<PAGE> 1
As filed with the Securities and Exchange Commission on December 22, 1997
File No. 333-29475
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------
UNITED INVESTORS REALTY TRUST
(Exact name of Registrant as Specified in its Governing Instruments)
------------------------------
5847 SAN FELIPE, SUITE 850, HOUSTON, TEXAS 77057
(713) 781-2860
(Address of Principal Executive Offices)
------------------------------
LEWIS H. SANDLER, CHIEF EXECUTIVE OFFICER
UNITED INVESTORS REALTY TRUST
5847 SAN FELIPE, SUITE 850
HOUSTON, TEXAS 77057
(713) 781-2860
(Name and Address of Agent for Service)
------------------------------
Copies To:
Bryan L. Goolsby
Gina E. Betts Bruce A. Cheatham
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Winstead Sechrest & Minick P.C.
2001 Ross Avenue, Suite 3000 1201 Elm Street, Suite 5400
Dallas, Texas 75201 Dallas, Texas 75270
(214) 849-5500 (214) 754-5400
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Offering Registration
Being Registered Registered(1) Per Share(2) Price(2) Fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest,
no par value 8,625,000 shares(1) $10.75 $92,718,750 $27,352(3)
============================================================================================================
</TABLE>
(1) Includes 1,125,000 Common Shares of Beneficial Interest which may be
purchased by the Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457(o).
(3) $12,285 of which was paid in connection with the initial filing.
<PAGE> 2
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1997
7,500,000 SHARES
United INVESTORS REALTY TRUST
COMMON SHARES OF BENEFICIAL INTEREST
-------------------------
United Investors Realty Trust, a Texas real estate investment trust
(the "Company"), has been operating since 1989 as a private real estate
investment trust engaged in the acquisition, ownership, management, leasing and
redevelopment of community shopping centers in the Sunbelt region of the United
States. Since its inception, the Company has acquired and improved eight
community shopping centers located in Texas, Tennessee and Arizona
(collectively, the "Original Properties"). The Original Properties contain an
aggregate of 753,790 square feet of gross leasable area ("GLA") and were 95.0%
leased as of September 30, 1997.
The Company has under contract or option to purchase eight community
shopping centers located in Texas, Florida and Arizona (collectively, the
"Acquisition Properties"). The Acquisition Properties contain an aggregate of
988,735 square feet of GLA. As of September 30, 1997, the Acquisition
Properties were 97.4% leased. The Original Properties and Acquisition
Properties are sometimes hereinafter referred to as the "Properties." It is
anticipated that seven of the Acquisition Properties will be acquired prior to
or in conjunction with completion of the Offering (as defined below), and the
remaining Acquisition Property will be acquired shortly after completion of the
Offering. A portion of the net proceeds from the Offering is being used to
retire indebtedness incurred by the Company to finance a portion of the
purchase price of the Acquisition Properties. See "Use of Proceeds." Upon
consummation of the purchase of the Acquisition Properties, the Company will
own 16 Properties containing approximately 1,742,525 square feet of GLA. The
Company elected to be treated as a real estate investment trust ("REIT") for
federal tax purposes for the taxable year ended 1989 and for each subsequent
year and is advised by an affiliate, FCA Corp (the "Investment Manager"). See
"Investment Manager."
All of the common shares of beneficial interest, no par value per
share (the "Common Shares"), of the Company offered hereby (the "Offering") are
being sold by the Company. It is currently anticipated that the initial public
offering price per share will be between $ and $ . See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Prior to the Offering, there has been no public market for the Common
Shares. The Company has applied for listing of the Common Shares on the New
York Stock Exchange. The Company intends to pay quarterly cash distributions
to its shareholders. See "Distribution Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES INCLUDING:
o The Company is solely reliant on the Investment Manager and is
incapable of operating without the Investment Manager because the
Company utilizes the Investment Manager's personnel to acquire and
manage all of its Properties.
o A conflict of interest with the Investment Manager may exist.
o The Company's financial condition could be adversely affected if the
Company fails to manage rapid growth and integrate operations.
o Immediate dilution in the net tangible book value of Common Shares
purchased in the Offering will occur in the amount of $ per share.
o The Properties are currently limited to the Sunbelt region of the
United States.
o The liquidation value of the Company may be less than the value of the
Company as a going concern.
o The Board of Trust Managers has the ability to change the investment,
financing and other policies of the Company at any time without
shareholder approval.
o Limiting ownership to 9.8% of the outstanding Common Shares and
certain other provisions contained in the Company's organizational
documents may have an anti-takeover effect.
o There is no limitation on the amount or type of indebtedness that may
be incurred by the Company.
o There is no prior public market for the Common Shares.
o The Company will be taxed as a corporation if it fails to continue to
qualify as a REIT.
<PAGE> 4
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================
Price to Public Underwriting Discount(1) Proceeds to Company(2)
<S> <C> <C> <C> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
====================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering estimated at $ payable by
the Company.
(3) The Company has granted the Underwriters an option to purchase up to
1,125,000 additional Common Shares at the Price to Public, less the
Underwriting Discount, for the purpose of covering over-allotments, if any. If
the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------------
The Common Shares are offered by the Underwriters when, as and if delivered to
and accepted by them, subject to their right to withdraw, cancel or reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the Common Shares will be
made against payment on or about , 1998, at the offices of Morgan
Keegan & Company, Inc. in Memphis, Tennessee or through the facilities of The
Depository Trust Company.
MORGAN KEEGAN & COMPANY, INC. SOUTHWEST SECURITIES
The date of this Prospectus is , 1998.
2
<PAGE> 5
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR ON THE STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
3
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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Page
No.
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PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . 6
The Company . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 7
Business Objectives and Strategies . . . . . . . . . . . . 8
Industry . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Properties . . . . . . . . . . . . . . . . . . . . . . 10
Distributions . . . . . . . . . . . . . . . . . . . . . . . 13
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . 13
The Offering . . . . . . . . . . . . . . . . . . . . . . . 13
Summary Financial Data . . . . . . . . . . . . . . . . . . . 14
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Sole Reliance on Investment Manager . . . . . . . . . . . . 17
Conflicts of Interest . . . . . . . . . . . . . . . . . . 17
Failure to Manage Rapid Growth
and Integrate Operations;
Acquisition of Additional
Properties . . . . . . . . . . . . . . . . . . . . . . 17
Immediate and Substantial Dilution . . . . . . . . . . . . 17
Limited Geographic Diversification
of the Portfolio . . . . . . . . . . . . . . . . . . . . 17
Limitations on Acquisition and
Change in Control . . . . . . . . . . . . . . . . . . . 17
Liquidation Value of The Company May Be Less
Than Value as a Going Concern . . . . . . . . . . . . . 18
Changes in Investment and Financing
Policies . . . . . . . . . . . . . . . . . . . . . . . 18
Ownership Limit; Anti-Takeover Effect . . . . . . . . . . . 18
No Limitation in Organizational
Documents on the Incurrence of
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Adverse Consequences of Failure
to Qualify as a REIT . . . . . . . . . . . . . . . . 18
Absence of Prior Public Market
for Common Shares . . . . . . . . . . . . . . . . . . . 19
Risks Associated with Development
and Construction . . . . . . . . . . . . . . . . . . . 19
Real Estate Investment Considerations . . . . . . . . . . . 19
Competition . . . . . . . . . . . . . . . . . . . . . . . . 20
Adverse Effect of Increase In Market Interest
Rate on Financial Position and Common Share Price . . 20
Increased Leverage May Result in Loss of
Properties in the Event of a Foreclosure . . . . . . 21
Inability to Acquire Additional Properties;
Acquisition Properties May Not Perform
As Expected . . . . . . . . . . . . . . . . . . . . . 21
Environmental Matters . . . . . . . . . . . . . . . . . . . 21
Uninsured Loss and Condemnation . . . . . . . . . . . . . 21
Shares Available for Future Sale . . . . . . . . . . . . . 22
Investors Subject to ERISA . . . . . . . . . . . . . . . . 22
Forward Looking Information . . . . . . . . . . . . . . . . 22
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . 22
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No.
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<S> <C>
DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . . . . . 23
General . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Dividend Reinvestment Plan . . . . . . . . . . . . . . . . 25
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 26
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SELECTED PRO FORMA AND HISTORICAL
FINANCIAL AND PROPERTIES
INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 28
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . 30
Overview . . . . . . . . . . . . . . . . . . . . . . . . . 30
Results of Operations . . . . . . . . . . . . . . . . . . . 30
Liquidity and Capital Resources . . . . . . . . . . . . . . 32
STRATEGY FOR FUTURE GROWTH . . . . . . . . . . . . . . . . . . . 35
Growth Strategy . . . . . . . . . . . . . . . . . . . . . . 35
Operating Strategy . . . . . . . . . . . . . . . . . . . . . 36
Financing . . . . . . . . . . . . . . . . . . . . . . . . . 37
BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . . . 38
Business . . . . . . . . . . . . . . . . . . . . . . . . . 38
Management and Leasing . . . . . . . . . . . . . . . . . . 39
The Properties . . . . . . . . . . . . . . . . . . . . . . 39
Major Tenants . . . . . . . . . . . . . . . . . . . . . . . 43
National, Regional and Local Tenant Summary . . . . . . . . 44
Additional Information Concerning Certain
Properties . . . . . . . . . . . . . . . . . . . . . . . 44
Additional Information Concerning the
Acquisition Properties . . . . . . . . . . . . . . . . . 51
Leases Expirations . . . . . . . . . . . . . . . . . . . . . 63
Tenant Delinquencies and Bankruptcies . . . . . . . . . . . 63
Mortgage Indebtedness . . . . . . . . . . . . . . . . . . . 63
Rental Revenues . . . . . . . . . . . . . . . . . . . . . . 64
Capital Expenditures . . . . . . . . . . . . . . . . . . . . 65
Competition . . . . . . . . . . . . . . . . . . . . . . . . 65
Employees . . . . . . . . . . . . . . . . . . . . . . . . . 65
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 65
Regulations and Insurance . . . . . . . . . . . . . . . . . 65
Environmental Matters . . . . . . . . . . . . . . . . . . . 66
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Investment Policies . . . . . . . . . . . . . . . . . . . 67
Financing Policies . . . . . . . . . . . . . . . . . . . . . 67
Affiliate Transaction Policy . . . . . . . . . . . . . . . . 68
Certain Other Policies . . . . . . . . . . . . . . . . . . . 68
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Trust Managers and Officers . . . . . . . . . . . . . . . . 68
Committees of the Board of Trust Managers . . . . . . . . . 70
Compensation of Trust Managers . . . . . . . . . . . . . . . 71
Executive Compensation . . . . . . . . . . . . . . . . . . . 71
Advisory Board . . . . . . . . . . . . . . . . . . . . . . . 73
Share Incentive Plan. . . . . . . . . . . . . . . . . . . . 74
Indemnification Agreements . . . . . . . . . . . . . . . . . 74
Limitation of Liability and Indemnification . . . . . . . . 75
CERTAIN RELATIONSHIPS AND TRANSACTIONS . . . . . . . . . . . . . 75
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . 77
</TABLE>
4
<PAGE> 7
<TABLE>
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No.
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DESCRIPTION OF SHARES OF BENEFICIAL
INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . 78
General . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Restrictions on Transfer . . . . . . . . . . . . . . . . . 78
Preemptive Rights and Cumulative Voting . . . . . . . . . . 79
Share Distributions . . . . . . . . . . . . . . . . . . . . 79
Redemption of Company Shares . . . . . . . . . . . . . . . . 79
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . 80
CERTAIN PROVISIONS OF THE TEXAS REIT
ACT AND OF THE COMPANY'S CHARTER AND BYLAWS . . . . . . . 80
Board of Trust Managers . . . . . . . . . . . . . . . . . . 80
Business Combinations . . . . . . . . . . . . . . . . . . . 80
Shareholder Liability . . . . . . . . . . . . . . . . . . . 81
Trust Manager Liability . . . . . . . . . . . . . . . . . . 82
Special Shareholder Meetings . . . . . . . . . . . . . . . . 82
Termination of the Company . . . . . . . . . . . . . . . . . 82
Amendment of Charter and Bylaws . . . . . . . . . . . . . . 82
SHARES AVAILABLE FOR FUTURE SALE . . . . . . . . . . . . . . . . 82
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . 83
General . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Requirements for Qualification as a Real Estate
Investment Trust . . . . . . . . . . . . . . . . . . . . 84
Federal Taxation of the Company--Specific
Items . . . . . . . . . . . . . . . . . . . . . . . . . 88
Failure to Qualify
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Taxation of Shareholders . . . . . . . . . . . . . . . . . . 88
Disclosure Regarding Dividend
Reinvestment Plan . . . . . . . . . . . . . . . . . . . 89
Taxation of Tax-Exempt Shareholders . . . . . . . . . . . . 89
Taxation of Foreign Shareholders . . . . . . . . . . . . . . 90
Other Taxation . . . . . . . . . . . . . . . . . . . . . . . 91
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . 91
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . 93
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 94
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . 95
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . F-1
SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
5
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
description and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. Capitalized and certain other terms
used herein shall have the meanings assigned to them in the Glossary which
begins on page 96. Except as otherwise indicated, all information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. All references to the Company shall include its wholly-owned
subsidiaries.
THE COMPANY
United Investors Realty Trust (the "Company") has been operating since
1989 as a private REIT engaged in the acquisition, ownership, management,
leasing and redevelopment of community shopping centers in the "Sunbelt" region
of the United States. The Company focuses on purchasing properties anchored by
major retail tenants located in this economically favorable region. Management
believes that its best opportunities for growth will come from focusing on
acquiring single properties and small portfolios. The Company believes its
primary competitors for these properties are private individuals and groups
that will not have the resources of a public REIT. It is also management's
belief that the Company's operating flexibility provides it with an advantage
in acquiring these properties relative to its larger, public competitors.
In 1997, FCA Corp (the "Investment Manager") hired Lewis Sandler as the
Company's President and CEO, and Daniel M. Jones, III as CFO, and provided
additional resources to accelerate the Company's growth plans. As of December
15, 1997, the Company had entered into contracts or options to acquire eight
community shopping centers (the "Acquisition Properties") located in Texas,
Florida and Arizona containing approximately 988,735 square feet of GLA. The
acquisitions represent a 131% increase in GLA over the 753,790 square feet
contained in the Company's existing properties. While its association with the
Investment Manager provides the Company with professional resources normally
unavailable to a Company its size, the Company is reliant on the Investment
Manager to perform normal operating activities and conflicts between the
Investment Manager and the Company's interests may arise.
The Company currently owns or controls eight community shopping center
properties located in Texas, Tennessee and Arizona (collectively, the "Original
Properties" and, collectively with the Acquisition Properties, the
"Properties"). Upon completion of the acquisition of these properties, the
Company will have 16 properties with an aggregate GLA of approximately
1,742,525 square feet. The Properties are strategically located in areas
intended to provide busy working families with the opportunity to do most of
their shopping between work and home. The Properties range in size from
approximately 29,000 square feet to approximately 316,000 square feet, and are
anchored primarily by national and regional supermarkets and retailers who
offer everyday necessities to their neighborhood communities. Any future
property acquisitions by the Company are expected to be in established
neighborhoods in medium to large-sized metropolitan communities, where
potential future increases in rental and occupancy rates are anticipated to be
realized as a result of better than average population and employment growth.
The Company seeks to maximize growth in Funds From Operations and Cash
Available for Distribution to shareholders through effective management,
operation and acquisition of community shopping centers. The Company currently
follows five general investment policies to achieve its objectives: (i) the
Company seeks to acquire real estate assets for long-term investment and income
applying selective criteria and employing the most advantageous sources of
capital alternatives; (ii) the Company intends to aggressively seek
acquisitions, including properties that it can renovate and/or expand, and
maintain and intensively manage a portfolio of high quality and well-located
properties with a majority of the space already leased; (iii) the Company
intends to focus its acquisition efforts on communities in which it already has
properties or in areas where the Company can acquire several properties
concurrently, in order to obtain economies of scale in the use of local
personnel, advertising and purchasing of services; (iv) the Company expects to
enhance its existing portfolio by entering into a limited number of joint
venture alliances with experienced developers in order to develop new community
shopping centers; and (v) the Company intends to sell, from time to time,
select properties as dictated by market conditions in order to realize capital
gains and to improve the Company's overall portfolio profile and valuation.
Historically, the Company has contracted with local, professional
management for the day to day operation of the properties. Management
believes that these managers possess a valuable understanding of their local
markets. Further, management has concluded that local management, in select
situations, is currently an economical alternative to management by Company
personnel, and the opportunity to manage future properties acquired by the
Company provides an incentive for these
6
<PAGE> 9
professionals to assist the Company in finding additional potential
acquisitions. These local professionals are, or can be, on site on a daily
basis and are familiar with the communities in which the centers are situated
and the needs of the tenants that these centers serve. In connection with the
purchase of the Acquisition Properties, the Company intends to manage, with its
own personnel, the four Houston Acquisition Properties and one of the Original
Properties located in the Houston area. In addition, the Company intends to
selectively retain certain qualified senior managers to continue the leasing
and management of properties acquired by the Company on terms satisfactory to
the Company. The Company has also established a regional office in Tampa to
help supervise its central and southern Florida properties and provide a
foundation for future growth in those markets.
The investments of the Company are managed by the Investment Manager.
Robert W. Scharar, Chairman of the Board of the Company, is a principal
shareholder of the Investment Manager. The Company's President and Chief
Executive Officer, Lewis H. Sandler, is also the Chief Executive Officer of the
real estate services division of the Investment Manager. See "Risk
Factors--Conflicts of Interest." The Investment Manager's senior management
originally sponsored the organization of the Company as a benefit to a number
of clients who desired to include real estate properties in their investment
portfolios. The Investment Manager currently provides administrative,
accounting, financial, legal and operating personnel as well as asset
management to the Company on an "as-needed" basis. After completion of the
Offering, the Investment Manager has agreed to dedicate to the administration
of the Company the full-time services of Randall D. Keith and Daniel M. Jones,
III, who will serve as the Company's Chief Operating Officer and Chief
Financial Officer, respectively. See "Management."
The Company is a real estate investment trust formed under the Texas
REIT Act. The Company elected to be taxed as a REIT under the Code for its
taxable year ended December 31, 1989 and for each subsequent taxable year. The
Company's principal executive offices are located at 5847 San Felipe, Suite
850, Houston, Texas 77057, and its telephone number is (713) 781-2860.
RISK FACTORS
An investment in the Common Shares involves various risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" prior to any investment in the Company. Such risks include,
among others:
o The Company is solely reliant upon the Investment Manager and is
incapable of operating without the Investment Manager because the
Company utilizes the Investment Manager's personnel to acquire and
manage all of its Properties.
o The officers of the Company and the Investment Manager may be subject
to certain conflicts of interest.
o The Company's financial condition could be adversely affected if the
Company fails to manage rapid growth and integrate operations.
o Investors in the Offering will experience immediate dilution in the
net tangible book value of Common Shares purchased in the Offering.
o The Properties are currently limited to the Sunbelt region of the
United States.
o The liquidation value of the Company may be less than the value of the
Company as a going concern.
o The Board of Trust Managers has the ability to change the investment,
financing and other policies of the Company at any time without
shareholder approval.
o The potential anti-takeover effect of limiting share ownership to 9.8%
of the outstanding Common Shares (with certain exceptions) and certain
other provisions contained in the organizational documents of the
Company, such as the ability to issue preferred shares, any of which
may discourage a change in control, may limit the opportunity for the
Company's shareholders to receive a premium for their Common Shares.
o There is no provision in the organizational documents of the Company
that limits the amount and type of debt that the Company may incur,
which may result in increases in debt service requirements that could
adversely affect the Company's funds from operations and its ability
to make distributions to shareholders and result in an increased risk
of default on the Company's obligations.
7
<PAGE> 10
o There is no prior public market for the Common Shares.
o The Company will be taxed as a corporation if it fails to continue to
qualify as a REIT.
o There exist certain real estate investment risks, such as the effect
of economic and other conditions on commercial property values,
including the dependence of the Properties on the economies of the
metropolitan areas in which they are located, the ability of tenants
to make rent payments, the ability of the Properties to generate
revenues sufficient to meet operating expenses, including future debt
service, and the illiquidity of real estate investments.
o Many entities, as well as individuals, compete for investments similar
to those proposed to be made by the Company, many of whom have far
greater resources than the Company.
o Increases in market interest rates may lead prospective purchasers of
the Common Shares to demand a higher annual yield from future
distributions, which may adversely affect the market price of the
Common Shares.
o Failure to make payments on secured indebtedness may result in the
loss of the property securing such indebtedness.
o Acquired properties may not perform as expected.
o The Company is potentially liable for unknown or future environmental
issues.
o The Company may suffer losses in the event of a casualty or other
liabilities that are not insured, are uninsurable or not economically
insurable.
o Future sales of Common Shares could adversely affect the prevailing
market price for Common Shares.
o Investment in Common Shares may not be suitable for certain investors
subject to ERISA.
BUSINESS OBJECTIVES AND STRATEGIES
The Company's operating, acquisition and financing strategies and
management policies are determined by the Board of Trust Managers and are
implemented by the Company's executive officers and by the Investment Manager.
These strategies and policies may be amended or revised from time to time at
the discretion of the Board of Trust Managers without a vote of the
shareholders of the Company.
GROWTH STRATEGY
The Company's growth strategy will be to:
o Focus primarily on acquisitions of community shopping centers in
medium to large-sized metropolitan communities where the Company
currently owns and operates properties and in the Houston area, where
the Company is based, or in areas where the Company can acquire,
concurrently, several properties, in order to obtain economies of
scale. In either event, the Company will focus on areas where
potential future increases in rental and occupancy rates are
anticipated to be realized as a result of better than average
population and employment growth.
o Acquire community shopping centers that are generally anchored by
supermarkets or by national or regional retailers with long-term
leases and which offer everyday necessities to their neighborhood
communities.
o Acquire community shopping centers located along major traffic
arteries in established neighborhoods where the development of
competing shopping centers is impeded by the lack of developable land
and zoning restrictions and where tenant relocation alternatives are
limited.
8
<PAGE> 11
o Take advantage of its structural flexibility by offering, on a
selective basis, senior management of prospective sellers an
opportunity to continue the management of their former community
shopping centers if such persons can be retained on terms acceptable
to the Company.
o Acquire, redevelop and re-tenant under-managed retail properties in
areas with strong prospects for future growth.
o Renovate and expand the existing Properties to meet the needs of
existing or new tenants.
o Develop on a limited basis (up to approximately 20% of its GLA), with
experienced joint venture partners, new community shopping centers in
select areas with supermarkets or other national or regional retail
anchors.
OPERATING STRATEGY
The Company's operating objectives are to:
o Hold and maintain properties for long-term investment and place a
strong emphasis on aesthetics, regular maintenance, periodic
renovation and capital improvements.
o Maintain and diversify its core base of national and regional
supermarket and retail tenants.
o Aggressively market vacant space, renew existing leases at higher base
rents per square foot, and utilize base rent escalation provisions in
its leases.
FINANCING
In order to most effectively pursue its business strategies, the
Company's financing strategy will be to:
o Maintain a capital structure with a ratio of long-term debt to Total
Market Capitalization of no more than 50%. On a pro forma basis at
September 30, 1997, after giving effect to the Offering (assuming an
initial public offering price of $10.75 per Common Share), the Company
would have had a long-term debt to Total Market Capitalization ratio
of approximately 26.8%. See "Strategy For Future Growth--Financing."
o Utilize the most appropriate sources of capital for potential future
acquisition projects, which may include undistributed Cash Available
for Distribution, the issuance of equity securities (including
preferred shares), bank and other institutional borrowings (secured
and unsecured) and the issuance of debt securities, and proceeds from
the sale of properties.
INDUSTRY
In the early 1990s, many major retailers restructured or downsized
their operations. As a result, landlords encountered loss of credit-worthy
tenants and experienced high anchor tenant turnover. The Company believes that
the retail industry is now healthy and anticipates aggressive expansion in the
retail sector.
Management believes that the community shopping centers with a grocery
store or drug store anchor and other tenants such as restaurants and dry
cleaners provide consumers with basic goods and services that will always be in
demand. According to the International Council of Shopping Centers ("ICSC"), in
1996 $973.6 billion of retail sales, or 52% of total non-automotive retail
sales, took place in shopping centers. ICSC statistics indicate that there are
42,048 shopping centers in the United States containing approximately 5.1
billion square feet of GLA. The Company estimates from the National Association
of Real Estate Investment Trusts' ("NAREIT") 1997 REIT Handbook that publicly
owned REITs owned approximately 600 million square feet of retail space with
approximately 45% of that in strip shopping centers. The non-REIT owned portion
of the industry remains highly fragmented and provides the Company with the
opportunity to consolidate single assets and small portfolios. The Company's
Properties are community shopping centers with an average size of 108,000 square
feet of GLA. According to ICSC, 36,683 centers, or 87% of all centers, are
under 200,000 square feet of GLA.
9
<PAGE> 12
The Company believes the retail industry will provide potential upside
as leases turn over. Additionally, the Company believes that the threat of new
supply of retail space is minimal. According to ICSC, over the four year
period of 1994 to 1996, 148.8 million square feet of shopping center GLA was
added, representing an average increase of less than 1% per year.
THE PROPERTIES
The Original Properties consist of eight community shopping centers
located in Austin, College Station, El Campo and San Antonio, Texas; Lenoir
City and Athens, Tennessee; and Phoenix, Arizona. The Properties were built
between 1970 and 1991, with the oldest property having been substantially
expanded and renovated in 1984. The Original Properties were 95.0% leased as
of September 30, 1997.
The Acquisition Properties consist of eight community shopping
centers, four of which are located in Houston and the others in Carrollton
(Dallas suburb), Tampa and Pembroke Pines (Fort Lauderdale area), and Phoenix.
These Acquisition Properties were built between 1973 and 1994, with most having
undergone substantial renovations in recent years. As of September 30, 1997,
the Acquisition Properties were 97.4% leased.
The Properties range in size from approximately 29,000 square feet to
316,000 square feet. Further acquisitions are expected to concentrate on
similar properties that are anchored primarily by national and regional
supermarkets and retailers who offer everyday necessities to their neighborhood
communities. The Company's success has been based, in part, on its ability to
infuse capital, on a selective basis, into those shopping centers where the
capital is expected to generate greater occupancies and higher rents.
