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 239,363 $ 243,664
Notes payable 66,398 168,894
Senior notes payable 75,000 75,000
Capital leases 27,229 26,850
Accounts payable and accrued liabilities 10,019 10,135
Deferred rental income 4,046 2,662
Other liabilities 4,690 4,490
------------ ------------
Total liabilities 426,745 531,695
------------ ------------
Minority interests in partnership 41,249 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,
23,432,223 and 20,999,634 shares issued and outstanding
in 1998 and 1997, respectively 234 210
Additional paid-in capital 661,260 507,866
Accumulated distributions in excess of net income (42,193) (5,606)
------------ ------------
Total stockholders' equity 619,329 502,516
------------ ------------
$ 1,087,323 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 26,009 $ 16,725 $ 52,634 $ 29,771
Expense reimbursements 5,607 2,160 10,852 3,758
Interest 4,200 3,671 9,410 7,200
Other 401 905 611 3,055
---------- ---------- ---------- ----------
Total revenue 36,217 23,461 73,507 43,784
---------- ---------- ---------- ----------
Operating expenses:
Interest 7,062 5,514 14,886 9,835
Depreciation and amortization 4,098 2,648 8,248 4,758
Property taxes 2,786 1,254 5,779 2,117
Repairs and maintenance 1,978 961 3,831 1,705
Other property expenses 1,572 819 3,200 1,625
General and administrative 1,912 1,297 3,614 2,347
Other 526 -- 879 119
---------- ---------- ---------- ----------
Total operating expenses 19,934 12,493 40,437 22,506
---------- ---------- ---------- ----------
Income before real estate sales, minority
interest, and other items 16,283 10,968 33,070 21,278
Minority interest (407) (70) (812) (70)
Gain on sale of real estate 309 293 286 293
Merger costs (707) -- (707) --
---------- ---------- ---------- ----------
Net income $ 15,478 $ 11,191 $ 31,837 $ 21,501
========== ========== ========== ==========
Basic net income per common share $ 0.46 $ 0.48 $ 0.98 $ 0.96
========== ========== ========== ==========
Diluted net income per common share $ 0.44 $ 0.47 $ 0.93 $ 0.92
========== ========== ========== ==========
</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>
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>
SIX MONTHS ENDED JUNE 30, 1998:
Balance at January 1, 1998 4,600,000 $ 46 20,999,634 $ 210 $ 507,866 $ (5,606) $ 502,516
Issuance of preferred stock 630,000 6 -- -- 157,494 -- 157,500
Preferred stock converted to
common stock (2,473,620) (24) 2,373,006 24 -- -- --
Issuance of common stock -- -- 59,583 -- 1,240 -- 1,240
Selling expenses -- -- -- -- (5,340) -- (5,340)
Net income -- -- -- -- -- 31,837 31,837
Distributions declared -- -- -- -- -- (68,424) (68,424)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 2,756,380 $ 28 23,432,223 $ 234 $ 661,260 $ (42,193) $ 619,329
========== ========== ========== ========== ========== ========== ==========
SIX MONTHS ENDED JUNE 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 -- -- 146,355 2 3,164 -- 3,166
Selling expenses -- -- -- -- (3,664) -- (3,664)
Net income -- -- -- -- -- 21,501 21,501
Distributions declared -- -- -- -- -- (18,284) (18,284)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 4,600,000 $ 46 18,377,444 $ 184 $ 438,683 $ (8,540) $ 430,373
========== ========== ========== ========== ========== ========== ==========
</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>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31,837 $ 21,501
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 8,240 4,743
(Income) loss from affiliates 3,363 (946)
Provision for bad debts 819 465
Minority interests in income of partnership 812 70
Amortized loan costs and leasing commissions 573 618
Foreign currency loss 329 107
Gain on sale of real estate (286) (293)
Loan costs written off -- 664
Change in accounts receivable 785 401
Change in other assets 1,219 (4,034)
Change in accounts payable 221 454
Change in other liabilities 1,468 988
--------- ---------
Net cash provided by operating activities 49,380 24,738
--------- ---------
Cash flows from investing activities:
Real estate acquisitions and building improvements (78,439) (60,060)
Principal payments on notes receivable 53,822 10,945
Advances for notes receivable (46,587) (25,297)
Escrow deposits (2,671) (431)
Proceeds from real estate sales 2,617 1,401
Other -- 355
--------- ---------
Net cash used in investing activities (71,258) (73,087)
--------- ---------
Cash flows from financing activities:
Principal payments of mortgages and notes payable (180,774) (102,737)
Issuance of preferred stock 157,500 --
Proceeds from notes payable 125,758 57,807
Distributions paid (29,160) (18,284)
Selling and offering costs (5,340) (3,664)
Minority interest distributions (1,733) --
Issuance of common stock 1,240 116,934
Loan costs paid (567) (1,191)
--------- ---------
Net cash provided by financing activities 66,924 48,865
--------- ---------
Net increase in cash 45,046 516
Cash at January 1 18,426 5,038
--------- ---------
Cash at June 30 $ 63,472 $ 5,554
========= =========
</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 June 30, 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 5).