Set forth below is information regarding the Properties as of
September 30, 1997:
10
<PAGE> 13
<TABLE>
<CAPTION>
GROSS
YEAR LEASABLE TOTAL
DEVELOPED/ AREA PERCENT NUMBER
PROPERTY LOCATION RENOVATED (SQ. FT.) LEASED OF TENANTS
- -------- -------- --------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
TEXAS
Autobahn Shopping Center San Antonio 1984 28,878 97.2% 6
Bandera Shopping Center San Antonio 1989 189,446 96.8 26
Benchmark Crossing Shopping Center (7) Houston 1986/1990/1994 58,341 100.0 5
Centennial Shopping Center(1) Austin 1970/1984 80,492 90.9 12
El Campo Shopping Center El Campo 1985 83,330 90.0 16
Hedwig Shopping Centers(7) Houston 1974/1987/1989 69,554 98.2 11
The Market at First Colony(7) Houston 1988/1991/1994 94,241 98.4 32
Mason Park Centre(7) Houston 1985 160,047 92.6 33
Rosemeade Park Shopping Center(7) Carrollton 1986 49,554 86.6 17
University Park Shopping Center(2) College 1973-1991 91,654 100.0 6
--------- ------ --
Station
TOTAL/WEIGHTED AVERAGE 905,537 95.3% 164
ARIZONA
Park Northern Shopping Center(1) Phoenix 1982 128,365 89.6 22
Southwest/Walgreen's Shopping Center(7) Phoenix 1975 83,698 100.0 19
--------- ------ --
TOTAL/WEIGHTED AVERAGE 212,063 93.7% 41
FLORIDA
Town 'N Country Plaza(7) Tampa 1970/1986 157,704 100.0 17
University Mall Shopping Center(7) Pembroke Pines 1973/1984 315,596 98.0 37
--------- ------ --
TOTAL/WEIGHTED AVERAGE 473,300 98.7% 54
TENNESSEE
McMinn Plaza Shopping Center Athens 1982 99,969 98.0 10
Twin Lakes Shopping Center Lenoir City 1986 51,656 100.0 11
--------- ------ --
TOTAL/WEIGHTED AVERAGE 151,625 98.7% 21
--------- ------ --
GRAND TOTAL/WEIGHTED AVERAGE 1,742,525 96.3% 280
========= ====== ===
<CAPTION>
TOTAL BASE RENT
YEAR ENDED 12/31/96(4) ANNUALIZED BASE RENT
----------------------- ------------------------------
% OF TOTAL NET EFFECTIVE
PORTFOLIO ANNUALIZED RENT PER MAJOR TENANT(S)
PROPERTY BASE RENT BASE RENT BASE RENT(3) SQUARE FOOT(8) ---------------
- -------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
TEXAS
Autobahn Shopping Center $314,880 2.5% $318,202 $11.34 Blockbuster Music
Bandera Shopping Center 1,433,412 11.4 1,482,288 8.08 Eckerd Drugs
Kmart
Benchmark Crossing Shopping Center (7) 649,093 5.1 663,598 11.37 Bally's
Centennial Shopping Center(1) 578,052 4.6 632,936 8.65 Drug Emporium
El Campo Shopping Center 296,566 2.4 294,070 3.92 (5) David's
Supermarkets
Hedwig Shopping Centers(7) 789,234 6.3 845,114 12.37 Ross Stores
The Market at First Colony(7) 1,272,532 10.1 1,345,114 14.27 T J Maxx
Eckerd Drugs
Mason Park Centre(7) 1,586,135 12.6 1,606,527 10.84 Palais Royal
Petco
Cinemark Cinema
Walgreen's
Rosemeade Park Shopping Center(7) 445,535 3.5 543,988 12.68 Blockbuster Video
Cosmopolitan Lady
University Park Shopping Center(2) 746,008 5.9 749,215 8.17 Albertson's Food
----------- ------ ----------- -----
TOTAL/WEIGHTED AVERAGE 8,111,447 64.4% 8,481,051 9.82
ARIZONA
Park Northern Shopping Center(1) 623,934 4.9 669,639 5.82 (6) Safeway
Walgreen's
Southwest/Walgreen's Shopping Center(7) 546,832 4.3 547,692 6.54 Walgreen's
----------- ------ ----------- -----
Southwest
Supermarket
TOTAL/WEIGHTED AVERAGE 1,170,766 9.2% 1,217,331 6.13
FLORIDA
Town 'N Country Plaza(7) 667,037 5.3 687,692 4.36 Big Lots
T J Maxx
Autozone
University Mall Shopping Center(7) 1,930,896 15.3 2,071,575 6.70 Uptons
----------- ------ ----------- ----- Sports Authority
Ross Stores
Office Max
TOTAL/WEIGHTED AVERAGE 2,597,933 20.6% 2,759,267 5.91
TENNESSEE
McMinn Plaza Shopping Center 378,255 3.0 404,711 4.13 Ingles
Wal-Mart/Bud's
Twin Lakes Shopping Center 356,068 2.8 366,997 7.10 Food City
----------- ------ ----------- -----
TOTAL/WEIGHTED AVERAGE 734,323 5.8% 771,708 5.16
----------- ------ ----------- -----
GRAND TOTAL/WEIGHTED AVERAGE $12,614,469 100.0% $13,229,357 $7.88
=========== ====== =========== =====
</TABLE>
- --------------------------------
11
<PAGE> 14
(1) Owned by Park Northern/Centennial Partners L.P., a Texas limited
partnership, in which the Company is the general partner and owns 70% of the
partnership interests. The Company intends to purchase the minority interest
from the proceeds of the Offering.
(2) Owned by UIRT/University Park-I L.P., a Texas limited partnership, in
which the Company owns the 5% general partner's interest through a corporate
subsidiary and a 51% interest as a limited partner. The Company intends to
purchase all but 4% of the minority interest from the proceeds of the Offering.
(3) Based on September 30, 1997 rent rolls of the Original Properties and the
Acquisition Properties.
(4) Based on calendar year 1996.
(5) Annualized based on 6 months base rent ownership in 1996.
(6) Includes 11 months unaudited base rent prior to acquisition in 1996.
(7) All information on these properties was supplied to the Company by the
sellers of such properties.
(8) Net effective rent per square foot represents total annualized base rent
on September 30, 1997 divided by total leased square footage.
12
<PAGE> 15
DISTRIBUTIONS
Prior to the Offering, the Company has made quarterly distributions
per Common Share in amounts sufficient to maintain the Company's REIT status.
Future distributions by the Company will be determined by and at the discretion
of the Board of Trust Managers and will be dependent upon a number of factors,
including the federal income tax requirement that a REIT must distribute
annually at least 95% of its taxable income. The Company intends to make
regular quarterly distributions to the holders of the Common Shares. The
Company expects to pay a pro rata distribution for the quarter of 1998 in which
the Offering is completed (pro rated for each full month remaining in the
calendar quarter in which the Offering is completed through the end of such
quarter). Initially, the Company intends to pay regular quarterly
distributions to its shareholders of $0.90 per share on an annualized basis.
This would represent an initial annualized yield of approximately 8.37%, based
on an assumed initial public offering price of $10.75 per share. The Company
currently intends to maintain its initial distribution rate for the balance of
1998, unless actual results of operations, economic conditions and other
factors differ materially from the assumptions used in its estimate. The
Company does not intend to reduce the expected distribution rate if the
Underwriters' over-allotment option is exercised. Approximately 30.4% of the
distributions anticipated to be paid by the Company for 1998 are expected to
represent a return of capital for federal income tax purposes.
TAX STATUS
The Company elected to be treated as a REIT under sections 856 through
860 of the Code for the taxable year ended December 31, 1989 and for each
subsequent taxable year. As a REIT, the Company generally will not be subject
to federal income tax provided it makes certain distributions to its
shareholders and meets certain organizational and other requirements. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. See "Risk Factors--Adverse
Consequences of the Failure to Qualify as a REIT" and "Federal Income Tax
Consequences." As a REIT, the Company is subject to certain federal, state and
local taxes. See "Federal Income Tax Consequences."
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. will deliver prior to the
closing of this Offering its opinion that: (1) the Company has been organized
in conformity with the requirements for qualification as a REIT for federal
income tax purposes for the taxable year ending December 31, 1989, and has
continued to satisfy the requirements for qualification as a REIT through the
date of the opinion; and (2) the Company's anticipated investments and plan of
operation (which plan includes complying with all of the REIT requirements
described in the Prospectus) will enable it to continue to satisfy the
requirements for qualification as a REIT for federal income tax purposes.
THE OFFERING
<TABLE>
<S> <C>
Shares Offered . . . . . . . . . . . . . . . . . . . 7,500,000
Shares to be Outstanding After the Offering. . . . . 8,412,489(1)
Use of Proceeds . . . . . . . . . . . . . . . . . . . To repay certain mortgage and other indebtedness
associated with the Properties, acquisitions of
properties and partnership interests and for general
working capital purposes.
New York Stock Exchange Symbol . . . . . . . . . . .
</TABLE>
- -------------------
(1) Does not include 300,000 Common Shares issuable upon exercise of
options to be granted pursuant to the Company's 1997 Share Incentive
Plan (the "Plan") upon completion of the Offering. Includes 67,000
Common Shares awarded to the Investment Manager and to certain key
executives under the Plan and 2,000 Common
13
<PAGE> 16
Shares awarded to each of the four independent Trust Managers under
the Plan in December 1997 in anticipation of completion of the
Offering. See "Management--Share Incentive Plan."
SUMMARY FINANCIAL DATA
The following table sets forth pro forma information and historical
summary consolidated financial data of the Company. The following financial
information should be read in conjunction with all of the financial statements
and notes thereto included elsewhere in this Prospectus. The historical and
pro forma operating data of the Company may not be indicative of future
operating results of the Company. The pro forma operating data of the Company
are presented as if the Offering had occurred as of January 1, 1996. The pro
forma balance sheet data are presented as if the Offering had occurred on
September 30, 1997. The following pro forma information is not necessarily
indicative of what the Company's results of operations or financial condition
would have been for the periods or at the date indicated.
14
<PAGE> 17
SUMMARY SELECTED PRO FORMA AND HISTORICAL
FINANCIAL AND PROPERTIES INFORMATION
<TABLE>
<CAPTION>
Year ended
Nine Months ended September 30 December 31
----------------------------------------- ------------
Pro Forma Pro Forma
1997 1997 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FINANCIAL INFORMATION: (unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Base rent (1) ................................. $ 9,824,814 $ 3,706,057 $ 2,973,056 $ 11,705,779
Percentage rent ............................... 265,341 19,800 24,617 292,737
Tenant reimbursements ......................... 2,901,355 873,054 593,651 3,304,311
Interest and other income ..................... 27,034 20,870 57,543 102,361
------------ ------------ ------------ ------------
Total revenue ............................... 13,018,544 4,619,781 3,648,867 15,405,188
------------ ------------ ------------ ------------
Expenses:
Property operating and maintenance .............. 1,721,387 556,975 304,202 2,108,554
General and administrative ...................... 1,065,181 581,520 445,378 975,567
Interest ........................................ 1,988,451 1,825,810 1,562,804 2,300,510
Depreciation and amortization ................... 2,470,972 870,972 688,187 3,008,778
Real estate taxes ............................... 1,686,332 565,698 398,193 1,985,226
------------ ------------ ------------ ------------
Total expenses .............................. 8,932,323 4,400,975 3,398,764 10,376,635
------------ ------------ ------------ ------------
Income before gain on sale of investment real estate,
minority interest and redeemable preferred stock
dividend requirements ................................. 3,701,221 218,806 250,103 5,028,553
Gain on sale of investment real estate ......... -- -- 6,760 --
------------ ------------ ------------ ------------
Income before minority interest and
redeemable preferred stock dividend
requirements ....................................... 4,086,221 218,806 256,863 5,028,553
Minority interest in net income of real estate
ventures ...................................... -- (38,482) (37,421) --
------------ ------------ ------------ ------------
Income before redeemable preferred stock dividend
requirements ................................... 4,086,221 180,324 219,442 5,028,553
Redeemable preferred stock dividend requirements ...... -- (72,474) (72,138) --
Net income available for common shareholders .......... 4,086,221 107,850 147,304 5,028,553
Net income (loss) per share ........................... $ 0.49 $ 0.13 $ 0.18 $ 0.60
============ ============ ============ ============
Weighted Average Common Shares ........................ 8,412,489 837,489 859,397 8,412,489
============ ============ ============ ============
Cash distributions per common share (2)................ -- -- -- --
============ ============ ============ ============
BALANCE SHEET INFORMATION
Investment real estate, gross .................... 112,825,285 39,671,734 34,668,182
Total assets ..................................... 114,191,755 36,793,046 33,153,032
Mortgage and other notes payable ................. 33,246,627 26,279,407 23,552,436
Total liabilities ................................ 34,189,962 27,222,742 24,914,413
Minority interest ................................ -- 1,585,419 686,965
Preferred stock .................................. -- 1,068,226 1,068,226
Net equity ....................................... 80,001,793 6,916,659 8,238,619
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL INFORMATION: (unaudited)
(unaudited) (unaudited)
Revenues:
Base rent (1) ................................. $ 4,097,911 $ 4,389,491 $ 3,794,711 $ 3,194,084 $ 2,325,950
Percentage rent ............................... 32,822 -- -- -- --
Tenant reimbursements ......................... 835,940 848,975 844,299 622,164 477,188
Interest and other income ..................... 67,409 44,224 10,344 13,886 30,436
------------ ------------ ------------ ------------ ------------
Total revenue ............................... 5,034,082 5,282,690 4,649,354 3,830,134 2,833,574
------------ ------------ ------------ ------------ ------------
Expenses:
Property operating and maintenance .............. 442,701 662,687 445,635 355,276 225,316
General and administrative....................... 642,944 657,466 507,137 442,459 430,071
Interest ........................................ 2,132,390 2,177,447 2,101,762 1,923,640 1,470,975
Depreciation and amortization ................... 958,778 960,876 756,914 631,567 456,214
Real estate taxes ............................... 558,000 569,634 512,070 437,679 335,526
------------ ------------ ------------ ------------ ------------
Total expenses .............................. 4,734,813 5,028,110 4,323,518 3,790,621 2,918,102
------------ ------------ ------------ ------------ ------------
Income before gain on sale of investment real estate,
minority interest and redeemable preferred stock
dividend requirements ................................. 299,269 254,580 325,836 39,513 (84,528)
Gain on sale of investment real estate ......... -- 25,020 -- -- --
------------ ------------ ------------ ------------ ------------
Income before minority interest and
redeemable preferred stock dividend
requirements ....................................... 299,269 279,600 325,836 39,513 (84,528)
Minority interest in net income of real estate
ventures ...................................... (51,941) (43,278) (48,435) (31,084) 1,359
------------ ------------ ------------ ------------ ------------
Income before redeemable preferred stock dividend
requirements ................................... 247,328 236,322 277,401 8,429 (83,169)
Redeemable preferred stock dividend requirements ...... (96,296) (43,618) -- -- --
Net income available for common shareholders .......... 151,032 192,704 277,401 8,429 (83,169)
Net income (loss) per share............................ $ 0.18 $ 0.23 $ 0.35 $ 0.01 $ (0.14)
============ ============ ============ ============ ============
Weighted Average Common Shares ........................ 834,655 834,397 797,655 670,725 590,782
============ ============ ============ ============ ============
Cash distributions per common share (2)................ -- -- $ 0.40 $ 0.39 $ 0.38
============ ============ ============ ============ ============
BALANCE SHEET INFORMATION
Investment real estate, gross .................... 39,327,929 34,166,161 33,852,985 29,349,299 22,268,417
Total assets ..................................... 37,201,773 32,461,433 32,702,850 28,773,597 22,148,861
Mortgage and other notes payable ................. 26,542,992 22,484,845 23,826,831 21,690,375 16,347,640
Total liabilities ................................ 27,406,859 23,407,145 24,647,866 23,113,687 16,927,667
Minority interest ................................ 1,584,673 699,984 794,730 813,578 69,600
Preferred stock .................................. 1,068,226 1,068,226 -- -- --
Net equity ....................................... 7,142,015 7,286,078 7,260,254 5,578,532 5,151,594
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Year ended
Nine Months ended September 30 December 31
--------------------------------------------------- -----------
Pro Forma Pro Forma
1997 1997 1996 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Other Data:
Funds from Operations (3) .............. $ 6,794,188 $ 978,822 $ 835,491 $ 6,228,957
Cash flows from: .......................
Operating activities ................. -- 867,473 512,344 --
Investing activities ................. -- (343,805) (2,128,568) --
Financing activities ................. -- (386,501) 1,881,076 --
Number of operating properties (at ..... 16 8 7 16
end of period) .........................
GLA (sq. ft.)(at end of period) ........ 1,742,525 753,790 625,425 1,742,525
Occupancy of Properties owned (at ...... 96% 97% N/A 95%
end of period) .........................
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Other Data:
Funds from Operations (3) .............. $ 1,109,810 $ 1,128,560 $ 1,034,315 639,996 373,045
Cash flows from: .......................
Operating activities ................. 1,062,002 958,510 993,272 504,103 506,670
Investing activities ................. (1,319,213) (269,479) (2,240,884) (7,030,882) (10,976,073)
Financing activities ................. (51,293) (384,637) 1,121,241 6,474,138 7,960,328
Number of operating properties (at ..... 8 6 6 5 4
end of period) .........................
GLA (sq. ft.)(at end of period) ........ 753,790 542,095 542,095 442,126 350,472
Occupancy of Properties owned (at ...... 96% 95% 96% 96% 90%
end of period) .........................
</TABLE>
(1) Base rent was lower in 1996 as a result of the spin-off of the One West
Hills office building on January 1, 1996 to Ivy Realty Trust ("Ivy"), an
office REIT managed by the Investment Manager.
(2) For 1997, 1996 and 1995, the Company distributed a dividend in kind of Ivy
stock with a value of $0.478, $0.40 and $0.20 per share, respectively.
(3) The NAREIT White Paper defines Funds From Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated entities in which
the REIT holds an interest. Management believes Funds From Operations is
helpful to investors as a measure of the performance of an equity REIT
because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and
make capital expenditures. The Company computes Funds From Operations in
accordance with the standards established by the White Paper, which may
differ from the methodology for calculating Funds From Operations utilized
by other equity REITs, and accordingly, may not be comparable to such other
REITs. Further, Funds From Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and
uncertainties. Funds From Operations should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
16
<PAGE> 19
RISK FACTORS
An investment in the Company involves various investment risks.
Prospective investors should carefully consider the following factors together
with the information provided elsewhere in this Prospectus in evaluating an
investment in the Company.
SOLE RELIANCE ON INVESTMENT MANAGER
The Company does not currently have the personnel to acquire and
manage properties, and as a result, the Company is solely dependent upon the
efforts and abilities of the officers of the Investment Manager, Robert W.
Scharar, the Investment Manager's President, and Lewis H. Sandler, Chief
Executive Officer of the real estate services division of the Investment
Manager. These and the other officers of the Company are paid by the
Investment Manager and several of them are also officers of the Investment
Manager. The success of the Company is dependent in large part on its
officers. The loss or interruption of the services of these persons could have
a material adverse effect on the Company. Although management of the Company
believes that the Company can obtain the services of third party investment
advisors or hire sufficient personnel to manage the Company's investments, in
the event that the Amended and Restated Advisory Agreement (the "Advisory
Agreement") is terminated, no assurance can be given that the Company could
obtain alternative investment management services of a comparable quality or at
comparable prices.
CONFLICTS OF INTEREST
The fee of the Investment Manager is based on a percentage of Funds
From Operations before deducting annual interest payments on outstanding
indebtedness and the fee payable to the Investment Manager ("Advisory Funds
From Operations") and is not dependent upon the profitability of the
Properties. Determination of the fee was not the result of an arm's-length
negotiation. See "Certain Relationships and Transactions."
FAILURE TO MANAGE RAPID GROWTH AND INTEGRATE OPERATIONS; ACQUISITION OF
ADDITIONAL PROPERTIES
The Company is currently experiencing a period of rapid growth. As a
result of the rapid growth of the Company's portfolio, there can be no
assurance that the Company will be able to adapt its management,
administrative, accounting and operational systems to respond to any future
acquisitions of additional properties without certain operating disruptions or
unanticipated costs. The failure to successfully integrate any future
acquisitions into the Company's portfolio could have a material adverse effect
on the results of operations and financial condition of the Company and its
ability to pay expected distributions to shareholders. As it acquires
additional properties, the Company will be subject to risks associated with new
properties, including tenant retention and indebtedness default. In addition,
there can be no assurance that the Company will be able to maintain its current
rate of growth or negotiate and acquire any acceptable properties in the
future. A larger portfolio of properties would entail additional operating
expenses that would be payable by the Company.
IMMEDIATE AND SUBSTANTIAL DILUTION
The anticipated price per Common Share in the Offering substantially
exceeds the pro forma net tangible book value per share immediately subsequent
to the Offering. Accordingly, the shareholders acquiring shares in the Offering
will experience immediate and substantial dilution of $1.24 per share in the
net tangible book value of the Common Shares. See "Dilution."
LIMITED GEOGRAPHIC DIVERSIFICATION OF THE PORTFOLIO
The Company's Properties are located in four states, Texas (52.0 %),
Florida (27.2%), Arizona (12.1%) and Tennessee (8.7%), (based on percentage of
GLA). The concentration of the portfolio in a limited number of geographic
regions creates the risk that should any one of these regions experience an
economic downturn, the Company's operations may be adversely affected.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
The Company's Amended and Restated Declaration of Trust (the
"Charter") and Amended and Restated Bylaws (the "Bylaws") of the Company
contain a number of provisions, and the Board of Trust Managers has taken
certain actions that could impede a change of control in the Company. The
Charter authorizes the Board of Trust
17
<PAGE> 20
Managers to create new classes and series of securities and to establish the
preferences and rights of any such classes and series. See "Description of
Capital Stock." The issuance of securities by the Board of Trust Managers
pursuant to this Charter provision could have the effect of delaying or
preventing a change of control of the Company, even if a change of control were
in the interest of some, or a majority, of shareholders.
LIQUIDATION VALUE OF THE COMPANY MAY BE LESS THAN VALUE AS A GOING CONCERN
The valuation of the Company has not been determined on a
property-by-property basis because the Company is an on-going business
enterprise. Rather, the Company has been valued based on the cash flow and
cash flow potential of the Properties owned by the Company, and the factors set
forth in this Prospectus. The Company does not obtain appraisals of its
properties in the ordinary course of business, and appraisals of the Properties
have not been obtained in connection with the Offering. Investors should be
aware that the liquidation value of the Company may be less than the value of
the Company as a going concern.
CHANGES IN INVESTMENT AND FINANCING POLICIES
The investment and financing policies of the Company, and its policies
with respect to certain other activities, including its growth, debt
capitalization, distributions, REIT status and investment and operating
policies are determined by the Board of Trust Managers. Although it has no
present intention to do so, these policies may be amended or revised from time
to time at the discretion of the Board of Trust Managers without a vote of the
shareholders of the Company.
OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT
In order to maintain its qualification as a REIT, not more than 50% in
value of the outstanding shares of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). To ensure that the Company will not fail to qualify as a
REIT under this test, the Charter provides that no holder of capital shares,
other than any person approved by the Trust Managers, may directly or
indirectly own more than 9.8% of the lesser of the number or value of the
outstanding capital shares. There can be no assurance that there will not be
five or fewer individuals who will own more than 50% in value of the shares
thereby causing the Company to fail to qualify as a REIT. The ownership limits
may discourage a change of control of the Company and may also (i) deter tender
offers for the Common Shares, which offers may be attractive to the
shareholders or (ii) limit the opportunity for shareholders to receive a
premium for their Common Shares that might otherwise exist if an investor
attempted to assemble a block of Common Shares in excess of 9.8% in number or
value of the outstanding capital shares or otherwise to effect a change of
control of the Company. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer."
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON THE INCURRENCE OF DEBT
The Company currently has a general policy of limiting its borrowings
to a ratio of approximately 50% or less of long-term debt to Total Market
Capitalization. The organizational documents of the Company contain no
limitation on the amount or percentage of indebtedness which the Company may
incur. Therefore, the Board of Trust Managers, without a vote of the
shareholders, could alter or eliminate the current policy of limiting
borrowings at any time. If the Company's debt to capitalization policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the Company's operating
cash flow and its ability to make expected distributions to shareholders and
could result in an increased risk of default on its obligations.
Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of properties to be acquired with debt financing, the
estimated market value of properties upon refinancing, and the ability of
particular properties and the Company, as a whole, to generate cash flow to
cover expected debt service), there can be no assurance that the ratio of
long-term debt to Total Market Capitalization will be consistent with the
maintenance of the expected level of distributions to shareholders.
ADVERSE CONSEQUENCES OF FAILURE TO CONTINUE TO QUALIFY AS A REIT
The Company must continue to meet a number of highly technical and
complex requirements to maintain its status as a REIT under the Code. Failure
to continue to qualify as a REIT would result in the taxation of the Company at
corporate rates and loss of pass-through tax treatment which would have a
significant adverse effect on the return to shareholders. Failure to qualify as
a REIT under the Code during a taxable year would generally render the Company
18
<PAGE> 21
ineligible to elect REIT status again until the fifth subsequent taxable year.
The Company will not be required to make distributions to shareholders in the
event that it fails to qualify as a REIT under the Code and there can be no
assurance that the Company will continue to make distributions in such event.
Transfers of the Common Shares are subject to certain restrictions to protect
the Company's REIT status under the Code. In addition, the Company may be
subject to state or local taxes. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
change the tax laws with respect to qualification as a REIT, the federal income
tax consequences of such qualification or the application of state or local
taxes to the Company. See "Federal Income Tax Consequences."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES
Prior to the Offering, there has been no public market for the Common
Shares. Although the Common Shares are expected to be listed on the New York
Stock Exchange, there can be no assurance that an active trading market will
develop or be sustained or that investors in the Offering will be able to
resell their Common Shares at or above the initial public offering price. The
initial public offering price of the Common Shares was determined by agreement
among the Company and the Underwriters and may not be indicative of the market
price for the Common Shares after the Offering. See "Underwriting."
RISKS ASSOCIATED WITH DEVELOPMENT AND CONSTRUCTION
The Company intends to selectively develop and construct community
shopping centers on a limited basis (up to approximately 20% of GLA) with
experienced joint venture partners. Risks associated with the Company's
development and construction activities may include abandonment of development
opportunities; goals of the joint venture partner may not be compatible with
the Company's goals; construction costs of a property exceeding original
estimates, possibly making the property uneconomical; occupancy rates and rents
at a newly renovated or completed property may not be sufficient to make the
property profitable; financing may not be available on favorable terms for
development of a property; permanent financing may not be available on
favorable terms to replace a short-term construction loan; and construction and
lease- up may not be completed on schedule, resulting in increased debt service
expense and construction costs. In addition, new development activities,
regardless of whether they are ultimately successful, typically require a
substantial portion of management's time and attention. Development activities
are also subject to risks relating to the inability to obtain, or delays in
obtaining, all necessary zoning, land-use, building, occupancy and other
required governmental permits and authorizations.
REAL ESTATE INVESTMENT CONSIDERATIONS
Economic Performance and Value of Properties Dependent on Many
Factors. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income generated and expenses incurred. If the Company's properties
do not generate income sufficient to meet operating expenses, including debt
service, the Company's income and ability to make distributions to its
shareholders will be adversely affected.
The income from and market value of a leased property may be adversely
affected by such factors as changes in the general economic climate, 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 and
competition from other available space. Real estate values and income are also
affected by such factors as government regulations and changes in real estate,
zoning or tax laws, interest rate levels, the availability of financing and
potential liability under environmental and other laws.
Adverse economic conditions could adversely affect the ability of a
tenant to make its lease payments to the Company, resulting in a reduction in
the cash flow of the Company and a decrease in the value of the property leased
to such tenant in the event the lease is terminated and the Company is unable
to lease the property to another tenant on similar or better terms, or at all.
In addition, the Company may experience delays in enforcing its rights as
lessor and may incur substantial costs in protecting its investment. The
Company not only could lose the cash flow from such defaulting tenant, but in
order to prevent a foreclosure, also might divert cash flow generated by other
properties to meet mortgage payments, if any, and pay other expenses associated
with owning the property with respect to which the default occurred.
Dependence on Rental Income from Real Property to Meet Debt
Obligations and Make Distributions. As substantially all of the Company's
income is derived from rental income from real property, the Company's income
and Funds From Operations could be adversely affected if a single major tenant
or a number of smaller tenants were unable
19
<PAGE> 22
to meet their obligations to the Company or if the Company were unable to lease
on economically favorable terms a significant amount of space in its
Properties. Although such adverse effect may be limited by the fact that the
Company does not rely on any single major tenant, such risk is not eliminated.
In addition, the Company's tenants may have the right to terminate their leases
upon the occurrence of certain customary events of default, or, in some cases,
if the lease held by an anchor tenant or other principal tenant of the property
expires, is terminated or the property subject to the lease is vacated, even if
rent continues to be paid under the lease. No assurance can be given that
leases that expire or are terminated can be renewed or replaced, or that the
properties covered by leases that expire or are terminated can be leased to
comparable tenants or on comparable terms, or at all.
Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major
tenant or a number of small tenants may have an adverse impact on the
properties affected and on the income produced by such properties. Generally,
under bankruptcy law, a tenant has the option of continuing or terminating any
unexpired lease. If the tenant continues 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
terminates the lease, the Company's claim for breach of the lease would (absent
collateral securing the claim) be treated as a general unsecured claim.
General unsecured claims are the last claims to be paid in a bankruptcy and
therefore funds may not be available to pay such claims. As of September 30,
1997, none of the Company's major tenants was in bankruptcy or had defaulted on
a lease which caused a material adverse effect on the Company.
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 in response to changes in economic or other
conditions. In addition, mortgage payments and, to the extent a property is
not subject to Triple Net Leases, certain significant expenditures such as real
estate taxes and maintenance costs generally are not reduced when circumstances
cause a reduction in income from the investment, and should such events occur,
the Company's income and Cash Available for Distribution would be adversely
affected. At this time, substantially all of the Properties' leases are Triple
Net Leases. See "--Increased Leverage May Result in Loss of Properties in the
Event of a Foreclosure."
Changes in Laws. Costs resulting from changes in real estate taxes
generally may be passed through to tenants and, to such extent, will not affect
the Company. Increases in income, service or transfer taxes, however,
generally are not passed through to tenants under the leases and may adversely
affect the Company's operating cash flow and its ability to make distributions
to shareholders. Similarly, changes in laws increasing the potential liability
for environmental conditions existing on properties or increasing the
restrictions on discharges or other conditions may result in significant
unanticipated expenditures, which would adversely affect the Company's
operating cash flow and its distributions to shareholders.
COMPETITION
All of the Properties are located in areas which have shopping centers
and other retail facilities. Generally, there are other community shopping
centers within close proximity to the Properties. The amount of rentable
retail space in an area could have a material adverse effect on the amount of
rent charged by the Company and on the Company's ability to rent vacant space
and/or renew leases. There are numerous commercial developers, real estate
companies, REITs and major retailers that compete with the Company in seeking
properties for acquisition and tenants for properties, many of which may have
greater financial and other resources than the Company and may have
substantially more operating experience than that of the Company, its officers
and agents. There are numerous shopping facilities that compete with the
Properties in attracting retailers to lease space. In addition, retailers at
the Properties face increasing competition from outlet malls, discount shopping
clubs, catalog companies, direct mail and telemarketing. This competition may
affect the amount of percentage rent retailers pay to the Company and their
desire to renew their leases at the Properties.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATE ON FINANCIAL POSITION AND
COMMON SHARE PRICE
One of the factors that may influence the price of the Company's
shares in public markets is the annual distribution rate on the Common Shares.
Thus, an increase in market interest rates may lead purchasers of Common Shares
to demand a higher annual distribution rate, which could adversely affect the
market price of the Common Shares. In addition, an increase in the market rate
of interest may increase interest expenses under any variable rate indebtedness
of the Company. After the Offering, the Company expects to obtain a revolving
credit line with a variable interest rate. Although the Company intends to
purchase an interest rate collar or similar hedging instrument against
fluctuating interest rates, there can be no assurance that such collar or
similar arrangement will be available, or if available, at economically
feasible rates.
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<PAGE> 23
INCREASED LEVERAGE MAY RESULT IN LOSS OF PROPERTIES IN THE EVENT OF A
FORECLOSURE
At September 30, 1997, after giving effect to the Offering (assuming
an initial public offering price of $10.75 per Common Share) and the purchase
of the Acquisition Properties, the Company would have had a ratio of long-term
debt to Total Market Capitalization of approximately 26.8%. Although the use of
leverage may increase the Company's rate of return on its investments and allow
the Company to make more investments than it otherwise would, the use of
leverage also presents an additional element of risk in the event that the cash
flow from lease payments on the Properties is insufficient to meet debt
obligations, the Company is unable to refinance its debt obligations as
necessary or on as favorable terms or there is an increase in interest rates.
If a property is mortgaged to secure payment of indebtedness and the Company is
unable to meet mortgage payments, the property could be lost through
foreclosure with a consequent loss of income and asset value to the Company.
Currently, all of the Original Properties are mortgaged to secure the repayment
of indebtedness.
INABILITY TO ACQUIRE ADDITIONAL PROPERTIES; ACQUISITION PROPERTIES MAY NOT
PERFORM AS EXPECTED
The fact that the Company must distribute 95% of its taxable income in
order to maintain its qualification as a REIT will limit the ability of the
Company to rely upon income from operations or cash flow from operations to
finance new acquisitions. As a result, if permanent debt or equity financing
was not available on acceptable terms to finance acquisitions, then further
acquisitions might be limited or Cash Available for Distribution might be
adversely affected. Acquisitions entail risks that investments will fail to
perform in accordance with expectations and that judgments with respect to the
costs of improvements to bring an acquired property up to standards established
for the market position intended for that property will prove inaccurate, as
well as general investment risks associated with any new real estate
investment.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and
regulations, an owner of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner knew
of, or was responsible for, the presence of such hazardous or toxic substances.
The costs of any required remediation or removal of such substances may be
substantial and the owner's liability therefor as to any property is generally
not limited under such laws, ordinances and regulations and could exceed the
value of the property. The presence of such substances, or the failure to
properly remediate such substances, may adversely affect the owner's ability to
sell the property or to borrow using real estate as collateral. All of the
Properties are subject to Phase I environmental audits (which involves
inspection without soil sampling or ground water analysis) by independent
environmental consultants; however, only three of the Original Properties have
had Phase I audit reports prepared in the last two years. Accordingly,
environmental problems may have arisen on certain of the Original Properties of
which the Company has no knowledge. The existing Phase I audit reports have
not revealed any environmental liability, nor is the Company aware of any
environmental liability that the Company's management believes would have a
material adverse effect on the Company's business, assets or results of
operations, taken as a whole. No assurance, however, can be given that these
reports reveal all environmental liabilities or that no prior owner created any
material environmental condition not known to the Company.
The Company believes that it is in compliance in all material respects
with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances, and neither the Company nor the Investment
Manager has been notified by any governmental authority of any noncompliance,
liability or other claim in connection with any of their respective present or
former properties.
UNINSURED LOSS AND CONDEMNATION
The Company carries comprehensive liability, fire, flood, extended
coverage and rental loss insurance with respect to the Original Properties (and
will cover the Acquisition Properties) with policy specifications and insured
limits customarily carried for similar properties. There are, however, certain
types of losses (such as from wars or earthquakes) which may be either
uninsurable or not economically insurable. Should an uninsured loss occur, the
Company could lose both its invested capital in and anticipated profits from
the property, and would continue to be obligated to repay any mortgage
indebtedness on the property, other than non-recourse mortgage indebtedness.
As of September 30, 1997, such non-recourse mortgage indebtedness represented
100% of the Company's pro forma total mortgage indebtedness.
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<PAGE> 24
Tenant leases may permit the tenant to terminate its lease in the
event of a substantial casualty or a taking by eminent domain of a substantial
portion of a property. Should any such event occur, the Company generally will
be compensated by insurance proceeds or a condemnation award. There can be no
assurance, however, that insurance proceeds, if available, or a condemnation
award, if given, will equal the value of such property or the Company's
investment in such property.
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have a total of
8,412,489 Common Shares outstanding, of which Common Shares will
constitute "restricted" securities as that term is defined in Rule 144 as
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). Of the shares, a total of restricted shares will be eligible for
sale in the public market pursuant to Rule 144 immediately after the
consummation of the Offering. Ninety days after the consummation of the
Offering, Common Shares will be eligible for resale pursuant to Rule
701 as promulgated under the Securities Act. In addition, Common
Shares, which are restricted securities, are subject to 180 day lock-up
agreements with the Underwriters. Of the shares, only shares will be
eligible for immediate resale upon expiration of the 180 day lock-up period (or
earlier with the consent of Morgan Keegan & Company, Inc.). The remaining
restricted shares will become eligible for sale in the public market from time
to time. Following this Offering, sales of substantial amounts of the Common
Shares in the public market pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, could adversely affect the prevailing
market price of the Common Shares and impair the Company's ability to raise
additional capital through the sale of equity securities. See "Shares
Available for Future Sale."
INVESTORS SUBJECT TO ERISA
Fiduciaries of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), should consider whether the investment of plan assets in the Common
Shares satisfies the diversification requirements of ERISA, whether the
investment is prudent in light of possible limitations on the marketability of
the Common Shares, and whether such fiduciaries have authority to acquire such
Common Shares under their appropriate governing instruments and Title I of
ERISA. See "ERISA Considerations."
FORWARD LOOKING INFORMATION
This Prospectus contains certain forward-looking information regarding
the plans and objectives of management for future operations, including plans
and objectives relating to future growth of the property portfolio and
availability of funds. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
the Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Prospectus will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, including, without limitation, the risks set forth in "Risk Factors,"
the inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of Common Shares in
the Offering, after payment of expenses, are estimated to be approximately
$74,376,563 (based on an estimated initial public offering price per share of
$10.75). A substantial portion of the net proceeds of the Offering will be
used to repay a bridge loan, the proceeds of which are expected to be used, in
substantial part, to (i) repay existing mortgage indebtedness of $16,243,066
on five of the eight Original Properties; and (ii) acquire six of the
Acquisition Properties for an aggregate consideration of approximately
$38,500,000.
The balance of the net proceeds from the Offering is expected to be
used to (i) repay short-term borrowings of $10,500,000 used to acquire two of
the remaining Acquisition Properties; (ii) purchase the minority interest in
three Original Properties for $2,023,000; (iii) pay loan origination fees and
costs on the bridge loan of $1,049,557; (iv) purchase Town 'N Country Plaza for
$4,990,000; (v) repay $650,000 of 11% short- term notes and $300,000 borrowed
under various lines of credit; (vi) retire 10,737 9% Preferred Shares for
$1,105,911; (vii) repay $212,400 of 9% Redeemable Convertible
22
<PAGE> 25
Subordinated Notes; (viii) develop existing outparcels and shopping center
upgrades for $1,690,000; and (ix) fund working capital of approximately
$1,760,000.
It is anticipated that the bridge loan discussed above will be used
to acquire six of the Acquisition Properties. Such loan will be secured by one
or more of the following properties: Twin Lakes, Autobahn, Centennial, Bandera,
El Campo, Mason Park, Southwest/Walgreen's and The Market at First Colony
shopping centers. It is anticipated that the term of the bridge loan will be
180 days with an interest rate of 30-day LIBOR plus 250 basis points. The
bridge loan will be repaid from the proceeds of the Offering.
The 11% short-term notes which will be repaid from the proceeds of the
Offering were issued in 1996 and 1997, and mature 18 months from the date of
issuance.
The 9% Redeemable Convertible Subordinated Notes mature on December
31, 2002.
As of September 30, 1997, the Company had two unsecured lines of
credit with total outstanding balances of $300,000. One of the lines of credit
matures on May 5, 1998 and carries interest at prime (8.50% on September 30,
1997) plus 1.5%. The second line of credit matures in April 1998 and carries
interest at prime plus 0.5%. The Company also has one secured line of credit
collateralized by Centennial Shopping Center which matures on September 25,
1998 and carries an interest rate of 9.0%.
The short-term borrowings incurred to acquire two of the Acquisition
Properties mature on February 19, 1998 and carry interest at 12%.
DISTRIBUTION POLICY
GENERAL
Initially, the Company intends to pay regular quarterly distributions
to its shareholders of $0.225 per share or $0.90 per share on an annualized
basis. This would represent an initial annualized yield of approximately
8.37%, based on the assumed public offering price of $10.75 per share. The
Company currently intends to pay a distribution for the quarter of 1998 in
which the Offering is completed (pro rated for each full month remaining in the
calendar quarter in which the Offering is completed through the end of such
quarter). The distribution rate was established based on an estimate of Cash
Available for Distribution after the Offering under present conditions.
Approximately 30.4% of the distributions anticipated to be paid by the Company
for 1998 are expected to represent a return of capital for federal income tax
purposes. The Company does not expect to change its estimated distribution
rate if the Underwriter's over-allotment option is exercised.
The Company's intended initial distribution is based upon an estimate
of Cash Available for Distribution that will be available for distributions
after the Offering under present conditions. This estimate has been based upon
pro forma 1998 Cash Available for Distribution with certain adjustments based
on the assumptions described below. The first cash distribution after the
completion of the Offering is expected to be paid on April 28, 1998 to record
holders on April 6, 1998, assuming that the Offering is completed in February
1998.
The Company believes that its estimate of Cash Available for
Distribution constitutes a reasonable basis for setting the initial
distribution, and the Company expects to maintain its initial distribution rate
for the balance of the calendar year in which the Offering is completed, unless
actual results of operations, economic conditions or other factors differ
materially from the assumptions used in the estimate. The actual return that
the Company will realize will be affected by a number of factors, including the
revenues received from rental properties, the operating expenses of the
Company, the interest expense incurred in its borrowings, the ability of
tenants to meet their obligations to the Company and unanticipated capital
expenditures. No assurance can be given that the Company's estimate will prove
accurate. Distributions in subsequent years will be impacted by the Company's
investing and financing strategies. In particular, the Company expects to
initially finance certain acquisitions and redevelopments through borrowings.
As a result, the Company's need to repay and/or refinance such indebtedness may
adversely affect its ability to make future distributions.
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The following table illustrates the adjustments made by the Company to
its pro forma Funds From Operations for the nine months ended September 30,
1997, as annualized, in order to calculate estimated distributions:
<TABLE>
<CAPTION>
AMOUNTS
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Pro forma income before minority interest for the nine months ended September 30, 1997 . . . . . $3,978
Plus pro forma depreciation and amortization for the nine months ended September 30,
1997(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,471
------
Pro forma Funds From Operations for the nine months ended September 30,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,449
Pro forma Funds From Operations for the nine months ended September 30, 1997, as
annualized(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,599
Net increase in base rent from renewals and new leases(3) . . . . . . . . . . . . . . . . . . . . 330
------
Pro forma Funds From Operations for the 12 months ended December 31, 1997 . . . . . . . . . . . . 8,929
Net effect of straight-line rents(4) . . . . . . . . . . . . . . . . . . . . . . . . . . (81)
------
Estimated adjusted pro forma cash flows from operating activities for the 12
months ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,848
Estimated cash flows used in investing activities for the 12 months ending December 31, 1997: (130)
Estimated capitalized leasing commissions(5) . . . . . . . . . . . . . . . . . . . . . . (400)
------
Estimated capital expenditures and tenant improvements(6) . . . . . . . . . . . . . . .
(530)
Estimated pro forma cash flows used in financing activities for the 12 months ending
December 31, 1997:
Scheduled debt repayment (per amortization schedules) . . . . . . . . . . . . . . . . . . . (594)
------
Estimated cash available for distribution for the 12 months ending December 31, 1997 . . . . . . $7,724
======
Total estimated initial annual distribution(7) . . . . . . . . . . . . . . . . . . . . . . . . . $6,309
======
Estimated initial annual distribution per share . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.90
Expected Payout Ratio of Cash Available for Distribution . . . . . . . . . . . . . . . . . . . . 81.68%
======
</TABLE>
- ----------------
(1) Pro forma depreciation for the nine months ended September 30, 1997
represents actual nine months depreciation on the Original Properties plus
depreciation on the Acquisition Properties, calculated on 85% of the purchase
price depreciated over 30 years.
(2) There is no seasonality in the operation of the Company. Therefore, there
is not a significant difference between the pro forma Funds From Operations for
the nine months ended September 30, 1997, as annualized, and pro forma Funds
From Operations for the 12 months ended September 30, 1997.
(3) Net increases in base rent from renewals and new leases are calculated by
taking the Company's 1997 growth rate of 2.5% times actual base rent on
September 30, 1997.
(4) Represents the effect of adjusting straight-line rental income included in
the 12 months ended September 30, 1997 from an accrual basis under GAAP to a
cash basis.
(5) 42 leases expire in 1997 for a total of 110,941 square feet. It is assumed
that 75% of the expiring leases will renew for an average of four years at a
base rent of $10 per square foot. Renewal commissions are calculated at 2%.
It is assumed that the remaining 25% of expiring leases will be replaced with
new leases averaging four years at $10 per square foot. The commission rate on
new leases is calculated at 6%.
(6) Capital expenditures and tenant improvements are budgeted at the three year
average of $0.23 per square foot.
(7) 1997 distributions are planned at $0.90 per share per year.
24
<PAGE> 27
Future distributions by the Company will be at the discretion of the Board
of Trust Managers and will depend on the actual cash flow of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code (see "Federal Income Tax Consequences --
Taxation of the Company") and such other factors as the Board of Trust Managers
deems relevant. The Company anticipates that distributions will be paid from
Cash Available for Distribution, which will be affected by a number of factors,
including: (i) changes in rent attributable to the renewal of existing leases
or replacement leases; (ii) operating expenses and capital expenditures
requirements; and (iii) debt service requirements. For a discussion of the tax
treatment of distributions to the shareholders, see "Federal Income Tax
Consequences -- Taxation of Shareholders" and " -- Taxation of Foreign
Shareholders."
Distributions to shareholders of the Company for 1997, 1996 and 1995
consisted of a distribution in kind of Ivy common shares with a value of
$0.478, $0.40 and $0.20 per share, respectively.
DIVIDEND REINVESTMENT PLAN
The Company intends to implement a Dividend Reinvestment Plan (the "DRIP")
upon consummation of the Offering. Pursuant to the DRIP, a shareholder whose
Common Shares are registered in his or her own name may elect to have all
distributions reinvested automatically in additional Common Shares by
contacting (the "Plan Agent"). The Company may place
limitations on participation in the DRIP to assure the maintenance of its REIT
status. See "Federal Income Tax Consequences." Shareholders whose Common
Shares are held in the name of a nominee may have distributions reinvested
automatically by the nominee in additional Common Shares under the DRIP, but
only to the extent the nominee participates on his or her behalf. Shareholders
whose Common Shares are held in the name of a nominee should contact the
nominee for details. All distributions to investors who do not participate (or
whose nominee does not participate) in the DRIP will be paid by check mailed
directly to the record holder by or under the direction of the Plan Agent.
The Plan Agent will promptly apply a DRIP participant's distributions to
the purchase of newly issued Common Shares from the Company. The purchase
price per share of Common Shares purchased from the Company will be 95% of the
closing price for Common Shares on the open market on the distribution payment
date. The number of Common Shares to be received by the DRIP participants of
record on the record date for the payment of the Company's distributions on
account of the distribution will be calculated on the basis of the open market
price of the Common Shares on the distribution payment date and will be
credited to their accounts as of the payment date of the distribution.
The Plan Agent will maintain all shareholder accounts in the DRIP and will
furnish written confirmations of all transactions in the account, including
information needed by shareholders for personal and tax records. Certificates
for the shares will be held in the name of the Plan Agent and will be issued to
a DRIP participant upon written request. There will be no charge to
participants for reinvesting distributions and capital gains distributions.
The DRIP also permits participants to purchase Common Shares thereunder by
making voluntary cash payments to the Plan Agent in amounts of not less than
$100 or more than $10,000 per calendar quarter. These optional cash payments
will be applied to acquire Common Shares from the Company on the same terms as
the reinvestment of distributions.
The automatic reinvestment of distributions will not relieve participants
of any income tax which may be payable on distributions.
Experience under the DRIP may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the DRIP on
written notice to participants in the DRIP. The Company may also amend or
terminate the DRIP without notice if necessary to preserve the Company's REIT
status. All correspondence concerning the DRIP should be directed to the
Company.
The Company has reserved 1,000,000 Common Shares for issuance pursuant to
the DRIP.
25
<PAGE> 28
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the
consolidated capitalization of the Company. The information set forth in the
following table should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in the Prospectus, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
September 30, 1997(1)
Historical Pro forma
(unaudited) (unaudited)
(in thousands) (in thousands)
------------ ------------
<S> <C> <C>
Mortgage notes payable ..................................... $ 25,117 $ 33,247 (2)
Short term notes and lines of credit ....................... 950 0
Redeemable convertible subordinated notes .................. 212 0
Minority interest in real estate joint ventures ............ 1,585 0
Redeemable preferred shares, no par value, 20,000 shares
designated at $100 par value; 10,737 shares
issued and outstanding .......................... 1,068 0
Common shareholders' equity:
Common shares of beneficial interest, no par value,
837,489 shares issued and outstanding ........... 7,528 82,710 (3)
Accumulated deficit ........................................ (611) (2,709)(4)
------------ ------------
Total common shareholders' equity .......................... 6,917 80,002
------------ ------------
Total capitalization ....................................... $ 35,849 $ 113,249
============ ============
</TABLE>
- ----------------
(1) Reflects capitalization of the Company as of September 30, 1997.
(2) Assumes the prepayment of the mortgages at Twin Lakes Shopping Center,
Autobahn Shopping Center, Bandera Festival Shopping Center, El Campo Shopping
Center, Centennial Shopping Center and Town 'N Country Shopping Center with a
portion of the proceeds of the Offering. Also assumes the acquisition of the
Hedwig Centers, Benchmark Crossing Shopping Center, University Mall and
Rosemeade Shopping Center, each of which is secured by a first mortgage that
will be continued in place in connection with the acquisition of the property
secured thereby.
(3) Includes the offering of 7,500,000 Common Shares at the assumed offering
price per share of $10.75, less Offering expenses of 7.75%. Assumes the
underwriters' over-allotment option to purchase up to 1,125,000 Common Shares
is not exercised. Includes 75,000 Common Shares awarded to the Investment
Manager and the Trust Managers and certain executive officers of the Company in
December 1997.
(4) Includes (i) prepayment penalties of $241,872 associated with the
prepayment of the above mortgages; (ii) fees and closing costs of $1,049,557
associated with the estimated placement of $56,800,000 in bridge financing;
(iii) $806,250 relating to the granting of 75,000 shares of Common Shares to
the Investment Manager, officers and Trust Managers of the Company; and (iv)
$37,685 payment in excess of book value to retire the 9% Preferred Shares.
26
<PAGE> 29
DILUTION
At September 30, 1997, the pro forma net tangible book value of the
Company immediately prior to the Offering would have been $6,916,659, or $8.67
per Common Share. After giving effect to the sale by the Company of the Common
Shares offered hereby, the pro forma net tangible book value of the Company at
September 30, 1997 would have been $80,243,665, or $9.55 per Common Share. This
represents an immediate decrease in the net tangible book value per Common
Share to purchasers of Common Shares in the Offering. Net tangible book value
per Common Share represents the amount of total tangible assets of the Company
less total liabilities, divided by the number of Common Shares outstanding.
The following table illustrates the foregoing dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per Common Share (1) . . . . . . . . . . . $10.75
Pro forma net tangible book value before the Offering (2) . . . . . . . . $7.58
Increase in net tangible book value per Common
Share attributable to the Offering . . . . . . . . . . . . . . . . . . $1.93
-----
Pro forma net tangible book value per Common
Share after the Offering (3) . . . . . . . . . . . . . . . . . . . . . $9.51
-----
Dilution per Common Share to new public investors . . . . . . . . . . . . $1.24
=====
</TABLE>
- -------------
(1) Before deduction of underwriting discounts and estimated expenses of
the Offering.
(2) Net tangible book value per share of Common Stock before the Offering
is determined by dividing net tangible book value (total tangible
assets less total liabilities) of the Company by the number of shares
of Common Stock of the Company.
(3) Based on pro forma net tangible book value of $80,243,665 divided by
8,412,489 shares of Common Stock outstanding.
The following table sets forth the number of Common Shares to be sold
by the Company in the Offering, the total price paid by purchasers of the
Common Shares sold in the Offering, the net book value as of September 30, 1997
attributable to the outstanding restricted shares and the price per share sold
in the Offering.