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.
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 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 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. Prior to May
22, 1998, these percentage rents were recorded on the accrual basis over
the course of the year. On May 22, the Emerging Issues Task Force of the
Financial Accounting Standards Board ("EITF") reached a consensus decision
on Issue No. 98-9, "Accounting for Contingent Rent In Interim Financial
Periods" which provides that recognition of rental income in interim
periods must be deferred until the specified target that triggers the
contingent rental income is achieved. This change in accounting policy did
not have a significant effect on the accompanying financial statements.
Percentage rents 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 potential conversion of ERP limited partner units. All
prior period earnings per share amounts have been restated to comply with
SFAS No. 128 (Note 10).
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.
8
<PAGE> 9
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
2. BUSINESS COMBINATION:
In May 1998, the Company signed a merger agreement with New Plan Realty
Trust, a Massachusetts business trust, ("New Plan"), providing for the
merger of a wholly-owned subsidiary of the Company with and into New Plan,
with New Plan surviving as a wholly-owned subsidiary of the Company. The
merger is subject to certain closing conditions and shareholder approval
of both companies at special stockholders' meetings which are anticipated
to be held separately on September 25, 1998.
3. REAL ESTATE:
ACQUISITIONS
In the six months ended June 30, 1998, the Company acquired four shopping
centers located in California (2), Nevada, and Tennessee. The total cost
of these properties was approximately $79,283,000 of which the Company
assumed $2,024,000 of mortgage debt. In July 1998, the Company acquired an
additional ten properties for approximately $116,200,000 and assumed
approximately $42,000,000 of mortgage debt
with interest rate of 8.85% per annum.
In the six months ended June 30, 1997, the Company acquired ten shopping
centers in California, three shopping centers located in Georgia, Nevada
and North Carolina, and two buildings leased to single tenants, Winn Dixie
and Kmart, in Tennessee and Florida, respectively. Three of the properties
acquired in California are subject to master leases which were capitalized
(Note 7). The total cost of these fifteen properties was approximately
$130,001,000. The Company assumed mortgage debt of $14,363,000 and capital
leases of $26,656,000 in the above transactions.
SALES
In the six months ended June 30, 1998 and 1997, the Company sold two
single tenant properties for $2,617,000, and one single tenant property
for proceeds of $1,401,000 in each respective period. Gains of $286,000
and $293,000 were recognized on the sales in 1998 and 1997, respectively.
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.
9
<PAGE> 10
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
4. NOTES RECEIVABLE:
The Company had the following notes receivable at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Notes from EDV, interest at 14% per annum, collateralized
by EDV assets. Due on demand $ 66,616 $ 90,124
Notes from development companies, interest from 11% to 12%
per annum. Maturity dates vary upon the completion of
certain properties 18,970 15,599
Note from a development company, interest at 25% per annum,
payable in Canadian dollars. Due 2003 10,906 11,235
Other 1,099 1,119
---------- ----------
Total notes receivable $ 97,591 $ 118,077
========== ==========
</TABLE>
Interest and principal payments from EDV are primarily received upon the
completion of development projects. Interest receivable from EDV was
$1,355,000 and $7,628,000 at June 30, 1998 and December 31, 1997,
respectively.