<TABLE>
<CAPTION>
Book Value of Total Book Value of
Shares Issued Consideration to Consideration Per
by the Company (1) the Company Common Share
----------------------------- -------------------------------- ------------------
Number Percent Amount Percent
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current shareholders 912,489 10.8% $ 8,333,827 10.0% $ 9.13
New public investors 7,500,000 89.2 $74,376,536(2) 90.0 $ 9.92(3)
----------- ----------- ----------- ----------- -----------
Total 8,412,489 100.0% $82,710,363 100.0%
=========== =========== =========== =========== ===========
</TABLE>
- -------------------
(1) Includes 75,000 shares of Common Stock issued to the Investment
Manager and the Trust Managers in connection with the Offering.
(2) This amount is based on the initial public offering price of $10.75
per share less offering expenses of 7.75%.
(3) After deducting the Underwriters' discounts and commissions and
offering expenses estimated to be $6,248,438.
27
<PAGE> 30
SELECTED PRO FORMA AND HISTORICAL
FINANCIAL AND PROPERTIES INFORMATION
<TABLE>
<CAPTION>
Nine Months ended September 30
-----------------------------------------
Pro Forma
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCIAL INFORMATION: (unaudited) (unaudited) (unaudited)
Revenues:
Base rent (1) ........................................... $ 9,824,814 $ 3,706,057 $ 2,973,056
265,341 19,800 24,617
Percentage rent ......................................... 2,901,355 873,054 593,651
Tenant reimbursements ................................... 27,034 20,870 57,543
Interest and other income ............................... ------------ ------------ ------------
13,018,544 4,619,781 3,648,867
Total revenue ......................................... ------------ ------------ ------------
Expenses: 1,721,387 556,975 304,202
Property operating and maintenance ........................ 1,065,181 581,520 445,378
General and administrative ................................. 1,988,451 1,825,810 1,562,804
Interest .................................................. 2,470,972 870,972 688,187
Depreciation and amortization ............................. 1,686,332 565,698 398,193
Real estate taxes ......................................... ------------ ------------ ------------
Total expenses ........................................ 8,932,323 4,400,975 3,398,764
------------ ------------ ------------
Income before gain on sale of investment real
estate, minority interest and redeemable preferred stock
dividend requirements ...................................... 4,086,221 218,806 250,103
Gain on sale of investment real estate ................... -- -- 6,760
------------ ------------ ------------
Income before minority interest and redeemable preferred
stock dividend requirements .................................. 4,086,221 218,806 256,863
Minority interest in net income of real estate ventures ... -- (38,482) (37,421)
------------ ------------ ------------
Income before redeemable preferred stock dividend requirements .. 4,086,221 180,324 219,442
Redeemable preferred stock dividend requirements ................ -- (72,474) (72,138)
Net income available for common shareholders .................... 4,086,221 107,850 147,304
Net income (loss) per share ..................................... $ 0.49 $ 0.13 $ 0.18
============ ============ ============
Weighted Average Common Shares .................................. 8,412,489 837,489 859,397
============ ============ ============
Cash distributions per common share (2) ......................... -- -- --
============ ============ ============
BALANCE SHEET INFORMATION
Investment real estate, gross............................... 112,825,285 39,671,734 34,668,182
Total assets ............................................... 114,191,755 36,793,046 33,153,032
Mortgage and other notes payable ........................... 33,246,627 26,279,407 23,552,436
Total liabilities .......................................... 34,189,962 27,222,742 24,914,413
Minority interest .......................................... -- 1,585,419 686,965
Preferred stock ............................................ -- 1,068,226 1,068,226
Net equity ................................................. 80,001,793 6,916,659 8,238,619
<CAPTION>
Year ended December 31
------------------------------------------
Pro Forma
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
FINANCIAL INFORMATION: (unaudited)
Revenues:
Base rent (1) ........................................ $ 11,705,779 $ 4,097,911 $ 4,389,491
Percentage rent ...................................... 292,737 32,822 --
Tenant reimbursements ................................ 3,304,311 835,940 848,975
Interest and other income ............................ 102,361 67,409 44,224
------------ ------------ ------------
Total revenue ...................................... 15,405,188 5,034,082 5,282,690
------------ ------------ ------------
Expenses:
Property operating and maintenance ..................... 2,108,554 442,701 662,687
General and administrative ............................. 973,567 642,944 657,466
Interest ............................................... 2,300,510 2,132,390 2,177,447
Depreciation and amortization .......................... 3,008,778 958,778 960,876
Real estate taxes ...................................... 1,985,226 558,000 569,634
------------ ------------ ------------
Total expenses ..................................... 10,376,635 4,734,813 5,028,110
------------ ------------ ------------
Income before gain on sale of investment real
estate, minority interest and redeemable preferred stock
dividend requirements ................................... 5,028,553 299,269 254,580
Gain on sale of investment real estate ................ -- -- 25,020
------------ ------------ ------------
Income before minority interest and redeemable preferred
stock dividend requirements ............................... 5,028,553 299,269 279,600
Minority interest in net income of real estate ventures
-- (51,941) (43,278)
------------ ------------ ------------
Income before redeemable preferred stock dividend
requirements ........................................... 5,028,553 247,328 236,322
Redeemable preferred stock dividend requirements ............. -- (96,296) (43,618)
Net income available for common shareholders ................. 5,028,553 151,032 192,704
Net income (loss) per share .................................. $ 0.60 $ 0.18 $ 0.23
============ ============ ============
Weighted Average Common Shares ............................... 8,412,489 834,655 834,397
============ ============ ============
Cash distributions per common share (2)....................... -- -- --
============ ============ ============
BALANCE SHEET INFORMATION
Investment real estate, gross............................ 39,327,929 34,166,161
Total assets ............................................ 37,201,773 32,461,433
Mortgage and other notes payable ........................ 26,542,992 22,484,845
Total liabilities ....................................... 27,406,859 23,407,145
Minority interest ....................................... 1,584,673 699,984
Preferred stock ......................................... 1,068,226 1,068,226
Net equity .............................................. 7,142,015 7,286,078
<CAPTION>
Year ended December 31
----------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
FINANCIAL INFORMATION:
Revenues:
Base rent (1) ........................................ $ 3,794,711 $ 3,194,084 $ 2,325,950
-- -- --
Percentage rent ...................................... 844,299 622,164 477,188
Tenant reimbursements ................................ 10,344 13,886 30,436
Interest and other income ............................ ------------ ------------ ------------
Total revenue ...................................... 4,649,354 3,830,134 2,833,574
------------ ------------ ------------
Expenses:
Property operating and maintenance ..................... 445,635 355,276 225,316
General and administrative .............................. 507,137 442,459 430,071
Interest ............................................... 2,101,762 1,923,640 1,470,975
Depreciation and amortization .......................... 756,914 631,567 456,214
Real estate taxes ...................................... 512,070 437,679 335,526
------------ ------------ ------------
Total expenses ..................................... 4,323,518 3,790,621 2,918,102
------------ ------------ ------------
Income before gain on sale of investment real
estate, minority interest and redeemable preferred stock
dividend requirements ................................... 325,836 39,513 (84,528)
Gain on sale of investment real estate ................ -- -- --
------------ ------------ ------------
Income before minority interest and redeemable preferred
stock dividend requirements ............................... 325,836 39,513 (84,528)
Minority interest in net income of real estate ventures (48,435) (31,084) 1,359
------------ ------------ ------------
Income before redeemable preferred stock dividend requirements 277,401 8,429 (83,169)
Redeemable preferred stock dividend requirements ............. -- -- --
Net income available for common shareholders ................. 277,401 8,429 (83,169)
Net income (loss) per share .................................. $ 0.35 $ 0.01 $ (0.14)
============ ============ ============
Weighted Average Common Shares ............................... 797,655 670,725 590,782
============ ============ ============
Cash distributions per common share (2)....................... $ 0.40 $ 0.39 $ 0.38
============ ============ ============
BALANCE SHEET INFORMATION
Investment real estate, gross............................ 33,852,985 29,349,299 22,268,417
Total assets ............................................ 32,702,850 28,773,597 22,148,861
Mortgage and other notes payable ........................ 23,826,831 21,690,375 16,347,640
Total liabilities ....................................... 24,647,866 23,113,687 16,927,667
Minority interest ....................................... 794,730 813,578 69,600
Preferred stock ......................................... -- -- --
Net equity .............................................. 7,260,254 5,578,532 5,151,594
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
Nine Months ended September 30
------------------------------------------
Pro Forma
1997 1997 1996
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Data:
Funds from Operations (3) ......................... $ 6,794,188 $ 978,822 $ 835,491
Cash flows from:
Operating activities ............................ -- 867,473 512,344
Investing activities ............................ -- (343,805) (2,128,568)
Financing activities ............................ -- (386,501) 1,881,076
Number of operating properties (at end of period) . 16 8 7
GLA (sq ft.)(at end of period) ................... 1,742,525 753,790 625,425
Occupancy of Properties owned (at end of period) .. 96% 97% N/A
<CAPTION>
Year ended December 31
------------------------------------------------------------------------------
Pro Forma
1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Funds from Operations (3) ......................... $ 6,228,957 $ 1,109,810 $ 1,128,560 $ 1,034,315 639,996 373,045
Cash flows from:
Operating activities ............................ -- 1,062,002 958,510 993,272 504,103 506,670
Investing activities ............................ -- (1,319,213) (269,479) (2,240,884) (7,030,882) (10,976,073)
Financing activities ............................ -- (51,293) (384,637) 1,121,241 6,474,138 7,960,328
Number of operating properties (at end of period) . 16 8 6 6 5 4
GLA (sq ft.)(at end of period) ................... 1,742,525 753,790 542,095 542,095 442,126 350,472
Occupancy of Properties owned (at end of period) .. 95% 96% 95% 96% 96% 90%
</TABLE>
- ---------------
(1) Base rent was lower in 1996 as a result of the spin-off of the One West
Hills office building on January 1, 1996 to Ivy, an office REIT managed by
the Investment Manager.
(2) For 1997, 1996 and 1995, the Company distributed a dividend in kind of Ivy
stock with a value of $0.478, $0.40 and $0.20 per share, respectively.
(3) The NAREIT White Paper defines Funds From Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation
and amortization and after adjustments for unconsolidated entities in which
the REIT holds an interest. Management believes Funds From Operations is
helpful to investors as a measure of the performance of an equity REIT
because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt and
make capital expenditures. The Company computes Funds From Operations in
accordance with the standards established by the White Paper, which may
differ from the methodology for calculating Funds From Operations utilized
by other equity REITs, and accordingly, may not be comparable to such other
REITs. Further, Funds From Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and
uncertainties. Funds From Operations should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Selected Consolidated Financial Data and the Consolidated Financial Statements
and the related Notes included elsewhere in this Prospectus.
OVERVIEW
The Historical Consolidated Financial Statements for United Investors
Realty Trust present the financial position and results of operations of the
Company for each of the fiscal periods indicated. The financial results
presented in the Historical Consolidated Financial Statements and the related
Notes reflect the operating revenues and expenses associated with the Original
Properties, as well as other related expenses, including general and
administrative expenses associated with the management function such as
Investment Manager fees and direct overhead items.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
For the nine months ended September 30, 1997, net income before gain
on sale of investment real estate was $218,807 as compared to $250,103 in the
corresponding period of 1996, a 12% decrease. The table below breaks new
centers out from mature centers and allows the reader to look at income before
depreciation, which is up 16% in total and 3% at mature centers for the first
nine months of 1997.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
(in thousands) (in thousands)
---------------------------------------- ----------------------------------------
El Campo & El Campo &
Mature(1) Park Northern Total Mature(1) Park Northern Total
--------- ------------- ----- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $ 3,654 $ 966 $ 4,620 $ 3,563 $ 92 $ 3,655
Expenses:
Property operating 457 99 556 297 7 304
General and administrative 407 175 582 435 10 445
Interest 1,460 366 1,826 1,517 46 1,563
Depreciation and amortization 708 163 871 674 14 688
Real estate taxes 390 176 566 387 11 398
--------- --------- --------- --------- --------- ---------
Total expenses $ 3,407 $ 994 $ 4,401 $ 3,310 $ 88 $ 3,399
--------- --------- --------- --------- --------- ---------
Income before gain on sale of
investment real estate $ 247 $ (28) $ 219 $ 252 $ (4) $ 256
========= ========= ========= ========= ========= =========
Income before gain on sale of
investment real estate
and depreciation $ 955 $ 135 $ 1,090 $ 926 $ 18 $ 944
========= ========= ========= ========= ========= =========
</TABLE>
- -----------------
(1) Mature centers are those that were owned by the Company for all of 1997
and 1996.
Total revenues increased 27% to $4,620,000 for the first nine months of
1997 as compared to $3,649,000 in 1996. Of the increase, $880,000 was
attributable to the addition of El Campo and Park Northern Shopping Centers in
1996 but revenues at mature shopping centers also increased by $91,000, or 3%,
in the same period.
Property operating expenses at mature properties increased $63,000 in
1997 due to higher painting and other maintenance costs at Bandera, Autobahn
and University Place. General and administrative costs at mature properties
increased $55,000, which includes increased reserves for bad debt of $19,000.
Interest expense increased from $1,563,000 in the first nine months of
1996 to $1,826,000 during the same period 1997, an increase of 17%. Of this
increase, $289,000 is directly attributable to mortgages assumed at El Campo
and Park Northern. The balance is attributable to the $600,000 in 11%
short-term notes and $300,000 in new lines of credit utilized to purchase El
Campo and Park Northern.
30
<PAGE> 33
Depreciation and amortization expenses increased 27% to $871,000 in the
first nine months of 1997 from $688,000 in 1996. The increase is attributable
to higher amortization of leasing costs and leasehold improvements.
Real estate taxes increased from $398,000 during the first nine months
of 1996 to $566,000 during the first nine months of 1997, all of which is
attributable to El Campo and Park Northern.
Advisory fees, which are included in general and administrative
expenses, increased 11.9% to $258,750 for the nine months ended September 30,
1997, as compared to $231,150 for the corresponding period of the prior year.
Advisory fees, which were based on a percentage of assets of the Company,
increased as a result of the acquisitions of the El Campo and Park Northern
properties. In connection with the Offering, the basis for calculating the
advisory fee is being changed and will be based on a percentage of Advisory
Funds From Operations (as defined in the Glossary). See "Certain Relationships
and Transactions." Management believes that an advisory fee based on Advisory
Funds From Operations is tantamount to incentive based compensation and that
such basis is in the best interest of the shareholders. For 1997, the advisory
fee would have been essentially the same regardless of which method was used.
Year Ended December 31, 1996 Compared to the Year Ended December 31,
1995
For the year ended December 31, 1996, net income available for common
shareholders decreased 21.6% to $151,032 as compared to $192,704 for the year
ended December 31, 1995, primarily because the results of One West Hills Office
Building were included in 1995 but not in 1996. Excluding the gain on sale of
investments and the net income generated by One West Hills of $68,710 in 1995,
net income available for common shareholders actually increased 53% to $151,032
in 1996 as compared to $98,974 in 1995. The spin-off of the One West Hills
Office Building to Ivy occurred on January 1, 1996.
Total revenues decreased 5% to $5,034,082 in 1996 as compared to
$5,282,690 in 1995. The exclusion of One West Hills revenue of $619,820 in
1995 would have resulted in an 8% increase in revenues for 1996 as compared to
1995. The additional revenues consisted of $176,812 from the El Campo Shopping
Center and $137,607 from the Park Northern Shopping Center acquisitions during
1996, with the balance from additional rents from existing shopping centers.
Property operating and maintenance expenses decreased 33% to $442,701 in
1996 as compared to $662,687 for 1995. The decrease in property operating and
maintenance expenses was primarily attributable to the spin off of One West
Hills, which was partially offset by additional operating expenses of $38,022
and $37,173 in 1996 for El Campo and Park Northern, respectively.
Real estate taxes decreased 2% to $558,000 in 1996 as compared to
$569,634 in 1995. The decrease was attributable to the spin off of One West
Hills to Ivy, offset by the El Campo and Park Northern acquisitions.
Advisory fees increased 1% to $279,000 in 1996 as compared to $276,000
in 1995. The advisory fee, which was based on assets at year end, was prorated
with respect to the Properties acquired during the year.
Management fees decreased 34% to $139,780 in 1996 as compared to
$212,506 in 1995. The decrease, which was primarily attributable to the spin
off of One West Hills to Ivy, was partially offset by the acquisitions of El
Campo and Park Northern. Management fees, which included on site personnel, are
generally higher for office buildings.
Legal and accounting expenses increased 54% to $93,302 in 1996 as
compared to $60,482 in 1995. The increase was primarily attributable to
professional fees associated with the documentation of the Partnership.
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Other general and administrative expenses increased 21% to $130,862 in
1996 as compared to $108,478 in 1995. The increase was attributable to
additional expenses associated with a larger asset base and ground lease
expenses for Park Northern.
Interest expense decreased 2% to $2,132,390 in 1996 as compared to
$2,177,447 in 1995. The decrease is also primarily attributable to the One
West Hills spin off to Ivy. This was partially offset by interest expense from
short- term notes issued in 1996.
Depreciation and amortization expenses decreased less than 1% to
$958,778 in 1996 as compared to $960,876 in 1995. The decrease was
attributable to the spin off of One West Hills to Ivy, which was offset by the
depreciation expense on the El Campo and Park Northern acquisitions.
Year Ended December 31, 1995 Compared to the Year Ended December 31,
1994
For the year ended December 31, 1995, net income available for common
shareholders decreased 30% to $192,704 in 1995 as compared to $277,401 in 1994.
The decrease was the result of higher depreciation expenses associated with the
McMinn Plaza Shopping Center and One West Hills Office Building acquisitions,
which were acquired in June and September, 1994, respectively, and depreciation
expenses on capital improvements to the existing portfolio.
Total revenues increased 14% to $5,282,690 in 1995 as compared to
$4,649,354 in 1994. The increase in revenues was primarily attributable to the
acquisitions of McMinn Plaza and One West Hills Office Building.
Property operating and maintenance expenses increased 49% to $662,687 in
1995 as compared to $445,635 for 1994. The increase in operating expenses was
the result of the acquisitions in 1994 of McMinn Plaza and One West Hills.
Real estate taxes increased 11% to $569,634 in 1995 as compared to
$512,070 in 1994. The increase was primarily attributable to the McMinn Plaza
and One West Hills acquisitions.
Advisory fees increased 9% to $276,000 in 1995 as compared to $253,000
in 1994. The increase was primarily attributable to the One West Hills and
McMinn Plaza acquisitions.
Management fees increased 70% to $212,506 in 1995 as compared to
$124,672 in 1994. The increase was primarily attributable to the One West Hills
acquisition and, to a lesser extent, the McMinn Plaza acquisition.
Legal and accounting expenses increased 19% to $60,482 in 1995 as
compared to $50,657 in 1994. The increase was primarily attributable to higher
professional fees associated with the larger asset base in 1995 as compared to
1994.
Other general and administrative expenses increased 38% to $108,478 in
1995 as compared to $78,808 in 1994. The increase was primarily attributable
to franchise tax associated with the McMinn Plaza acquisition and additional
expenses associated with a larger asset base.
Interest expense increased 4% to $2,177,447 in 1995 as compared to
$2,101,762 in 1994. The increase was primarily attributable to the additional
first mortgages associated with the McMinn Plaza and One West Hills
acquisitions and was partially offset by the repayment of short term notes
during 1994.
Depreciation and amortization expenses increased 27% to $960,876 in 1995
as compared to $756,914 in 1994. The increase was primarily attributable to
the McMinn Plaza and One West Hills acquisitions and, to a lesser extent,
depreciation expense on capital and tenant improvements at Bandera Festival
Shopping Center and Centennial Shopping Center.
LIQUIDITY AND CAPITAL RESOURCES
Indebtedness
As of September 30, 1997, the Company had total indebtedness of
approximately $26.3 million, which consisted of approximately $25.0 million in
indebtedness collateralized by the eight Original Properties and a recently
acquired unimproved outparcel, and $1.3 million of unsecured indebtedness. Of
such indebtedness, $300,000 is variable rate
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indebtedness and $26.0 million is at a fixed rate. Under the current debt
structure, in which only $300,000 is not fixed or capped, the Company does not
hedge against changes in interest rates. Upon acquisition of additional
properties through debt financing or the refinancing of existing debt, the
Company will consider the purchase of interest rate hedges. The purchase of
hedges, in either event, will require outlays of capital and could affect the
Company's ability to continue its planned level of distributions. Accordingly,
the Company plans to use variable rate debt only if the cost of an appropriate
hedge is in line with the Company's overall strategy for distribution and
growth. The costs of any future interest rate caps are dependent upon any
number of factors, including fluctuations in interest rates, and may increase
in the future. The Company's indebtedness has interest rates ranging from 7.63%
to 10.75%, with a weighted average interest rate of 9.13%, and will mature
between 1997 and 2018, with a weighted average remaining term to maturity of
6.6 years. See "Business and Properties -- Mortgage Indebtedness." Most of the
Company's indebtedness maturing in 1997, 1998 and 1999 is expected to be repaid
with proceeds from the Offering. Of the remaining mortgage debt, no individual
note with balances due at maturity (of any significance) will mature until
2005. See "Risk Factors --Increased Leverage May Result in Loss of Properties
in the Event of a Foreclosure" for a more complete discussion of uncertainties
regarding refinancing of the Company's mortgage indebtedness.
Liquidity Sources and Requirements
Historically, the principal sources of funding for the Company's
acquisitions of properties have been equity offerings, mortgages, notes and
short term lines of credit.
The Company expects to meet its short term liquidity requirements
generally through working capital and ongoing net cash provided by operations.
The Company believes that its net cash provided by operations will be
sufficient to allow the Company to make any distributions necessary to enable
the Company to continue to qualify as a REIT. The Company also believes that
the foregoing sources of liquidity will be sufficient to fund its short-term
liquidity needs through 1998. Development activities are expected to be
financed in part by construction loans and other available credit facilities.
The Company expects to meet certain long term liquidity requirements
such as property acquisitions, scheduled debt maturities, renovations,
expansions and other non-recurring capital improvements through long term
collateralized and uncollateralized indebtedness, including a new line of
credit facility and the issuance of additional equity securities.
The Company's primary demands for liquidity are expected to be funding
distributions to its shareholders, debt service payments, property operations
and general and administrative expenses.
With regard to future shareholder distributions, the Company must
distribute at least 95% of its "real estate investment trust taxable income"
(as defined in the Code) in order to meet the qualifications of a REIT. The
Company's regular quarterly distributions are expected to be paid with Cash
Available for Distribution. However, under certain circumstances, the Company
may be required to make distributions in excess of Cash Available for
Distribution in order to meet REIT distribution requirements.
The Company has received a letter of intent from a bank for a $20
million revolving line of credit. If utilized, the credit line will be used
primarily to acquire additional community shopping centers. The credit line,
which is expected to bear interest on funds as they are drawn down at the rate
of 150 basis points over 90-day LIBOR, will have a two-year term and will be
secured by a first lien on several of the Properties whose existing mortgage
debt will be repaid in connection with the completion of the Offering.
Cash Flow
Net cash flow from operating activities increased from $512,344 for the
first nine months of 1996 to $867,473 for the first nine months of 1997. The
net increase of $355,129 was primarily due to the addition of El Campo and Park
Northern Shopping Centers, and reductions in trade accounts receivable, offset
by increased prepaid expenses relating to tax escrow accounts for Park Northern
and expenses incurred in preparation for the Offering. Net cash flow provided
by operating activities increased from $958,510 in 1995 to $1,062,002 in 1996
due primarily to improved property performance in 1996. Trade accounts payable
were up $191,717 at December 31, 1996 but were largely offset by increased
accounts receivable and decreased accrued expenses. For 1995, net cash flow
from operating activities was virtually unchanged from 1994 at approximately
$1.0 million in each year.
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Net cash flow used in investing activities decreased from $2,128,568 in
the first nine months of 1996 to $343,805 in 1997, reflecting the purchase of El
Campo in 1996 versus normal capital repairs in 1997. Cash flow used in
investing activities increased from $269,479 in 1995 (roof at Centennial) to
$1,319,213 (primarily new acquisitions) in 1996. On January 1, 1996, the Company
transferred its investment in One West Hills office building to Ivy and during
1996, it acquired El Campo Shopping Center and a majority interest in Park
Northern Shopping Center. Net cash flow used in investing activities in 1994
were $2,240,884, mostly attributable to the acquisition of McMinn Shopping
Center and the One West Hills office building.
For the nine months ended September 30, 1997, $386,501 was used in
financing activities, representing the excess of principal payments on mortgages
over new short-term borrowings. For the same period in 1996, funds provided by
financing activities were $1,881,076 as the Company assumed $1,600,000 in
existing debt at El Campo and issued $600,000 in new short-term notes payable to
fund the purchase of El Campo. Cash flow used for financing activities
decreased from $384,637 in 1995 to $51,293 in 1996. During 1996, $600,000 in
new, short term notes and new lines of credit totaling $140,000 were secured to
complete the purchase of El Campo and Park Northern and pay down the mortgage at
Park Northern by $600,000. During 1995, $0.6 million was received as proceeds
from preferred stock and $2.0 million in new mortgage notes were obtained, and
$2.9 million in mortgage and note principal was retired. In 1994, $1.6 million
in new mortgages were assumed as part of the McMinn Plaza and One West Hills
office building acquisitions and $0.4 million in principal was retired. Total
cash flow from financing operations in 1994 were $1.1 million.
Capital Expenditures
The Company's capital improvements have averaged approximately $0.23 per
square foot per year over the last three years. Several factors exist which
help to minimize capital improvements. They are:
(i) The majority of the Company's leases provide for the tenants
to share in the common area maintenance expenses of the
shopping centers owned by the Company.
(ii) Tenants are typically responsible for the repair and
replacement of their HVAC systems.
(iii) Only 2,990 square feet of the Company's portfolio is shell
space (i.e., not previously improved for a tenant).
(iv) Leases typically provide for the Company to provide tenants
with a "white box" (i.e., unfinished space). Hence, the
tenant is responsible for finishing out the space for its
needs. Additionally, some leases provide that the space is
delivered to the tenant in an "as is" condition.
(v) The Company maintains an active preventative maintenance
program designed to preserve and lengthen the life of the
roofs and parking lots of its shopping centers.
The Company capitalized $161,063 in improvements during 1996 and has
budgeted approximately $333,743 for capital improvements for 1997, after tenant
recoveries of approximately $91,000.
Inflation
During the periods presented above, inflation has not had a significant
impact on the Company. Most of the Company's long-term leases contain
provisions designed to mitigate the adverse impact of inflation on the
Company's net income. Such provisions include clauses enabling the Company to
receive percentage rents based on gross sales of tenants, which generally
increase as prices rise, and/or in certain instances, escalation clauses, which
generally increase rental rates during the terms of the leases. In addition,
most of the Company's leases require the tenants to pay their share of
operating expense, including common area maintenance, real estate taxes,
insurance and utilities, thereby reducing the Company's exposure to increases
in costs and operating expenses resulting from inflation.
New Accounting Pronouncement
In February 1997, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share" which simplifies the standards
for computing and presenting earnings per share ("EPS") and makes them
comparable to international EPS standards. This statement is effective for the
year ending December 31, 1997. Earlier application is not permitted and
restatement of prior period earnings per share data is not required. The Company
does not believe that implementation of SFAS No. 128 will have a material
impact on its EPS.
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STRATEGY FOR FUTURE GROWTH
The Company will seek to maximize growth in Cash Available for
Distribution and enhance the value of its portfolio through effective
acquisition, operation, rehabilitation and financing strategies as well as
intensive management policies. The Company believes that attractive
opportunities exist to acquire additional community shopping centers at prices
that are accretive to the Company's Funds From Operations. The Company intends
to aggressively pursue such acquisitions at costs that are generally less than
the cost of new construction. Such acquisition policy should continue to
present the Company with potential for cash flow growth and capital
appreciation.
The Company also believes that attractive opportunities exist to
increase rental revenues and Cash Available for Distribution through effective
leasing and intensive management of the properties in its portfolio. This is
especially true with respect to most of the Acquisition Properties, which,
management believes, have been under-managed. By way of example, management
believes that University Mall can be repositioned in its market with some
aggressive leasing combined with the introduction of an attractive signage
program, installation of better lighting and the implementation of an overall
plan to reduce the impact of existing trees to create better visibility from
the street.
Management expects to enter into a limited number of joint venture
arrangements with experienced shopping center developers to build, in select
areas, additional retail centers with supermarket or other national or regional
retail anchors. Several potential joint venture partners and identified sites
are currently under consideration by management. Although such development
will be limited, initially, to approximately 20% of the Company's GLA, such
development presents the potential for returns in excess of those that can
generally be obtained from acquisitions of existing properties.
The Company's operating, acquisition, development and financing
strategies and management policies are determined by the Company's Board of
Trust Managers and implemented by the executive officers and other key
employees of the Investment Manager and may be amended or revised from time to
time at the discretion of the Board of Trust Managers without a vote of the
shareholders of the Company.
GROWTH STRATEGY
Acquisitions
The Company's primary strategy to increase the size of its portfolio
is to acquire well-located community shopping centers anchored by supermarkets
and other national and regional credit-worthy tenants with long-term leases.
The Company's acquisition emphasis will be on retail properties with what
management considers to be strong prospects for future cash flow growth and
capital appreciation, and on community shopping centers where significant
redevelopment opportunities exist. The Company will focus primarily on
acquisitions of retail properties in medium to large-sized metropolitan
communities where the Company's knowledge of the real estate market is
strongest or in areas where the Company can acquire, concurrently, several
properties, in order to obtain economies of scale. In either event, the
Company will focus on areas where potential future increases in rental and
occupancy rates are anticipated to be realized as a result of better than
average population and employment growth. The Company intends to acquire
community shopping centers located along major traffic arteries in established
neighborhoods where the development of competing shopping centers is impeded by
the lack of developable land and zoning restrictions, and where tenant
relocation alternatives are limited.
In evaluating the potential acquisition of any property, management
considers a variety of factors such as (i) the location, visibility and
accessibility of the property; (ii) the demographic characteristics of the
local market, including potential for growth; (iii) the size of the property;
(iv) the purchase price; (v) the availability of funds or other consideration
for the proposed acquisition and the cost thereof; (vi) the geographic "fit" of
the property with the Company's existing portfolio; (vii) the absence or
existence of environmental problems, if any; (viii) the current and projected
cash flow of the property and perceived ability to increase cash flow; (ix) the
terms of the leases, including the potential for rent increases; (x) the
quality of construction, physical condition and design of the property; (xi)
the terms of existing financing on the property; and (xii) existing and the
potential for future competition within the community in which the prospective
acquisitions are located.
The Company believes the Acquisition Properties are indicative of the
growth potential through acquisitions available in the marketplace. Further,
it believes that its ability to compete effectively with other shopping center
operators in its peer group with respect to future acquisitions will be
enhanced by the completion of the Offering. It has been management's
experience that many retail center owners with an interest in selling their
properties wish to maintain an active role in the management of their centers.
Management believes that many of the Company's competitors have
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no interest in or capacity for retaining the management services of the persons
who control the assets that such competitors wish to acquire. The Company is
prepared to allow certain qualified senior management to continue the
management of their former assets if such persons can be retained on terms
satisfactory to the Company. For example, the Town 'N Country shopping center
in Tampa, Florida involves a group of professional shopping center operators
who currently own and operate six other retail centers in the same central
Florida area. Two members of this group (the "Tampa Group") have been retained
by the Company to manage the Town 'N Country shopping center and to act as
regional (initially limited to central and south Florida) representatives for
the Company upon the acquisition of the property by the Company. The Company
believes that its ability to retain such managers will facilitate access to
additional acquisitions, integration of future property acquisitions, and
retention of the existing goodwill resulting from the long-term tenant
relations and community involvement of such managers.
Initially, the Company will concentrate its acquisition activities on
communities in which it already has properties or where the Company can acquire
several properties in order to obtain economies of scale in the use of local
personnel, advertising and purchasing of services locally. The Company believes
that its strategy to anchor its shopping centers with supermarkets and other
national and regional credit tenants under long-term leases will continue to
support stable cash flows from the Properties.
Redevelopment
Redevelopment activities have been an integral part of the Company's
business strategy and will continue to be an important component of its
strategy in the future. Redevelopment activities generally involve physically
upgrading an existing retail facility in order to meet current industry
standards as well as to accommodate the expansion of existing tenants and/or
the placement of additional tenants. The Company has significant experience in
all phases of the redevelopment process. Management believes that most of the
Acquisition Properties have been under-managed and, as a result, present
opportunities for such redevelopment. Plans and budgets for redevelopment
and/or expansion of several of the Acquisition Properties and two of the
Original Properties are being prepared for implementation after the completion
of the Offering.
Development
With respect to development opportunities, the Company has a contract
to acquire an 8.5 acre site in San Antonio, Texas that management considers to
be an excellent location. The Company is currently evaluating various
development plans for the site and is in discussions with several prospective
tenants. A second site is under consideration in central Florida where the
Tampa Group has obtained a preliminary indication of possible interest from a
supermarket chain. If the Company decides to proceed with either or both
sites, it intends to enter into joint venture arrangements with experienced
local retail developers for the development and lease-up of these properties.
Management believes that development properties, if well-located and properly
leased, can provide better than average returns to the Company. Since the risk
inherent in such development is also potentially greater than in acquisition of
mature properties, management intends to limit such development activities to
approximately 20% of the Company's GLA.
OPERATING STRATEGY
The Company believes in an aggressive leasing and property management
strategy conducted by professionals with extensive experience, knowledge of
local markets and an established track record with national, regional and local
retailers. The Company's leasing and property management activities are
conducted by Company managers and representatives as well as by local leasing
and property managers, all of whom are supervised by the Company's officers.
Regional supervision of the Company's central and south Florida properties will
be provided by the Tampa Group. The Company believes that the expertise and
relationships developed by the professional leasing and management teams
enhance the Company's ability to retain existing tenants as well as attract
national and regional retailers to its Properties.
The Company's overall property management and leasing strategy is
designed to permit the Company to realize significant opportunities for
increased rental revenue and cash flow growth. Each Property has a specific
management and leasing program which takes into account the location, community
needs, tenant mix and other factors affecting such Property. Key elements of
the Company's strategy include:
o Tenants. The Company intends to maintain and diversify its core base
of national and regional credit-worthy tenants. The Company
recognizes the dynamics inherent at each of its properties and intends
to tailor the tenant mix at each Property to meet the needs of the
local communities. The Company also intends to continue to focus its
anchorage at each Property on supermarkets and on other recognized
national and regional tenants.
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o Lease Renewals/Extensions. Company officers and property managers
(under the direction of Company officers) expect to aggressively
market vacant space, renew existing leases at higher base rents per
square foot, and utilize base rent escalation provisions in its leases
to the extent allowed by lease and market conditions. The Company
believes that a number of its leases currently are below market rents
and that opportunities may exist in the future to renew those leases
at higher base rents upon expiration.
o Property Management. The Company seeks to maintain attractive
facilities through regularly scheduled inspection visits and
maintenance programs for each Property, placing a strong emphasis on
aesthetics, regular maintenance, periodic renovation and capital
improvements. The Company expects to continue such programs and will
budget annually what management considers to be appropriate
maintenance expenditures. The Company's property managers will be
charged with the responsibility for implementing designated repairs
and improvements, which the Company's officers will regularly inspect.
The Company believes that such hands-on property management enhances
the value of its Properties in the eyes of its tenants and attracts
new tenants to its Properties.
o Property Sales. The Company may, from time to time, sell properties
at advantageous prices, depending on prevailing market conditions and
subject to certain limitations relating to the Company's taxation as a
REIT. The Company currently has no plans to sell any of the
Properties.
FINANCING
In order to pursue its acquisition, redevelopment, development and
operating strategies most effectively, the Company intends to maintain a
capital structure with a ratio of long-term debt to Total Market Capitalization
of no more than approximately 50%. On a pro forma basis at September 30, 1997,
after giving effect to the Offering (assuming an initial public offering price
of $10.75 per Common Share), the purchase of all Acquisition Properties and the
application of the estimated net proceeds, the Company would have had a
long-term debt to Total Market Capitalization ratio of approximately 26.8%.
The Company, however, may from time to time increase or decrease its ratio of
long-term debt to Total Market Capitalization in light of then current economic
conditions, relative costs of debt and equity capital, the market values of its
properties, growth and acquisition opportunities and other factors.
Fluctuations in the market price of the Common Shares may cause this ratio to
vary from time to time. The Company has established its financing policies
relative to the Total Market Capitalization of the Company rather than relative
to the book value of the Company's assets. The Company has used market
capitalization because management believes that the book value of the Company's
assets does not accurately reflect the fair market value of such assets or the
Company's ability to borrow and to meet debt service requirements. The market
capitalization of the Company, however, is more variable than book value, and
does not necessarily reflect the fair market value of the underlying assets of
the Company at all times. The Company intends to avoid exposure to long-term
variable rate debt by utilizing either fixed-rate debt or entering into
interest rate protection agreements.
The Company intends to finance its acquisitions, redevelopments and
developments with what it considers to be the most appropriate sources of
capital, which may include undistributed cash available for distribution, the
issuance of equity securities (including preferred shares), sales of
investments, bank and other institutional borrowings (secured and unsecured),
the issuance of debt securities and proceeds from the sale of properties.
The Company has received a letter of intent from a bank for a $20
million revolving line of credit. If utilized, the credit line will be used
primarily to acquire additional community shopping centers. The credit line,
which is expected to bear interest on funds as they are drawn down at the rate
of 150 basis points over 90-day LIBOR, will have a two-year term and will be
secured by a first lien on several of the Properties whose mortgage debt will
be repaid in connection with the completion of the Offering.
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BUSINESS AND PROPERTIES
BUSINESS
The Company was formed for the purpose of investing directly in income
producing real property located in the continental United States and in
partnerships formed to own such real properties. The Company currently owns or
controls eight community shopping center properties located in Texas, Tennessee
and Arizona. The Company has recently acquired or has under contract or option
to purchase eight additional community shopping centers located in Texas,
Florida and Arizona. The Properties are strategically located in areas
intended to provide busy working families with the opportunity to do most of
their shopping between work and home. The Properties range in size from
approximately 29,000 square feet to 316,000 square feet, and are anchored
primarily by supermarkets and by national and regional retailers who offer
everyday necessities to their neighborhood communities.
Any future property acquisitions by the Company are expected to be in
established neighborhoods in medium to large-sized metropolitan communities,
where potential future appreciation will be driven by better than average
population and employment growth. The Company partners with local,
professional management for day-to-day operation of most of its Properties.
Management feels that these managers possess valuable understanding of these
local markets. Further, management has concluded that local management is
currently an economical alternative to management by Company personnel in all
but its Houston markets. Management also believes that the opportunity to
manage future properties acquired by the Company provides incentive for these
professionals to assist the Company in finding additional potential
acquisitions. These local professionals are, or can be, on-site on a daily
basis and are familiar with the communities in which the centers are situated
and the needs of the tenants that these centers serve. The Company intends to
lease and manage four of the Acquisition Properties and one of the Original
Properties, all of which are located in or near Houston, directly from its
Houston office and to rely on unaffiliated professional managers on the
remaining four Acquisition Properties. The Company has also established a
regional office in Tampa to help supervise its central and southern Florida
properties and to facilitate the acquisition of additional community shopping
centers in that area.
The Company seeks to maximize growth in Funds From Operations and Cash
Available for Distribution to shareholders through effective management,
operation and acquisition of community shopping centers. The Company currently
follows five general investment policies to achieve its objectives: (i) the
Company seeks to acquire real estate assets for long-term investment and income
applying selective criteria and employing the most advantageous sources of
capital alternatives; (ii) the Company intends to aggressively seek
acquisitions, including properties that it can renovate and/or expand, and
maintain and intensively manage a portfolio of high quality and well-located
properties with a majority of the space already leased; (iii) the Company
intends to focus its acquisition efforts on communities in which it already has
properties or in areas where the Company can acquire several properties
concurrently, in order to obtain economies of scale in the use of local
personnel, advertising and purchasing of services; (iv) the Company expects to
enhance its existing portfolio by entering into a limited number of joint
venture alliances with experienced developers in order to develop new community
shopping centers; and (v) the Company intends to sell, from time to time,
select properties as dictated by market conditions in order to realize capital
gains and to improve the Company's overall portfolio profile and valuation.
The investments of the Company are managed by the Investment Manager.
Robert W. Scharar, Chairman of the Board of the Company, is a principal
shareholder of the Investment Manager. The Company's President and Chief
Executive Officer, Lewis H. Sandler, is also the Chief Executive Officer of the
real estate services division of the Investment Manager. See "Risk
Factors--Conflicts of Interest." The Investment Manager's senior management
originally sponsored the organization of the Company as a benefit to a number
of clients who desired to include real estate properties in their investment
portfolios. The Investment Manager currently provides administrative,
accounting, financial, legal and operating personnel as well as asset
management to the Company on an "as-needed" basis. See "Investment Manager."
After completion of the Offering, the Investment Manager has agreed to dedicate
to the administration of the Company the full- time services of Randall D.
Keith and Daniel M. Jones, III, who currently serve as the Company's Chief
Operating Officer and Chief Financial Officer, respectively. See "Management."
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MANAGEMENT AND LEASING
The Company maintains operating flexibility while minimizing its
overhead expenses by using local third-party management and leasing firms to
handle the day-to-day activities of its centers where it does not have a large
enough concentration of properties to warrant the hiring of "in-house"
management personnel. Management believes that as the Company acquires a
concentration of community shopping centers in a limited geographic area, it
may become more cost effective and managerially efficient to perform certain
third party functions in-house. The Company intends to hire an in-house
professional property manager to manage and lease the four Acquisition
Properties located in Houston and one of the Original Properties located near
Houston in El Campo, Texas. It is anticipated that the professional property
manager will be retained prior to or shortly after the completion of the
Offering. Under the direction of the Company's executive officers, six
property management firms currently perform day-to-day on-site management and
leasing functions at the Company's eight shopping centers. After the
Acquisition Properties have been purchased, the Company expects to retain an
aggregate of seven unaffiliated property managers and one "in-house" manager to
perform these functions at the Properties. The third party management
contracts are typically cancelable upon 30 days' notice or upon the occurrence
of certain events, such as selling the property. Company executives are in
daily contact with local property representatives and make all substantive
management, capital expenditure and tenant leasing decisions. The Company
constantly monitors each Property's performance through its local
representatives and by periodic visits by Company officers and regional
representatives.
The Company has the flexibility to select the best available local
firm or person who is familiar with each tenant and the needs of each community
served by its shopping centers, which provides the Company with a
cost-effective way to operate the Properties. Because the community shopping
center management and leasing business is a highly competitive and fragmented
industry, the Company is able to select qualified local third-party management
and leasing representatives at market rates.
The Company's third-party property management will be supplemented,
where appropriate, by the establishment of regional offices. In this
connection, the Tampa Group has agreed to act as a regional representative of
the Company. The Tampa Group currently owns and operates a number of community
shopping centers in the Tampa area. They will continue to manage the Town 'N
Country property and will help supervise the management and leasing of the
University Mall center in Pembroke Pines, Florida. Their knowledge of the
Florida markets and proximity to these two Properties should facilitate good
management practices and leasing activity. In addition, the Company believes
the Tampa Group's knowledge of and reputation in the Tampa market should
facilitate acquisitions by the Company of additional community shopping centers
in the central and southern Florida markets.
The Company's operating flexibility is expected to play an important
role in its ability to acquire additional retail centers. Many owner-operators
of well located and tenanted neighborhood centers are looking for exit
strategies. Management believes that if it offers certain senior management of
these community shopping centers an opportunity to continue in property
management and leasing positions, on terms and conditions acceptable to the
Company, they may be more willing to sell their community shopping centers to
the Company upon favorable terms.
THE PROPERTIES
The Company currently owns or controls the eight Original Properties
and has acquired or has under contract or option to purchase the eight
Acquisition Properties. Each of the Properties is designed to meet the needs
of surrounding local communities and is anchored by a supermarket and/or by one
or more nationally and/or regionally recognized tenants. The Properties are
located in four states, Texas (10), Florida(2), Tennessee(2) and Arizona(2).
The Properties contain approximately 1,742,525 square feet of total
GLA. The Company's three largest Properties, University Mall, Bandera Festival
Shopping Center and Mason Park Centre, account for approximately 18.1%, 10.9%
and 9.2% of the Company's total GLA, respectively.
As of September 30, 1997, the Original Properties were approximately
95.0% leased. Anchor space at the Original Properties, representing
approximately 60.5% of total GLA was 100% leased as of September 30, 1997,
while non-anchor space, accounting for the remaining 39.5% balance, was
approximately 87.2% leased. National, regional and local tenants represented
38.6%, 38.5% and 22.9% of total GLA, respectively.
Although the Company did not own any of the Acquisition Properties at
September 30, 1997, the Company believes that they were approximately 97.4%
leased, that the anchor space, representing 51.0% of the total GLA, was
39
<PAGE> 42
100.0% leased, and that non-anchor space was approximately 94.0% leased.
National, regional and local tenants at the Acquisition Properties accounted
for approximately 50.3%, 17.7% and 32.0% of total GLA, respectively.
Substantially all of the Company's revenues from the Properties will
consist of base rents and percentage rents received under long-term leases.
For the year ended December 31, 1996, total base rents and percentage rents
from the Original Properties were $4,097,911 and $32,822, respectively. The
Company believes that the total base rents and percentage rents from the
Acquisition Properties for the year ended December 31, 1996 were $7,607,868 and
$259,915, respectively.
The following table presents certain information with respect to the
Properties:
LOCATIONS OF THE PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Number of Total GLA Total
State Properties (sq. ft.) GLA
- ------------ ---------- ---------- ---------
<S> <C> <C> <C>
Texas 10 905,537 51.97 %
Florida 2 473,300 27.16
Arizona 2 212,063 12.17
Tennessee 2 151,625 8.70
----- ---------- -------
Total 16 1,742,525 100.00%
===== ========== =======
</TABLE>
40
<PAGE> 43
Set forth below is information regarding the Properties as of September 30,
1997:
<TABLE>
<CAPTION>
GROSS
YEAR LAND LEASEABLE TOTAL
DEVELOPED/ AREA AREA ANNUALIZED
PROPERTY LOCATION RENOVATED OWNERSHIP (ACRES) (SQ. FT.) BASE RENT(3)
-------- -------- --------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
Autobahn Shopping Center San Antonio 1984 100% 2.4 28,878 $318,202
Bandera Shopping Center San Antonio 1989 100 19.8 189,446 1,482,288
Benchmark Crossing Shopping Houston 1986/1990/1994 100 6.6 58,341 663,598
Center(4)
Centennial Shopping Center Austin 1970/1984 70 (1) 6.3 80,492 632,936
El Campo Shopping Center El Campo 1985 100 7.4 83,330 294,070
Hedwig Shopping Centers(4) Houston 1974/1987/1989 100 4.1 69,554 845,114
The Market at First Colony(4) Houston 1988/1991 100 9.7 94,241 1,345,114
Mason Park Centre(4) Houston 1985 100 13.6 160,047 1,606,527
Rosemeade Park Shopping Carrollton 1986 100 6.2 49,554 543,988
Center(4)
University Park Shopping College Station 1973/1991 56(2) 8.5 91,654 749,215
---- ------ -------
Center
TOTAL/WEIGHTED AVERAGE 84.6 905,537 8,481,051
ARIZONA
Park Northern Shopping Center Phoenix 1982 70(1) 15.0 128,365 669,639
Southwest/Walgreen's Shopping Phoenix 1975 100 10.0 83,698 547,692
---- ------ -------
Center(4)
TOTAL/WEIGHTED AVERAGE 25.0 212,063 1,217,331
<CAPTION>
NET EFFECTIVE
RENT PER
SQUARE PERCENT MAJOR TENANT(S)
PROPERTY FOOT (5) LEASED (LEASE EXPIRATION)
-------- -------- ------ ------------------
<S> <C> <C> <C>
TEXAS
Autobahn Shopping Center $11.34 97.2% Blockbuster Music (2000)
Bandera Shopping Center 8.08 96.8 Eckerd Drugs (2008)
Kmart (2013)
Benchmark Crossing Shopping 11.37 100.0 Bally's (2006)
Center(4)
Centennial Shopping Center 8.65 90.9 Drug Emporium (2001)
El Campo Shopping Center 3.92 90.0 David's Supermarkets (2002)
Hedwig Shopping Centers(4) 12.37 98.2 Ross Stores (2010)
Blockbuster Video (2000 )
The Market at First Colony(4) 14.27 98.4 T J Maxx (2002)
Eckerd Drugs (2014)
Mason Park Centre(4) 10.84 92.6 Palais Royal (2006)
Petco (2005)
Cinemark Cinema (2000)
Walgreen's (2015)
Rosemeade Park Shopping 12.68 86.6 Blockbuster Video (2003)
Center(4) Cosmopolitan Lady (2004)
University Park Shopping 8.17 100.0 Albertson's Food (2023)
---- -----
Center
TOTAL/WEIGHTED AVERAGE 9.82 95.3%
ARIZONA
Park Northern Shopping Center 5.82 89.6 Safeway (2003)
Walgreen's (2011)
Southwest/Walgreen's Shopping 6.54 100.0 Southwest Supermarket (2000)
---- -----
Center(4) Walgreen's (2000)
TOTAL/WEIGHTED AVERAGE 6.13 93.7%
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
GROSS
YEAR LAND LEASEABLE TOTAL
DEVELOPED/ AREA AREA ANNUALIZED
PROPERTY LOCATION RENOVATED OWNERSHIP (ACRES) (SQ. FT.) BASE RENT(3)
-------- -------- --------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA
Town 'N Country Plaza(4) Tampa 1970/1986 100 11.1 157,704 687,692
University Mall Shopping Pembroke Pines 1973/1984 100 29.0 315,596 2,071,575
----- --------- ------------
Center(4)
TOTAL/WEIGHTED AVERAGE 40.1 473,300 2,759,267
TENNESSEE
McMinn Plaza Shopping Center Athens 1982 100 10.6 99,969 404,711
Twin Lakes Shopping Center Lenoir City 1986 100 7.5 51,656 366,997
----- --------- ------------
TOTAL/WEIGHTED 18.1 151,625 771,708
-----
AVERAGE
Grand Total/Weighted Average 167.8 1,742,525 $ 13,229,357
===== ========= ============
<CAPTION>
NET EFFECTIVE
RENT PER
SQUARE PERCENT MAJOR TENANT(S)
PROPERTY FOOT (5) LEASED (LEASE EXPIRATION)
-------- -------- ------ ------------------
<S> <C> <C> <C>
FLORIDA
Town 'N Country Plaza(4) 4.36 100.0 Autozone (2002)
Big Lots (2002)
T J Maxx (1999)
University Mall Shopping 6.70 98.0 Office Max (2003)
-------- ----
Center(4) Ross Stores (2001)
Sports Authority (2012)
Uptons (2002)
TOTAL/WEIGHTED AVERAGE 5.91 98.7%
TENNESSEE
McMinn Plaza Shopping Center 4.13 98.0 Ingles (2002)
Walmart/Bud's (2002)
Twin Lakes Shopping Center 7.10 100.0 Food City (2007)
-------- ----
TOTAL/WEIGHTED 5.16 98.7%
AVERAGE
Grand Total/Weighted Average $ 7.88 96.3%
========= ====
</TABLE>
- -----------------------
(1) Owned by Park Northern/Centennial Partners L.P., a Texas limited
partnership, in which the Company is the general partner and owns 70%
of the partnership interests.
(2) Owned by UIRT/University Park-I L.P., a Texas limited partnership, in
which the Company owns the 5% general partner's interest through a
corporate subsidiary and a 51% interest as a limited partner. The
Company intends to purchase the minority interest from the proceeds of
the Offering.
(3) Based on September 30, 1997 rent roll.
(4) Information on these properties was supplied by the sellers of such
properties.
(5) Net effective rent per square foot represents total annualized base
rent on September 30, 1997 divided by total leased square footage.
42
<PAGE> 45
MAJOR TENANTS
The following table sets forth certain information as of September
30, 1997 with respect to certain of the Company's major tenants.
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT 9/30/97
----------------------------------------
LEASED GLA ANN. % OF TOTAL
NUMBER OF AS OF 9/30/97 % OF TOTAL TOTAL ANN. BASE RENT/ ANN.