The Company has made loans totaling $16,050,000 Canadian dollars
($10,906,000 U.S. dollars at June 30, 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
$18,470,000 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.
5. 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. Had the Company converted its notes and related
interest receivable from ERP on January 1, 1997, net income for the six
months ended June 30, 1997 would have been decreased by $243,000 and net
income per share would have decreased by $0.01 for both the basic and
diluted calculations.
10
<PAGE> 11
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
5. INVESTMENTS, CONTINUED:
Properties held by ERP have been contributed to ERP in exchange for
limited partnership units (which may be converted to Company common shares
at stipulated prices) and cash. At June 30, 1998, there were 2,828,790
limited partner units outstanding of which the Company owned 1,152,121
units. Quarterly distributions approximate $885,000 for limited partner
units held by third parties at June 30, 1998.
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>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEETS
Notes receivable from developers, interest at 10% to 20% $ 55,100 $ 79,400
Net real estate and other assets 13,300 25,500
------------ ------------
Total assets $ 68,400 $ 104,900
============ ============
Notes payable to Excel Realty Trust, Inc. $ 66,600 $ 90,100
Other liabilities 1,600 11,200
------------ ------------
Total liabilities 68,200 101,300
Total stockholders' equity 200 3,600
------------ ------------
Total liabilities and stockholders' equity $ 68,400 $ 104,900
============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Total revenues $ 2,700 $ 3,700 $ 6,400 $ 7,200
Interest expense to Excel Realty Trust, Inc. (2,500) (2,100) (5,700) (3,700)
Fees paid to Excel Realty Trust, Inc. -- (100) (2,900) (2,000)
Other expenses (300) (700) (1,200) (900)
---------- ---------- ---------- ----------
Net income (loss) $ (100) $ 800 $ (3,400) $ 600
========== ========== ========== ==========
</TABLE>
EDV's receivables include loans of approximately $23,835,000 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.
11
<PAGE> 12
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
5. INVESTMENTS, CONTINUED:
EXCEL LEGACY CORPORATION
In March 1998, the Company spun off Excel Legacy Corporation (" Legacy"),
a newly-formed corporation which was a wholly-owned subsidiary of the
Company (the "Spin-off"). 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 its 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 $16,377,000 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.
12
<PAGE> 13
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
6. MORTGAGES PAYABLE:
The Company had the following mortgages payable at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Mortgage notes at 3.1% to 10%, payable in installments
through 2021 (monthly payments at June 30, 1998 of $2,087):
Insurance companies $ 117,879 $ 125,377
Banks 107,391 77,467
Bonds 14,093 40,820
------------ ------------
Total mortgages payable $ 239,363 $ 243,664
============ ============
</TABLE>
The principal payments required to be made on mortgages payable are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998, remaining six months $ 11,088
1999 49,911
2000 21,634
2001 22,364
2002 5,131
Thereafter 129,235
---------
$ 239,363
=========
</TABLE>
Two mortgage notes totaling $8,217,000 were repaid in July and August
1998. These notes carried interest rates of 9.75% and 8.75%.
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 is
thirty-four years and the monthly lease payments are approximately
$204,000. In addition, the Company has purchased the option to acquire fee
title to the Master Leased Centers, exercisable at a fixed price 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.
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 Senior Notes is payable semi-annually on
April 15 and October 15 of each year.
13
<PAGE> 14
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
9. NOTES PAYABLE:
The Company had the following notes payable at June 30, 1998 and December
31, 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Unsecured credit agreement of $250,000, interest
at LIBOR +1.20% (6.9% at June 30, 1998) $ 66,000 $ 148,572
Unsecured loan payable to a financial institution, interest
at 8.75% -- 19,926
Other 398 396
------------ ------------
Total notes payable $ 66,398 $ 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. The Company's senior unsecured credit is currently rated Baa3 and
BBB- from Moody's Investor Service and Standard and Poor's Corporation,
respectively. 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.
10. CAPITAL STOCK:
EQUITY OFFERINGS
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, 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
$24.13 (after giving effect to the spin-off of Legacy). 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.
14
<PAGE> 15
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
10. CAPITAL STOCK, CONTINUED:
DISTRIBUTIONS
In April and January, quarterly distributions of $0.50 per share in 1998
and $0.46 per share in 1997 were paid to common stockholders. In April
1998, January 1998 and April 1997, $0.53, $0.53 and $0.32 ($2.125 per
annum) was paid to the holders of the Preferred A Shares, respectively. In
April 1998, $0.48 was paid to the holders of the Preferred B Shares. For
both the six months ended June 30, 1998 and 1997, none of the cash
distributions received by common stockholders were considered to be a
return of capital for tax purposes. In March 1998, the Company distributed
to the common stockholders, 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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EPS
NUMERATOR:
Net income $ 15,478 $ 11,191 $ 31,837 $ 21,501
Preferred dividends (4,665) (2,444) (9,737) (3,910)
---------- ---------- ---------- ----------
$ 10,813 $ 8,747 $ 22,100 $ 17,591
========== ========== ========== ==========
DENOMINATOR:
Weighted average of common
shares outstanding 23,429 18,348 22,613 18,306
========== ========== ========== ==========
EARNINGS PER SHARE: $ 0.46 $ 0.48 $ 0.98 $ 0.96
========== ========== ========== ==========
DILUTED EPS
NUMERATOR:
Net income $ 15,478 $ 11,191 $ 31,837 $ 21,501
Preferred dividends (4,665) (2,444) (9,737) (3,910)
Adjustments for ERP third party units 408 70 812 (145)
---------- ---------- ---------- ----------
Net income available to common shares $ 11,221 $ 8,817 $ 22,912 $ 17,446
========== ========== ========== ==========
DENOMINATOR:
Weighted average of common
shares outstanding 23,429 18,348 22,613 18,306
Effect of diluted securities:
Common stock options and warrants 350 218 350 218
ERP third party units 1,773 391 1,772 391
---------- ---------- ---------- ----------
25,552 18,957 24,735 18,915
========== ========== ========== ==========
EARNINGS PER SHARE: $ 0.44 $ 0.47 $ 0.93 $ 0.92
========== ========== ========== ==========
</TABLE>
15
<PAGE> 16
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest during the six months ended June 30, 1998
and 1997 were approximately $14,576,000 and $7,401,000, respectively.
State income taxes of approximately $20,000 and $78,000 were paid in 1998
and 1997, respectively.
In 1998, the Company spun-off certain assets to Legacy in the form of a
dividend and note receivable as described in Note 5. 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. In the six months ended
June 30, 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. Also in 1998, the Company assumed
$2,024,000 in mortgages payable in conjunction with a shopping center
acquisition.
In the six months ended June 30, 1997, the Company acquired real estate of
$72,546,000 without the use of cash by issuing $28,424,000 of ERP limited
partner units, assuming $26,656,000 of capitalized leases and $14,363,000
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 receivables 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.
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 owned at June 30, 1998 and subject to noncancelable operating
leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998, remaining six months $ 50,746
1999 93,513
2000 86,816
2001 80,224
2002 71,478
Thereafter 596,452
</TABLE>
16
<PAGE> 17
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED, CONTINUED
----------
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 June 30, 1998 to the three months ended
June 30, 1997.
Rental revenue and expense reimbursements increased $12.7 million, or 67% to
$31.6 million in the three months ended June 30, 1998 from $18.9 million in the
three months ended June 30, 1997. The increase is primarily due to the Company's
30 properties acquired in 1997 that accounted for approximately $12.1 million
more revenues during the three month period in 1998 than in 1997. Additionally,
four shopping centers acquired in 1998 accounted for $1.3 million of revenues in
1998. The increase is also partially attributable to a net increase in rents
from its existing properties. In March 1998, the Company transferred certain
assets to Excel Legacy Corporation ("Legacy") which was spun off as a separate
company. Included in these assets were ten single tenant properties that
accounted for $1.2 million in revenues in the three months ended June 30, 1997.