TENANT LEASES (SQ. FT.) LEASED GLA BASE RENT SQ. FT. BASE RENT
------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Albertson's 1 80,478 4.8% $601,013 $ 7.47 4.5%
Autozone 1 10,000 0.6% 85,000 8.50 0.6
Bally's 1 40,966 2.4% 315,000 7.69 2.4
Big Lots 1 30,000 1.8% 88,372 2.95 0.7
Blockbuster Video and Music 3 32,214 1.9% 380,712 11.82 2.9
Cinemark Cinema 1 28,750 1.7% 301,872 10.50 2.3
Cosmopolitan Lady 1 13,000 0.8% 127,270 9.79 1.0
David's Supermarkets 1 30,195 1.8% 78,000 2.58 0.6
Drug Emporium 1 31,050 1.8% 194,063 6.25 1.5
Eckerd Drugs 2 17,355 1.0% 175,673 10.12 1.3
Food City 1 31,846 1.9% 199,038 6.25 1.5
Ingle's 1 27,200 1.6% 108,000 3.97 0.8
Kmart 1 86,479 5.2% 454,015 5.25 3.4
Office Max 1 23,500 1.4% 129,240 5.50 1.0
Palais Royal 1 29,922 1.8% 243,240 8.13 1.8
Petco 1 13,973 0.8% 90,545 6.48 0.7
Ross Stores 2 52,976 3.2% 456,264 8.61 3.4
Safeway 1 53,037 3.2% 184,363 3.48 1.4
Solo Serve 1 30,000 1.8% 213,900 7.13 1.6
Southwest Supermarket 1 27,064 1.6% 82,884 3.06 0.6
Sports Authority 1 38,000 2.3% 190,000 5.00 1.4
T J Maxx 2 49,540 3.0% 333,809 6.74 2.5
Tuesday Morning 1 23,493 1.3% 140,958 6.00 1.1
Uptons 1 91,500 5.5% 320,250 3.50 2.4
Walgreen's 3 38,998 2.3% 218,679 5.61 1.7
Wal-Mart/Bud's 1 52,769 3.1% 179,415 3.40 1.4
------- -------- -------- ---------- -------- --------
TOTAL 33 984,305 58.6% $5,891,575 $ 5.99 44.5%
======= ======== ======== ========== ======== ========
</TABLE>
43
<PAGE> 46
NATIONAL, REGIONAL AND LOCAL TENANT SUMMARY
The following table sets forth certain information regarding the
Company's national, regional and local tenants at each Property as of September
30, 1997 and a breakdown of base rents in place at September 30, 1997 and for
each Property shopping center by type of retail tenant.
<TABLE>
<CAPTION>
NATIONAL TENANTS(1) REGIONAL TENANTS(1) LOCAL TENANTS (1)
----------------------- -------------------------------------------------------
% OF % OF % OF
% OF PROPERTY % OF PROPERTY % OF PROPERTY
PROPERTY ANN. PROPERTY ANN. PROPERTY ANN.
PROPERTY AND LOCATION LEASED GLA BASE RENT LEASED GLA BASE RENT LEASED GLA BASE RENT
- --------------------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
Autobahn Shopping Center 48.4% 51.6% 36.6% 35.4% 15.3% 13.0%
Bandera Shopping Center 55.5 46.6 19.0 22.5 25.5 30.9
Benchmark Crossing 88.0 86.3 12.0 13.7 0.0 0.0
Centennial Shopping Center 36.4 39.1 44.4 33.5 19.2 27.4
El Campo Shopping Center 14.3 14.9 40.3 26.5 45.4 58.6
Hedwig Shopping Centers 70.8 19.2 15.6 21.4 13.6 59.4
The Market at First Colony 43.7 31.5 10.5 13.9 45.8 54.5
Mason Park Centre 69.7 62.2 6.0 8.5 24.3 29.4
Rosemeade Park 20.9 36.2 3.3 3.4 75.9 60.5
University Park Shopping Center 0.0 0.0 94.5 91.5 5.5 8.5
----- ---- ---- ---- ---- ----
WEIGHTED AVERAGE 47.0% 41.3% 26.9% 24.0% 26.1% 34.7%
ARIZONA
Park Northern Shopping Center 58.7 40.1 14.8 12.2 26.5 47.7
Southwest/Walgreen's 21.6 8.8 32.3 15.1 46.0 76.1
----- ---- ---- ---- ---- ----
Shopping Center
WEIGHTED AVERAGE 43.1% 26.0% 22.2% 13.5% 34.7% 60.5%
FLORIDA
Town 'N Country Plaza 54.5 72.5 7.2 7.3 38.4 20.2
University Mall Shopping Center 41.0 43.2 30.5 17.4 28.4 39.5
----- ---- ---- ---- ---- ----
WEIGHTED AVERAGE 45.4% 50.5% 22.7% 14.9% 31.8% 34.7%
TENNESSEE
McMinn Plaza Shopping Center 55.9 47.3 33.1 37.4 11.0 15.3
Twin Lakes Shopping Center 2.3 3.1 61.7 54.2 36.0 42.7
----- ---- ---- ---- ---- ----
WEIGHTED AVERAGE 37.4% 26.3% 42.9% 45.4% 19.7% 28.3%
PORTFOLIO TOTAL 45.3% 40.9% 26.6% 22.4% 28.1% 36.7%
===== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) The Company defines national tenants as any tenant that operates in at
least four metropolitan areas located in more than one region (i.e.
northwest, northeast, midwest, southwest or southwest); regional tenants
as any tenant that operates in two or more metropolitan areas located
within the same region; and local tenants as any tenant that operates
stores only within the same metropolitan area as the shopping center.
ADDITIONAL INFORMATION CONCERNING CERTAIN PROPERTIES
As of September 30, 1997, four of the Original Properties, Bandera
Festival Shopping Center, Centennial Shopping Center, Park Northern Shopping
Center and University Park Shopping Center, and all of the Acquisition
Properties each had a book value equal to or greater than 10% of the total
assets of the Company or gross revenues equal to or greater than 10% of the
Company's aggregate gross revenues. Set forth below is additional information
with respect to such Properties.
44
<PAGE> 47
Bandera Festival Shopping Center
Bandera is a 189,446 square foot shopping center located at the
northwest corner of Bandera Road and Guilbeau Road in northwest San Antonio,
Texas. The property consists of 19.8 acres. San Antonio is the home of Kelly,
Lackland and Randolph Air Force Bases, Fort Sam Houston and USAA Insurance
Company. The site offers excellent access, high visibility and a traffic count
of approximately 58,993 cars per day. The trade area supports a population of
approximately 198,500 within a five mile radius with an average household
income of approximately $45,000. Northwest San Antonio is the fastest growing
quadrant of the city.
Bandera was built in 1988 and is anchored by Kmart (86,479 square
feet), Solo Serve (30,000 square feet) and Eckerd Drugs (8,715 square feet).
McDonald's, Peter Piper Pizza and Frost Bank are situated on outparcels within
the shopping center. The Taco Cabana site is a free-standing building within
the shopping center and is owned by the Company. Bandera has 26 tenants
ranging in size from 975 square feet to 86,479 square feet. The small tenants
include a mix of national, regional and local retail and service tenants. The
center is currently 96.8% occupied.
In 1997, Bandera accounted for approximately 25.51% of the total GLA
and 30.1% of the total annualized minimum rents from the Original Properties.
As of September 30, 1997, Bandera was 96.8% leased, with approximately 66.1% of
its GLA leased to anchor tenants.
Depreciation on Bandera is taken on a straight line basis over 40
years for book purposes and 31.5 years for tax purposes, resulting in a rate of
approximately 2.5% and 3.20% per year, respectively. At December 31, 1996, the
federal tax basis of the Bandera Festival Shopping Center was approximately
$10.0 million. The realty tax on the Bandera Festival Shopping Center is
approximately $2.80 per $100 of assessed value, resulting in a 1997 realty tax
of approximately $266,000.
The following table sets forth the percentage of GLA at Bandera which
was leased as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
As of: Percentage Leased
- ------ -----------------
<S> <C>
December 31, 1992 . . . . . . . . . . . . . . . . . . 89.6%
December 31, 1993 . . . . . . . . . . . . . . . . . . 98.1
December 31, 1994 . . . . . . . . . . . . . . . . . . 98.1
December 31, 1995 . . . . . . . . . . . . . . . . . . 95.5
December 31, 1996 . . . . . . . . . . . . . . . . . . 98.5
</TABLE>
The following table sets forth the average annual rental income per
square foot at Bandera for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft of GLA.
- ------- -------------------------
<S> <C>
Year Ended December 31, 1992 . . . . . . . . . . . . . . $7.26
Year Ended December 31, 1993 . . . . . . . . . . . . . . 7.38
Year Ended December 31, 1994 . . . . . . . . . . . . . . 7.80
Year Ended December 31, 1995 . . . . . . . . . . . . . . 7.63
Year Ended December 31, 1996 . . . . . . . . . . . . . . 7.56
</TABLE>
The following table shows, as of September 30, 1997, Bandera's anchor
tenants, their GLA, gross annual rent for 1997 and lease expiration date, not
including renewal options:
<TABLE>
<CAPTION>
Gross Annual Lease
Tenant GLA (Sq. Ft.) Rent Expiration Date
- ------ ------------- -------------- ------------------
<S> <C> <C> <C>
Eckerd Drugs 8,715 $ 89,154 October 31, 2008
Kmart 86,479 484,015 October 31, 2013
Solo Serve 30,000 286,800 January 31, 2004
</TABLE>
Scheduled lease expirations at Bandera during the next 10 years are as
follows:
45
<PAGE> 48
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
------------------------ ------------------------------------------
Lease No. of Leases Approximate Percent of Percent of Average per
Expiration Expiring Sq. Ft. Total Amount Total Sq. Ft.
---------- -------- ------------ ----------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 0 0 0.0% $ 0 0.0% $ 0
1998 2 11,920 6.5 105,360 7.1 8.84
1999 2 1,950 1.1 27,874 1.9 14.29
2000 4 8,330 4.5 94,470 6.4 11.34
2001 4 8,630 4.7 109,617 7.4 12.70
2002 6 14,023 7.6 186,826 12.6 13.32
2003 3 5,892 3.2 68,336 4.6 11.60
2004 2 34,999 19.1 262,640 17.7 7.50
2005 0 0 0.0 0 0.0 0
2006 and
thereafter 3 97,594 53.2% 627,165 42.3 6.43
-- ------- ------ ----------- ------ --------
Total 26 183,338 100.0% $ 1,482,288 100.0% $ 8.08
== ======= ====== =========== ====== ========
</TABLE>
Two tenants at Bandera, Solo Serve and Kmart, each occupy in excess
of 10% of the GLA at Bandera. Solo Serve occupies 30,000 square feet and has
annual minimum rent of $213,900. The lease expires on January 31, 2004 and has
2 five-year options under the same terms and conditions except rent which will
be $9.00/sq. ft. and $9.67/sq. ft., respectively. Kmart occupies 86,479 square
feet and has annual minimum rent of $454,015. The lease expires on October 31,
2013 and has 10 five-year options under the same terms and conditions.
Although Eckerd Drugs has moved out of its 8,715 square foot space, it
is obligated to pay its annual minimum rent of $89,154 through the term of the
lease, which expires October 31, 2008.
Centennial Shopping Center
Centennial is a 80,492 square foot shopping center located on 6.31
acres in Austin, Texas. Centennial is located at the northeast corner of
Burnet Road and Greenlawn Parkway, approximately one mile from Northcross Mall.
Burnet Road has a traffic count of over 30,000 cars daily. The trade area is
north/central Austin, which is considered an "in-fill" (i.e., a developed area
with limited space available for development by additional competition)
location and supports a population of approximately 245,000 within a five mile
radius.
Centennial was built in two phases. The original building, built in
1970, was a Gibson's Discount center and contained 54,000 square feet. In
1984, approximately 23,000 square feet of retail space was added along the
north boundary and extending from the original building toward Burnet Road.
The center is anchored by Drug Emporium (31,050 square feet) and Tuesday
Morning (23,493 square feet). Taco Bell is a free-standing building within the
shopping center and is owned by the Company. Additional revenue is received
from the parking lot that is leased in the evenings to an adjacent night club.
Centennial has 11 tenants ranging in size from 1,000 square feet to 31,050
square feet. The small tenants include a mix of regional and local retail and
service tenants. As of September 30, 1997, the center was 90.9% occupied.
In 1997, Centennial accounted for approximately 10.7% of total GLA and
12.9% of the total annualized minimum rents from the properties. As of
September 30, 1997, Centennial was 90.9% leased, with approximately 38.6% of
its GLA occupied by anchor tenants.
Depreciation on Centennial Shopping Center is taken on a straight line
basis over 30 years for book purposes and 31.5 years for tax purposes,
resulting in a rate of approximately 3.3% and 3.2% per year, respectively. At
December 31, 1996, the federal tax basis of the Centennial Shopping Center was
approximately $4.6 million. The realty tax on the Centennial Shopping Center
is approximately $2.48 per $100 of assessed value, resulting in a 1997 realty
tax of approximately $104,000.
46
<PAGE> 49
The following table sets forth the percentage of GLA at Centennial
which was leased as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
As of: Percentage Leased
- ------ -----------------
<S> <C>
December 31, 1992 . . . . . . . . . . . . . 85.0%
December 31, 1993 . . . . . . . . . . . . . 80.0
December 31, 1994 . . . . . . . . . . . . . 65.0
December 31, 1995 . . . . . . . . . . . . . 81.0
December 31, 1996 . . . . . . . . . . . . . 78.0
</TABLE>
The following table sets forth the average annual rental income per
square foot at Centennial for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA
- ------ -------------------------
<S> <C>
Year ended December 31, 1992 . . . . . . . $ 7.33
Year ended December 31, 1993 . . . . . . . 7.49
Year ended December 31, 1994 . . . . . . . 6.74
Year ended December 31, 1995 . . . . . . . 6.93
Year ended December 31, 1996 . . . . . . . 7.18
</TABLE>
The following table shows, as of September 30, 1997, Centennial's
anchor tenants, their GLA, gross annual rent for 1996 and lease expiration
date, not including renewal options:
<TABLE>
<CAPTION>
Gross Lease
Tenant GLA Annual Ren Expiration Date
- ------ -------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Drug Emporium 31,050 $ 262,373 August 31, 2001
Tuesday Morning 23,493 104,958 December 31, 2004
</TABLE>
Scheduled lease expirations at Centennial during the next 10 years
are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
---------------------------- -----------------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
- ---------- -------- ---------------- -------- ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C>
1997 0 0 0.0% $ 0 0.0% $ 0
1998 1 1,420 1.9 14,910 2.4 10.50
1999 1 3,155 4.3 106,380 16.8 33.72
2000 5 10,479 14.3 135,235 21.4 12.91
2001 2 32,450 44.4 211,913 33.5 6.53
2002 2 2,160 3.0 23,540 3.7 10.90
2003 0 0 0.0 0 0.0 0
2004 1 23,493 32.1 140,958 22.3 6.00
2005 0 0 0.0 0 0.0 0
2006 and
thereafter 0 0 0.0 0 0.0 0
------ --------- -------- ---------- ------- ----------
Total 12 73,157 100.0% $ 632,936 100.0% $ 8.65
====== ========= ======== ========== ======= ==========
</TABLE>
Two tenants, Drug Emporium and Tuesday Morning, each occupy in excess
of 10% of the GLA at Centennial. Drug Emporium occupies 31,050 square feet and
has annual minimum rent of $194,063. The lease expires on August 31, 2001 and
has three renewal options of five years each under the same terms and
conditions except rent, which will be $7.80/sq. ft., $8.96/sq. ft. and
$10.32/sq. ft., respectively. The tenant is granted a one-time only option to
cancel which
47
<PAGE> 50
resulted from their plan of reorganization. Tuesday Morning occupies 23,493
square feet and has annual minimum rent of $140,958. The lease expires on
December 31, 2004 and has one renewal option of five years under the same terms
and conditions except rent, which will be $8.00/sq. ft.
Park Northern Shopping Center
Park Northern is a 128,365 square foot of GLA shopping center located
in Phoenix, Arizona. The center was acquired in November 1996 by Park
Northern/Centennial Partners L.P., of which the Company is the general partner
and owns 70% of the limited partner interests. The shopping center is located
in the Glendale area, which is the northwest quadrant of Phoenix. The trade
area supports a population of approximately 400,000 within a five mile radius.
Park Northern is located at the northeast corner of Northern Avenue
and 35th Avenue in Northwest Phoenix. This is one of the busiest intersections
in the City of Phoenix, with Northern Avenue being the primary east-west road
into Glendale, Arizona, with an average daily traffic count of over 72,200.
35th Avenue is a major north-south arterial with an average daily traffic count
of 70,500. This site is approximately one and one-half miles from Metrocenter
Mall, which is the largest mall in Arizona. The center is also located one mile
west of the Black Canyon Freeway (I-17), which is the major interstate freeway
through Phoenix.
The property includes 15.0 acres of land and is subject to a long term
ground lease. Pursuant to the ground lease, the Company pays rent of $100,000
per year plus 5% of the base rent plus percentage rent. The lease expires in
November 2035 and has four 10-year renewal options. The shopping center was
built in 1982. The shopping center is anchored by Safeway (53,037 square feet)
and Walgreen's (12,000 square feet). Safeway has recently completed an
expansion of its store by approximately 11,700 square feet at its own cost.
The cost of the addition can be offset against future percentage rents due, if
any. Safeway's reimbursement of the shopping center's common area maintenance
expenses, taxes and insurance has been increased to reflect its higher pro rata
share of the leased premises. Long John Silver's and Chuck E. Cheese's are
free-standing buildings within the shopping center and are owned by the
Company. Bank One is situated on an outparcel adjacent to the property. The
bank site is not owned by the Company. Park Northern has 22 tenants ranging in
size from 750 square feet to 53,037 square feet. The small tenants include a
mix of regional and local retail and service tenants. The center is currently
89.6% occupied.
In 1997, Park Northern accounted for approximately 17.0% of total GLA
and 13.6% of the total annualized minimum rents from the Original Properties.
As of September 30, 1997, Park Northern was 89.6% leased, with approximately
50.7% of its GLA occupied by anchor tenants.
Depreciation on Park Northern Shopping Center is taken on a straight
line basis over 30 years for book purposes and 39 years for tax purposes,
resulting in a rate of approximately 3.3% and 2.6% per year, respectively. At
December 31, 1996, the federal tax basis of the Park Northern Shopping Center
was approximately $4,332,592. The realty tax on the Park Northern Shopping
Center is approximately $3.47 per $100 of assessed value, resulting in a 1997
realty tax of approximately $191,000.
As of December 31, 1996, the only year for which such information is
available, 85.0% of the GLA at Park Northern was leased.
48
<PAGE> 51
For the year ended December 31, 1996, the only year for which such
information is available, the average rental income per square foot of GLA at
Park Northern was $5.22.
The following table shows, as of September 30, 1997, Park Northern's
major tenants, their GLA, gross annual rent for 1996 and lease expiration date,
not including renewal options:
<TABLE>
<CAPTION>
Gross Lease
Tenant GLA Annual Rent Expiration Date
- ------ --- ----------- ---------------
<S> <C> <C> <C>
Walgreen's 12,000 $ 85,086 April 30, 2011
Safeway 53,037 291,222 May 31, 2003
</TABLE>
Scheduled lease expirations at Park Northern during the next 10 years
are as follows:
<TABLE>
<CAPTION>
Gross Leaseable Area Effective Annual Rental Income
No. of ------------------------- ---------------------------------------
Lease Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- ------------ -------------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1 1,260 1.1% $ 13,860 2.1% $ 11.00
1998 2 15,703 13.7 61,333 9.2 3.91
1999 4 4,935 4.3 59,220 8.8 12.00
2000 4 10,126 8.8 94,604 14.1 9.34
2001 4 11,273 9.8 121,824 18.2 10.81
2002 5 6,650 5.8 79,235 11.8 11.92
2003 1 53,037 46.1 184,363 27.5 3.48
2004 0 0 0.0 0 0.0 --
2005 0 0 0.0 0 0.0 --
2006 and thereafter 1 12,000 10.4 55,200 8.2 4.60
--- -------- ------- ---------- -------- ---------
Total 22 114,984 100.0% $ 669,639 100.0% $ 5.82
=== ======== ======= ========== ======== =========
</TABLE>
One tenant at Park Northern occupies more than 10% of the GLA.
Safeway occupies 53,037 square feet and has annual minimum rent of $184,363.
The lease expires on May 31, 2003 and Safeway's lease has eight renewal options
of five years each under the same terms and conditions.
University Park Shopping Center
University Park is a 91,654 square foot shopping center located in
College Station, Texas. The center is located at the northwest corner of
University Drive and Tarrow Drive. College Station is approximately 100 miles
northwest of Houston, Texas and is home to Texas A&M University, which has an
enrollment of over 40,000 students. The shopping center is located
approximately one mile east of the University. University Drive has a traffic
count of over 38,000 cars daily. The trade area supports a population of over
110,000 within a five mile radius.
49
<PAGE> 52
The property includes 8.51 acres of land. The Company has acquired a
1.26 acre tract of land adjacent to the University Park Shopping Center and is
currently contemplating the development of this site into an approximate 13,000
square foot retail strip. The shopping center was built in 1991. University
Park has six tenants ranging in size from 1,168 square feet to 80,478 square
feet. The shopping center is anchored by an Albertson's Supermarket (80,478
square feet). The small tenants include a mix of regional and local retail and
service tenants. The center is currently 100% occupied.
In 1997, University Park accounted for approximately 12.2% of total
GLA and 15.2% of the total annualized minimum rents from the Original
Properties. University Park represents a total of 91,654 square feet of gross
leaseable area. As of September 30, 1997, University Park was 100% leased,
with approximately 87.7% of its gross leaseable area occupied by anchor
tenants.
Depreciation on University Park Shopping Center is taken on a straight
line basis over 40 years for book purposes and 31.5 years for tax purpose,
resulting in a rate of approximately 2.5% and 3.20% per year, respectively. At
December 31, 1996, the federal tax basis of the University Park Shopping Center
was approximately $6.2 million. The realty tax on the University Park Shopping
Center is approximately $2.58 per $100 of assessed value, resulting in a 1997
realty tax of approximately $152,000.
The following table sets forth the percentage of GLA at University
Park which was leased as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
Percentage
As of: Leased
- ------ ---------
<S> <C>
December 31, 1992 . . . . . . . . . . 100.0%
December 31, 1993 . . . . . . . . . . 100.0
December 31, 1994 . . . . . . . . . . 100.0
December 31, 1995 . . . . . . . . . . 100.0
December 31, 1996 . . . . . . . . . . 100.0
</TABLE>
The following table sets forth the average rental income per square
foot at University Park for each of the last four years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA
- ------- -------------------------
<S> <C>
Year ended December 31, 1993 . . . . . 8.08
Year ended December 31, 1994 . . . . . 8.13
Year ended December 31, 1995 . . . . . 8.06
Year ended December 31, 1996 . . . . . 8.14
</TABLE>
The following table shows, as of September 30, 1997, University Park's
anchor tenant, its GLA, gross annual rent for 1996 and lease expiration date,
not including renewal options:
<TABLE>
<CAPTION>
Tenant GLA Gross Annual Rent Lease Expiration Date
- ------ --- ----------------- ---------------------
<S> <C> <C> <C>
Albertson's 80,478 $815,008 April 12, 2023
</TABLE>
50
<PAGE> 53
Scheduled lease expirations at University Park during the next 10 years are
as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Annualized Base Rental Income
------------------------ ---------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ------- -------- ------ -------- ------------
<S> <C> <C> <C> <C> <C>
1997 1 1,168 1.3% $ 16,252 2.2% $ 14.00
1998 1 2,071 2.3 28,562 3.8 13.79
1999 0 0 0.0 0 0.0 --
2000 2 4,160 4.5 50,411 6.7 12.12
2001 0 0 0.0 0 0.0 --
2002 1 3,777 4.1 52,878 7.1 --
2003 0 0 0.0 0 0.0 14.00
2004 0 0 0.0 0 0.0 --
2005 0 0 0.0 0 0.0 --
2006 and thereafter 1 80,478 87.8% 601,013 80.2 7.47
-- -------- ----- -------- ------ -------
Total 6 91,654 100.0% $749,215 100.0% $ 8.17
== ======== ===== ======== ====== =======
</TABLE>
The only tenant occupying more than 10% of the GLA of the center is
Albertson's. Albertson's lease expires April 12, 2023 and has three renewal
options of five years each.
ADDITIONAL INFORMATION CONCERNING THE ACQUISITION PROPERTIES
The Company has contracts or options to acquire eight retail
properties: Benchmark Crossing Shopping Center, Hedwig Shopping Centers, The
Market at First Colony Shopping Center, Mason Park Centre Shopping Center,
Rosemeade Park Shopping Center, Southwest/Walgreen's Shopping Center, Town 'N
Country Shopping Center and University Mall Shopping Center. Set forth below
is additional information with respect to such properties.
Benchmark Crossing
Benchmark Crossing is a 58,341 square foot shopping center located at
the northeast corner of the intersection of Highway 290 and Hollister in
northwest Houston, Texas. The property includes approximately 6.6 acres of
land.
Benchmark Crossing consists of five separate buildings. The anchor
tenant, Bally's Total Fitness (the largest health club operator in the United
States), leases a two-story building built in 1986, consisting of 40,966 square
feet. Click's Billiards and the International House of Pancakes are single
story buildings built in 1994, consisting of 7,000 square feet and 4,543 square
feet, respectively. Burger King and Jack in the Box are single story buildings
built in 1990 and 1986, respectively. All parking lots are constructed of
concrete.
According to Revac, Inc. Houston/Harris County Market Survey, the
inner northwest submarket has had positive absorption of over 900,000 square
feet since 1992, resulting in an overall occupancy rate of 90% for all retail
centers. Benchmark Crossing is 100% leased under five long-term leases with
maturities ranging from 2004 to 2013.
After its acquisition in January 1998, the federal tax basis of
Benchmark Crossing will be its purchase price plus closing costs, estimated to
be $5,637,500. The realty tax rate on Benchmark Crossing is approximately
$3.06 per $100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $131,068.
51
<PAGE> 54
The following table sets forth the percentage of GLA at Benchmark
Crossing which was leased as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ------ --------------------
<S> <C>
December 31, 1992 . . . . . . . . . . 100.0%
December 31, 1993 . . . . . . . . . . 100.0
December 31, 1994 . . . . . . . . . . 100.0
December 31, 1995 . . . . . . . . . . 100.0
December 31, 1996 . . . . . . . . . . 100.0
</TABLE>
- ----------------
(1) Based on unaudited information provided by the seller.