The Company also sold seven single tenant properties in 1998 and 1997.
On May 22, 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") reached a consensus decision on Issue No. 98-9,
"Accounting for Contingent Rent In Interim Financial Periods" which provides
that recognition of rental income in interim periods must be deferred until the
specified target that triggers the contingent rental income is achieved. The
Company has historically recognized rental income based on a percentage of
tenant sales ratably over the course of the year. The EITF consensus is
effective May 22, 1998 and requires the Company to defer recognition of this
income until the date that the tenant's sales exceed the breakpoint set forth in
the lease agreement. Net income was not significantly affected in the quarter
ended June 30, 1998 by this consensus. The Company believes the impact of this
consensus will be to decrease percentage rentals in the year ending December 31,
1998 by approximately $0.2 million. Annual percentage rents after the current
year should not change significantly from past percentage rentals. The amount of
percentage rentals recognized in each quarter of subsequent fiscal years will
differ from historical experience.
Interest income increased $0.5 million, or 14% to $4.2 million in 1998 from $3.7
million in 1997. This increase is primarily related to additional notes
receivable issued during the period. The Company's outstanding notes receivable
were $97.6 million at June 30, 1998 compared to $74.4 million at June 30, 1997,
an increase of $23.2 million or 31%. This increase includes a net increase in
loans of $5.5 million made to ERT Development Corporation ("EDV") to facilitate
the development of various development projects. Also, $17.3 million in loans
have been made to certain developers since June 30, 1997.
Other income in the three months ended June 30, 1998 was $0.4 million compared
to $0.9 million in 1997. Other income in 1997 primarily related to the Company's
equity interest in EDV's net income. In the three
17
<PAGE> 18
months ended June 30, 1998, EDV incurred a loss of $0.1 million and the
Company's equity interest in EDV was included in other expenses.
Depreciation and amortization expenses increased $1.4 million or 54% in 1998
when compared to the three months ended June 30, 1997. This increase primarily
related to the acquisition of buildings which increased from $463.4 million at
June 30, 1997 to $619.7 million at June 30, 1998.
Interest expense increased $1.6 million or 29% to $7.1 million in the three
months ended June 30, 1998 from $5.5 million in the three months ended June 30,
1997. This increase is primarily related to an increase in overall debt levels
from the Company's growth. Debt from mortgages, notes and capital leases were
$408.0 million at June 30, 1998 compared to $286.4 million at June 30, 1997. Of
the debt at June 30, 1998, $58.0 million related to a borrowing from the
Company's credit facility on June 30, 1998 for an acquisition of a property
portfolio made on July 1, 1998.
Property taxes, repairs and maintenance, and other property expenses totaled
$6.3 million in 1998 compared to $3.0 million in 1997. This increase relates
primarily to property acquisitions made in 1997 and 1998. General and
administrative expenses increased by $0.6 million in 1998 from 1997 which was a
slight decrease as a percentage of total revenues from 5.5% to 5.3%. On March
19, 1998, the EITF reached a consensus decision on Issue No. 97-11, "Accounting
for Internal Costs Relating to Real Estate Property Acquisitions" which provides
that internal costs of identifying and acquiring operating property incurred
subsequent to March 19, 1998 should be expensed. The Company has historically
capitalized the direct internal costs of identifying and acquiring operating
properties and, accordingly, realized an increase in general and administrative
expense for the period of $0.1 million. The Company expects that this level of
acquisition costs will continue in the near future.
Other expenses were $0.5 million in 1998 and related to a foreign currency loss
of $0.4 million from a note receivable payable in Canadian dollars and $0.1
million related to the equity loss in EDV. In 1997, there was a currency gain of
$12,000 and the equity interest in EDV resulted in a $0.6 million gain. Both
items were included in other income in 1997.
Minority interest was $0.4 million in 1998 compared to $0.1 million in 1997.
This increase relates to an increase in the number of properties owned by Excel
Realty Partners, L.P. ("ERP"). In 1997, eight properties were contributed to ERP
from third parties.