The following table sets forth the average rental income per square foot
at Benchmark Crossing for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA (1)
- ------ ------------------------------
<S> <C>
Year ended December 31, 1992 . . . . . $ 7.84
Year ended December 31, 1993 . . . . . 7.86
Year ended December 31, 1994 . . . . . 10.03
Year ended December 31, 1995 . . . . . 10.88
Year ended December 31, 1996. . . . . . 11.13
</TABLE>
- ----------------
(1) Based on unaudited, cash basis financial statements provided by the
seller.
Scheduled lease expirations at Benchmark Crossing during the next 10
years are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Annualized Base Rental Income
---------------------------- --------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- --------------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
1997 0 0 0.0% $0 0.0% $ --
1998 0 0 0.0 0 0.0 --
1999 0 0 0.0 0 0.0 --
2000 0 0 0.0 0 0.0 --
2001 0 0 0.0 0 0.0 --
2002 0 0 0.0 0 0.0 --
2003 0 0 0.0 0 0.0 --
2004 1 7,000 12.0 91,000 13.7 13.00
2005 0 0 0.0 0 0.0 --
2006 and thereafter 4 51,384 88.0 572,598 86.3 11.14
-- -------- ------ -------- ------ -----------
Total 5 58,384 100.0% $663,598 100.0% $ 11.37
== ======== ====== ======== ====== ===========
</TABLE>
Two tenants, Bally's Fitness Center and Click's Billards, each occupy
in excess of 10% of the GLA at Benchmark Crossing. Bally's occupies 40,966
square feet under a lease which expires on December 31, 2006 and has two
renewal options of five years each. Click's occupies 7,000 square feet of GLA
under a lease which expires on July 31, 2004 and has one renewal option of five
years.
52
<PAGE> 55
Hedwig Shopping Centers
Hedwig Shopping Centers consists of three separate buildings totaling
69,554 square feet built in 1974, 1987 and 1989. The center fronts Interstate
10, which has an east/west traffic count of over 400,000 vehicles daily. The
center is located within Hedwig Village, an independent municipality surrounded
by Houston, Texas. Hedwig Village is considered an affluent area with a median
home price of $284,000 in 1996, according to the Houston Chronicle. The
property includes approximately 4.1 acres of land.
According to Revac Inc. Houston/Harris County Market Survey, the
average rental rate per square foot in the first half of 1997 for the inner
west submarket where Hedwig Shopping Centers is located was $22.41. Hedwig
Shopping Centers' average rental rate per square foot during the same period
was $12.37.
The shopping center is adjacent to and complemented by Target (120,000
sq. ft.) and Marshall's (35,650 sq. ft.) department stores, which are owned by
a third party. The center has 11 tenants ranging in size from 1,050 square
feet to 27,000 square feet.
After its acquisition in January 1998, the federal tax basis of Hedwig
Shopping Centers will be its purchase price plus closing costs, estimated to be
$6,937,500. The realty tax rate on Hedwig Shopping Centers is approximately
$2.77 per $100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $130,837.
The following table sets forth the percentage of GLA at Hedwig
Shopping Centers which was leased as of December 31 for each of the last five
years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ------ --------------------
<S> <C>
December 31, 1992 . . . . . . . . . . 100.0%
December 31, 1993 . . . . . . . . . . 100.0
December 31, 1994 . . . . . . . . . . 98.0
December 31, 1995 . . . . . . . . . . 100.0
December 31, 1996 . . . . . . . . . . 80.9
</TABLE>
- -------------
(1) Based on unaudited information provided by the seller.
The following table sets forth the average rental income per square
foot at Hedwig Shopping Centers for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA(1)
- ------ ----------------------------
<S> <C>
Year ended December 31, 1992 . . . . . $10.87
Year ended December 31, 1993 . . . . . 11.25
Year ended December 31, 1994 . . . . . 11.41
Year ended December 31, 1995 . . . . . 11.54
Year ended December 31, 1996. . . . . . 11.35
</TABLE>
- ------------
(1) Based on unaudited, cash basis financial statements provided by the
seller.
53
<PAGE> 56
Scheduled lease expirations at Hedwig Shopping Centers during the next
10 years are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Annualized Base Rental Income
---------------------------- -----------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- --------------- -------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997 2 5,050 7.4% $ 96,768 11.5% $ 19.16
1998 1 6,612 9.7 112,668 13.3 17.04
1999 0 0 0.0 0 0.0 0
2000 4 21,915 32.1 288,367 34.1 13.16
2001 1 2,564 3.8 41,024 4.9 16.00
2002 2 5,188 7.6 83,807 9.9 16.15
2003 0 0 0.0 0 0.0 0
2004 0 0 0.0 0 0.0 0
2005 0 0 0.0 0 0.0 0
2006 and thereafter 1 27,000 39.5 222,480 26.3 8.24
-- ------ ---- ----------- --------- -------
Total 11 68,329 100.0% $ 845,114 100.0% $ 12.37
== ====== ====== =========== ========= =======
</TABLE>
Two tenants, Ross Dress For Less and Blockbuster Music, each occupy in
excess of 10% of the GLA at the Hedwig Shopping Centers. Ross occupies 27,000
square feet of GLA under a lease which expires on March 31, 2010 and has two
renewal options of five years each. Blockbuster Music occupies 13,664 square
feet of GLA under a lease which expires on July 31, 2000 and has four renewal
options of five years each.
The Market at First Colony
The Market at First Colony is a 94,241 square foot shopping center
located at the corner of Texas State Highway 6 and Williams Trace Boulevard in
southwest Houston. The property includes approximately of 9.7 acres of land.
The shopping center was built in three phases in 1988, 1991 and 1994. The
parking lot is constructed of concrete.
The shopping center is adjacent to and complemented by a 62,000 square
foot Kroger Supermarket which is owned by a third party. Taco Bell is a free
standing building within the shopping center. Stop N Go, World Savings, Burger
King, McDonalds, Kentucky Fried Chicken, Bronx Grill and a Chevron Service
Station are situated on outparcels and owned by third parties. The center has
32 tenants ranging in size from 825 square feet to 25,220 square feet.
After its acquisition in January 1998, the federal tax basis of The
Market at First Colony will be its purchase price plus closing costs, estimated
to be $11,625,000. The realty tax rate on The Market at First Colony is
approximately $2.92 per $100 of assessed value, resulting in an estimated 1997
realty tax of approximately $224,911.
The following table sets forth the percentage of GLA at The Market at
First Colony which was leased as of December 31 for each of the last five
years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ------ --------------------
<S> <C>
December 31, 1992 . . . . . . . . . . 98.3%
December 31, 1993 . . . . . . . . . . 97.2
December 31, 1994 . . . . . . . . . . 93.4
December 31, 1995 . . . . . . . . . . 100.0
December 31, 1996 . . . . . . . . . . 95.0
</TABLE>
- --------------
(1) Based on unaudited information provided by the seller.
54
<PAGE> 57
The following table sets forth the average rental income per square
foot at The Market at First Colony for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA (1)
- ------ -----------------------------
<S> <C>
Year ended December 31, 1992 . . . . . $ 9.60
Year ended December 31, 1993 . . . . . 11.77
Year ended December 31, 1994 . . . . . 10.57
Year ended December 31, 1995 . . . . . 10.45
Year ended December 31, 1996. . . . . . 13.50
</TABLE>
- --------------
(1) Based on unaudited, cash basis financial statements provided by the seller.
Scheduled lease expirations at The Market at First Colony during the next
10 years are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
--------------------------- ------------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ------- -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 2 4,175 4.4% $ 64,087 4.8% $ 15.35
1998 7 14,993 15.9 271,357 20.2 18.10
1999 7 13,440 14.3 235,850 17.5 17.55
2000 9 16,403 17.4 272,957 20.3 16.64
2001 2 3,781 4.0 68,058 5.1 18.00
2002 3 30,820 32.7 284,929 21.2 9.24
2003 0 0 0.0 0 0.0 0
2004 0 0 0.0 0 0.0 0
2005 0 0 0.0 0 0.0 0
2006 and thereafter 2 10,629 11.3 147,876 11.0 13.91
-- ------ ----- ------------ ----- -------
Total 32 94,241 100.0% $ 1,345,114 100.0% $ 14.27
== ====== ===== ============ ===== =======
</TABLE>
One tenant, T J Maxx, occupies in excess of 10% of the GLA at The Market
at First Colony. T J Maxx occupies 25,220 square feet of GLA under a lease
which expires on April 30, 2002 and has two renewal options of five years each.
Mason Park Centre
Mason Park Centre is a 160,047 square foot shopping center located at the
corner of Mason Park Road and Kingsland Boulevard in west Houston. The
property includes approximately of 13.6 acres of land. The shopping center was
built in 1985. The parking lot is constructed of concrete.
According to Revac, Inc. Houston/Harris County Market Survey, the west
submarket grew in population by 87% from 1980 to 1996 and has a 1996 average
household income of approximately $74,000.
The shopping center is adjacent to and complemented by a 58,800 square
foot Kroger Supermarket which is owned by a third party. Scholtzky's is a
freestanding building within the shopping center. World Savings and an Exxon
Service Station are situated on outparcels and owned by third parties. The
center has 33 tenants ranging in size from 997 square feet to 29,922 square
feet. The center is anchored by Palais Royal (29,922 square feet), a women's
apparel store, Cinemark Cinema (28,750 square feet), an eight screen first run
theater, Petco (13,973 square feet), an upscale pet supply store, and
Walgreen's Drug Store (10,998 square feet). Palais Royal, Cinemark, Petco and
Walgreen's leases expire
55
<PAGE> 58
January 31, 2006, January 1, 2000, January 31, 2005 and October 31, 2015,
respectively. The center is approximately 93% occupied.
After its acquisition in January 1998, the federal tax basis of Mason Park
Centre will be its purchase price plus closing costs, estimated to be
$15,325,000. The realty tax rate on Mason Park Centre is approximately $2.03
per $100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $255,264 .
The following table sets forth the percentage of at Mason Park Centre
which was leased as of December 31 for each of the last two years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ------ --------------------
<S> <C>
December 31, 1995 . . . . . . . . . . 97.7%
December 31, 1996 . . . . . . . . . . 98.0
</TABLE>
- -----------------
(1) Based on unaudited information provided by the seller.
For the year ended December 31, 1996, the only year for which such
information is available, the average rental income per square foot of GLA at
Mason Park Centre was $9.91.
Scheduled lease expirations at Mason Park Centre during the next 10 years
are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
--------------------------- ------------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997 0 0 0.0% $ 0 0.0% $ 0
1998 3 4,623 3.1 59,566 3.7 12.88
1999 7 13,999 9.4 170,736 10.6 12.20
2000 9 41,092 27.7 463,973 28.9 11.29
2001 6 15,588 10.5 218,778 13.6 14.04
2002 1 3,709 2.5 46,362 2.9 12.50
2003 1 5,102 3.4 51,020 3.2 10.00
2004 1 2,404 1.6 28,848 1.8 12.00
2005 2 19,173 12.9 179,725 11.2 9.37
2006 and thereafter 3 42,520 28.7 387,519 24.1 9.11
-- ------- ----- ------------ ----- --------
Total 33 148,210 100.0% $ 1,606,527 100.0% $ 10.84
== ======= ===== ============ ====== ========
</TABLE>
56
<PAGE> 59
Two tenants, Palais Royal and Cinemark Cinema, each occupy in excess
of 10% of the GLA at Mason Park Shopping Center. Palais Royal occupies 29,922
square feet of GLA under a lease which expires on January 31, 2006 and has two
renewal options of five years each. Cinemark occupies 28,750 square feet of
GLA under a lease which expires on January 1, 2000 and has three renewal
options of five years each.
Rosemeade Park Shopping Center
Rosemeade Park is a 49,554 square foot shopping center located at the
northwest corner of Rosemeade Parkway and Marsh Lane in Carrollton, Texas.
Carrollton is a northern suburb of Dallas. The property includes approximately
of 6.2 acres of land.
Rosemeade Park was built in 1986. The parking lot is constructed of
concrete. The shopping center is adjacent to and complemented by a 58,900
square foot Kroger Supermarket, which is owned by a third party.
The shopping center is located in a strong demographic area as
evidenced by a 1996 average household income of $58,275, $76,925 and $83,497
for the one mile, three mile and five mile radiuses, respectively.
The shopping center has 16 tenants (excluding one ground lease)
ranging in size from 1,200 square feet to 13,000 square feet. Additionally,
the shopping center leases the land on the corner of the shopping center to
Mobil Oil for a service station. The center is anchored by Cosmopolitan Lady
(14,000 square feet), a health club, and Blockbuster Video (6,194 square feet).
Cosmopolitan Lady's lease expires July 31, 2007 and Blockbuster Video recently
renewed its lease through March 31, 2003. The center is approximately 87%
occupied.
After its acquisition in January 1998, the federal tax basis of
Rosemeade Park Shopping Center will be its purchase price plus closing costs,
estimated to be $4,700,000. The realty tax rate on Rosemeade Shopping Center
is approximately $2.36 per $100 of assessed value, resulting in an estimated
1997 realty tax of approximately $94,683.
The following table sets forth the percentage of GLA at Rosemeade
Shopping Center which was leased as of December 31 for each of the last five
years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ------ --------------------
<S> <C>
December 31, 1992 . . . . . . . . . . 27.0%
December 31, 1993 . . . . . . . . . . 84.0
December 31, 1994 . . . . . . . . . . 81.0
December 31, 1995 . . . . . . . . . . 84.0
December 31, 1996 . . . . . . . . . . 81.0
</TABLE>
- ----------------
(1) Based on unaudited information provided by the seller.
The following table sets forth the average rental income per square
foot at Rosemeade Park Shopping Center for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA
- ---------------------------------------- --------------------------
<S> <C>
Year ended December 31, 1992 . . . . . $
Year ended December 31, 1993 . . . . . 9.40
Year ended December 31, 1994 . . . . . 5.60
Year ended December 31, 1995 . . . . . 8.16
Year ended December 31, 1996. . . . . . 8.99
</TABLE>
- ----------------
(1) Based on unaudited, cash basis financial statements provided by the
seller.
57
<PAGE> 60
Scheduled lease expirations at Rosemeade Park Shopping Center during
the next 10 years are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
------------------------ --------------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1997 2 2,754 6.4% $ 32,508 6.0% $ 11.80
1998 3 6,248 14.6 67,621 12.4 10.82
1999 2 3,280 7.6 35,152 6.5 10.72
2000 6 9,222 21.5 92,498 17.0 10.03
2001 1 1,200 2.8 15,600 2.9 13.00
2002 1 0 0.0 86,124 15.8 0(1)
2003 1 6,194 14.4 77,425 14.2 12.50
2004 0 0 0.0 0 0.0 0
2005 0 0 0.0 0 0.0 0
2006 and 1 14,000 32.6 137,060 25.2 9.79
-- ------- ---- ---------- ------- -------
thereafter
Total 17 42,898 100.0% $ 543,988 100.0% $ 12.68
== ======= ====== ========== ======= =======
</TABLE>
Two tenants, Cosmopolitan Lady and Blockbuster Video, each occupy an
excess of 10% of the GLA at Rosemeade Park Shopping Center. Cosmopolitan Lady
occupies 14,000 square feet of GLA under a lease which expires on July 31,
2007 and has one five year option. Blockbuster Video occupies 6,194 square
feet of GLA under a lease which expires on March 31, 2003 and has two renewal
options of five years each.
Southwest/Walgreen's Shopping Center
Southwest/Walgreen's is an 83,698 square foot shopping located at the
northwest corner of Northern and 19th Avenues in Phoenix, Arizona. The
property includes approximately 10.0 acres of land. Southwest/Walgreen's was
built in 1975.
The shopping center is located approximately two miles from the
Company's Park Northern Shopping Center. The center is located in an infill
area where there is little vacant land available for development. Directly
across Northern Avenue a new Albertson's anchored shopping center was developed
in 1993, which replaced an obsolete building.
The shopping center consists of four buildings, which are occupied by
19 tenants ranging in size from 968 square feet to 27,064 square feet. The
shopping center is anchored by Southwest Supermarket (27,064 square feet) and
Walgreen's (16,000 square feet). Southwest Supermarket is a 38-store chain
owned by the New York investment firm of Kohlberg & Company. Southwest
Supermarket's lease expires May 31, 2000 and Walgreen's lease expires January
31, 2000. The shopping center is 100% occupied.
After its acquisition in January 1998, the federal tax basis of
Southwest/Walgreen's will be its purchase price plus closing costs, estimated
to be $4,800,000. The realty tax rate on Southwest/Walgreen's is approximately
$3.50 per $100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $117,486.
58
<PAGE> 61
The following table sets forth the percentage of GLA at
Southwest/Walgreen's which was leased as of December 31 for each of the last
five years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ------ --------------------
<S> <C>
December 31, 1992 . . . . . . . . . . 100.0%
December 31, 1993 . . . . . . . . . . 85.0
December 31, 1994 . . . . . . . . . . 96.0
December 31, 1995 . . . . . . . . . . 98.0
December 31, 1996 . . . . . . . . . . 100.0
</TABLE>
- ---------------
(1) Based on unaudited information provided by the seller.
The following table sets forth the average rental income per square
foot at Southwest/Walgreen's for each of the last three years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA(1)
- ---------------------------------------- ----------------------------
<S> <C>
Year ended December 31, 1994 . . . . . $6.04
Year ended December 31, 1995 . . . . . 6.45
Year ended December 31, 1996. . . . . . 5.32
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the
seller.
Scheduled expirations at Southwest/Walgreen's during the next 10 years
are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Annualized Base Rental Income
-------------------------- ---------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ----------- -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 4 8,690 10.4% $ 83,280 15.2% $ 9.58
1998 3 2,500 3.0 37,932 6.9 15.17
1999 4 11,614 13.9 124,140 22.7 10.69
2000 5 47,124 56.3 173,256 31.6 3.68
2001 3 13,770 16.5 129,084 23.6 9.37
2002 0 0 0.0 0 0.0 0
2003 0 0 0.0 0 0.0 0
2004 0 0 0.0 0 0.0 0
2005 0 0 0.0 0 0.0 0
2006 and thereafter 0 0 0.0 0 0.0 0
-- ------- ----- ----------- ----- --------
Total 19 83,698 100.0% $ 547,692 100.0% $ 6.54
== ======= ===== =========== ===== ========
</TABLE>
Two tenants, Southwest Supermarket and Walgreen's, each occupy in excess
of 10% of the GLA at Southwest/Walgreen's Shopping Center. Southwest
Supermarket occupies 27,064 square feet of GLA under a lease which expires on
May 31, 2000 and has seven renewal options of five years each. Walgreen's
occupies 16,000 square feet of GLA under a lease which expires on January 31,
2000.
59
<PAGE> 62
Town 'N Country Plaza
Town 'N Country Plaza is a 157,704 square foot shopping center located in
Tampa, Florida at the intersection of Hillsborough Avenue and Hanley Road. The
property includes approximately 11.1 acres of land. The shopping center was
built in 1970 (and renovated in 1986) and has an asphalt parking lot. An
extensive renovation of the facade, signage and parking lot lighting was
completed in 1997.
The shopping center is located in the northwest area of Tampa and is
considered an infill location. According to Claritas, Inc., the one mile,
three mile and five mile ring populations were approximately 17,183, 59,045 and
137,972, respectively, in 1995. Additionally, the three mile average household
income was approximately $46,000 in 1995.
The shopping center has 17 tenants ranging in size from 700 square feet
to 50,000 square feet. Additionally, separate buildings are leased to
Checkers, a fast food restaurant, and to NationsBank for an ATM. Kentucky
Fried Chicken is located on a ground lease parcel and owned by a third party.
The shopping center is anchored by Big Lots (30,000 square feet), and T J Maxx
(24,320 square feet), a clothing store. Holiday Wonderland occupies 50,000
square feet, but is not considered an anchor tenant because it may not be
considered a credit tenant. Big Lot's lease expires January 31, 2002 and T J
Maxx's lease expires October 31, 1999. The shopping center is 100% occupied.
After its acquisition in January 1998, the federal tax basis of Town 'N
Country will be its purchase price plus closing costs, estimated to be
$4,990,000. The realty tax rate on Town 'N Country is approximately $2.61 per
$100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $99,125.
The following table sets forth the percentage of GLA at Town 'N Country
which was leased as of December 31 for the last five years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
------ --------------------
<S> <C>
December 31, 1992 . . . . . . . . . . 100.0%
December 31, 1993 . . . . . . . . . . 100.0
December 31, 1994 . . . . . . . . . . 100.0
December 31, 1995 . . . . . . . . . . 67.7
December 31, 1996 . . . . . . . . . . 100.0
</TABLE>
- ---------------
(1) Based on unaudited information provided by the seller.
The following table sets forth the average rental income per square foot
at Town 'N Country for the last five years:
<TABLE>
<CAPTION>
Average Effective Annual
Period: Rental Income per Sq. Ft.(1)
- ---------------------------------------- ----------------------------
<S> <C>
Year ended December 31, 1992 . . . . . $3.08
Year ended December 31, 1993 . . . . . 3.14
Year ended December 31, 1994 . . . . . 3.36
Year ended December 31, 1995 . . . . . 3.76
Year ended December 31, 1996. . . . . . 3.58
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the
seller.
60
<PAGE> 63
Scheduled lease expirations at Town 'N Country during the next 10 years
are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
----------------------- ---------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ----------- -------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 3 13,350 8.5% $ 63,000 9.2% $ 4.72
1998 5 9,384 6.0 93,700 13.6 9.99
1999 3 26,720 16.9 169,120 24.6 6.33
2000 0 0 0.0 0 0.0 0
2001 0 0 0.0 0 0.0 0
2002 6 108,250 68.6 361,872 52.6
3.34
2003 0 0 0.0 0 0.0 0
2004 0 0 0.0 0 0.0 0
2005 0 0 0.0 0 0.0 0
2006 and thereafter 0 0 0.0 0 0.0 0
--- ------- ----- --------- ----- ------
Total 17 157,704 100.0% $ 687,692 100.0% $ 4.36
=== ======= ===== ========= ===== ======
</TABLE>
Three tenants, Holiday Wonderland, Big Lots and T J Maxx, each occupy in
excess of 10% of the GLA at Town 'N Country Shopping Center. Holiday
Wonderland occupies 50,000 square feet of GLA under a lease which expires on
January 31, 2002 and has one renewal option of five years. Big Lot occupies
30,000 square feet of GLA under a lease which expires on January 31, 2002 and
has three renewal options of five years each. T J Maxx occupies 24,320 square
feet of GLA under a lease which expires on October 31, 1999 and has one renewal
option of five years.
University Mall Shopping Center
University Mall is a 315,596 square feet shopping center located at the
corner of Pines and University Boulevards in Pembroke Pines, Florida. Pembroke
Pines is an independent municipality near Ft. Lauderdale, Florida. Pines and
University are the main thoroughfares in Pembroke Pines. The property includes
approximately 29.0 acres of land.
University Mall was built in 1973 and originally contained interior mall
space. Separate buildings (Phase II and Phase III) were developed in 1975 and
1984, respectively, and contain 16,298 square feet and 28,625 square feet,
respectively. During 1990 and 1993, an aggregate of 13,000 square feet was
added to Phase I and all interior mall space was converted to storefront space
with the addition of several large anchor tenants.
University Mall has 37 tenants ranging in size from 750 square feet to
91,500 square feet. Additionally, separate buildings are leased to TGI
Fridays, WAG's, Taco Bell and a Federal Express kiosk. Also, Pollo Tropical
and Red Lobster are situated on outparcels and owned by third parties.
University Mall is anchored by Uptons (91,500 square feet), whose lease expires
December 1, 2002, Sports Authority (42,000 square feet), whose lease expires
April 30, 2012, Ross Stores (25,920 square feet), whose lease expires January
31, 2001, OfficeMax (23,500 square feet), whose lease expires January 31, 2003
and Eckerd Drugs (12,000 square feet), whose lease expires December 31, 2002.
Additionally, 46,246 square feet in the rear of the shopping center is leased
to University Self Storage, a climate controlled, self-storage facility, the
lease for which expires December 15, 2007. The shopping center is
approximately 98% leased.
After its acquisition in January 1998, the federal tax basis of
University Mall will be its purchase price plus closing costs, estimated to be
$18,650,000. The realty tax rate on University Mall is approximately $2.68 per
$100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $337,853.
61
<PAGE> 64
The following table sets forth the percentage of GLA at University Mall
which was leased as of December 31 for each of the last five years:
<TABLE>
<CAPTION>
As of: Percentage Leased(1)
- ----- --------------------
<S> <C>
December 31, 1992 . . . . . . . . . 92.35%
December 31, 1993 . . . . . . . . . 92.40
December 31, 1994 . . . . . . . . . 90.71
December 31, 1995 . . . . . . . . . 94.81
December 31, 1996 . . . . . . . . . 97.60
</TABLE>
- ---------------
(1) Based on unaudited information provided by the seller.
The following table sets forth the average rental income per square foot
at University Mall for each of the last five years:
<TABLE>
<CAPTION>
Average Rental
Period: Income per Sq. Ft. of GLA(1)
- ---------------------------------------- ----------------------------
<S> <C>
Year ended December 31, 1992 . . . . . $5.84
Year ended December 31, 1993 . . . . . 5.93
Year ended December 31, 1994 . . . . . 6.07
Year ended December 31, 1995 . . . . . 6.08
Year ended December 31, 1996. . . . . . 6.12
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the
seller.
Scheduled lease expirations at University Mall during the next 10 years
are as follows:
<TABLE>
<CAPTION>
Gross Leasable Area Effective Annual Rental Income
---------------------------- -------------------------------------------
Lease No. of Leases Approximate Percent Percent Average per
Expiration Expiring Sq. Ft. of Total Amount of Total Sq. Ft.
---------- -------- ------------- -------------- ------------- -------------- -------------
-
<S> <C> <C> <C> <C> <C> <C>
1997 3 3,969 1.3% $ 63,520 3.1% $ 16.00
1998 2 5,572 1.8 74,895 3.6 13.44
1999 10 23,935 7.7 303,398 14.6 12.68
2000 6 10,751 3.5 140,459 6.8 13.06
2001 2 27,045 8.7 248,409 12.0 9.19
2002 8 119,497 38.6 517,350 25.0 4.33
2003 1 23,500 7.6 129,240 6.2 5.50
2004 0 0 0.0 0 0.0 0
2005 0 0 0.0 0 0.0 0
2006 and thereafter 5 95,077 30.7 594,304 28.7 6.25
--- ------- ----- ---------- ----- -------
Total 37 309,346 100.0% $2,071,575 100.0% $ 6.70
=== ======= ===== ========== ===== =======
</TABLE>
Two tenants, Uptons and The Sports Authority, each occupy in excess of
10% of the GLA at University Mall. Uptons occupies 91,500 square feet of GLA
under a lease which expires on December 1, 2002 and has five renewal options of
five years each. The Sports Authority occupies 42,000 square fee of GLA under
a lease which expires on April 30, 2012 and has four renewal options of five
years each.