Merger costs totaled $0.7 million in the three months ended June 30, 1998. In
May 1998, the Company signed a merger agreement with New Plan Realty Trust, a
Massachusetts business trust ("New Plan"), providing for the merger of a
wholly-owned subsidiary of the Company with and into New Plan, with New Plan
surviving as a wholly-owned subsidiary of the Company. The merger is subject to
certain closing conditions and shareholder approval of both companies at special
meetings of stockholders which are anticipated to be held on September 25, 1998.
Net income increased $4.3 million, or 38% to $15.5 million in the three months
ended June 30, 1998 from $11.2 million for the three months ended June 30, 1997.
Distributions per share increased to $0.50 for the three months ended June 30,
1998 from $0.46 for the same period in 1997.
Comparison of the six months ended June 30, 1998 to the six months ended June
30, 1997.
Rental revenue and expense reimbursements increased $30.0 million, or 90% to
$63.5 million in the six months ended June 30, 1998 from $33.5 million in the
six months ended June 30, 1997. The increase is primarily due to the Company's
30 properties acquired in 1997 that accounted for approximately $25.2 million
more revenues during the six month period 1998 than in 1997. The 1998 operating
results also reflect the consolidation ERP as of April 1, 1997. Had ERP been
consolidated for the full six months in 1997, rental revenues and expense
reimbursements would have increased by $2.8 million. Additionally, four shopping
centers acquired in 1998 accounted for $2.5 million of revenues in the 1998
period. The increase also relates to a net increase in rents from its existing
properties. In March 1998, the Company transferred certain assets to Excel
Legacy Corporation ("Legacy") which was spun off as a separate company. Included
in these assets were ten single tenant properties that accounted for $1.2
million more revenues in 1997 than in 1998. The
18
<PAGE> 19
Company also sold certain single tenant properties in 1998 and 1997.
Interest income increased $2.2 million, or 31% to $9.4 million in 1998 from $7.2
million in 1997. This increase is primarily related to additional notes
receivable issued during the period.
Other income in the six months ended June 30, 1998 was $0.6 million compared to
$3.1 million in 1997. In 1998, the Company received $2.9 million in fees from
EDV and recognized a $3.4 million loss in EDV's operations. The net $0.5 million
loss is included in other expenses. In 1997, the Company received $2.0 of
development fees from EDV and $0.6 million in income from EDV's operations. This
$2.6 million of income was included in other income in 1997. Additionally in
1997, the Company recognized $0.4 million related to its equity interest in ERP
before it was consolidated with the Company.
Depreciation and amortization expenses increased $3.5 million or 73% in 1998
when compared to the six months ended June 30, 1997. This increase primarily
related to the acquisition of buildings in 1997 and 1998.
Interest expense increased $5.1 million or 52% to $14.9 million in the six
months ended June 30, 1998 from $9.8 million in the six months ended June 30,
1997. This increase is primarily related to additional debt related to property
acquisitions, the consolidation of ERP and the issuance of $75.0 million of
senior notes in October 1997.
Property taxes, repairs and maintenance, and other property expenses totaled
$12.8 million in 1998 compared to $5.4 million in 1997. This increase relates
primarily to property acquisitions made in 1997 and 1998 in addition to the
consolidation of ERP on April 1, 1997. General and administrative expenses
increased $1.3 million in 1998 from 1997 which was a decrease as a percentage of
total revenues from 5.4% to 4.9%. This decrease 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. The Company has expensed all internal costs of
identifying and acquiring operating properties subsequent to March 19, 1998
which approximated $0.1 million during the period.
Other expenses were $0.9 million and related to a foreign currency loss of $0.4
million from a note receivable in Canadian dollars and $0.5 million related to
the equity loss in EDV (net of fees received from EDV). In 1997, there was a
currency loss of $0.1 million. The equity interest in EDV was a gain in 1997 and
included in other income.
Minority interest was $0.8 million in 1998 compared to $0.1 million in 1997.
This increase relates to an increase in the number of properties owned by ERP.
In 1997, eight properties were contributed to ERP from third parties. Merger
costs were $0.7 million in the six months ended June 30, 1998.
Net income increased $10.3 million, or 48% to $31.8 million in the six months
ended June 30, 1998 from $21.5 million for the six months ended June 30, 1997.
Distributions per share were $1.00 for the six months ended June 30, 1998
compared to $0.92 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
19
<PAGE> 20
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 May 1998, the Company signed a merger agreement with New Plan. The merger is
subject to certain closing conditions and shareholder approval of both companies
at special meetings of stockholders which are anticipated to be held on
September 25, 1998. There can be no assurance that the merger will be approved
or what effect, if any, the merger will have on the Company's financing
strategies.
In April 1997, the Company filed with the Securities and Exchange 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 (which has been adjusted for the spinoff of
Legacy) 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 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.
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%. 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 twelve 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 in March 2000. The outstanding balance at
August 13, 1998 was $97.5 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 a
$100 million construction loan related to a retail development project in
Orlando, Florida.
In September 1997, the Company established $25.7 million in credit facilities to
certain developers. The total outstanding amounts on the credit facilities of
$18.5 million at June 30, 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 $5.0 million 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.
20
<PAGE> 21
In March 1998, the Company spun off Legacy, a newly-formed corporation which was
a wholly-owned subsidiary of the Company (the "Spin-off"). 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 $16,377,000 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 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 June 30, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income $ 15,478 $ 11,191
Depreciation:
Buildings 3,766 2,510
Tenant improvements 242 89
From equity investments 168 (116)
Amortization (a):
Organization costs 4 3
Leasing commissions 78 51
Minority interest (b) 407 --
Preferred dividends (c) (3,396) --
Loan costs written off -- 589
Merger costs 707 --
Gain on sale of buildings: (309) (293)
---------- ----------
Funds from operations $ 17,145 $ 14,024
========== ==========
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
Other Information:
Leasing commissions paid $ 246 $ 108
Tenant improvements paid 65 128
Building improvements paid
(Capitalized parking lots, roofs, etc.) 20 144
</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
into 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 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
22
<PAGE> 23
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
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 June 30, 1998, the Company's two largest
tenants were Kmart Corporation and Wal-Mart Stores, Inc. whose scheduled ABR
accounted for approximately 11.0% and 6.7%, 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 June 30, 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.
23
<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 28, 1998.
(b) Not applicable
(c) The matters voted upon at the meeting and the votes cast with
respect thereto were as follows:
<TABLE>
<CAPTION>
Broker
For Withheld Abstentions Non-votes
<S> <C> <C> <C> <C>
Election of directors:
Richard B. Muir 19,603,169 59,270 -- --
John H. Wilmont 19,603,308 59,131 -- --
Approval of
Employee Plan: 14,123,005 1,352,127 123,452 4,063,854
</TABLE>
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 March 31, 1998 was filed with
the Commission regarding the spin-off of Excel Legacy Corporation.
A Current Report on Form 8-K, dated May 14, 1998, was filed with the
Commission regarding the Agreement and Plan of Merger between the
Company and New Plan Realty Trust.
A Current Report on Form 8-K, dated May 26, 1998 was filed with the
Commission regarding the Company's Stockholder Rights Plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 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
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 63,472,000
<SECURITIES> 0
<RECEIVABLES> 4,586,000
<ALLOWANCES> (1,612,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 939,577,000
<DEPRECIATION> (37,444,000)
<TOTAL-ASSETS> 1,087,323,000
<CURRENT-LIABILITIES> 0
<BONDS> 407,990,000
0
28,000
<COMMON> 234,000
<OTHER-SE> 619,067,000
<TOTAL-LIABILITY-AND-EQUITY> 1,087,323,000
<SALES> 0
<TOTAL-REVENUES> 36,217,000
<CGS> 0
<TOTAL-COSTS> 19,934,000
<OTHER-EXPENSES> 1,114,000
<LOSS-PROVISION> 819,000
<INTEREST-EXPENSE> 7,062,000
<INCOME-PRETAX> 15,478,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,478,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,478,000
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.44
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