62
<PAGE> 65
LEASE EXPIRATIONS
At September 30, 1997, anchor tenants leased approximately 60.7% of the
total leased GLA and 67.0% of anchor- leased GLA (36.9% of total leased GLA) is
scheduled to expire within the next ten years.
The following table sets forth certain information regarding lease
expirations for the Properties for each of the ten years beginning with 1997,
assuming that none of the tenants exercises renewal options or termination
rights:
<TABLE>
<CAPTION>
Annualized Base Rent in Place at 9/30/97
----------------------------------------
% of Total % of Total
Number of Square Footage Portfolio Portfolio Ann.
Lease Expiration Leases Under Expiring Expiring Total Ann. Ann. Base Rent/
Year Year Expiring Leases GLA Base Rent Base Rent Sq. Ft.
---- ---------------------- -------- ----------------- --- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10/1/97-12/31/97 21 44,906 2.8% $ 456,919 3.4% $ 10.18
2 1998 42 110,941 6.6 1,120,710 8.5 10.10
3 1999 49 131,465 7.8 1,398,450 10.6 10.64
4 2000 59 198,780 11.8 2,002,313 15.1 10.07
5 2001 29 127,041 7.6 1,293,364 9.8 10.18
6 2002 41 413,462 24.6 2,140,837 16.2 5.18
7 2003 7 93,725 5.6 510,384 3.9 5.45
8 2004 5 67,896 4.0 523,446 4.0 7.71
9 2005 2 19,173 1.1 179,725 1.3 9.37
10 2006 and thereafter 25 471,228 28.1 3,603,208 27.2% 7.65
--- --------- ----- ----------- ----- ----------
Total 280 1,678,617 100.0% $13,229,356 100.0% $ 7.88
=== ========= ===== =========== ===== ==========
</TABLE>
TENANT DELINQUENCIES AND BANKRUPTCIES
As of September 30, 1997, four tenants representing 2.4% of the total
GLA of the Original Properties were consistently delinquent with their rent.
Management expects two of these tenants to vacate and is actively seeking
replacement tenants. Management is not aware of any tenants that are currently
in bankruptcy.
MORTGAGE INDEBTEDNESS
The following table sets forth certain information regarding the
mortgage indebtedness of the Company as of September 30, 1997:
<TABLE>
<CAPTION>
Debt to be Projected
Repaid upon Interest Rate Annual
Completion Balance to on Balance Interest
Balance as of the Remain Remaining Maturity Payment as
Property of 9/30/97 Offering Outstanding Outstanding Dates (1) of 9/30/97
- -------- ---------- -------- ----------- ----------- --------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Original Properties:
- --------------------
Twin Lakes Shopping Center (4) $ 1,758 $ 1,758 $ 0 9.00% 05/10/05 $ 0
Autobahn Shopping Center (4) 1,167 1,167 0 8.50 11/30/98 0
Centennial Shopping Center (3) (4) 3,754 3,754 0 9.00 09/25/98 0
Bandera Festival Shopping Center(2) (4) 7,799 7,799 0 9.75 03/31/99 0
University Park Shopping Center 4,818 0 4,818 9.30 04/01/18 445
McMinn Plaza Shopping Center 401 0 401 8.25 07/01/03 31
McMinn Plaza Shopping Center 732 0 732 7.63 11/01/02 52
Centennial Shopping Center 13 13 0 9.50 03/25/98 0
Park Northern Shopping Center 2,758 0 2,758 8.37 11/19/06 231
El Campo Shopping Center (3) (4) 1,580 1,580 0 9.00 06/27/03 0
College Station land 206 0 206 8.50 12/27/99 18
--------- --------- -------- ---------
Total Original Properties $ 24,986 $ 16,072 $8,914 $ 776
</TABLE>
63
<PAGE> 66
<TABLE>
<CAPTION>
Debt to be Projected
Repaid upon Interest Rate Annual
Completion Balance to on Balance Interest
Balance as of the Remain Remaining Maturity Payment as
Property of 9/30/97 Offering Outstanding Outstanding Dates (1) of 9/30/97
- -------- ---------- -------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Acquisition Properties:
- -----------------------
The Market at First Colony (4) 0 -- 0 -- -- --
Hedwig Shopping Centers 3,585 0 3,585 10.75 06/10/99 384
Benchmark Crossing 3,673 0 3,673 9.25 08/01/05 337
University Mall Shopping Center 13,374 0 13,374 8.44 11/01/06 1,125
Mason Park Centre (4) 0 -- 0 -- -- 0
Rosemeade Park Shopping Center 3,500 0 3,500 8.30 10/24/07 290
Town 'N Country Shopping Center 2,500 2,500 0 8.25 11/01/02 0
Southwest/Walgreen's Shopping Center 0 -- -- -- -- 0
-------- --------- ----------
Total Acquisition Properties $ 26,631 $ 2,500 $ 24,131 $ 2,136
Total Mortgage Indebtedness $ 51,617 $ 18,572 $ 33,045 $ 2,912
======== ========= ========== ========
</TABLE>
- -----------------
(1) The mortgage loan secured by University Park Shopping Center may not be
prepaid until May 2005 and can be prepaid thereafter with a penalty of 5%, 4%,
3%, 2%, and 1%, respectively, in the next five years. The 7.625% mortgage
loan secured by McMinn Plaza Shopping Center may not be prepaid until July 1999
and can be prepaid thereafter with a penalty of 5%, 4%, 3%, 2%, and 1%,
respectively, in the following five years. The mortgage loan secured by Twin
Lakes Shopping Center may be prepaid prior to May 10, 2000 by paying a penalty
of 3%, 2% and 1% in the mortgage years ending May 10, 1998, May 10, 1999 and
May 10, 2000, respectively. The mortgage loan secured by Benchmark Crossing
may not be prepaid until August 2000 and the mortgage loan secured by
University Mall may not be prepaid until November 1998. All of the other
mortgage loans may be prepaid at any time, either at par or subject to
prepayment penalties calculated typically on a yield maintenance basis.
(2) This mortgage loan requires an additional principal payment equal to 1/2%
of outstanding principal on April 1, 1998.
(3) These mortgage loans may each be extended one time for three years after
the due date. The Centennial mortgage loan extension provides for an increase
in the interest rate to 9.5% and a $100,000 principal payment on September 25,
1998. The El Campo mortgage loan extension requires a $150,000 principal
payment on June 27, 2003 and the payment of interest at the lesser of prime
plus 1/2%, or 9%.
(4) It is anticipated that seven mortgages, with a combined balance of
approximately $16,000,000, will be repaid prior to completion of the Offering
from the proceeds of a $52,000,000 bridge loan that may be secured by a first
mortgage on the following properties: Twin Lakes, Autobahn, Centennial,
Bandera, El Campo, Mason Park, Southwest/Walgreen's and The Market at First
Colony. It is anticipated that the bridge loan will be repaid from the
proceeds of the Offering.
As of September 30, 1997, the Company's mortgage indebtedness was
approximately $25.0 million, with each mortgage loan being secured by one of
the Original Properties. The Company's mortgage indebtedness bears interest
rates ranging from 7.63% to 9.75%, with a weighted average stated interest rate
of 9.09% and a weighted maturity of 6.8 years.
All of the mortgage loans included in the above table, except the
College Station land loan (relating to the recently acquired outparcel of
University Park Shopping Center), have fixed interest rates. Accordingly,
99.2% of the Company's mortgage indebtedness has fixed interest rates.
RENTAL REVENUES
Substantially all of the income from the Properties consists of rent
received under long-term leases. In addition, substantially all of the leases
provide for payment from tenants of a pro rata share of the real estate taxes,
insurance, utilities and common area maintenance of the property. Leases at
the Properties which provide for the payment of percentage rents represent 39%
of the total number of leases. Percentage rents represented approximately 1.0%
of gross rental revenue from the Original Properties, or approximately $32,822,
for the year ended December 31, 1996.
64
<PAGE> 67
CAPITAL EXPENDITURES
The following table sets forth information relating to historical
capital expenditures on the Company's Original Properties:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total capital expenditures $ 117,964 $ 202,939 $ 60,052
Average number of square feet (1) 594,457 542,095 492,111
Capital expenditures per square foot $ 0.20 $ 0.37 $ 0.12
Three year average capital expenditure per square
foot $ 0.23
</TABLE>
- -------------------
(1) Represents the average aggregate amount of square feet owned by the Company
during the year.
COMPETITION
All of the Properties are located in areas which have shopping centers
and other retail facilities. Generally, there are other neighborhood and
community shopping centers within close proximity to the Property. The amount
of rentable retail space in an area could have a material adverse effect on the
amount of rent charged by the Company and on the Company's ability to rent
vacant space and/or renew leases. There are numerous commercial developers,
real estate companies, REITs and major retailers that compete with the Company
in seeking properties for acquisition and tenants for properties, many of which
may have greater financial and other resources than the Company and may have
substantially more operating experience than that of the Company, its officers
and agents. There are numerous shopping facilities that compete with the
Properties in attracting retailers to lease space. In addition, retailers at
the Properties face increasing competition from outlet malls, discount shopping
clubs, catalog companies, direct mail and telemarketing.
EMPLOYEES
The Company has no salaried employees. All personnel required for the
Company's operations are provided by the Investment Manager.
LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor, to its
knowledge, is any litigation threatened against the Company or any of the
Properties, except for routine litigation arising in the ordinary course of
business which, in the opinion of the executive officers of the Company, would
not have a material adverse effect on the Company.
REGULATIONS AND INSURANCE
General. The Properties, as well as any other properties which the
Company may acquire in the future, are subject to various federal, state and
local laws, ordinances and regulations, including, among other things, zoning
regulations, land use controls, environmental controls relating to air and
water quality, noise pollution and indirect environmental impacts such as
increased motor vehicle activity. The Company believes that each Property when
acquired had all permits and approvals necessary under current law.
Insurance. The Company believes that the Properties are, or upon
acquisition will be, covered by adequate property and liability insurance
provided by reputable, commercially rated companies and with commercially
reasonable deductibles and limits. Management expects to maintain such
insurance coverage and to obtain similar coverage with respect to any
additional properties acquired by the Company in the near future. The Company
has obtained or will obtain title insurance relating to the Properties in an
aggregate amount which the Company believes to be adequate. See "Risk
Factors--Uninsured Loss."
Americans With Disabilities Act. The Properties are subject to the
Americans with Disabilities Act of 1990 (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial facilities"
but generally requires that all public facilities be made accessible to people
with disabilities. The requirements became
65
<PAGE> 68
effective in 1992. Compliance with the ADA requirements could require removal
of access barriers and other capital improvements at the Properties.
Noncompliance could result in the imposition of fines by the U.S. government or
an award of damages to private litigants. The Company believes that the
Properties are substantially in compliance with these requirements.
ENVIRONMENTAL MATTERS
Under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), as well as similar state and
local laws, owners and operators of property, both past and present, may be
held financially responsible for the investigation and, if appropriate, the
remediation of hazardous substance releases into the environment. Other
parties who arranged for the disposition of hazardous substances or transported
hazardous substances for disposition also may be held liable. Liability under
CERCLA and similar laws is strict, joint and several and, in many instances,
may be imposed without regard to the party's culpability concerning the
hazardous substance release. Potentially responsible parties may be liable to
one another, the government and, in some instances, third parties.
Costs recoverable under CERCLA must be consistent with the National
Contingency Plan. The National Contingency Plan establishes a procedure
whereby contaminated properties are identified and, if necessary, remediated in
a priority fashion. If conducted in the appropriate manner, these costs will
include, but may not be limited to, funds expended to investigate and to
remediate hazardous substance releases. Costs associated with any such
environmental activity may be substantial.
Phase I environmental assessments have been conducted on all of the
Properties. Only three of these reports have been prepared in the past two
years. See "Risk Factors -- Environmental Matters." The purpose of Phase I
environmental assessments was to determine if past or present uses of, or
conditions on, the Properties or properties in the vicinity of the Properties,
indicate the potential for soil or groundwater contamination or if other
environmental conditions might affect future uses of the Properties or
liability associated therewith. Phase I environmental assessments generally
included the following: visual inspection of the property, review of available
land use records, interviews with the property representatives; examination of
information from environmental agencies; and a walk-through survey for
suspected asbestos and lead-containing materials. As may be required by any
applicable federal, state or local laws, the Company has addressed or will
address any recommendations contained in the Phase I environmental assessment
reports.
None of the reports from the Phase I environmental assessments or
subsequent investigations has revealed, nor is the Company or the Investment
Manager aware of, any environmental condition that the Company believes would
have a material adverse effect on the Company's business, assets or results of
operations. The Company and the Investment Manager believe that the Properties
are in compliance in all material respects with applicable federal, state and
local laws, ordinances and regulations concerning the presence of hazardous
substances. Neither the Company nor the Investment Manager has been notified
by any governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous substances in
connection with any of its Properties. It is possible, however, that the Phase
I environmental assessments and subsequent investigations do not reveal all
environmental liability concerns or that there are material environmental
liabilities of which the Company is unaware. Accordingly, no assurance can be
given that (i) future laws, ordinances or regulations will not require or
impose any material expenditures or liabilities in connection with the
environmental conditions by or on the Company or the Properties; (ii) the
current environmental condition of each Property will not be affected by
tenants and occupants of such Property, by the condition of properties in the
vicinity of such Property or by third parties unrelated to the Company; (iii)
prior owners or prior or current tenants of a Property did not create any
material adverse environmental condition of which the Company or the Investment
Manager is unaware.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current policies with
respect to investments, financings, affiliate transactions and certain other
activities. The Company's policies with respect to these activities have been
determined by management of the Company and by the Investment Manager and may
be amended or revised from time to time at the discretion of the Board of Trust
Managers without a vote of the shareholders of the Company. No assurance can
be given that the Company's investment objectives will be attained or that the
value of the Company will not decrease.
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INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The Company's
primary business objective is to maximize shareholder value by maintaining
long-term growth in Cash Available for Distribution and paying distributions to
its shareholders. The Company intends to pursue this objective by continuing
to acquire community shopping centers for long-term ownership and to manage its
properties intensively, and thereby seek to maximize current and long-term
income and the value of its assets. The Company's policy, as determined by the
Investment Manager, is to acquire or redevelop assets in geographic areas where
the Company believes that opportunities exist for acceptable investment
returns.
The Company expects to pursue its investment objectives primarily
through the direct ownership of properties. The Company currently intends to
invest in or develop primarily community shopping center properties in its
primary markets. However, future investment or redevelopment activities will
not be limited to any geographic area or to a specified percentage of the
Company's assets. All of the Properties initially will be managed by the
Company or third party on-site property managers retained by the Investment
Manager. There is no limit on the percentage of assets which will be invested
in any specific property.
The Company may also participate with other entities in property
ownership, through joint ventures or other types of common ownership. Equity
investments may be subject to existing mortgage financing and other
indebtedness which have priority over any equity interest of the Company.
Investments in Real Estate Mortgages. While the Company intends to
emphasize equity real estate investments, it may, in its discretion, invest in
first or second mortgages or other real estate interests consistent with its
qualification as a REIT. The Company may also invest in participating or
convertible mortgages if the Trust Managers conclude that the Company and its
shareholders may benefit from the cash flow or any appreciation in the value of
the subject property. Such mortgages are similar to equity participation.
There is no limit on the percentage of assets which may be invested in any type
of mortgage or in any single mortgage, nor is there any limit on the types of
properties subject to mortgages in which the Company may invest.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage ownership limitations
and gross income tests necessary for REIT qualification, the Company also may
invest in securities of entities engaged in real estate activities or
securities of other issuers, including for the purpose of exercising control
over such entities, although it has not done so in the past. See "Federal
Income Tax Consequences -- Requirements for Qualification as a Real Estate
Investment Trust." The Company may acquire all or substantially all of the
securities or assets of other REITs or similar entities where such investments
would be consistent with the Company's investment policies. There is no limit
on the percentage of assets which may be invested in securities of or interests
in other issuers.
Periodic Review of Assets. The Company has no current intention to
dispose of any of the Properties. Nevertheless, the Company reserves the right
to dispose of any of the Properties or any property that may be acquired in the
future if the Company determines that the disposition of such property is in
the best interests of the Company and its shareholders.
FINANCING POLICIES
As a general policy, the Company intends to maintain a ratio of total
indebtedness to Total Market Capitalization of approximately 50% or less.
However, no assurance can be given that the Company will be able to accomplish
this objective. The debt to Total Market Capitalization ratio is based in part
upon the stock market value of equity, and accordingly fluctuates with changes
in the price of the shares and differs from a debt-to tangible net worth ratio
which is based on book value of a company's assets. The Company is basing its
debt capitalization policy on a ratio of long-term debt to Total Market
Capitalization rather than debt-to-book value of assets because the Company
believes that market capitalization is a more appropriate measure of the market
value of the Company's assets than the book value of its assets and more
indicative of its ability to repay debt.
On a pro forma basis at September 30, 1997, after giving effect to the
Offering (assuming an initial public offering price of $10.75 per Common
Share), the Company had a ratio of long-term debt to Total Market
Capitalization of 26.8%. See "Capitalization." Assuming no change in the
market value of issued and outstanding Common Shares, the Company would be able
to incur approximately $60,000,000 of additional indebtedness and still
maintain a ratio of
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long-term debt to Total Market Capitalization of 50% or less. The Company,
however, may from time to time reevaluate its debt policy in light of current
economic conditions, relative cost of debt and equity capital, changes in the
market capitalization of the Company, acquisition opportunities and other
factors, and may modify its debt financing policy and may increase or decrease
its ratio of long-term debt to Total Market Capitalization without a vote of
its shareholders. The organizational documents of the Company do not contain
any limitations on the amount or percentage of indebtedness the Company may
incur.
Indebtedness incurred by the Company may be in the form of bank
borrowings, purchase money obligations to the sellers of properties, publicly
or privately placed debt instruments or financing from institutional investors
or other lenders, any of which indebtedness may be unsecured or may be secured
by mortgages or other interests in properties owned by the Company or may be
limited to the particular property to which the indebtedness relates. The
proceeds from any borrowings by the Company may be used for the payment of
distributions, for working capital, to refinance existing indebtedness or to
finance acquisitions of new properties.
In the event that the Trust Managers determine to raise additional
equity capital, the Trust Managers have the authority, without shareholder
approval, to issue additional Common Shares or Preferred Shares in any manner
(and on such terms and for such consideration) they deem appropriate, including
in exchange for property. Existing shareholders would have no preemptive right
to purchase such shares in any offering, and any such offering might cause a
dilution of a shareholder's investment in the Company. See "Description of
Shares of Beneficial Interest."
AFFILIATE TRANSACTION POLICY
The Company has adopted a policy that it will not without the approval
of a majority of the independent Trust Managers (i) acquire from or sell to any
Trust Manager, officer or employee of the Company, or any entity in which a
Trust Manager, officer or employee of the Company beneficially owns more than a
1% interest, or, except for any property in which the Company owns an economic
interest, acquire from or sell to any affiliate of any of the foregoing, any
property or other assets of the Company, or (ii) make any loan (other than
pursuant to the Plan) to or borrow from any of the foregoing persons.
CERTAIN OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuer, (ii) underwrite securities of other
issuers, or (iii) actively trade in loans or other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
purchase or otherwise reacquire Common Shares or any of its other securities in
the open market or otherwise and may engage in such activities in the future.
The Trusts Managers have no present intention of causing the Company to
repurchase any of the Common Shares, and any such action would be taken only in
conformity with applicable Federal and state laws and the requirements for
qualifying as a REIT under the Code. The Company may issue securities in
exchange for real estate assets if the Trust Managers determine such issuances
to be in the best interests of the Company's shareholders.
The Company has not made any loans to third parties, although it may
in the future make loans to third parties, including, without limitation, loans
to joint ventures in which it participates. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, and the Company does not intend to do so in the future. The Company's
policies with respect to such activities may be reviewed and modified from time
to time by the Board of Trust Managers without the vote of the shareholders.
MANAGEMENT
TRUST MANAGERS AND OFFICERS
The Company's Trust Managers are elected annually by the shareholders
and remain in office until their successors, if any, are elected. The Trust
Managers are responsible for appointing the executive officers of the Company,
for selecting, monitoring and supervising the Investment Manager and for
approving borrowings by the Company. The Trust Managers are also responsible
for the adoption from time to time of such investment policies and limitations
as they may deem appropriate in light of the Company's investment objective.
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The following table sets forth the names and positions of the Trust Managers
and officers of the Company.
<TABLE>
<CAPTION>
Positions and
Name Age Offices With the Company
- ------------------------- --- -------------------------------------------
<S> <C> <C>
Robert W. Scharar 49 Trust Manager and Chairman of the Board
Jerry M. Coleman 61 Trust Manager
Josef C. Hermans 54 Trust Manager
William C. Brooks 60 Trust Manager
Ira T. Wender 70 Trust Manager
Lewis H. Sandler 61 President and Chief Executive Officer
Daniel M. Jones, III 55 Chief Financial Officer
Randall D. Keith 39 Vice President and Chief Operating Officer
</TABLE>
Information concerning the Trust Managers and executive officers of
the Company is as follows:
Robert W. Scharar. Mr. Scharar, who resides in Houston, Texas,
received a B.S.B.A. degree in business from the University of Florida in 1970,
an M.B.A. degree in 1971 from Northeastern University, a J.D. from Northeastern
University Law School in 1974, and an L.L.M. degree in Taxation from Boston
University Law School in 1979. In 1975, he formed First Commonwealth
Associates, a Texas partnership, which engaged in financial planning and
advisory services. In 1981, the assets of First Commonwealth Associates were
acquired by UST Financial Planning Company, Inc., a subsidiary of UST Corp. (a
Massachusetts bank holding company), and Mr. Scharar served as President of
that subsidiary. In 1983, Mr. Scharar founded the Investment Manager, which
acquired the Texas and Florida offices of UST Financial Planning Company, Inc.
Mr. Scharar is President and a director of the Investment Manager. Mr. Scharar
also serves as one of four Trustees of both First Commonwealth Mortgage Trust
("FCMT"), a private real estate investment trust which is engaged in the
business of originating and investing in real estate mortgage loans, and Ivy, a
private REIT engaged in the business of acquiring and operating office
buildings. FCA Corp is also the Investment Manager for FCMT and Ivy. Since
1991, Mr. Scharar has served as President and Portfolio Manager of Capstone New
Zealand Fund and since 1997 as President and Portfolio Manager of Capstone
Japan Fund. From 1992 through 1996, he served as director of South West
Property Trust, Inc. ("SWP") and in 1997 when SWP merged into United Dominion
Realty Trust, Inc. ("UDR"), he became a director of UDR. Mr. Sharar has served
as a Trust Manager and Chairman of the Board of the Company since its inception
in 1989.
Jerry M. Coleman. Mr. Coleman resides in El Paso, Texas and is a
commercial real estate developer and builder. Mr. Coleman received his J.D.
from the University of Texas. Since 1975, Mr. Coleman has served as Chairman
and CEO of Capital Resource & Investment Co. and managing partner of
Azar-Coleman Properties since 1982. From 1977 to 1980, Mr. Coleman was
Chairman of the Board and Chief Executive Officer of Citizen National Bank of
Austin, Texas and remained Chairman of the Board of the successor MBank until
1988. Mr. Coleman has served as a Trust Manager of the Company since January
1, 1989.
Josef C. Hermans. Mr. Hermans resides in Houston, Texas and is a
consultant to the hotel industry. Mr. Hermans is a graduate of the Lausanne,
Switzerland Hotel Management School. In addition to his early experience in
European hotels, Mr. Hermans served as Vice President of Operations of Mariner
Corporation between 1976 and 1983. Since 1983, Mr. Hermans has been
self-employed as a consultant in the hospitality industry. Mr. Hermans
currently serves as a Trust Manager of FCMT and Ivy and a director of Mirror
Properties Corp. Mr. Hermans has served as a Trust Manager of the Company
since January 1, 1989.
William C. Brooks. Mr. Brooks is a financial consultant who resides
in Boynton Beach, Florida. Mr. Brooks is a graduate of Oberlin College in
Oberlin, Ohio. From 1980 to 1994, Mr. Brooks was Chief Financial Officer,
Senior Vice President and Treasurer of UST Corp., a Nasdaq bank holding
company. Since 1994, Mr. Brooks has served as a financial consultant. Mr.
Brooks currently serves as a Trust Manager of FCMT and Ivy. Mr. Brooks has
served as a Trust Manager of the Company since March 3, 1995.
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Ira T. Wender. Mr. Wender resides in New York, New York. He is a
former partner and is currently of counsel to the law firm of Patterson,
Belknap, Weber & Tyler, New York, New York since July 1996. From 1982 through
May 1997, Mr. Wender was a Director of Southwest Realty, Ltd. and its
successors in interests, South West Property Trust Inc. and United Dominion
Realty Trust. From January 1994 to December 1995, Mr. Wender was Chairman of
Perry Ellis International, Inc. His is currently a Director of Dime Savings
Bank of New York and REFAC Technology, Inc. Mr. Wender has served as a Trust
Manager of the Company since December 1997.
Lewis H. Sandler. Mr. Sandler resides in Dallas, Texas. Mr. Sandler
has served as President and Chief Executive Officer of the Company and the
Chief Executive Officer of the real estate services division of the Investment
Manager since January 1997. Prior to that time, he served as Executive Vice
President, Secretary, General Counsel and a Director of South West Realty,
Ltd., a publicly traded multi-family limited partnership from 1983 through
October, 1992. From October 1992 through December 1996, Mr. Sandler served in
similar roles for SWP. Mr. Sandler received a B.A. degree from Hamilton
College in 1958 and an L.L.B. from Columbia University Law School in 1961. He
is licensed to practice law in New York and Texas.
Daniel M. Jones, III. Mr. Jones, who resides in Garland, Texas, has
been Chief Financial Officer of the Company since May 1, 1997, and worked as a
consultant to the Company and the Investment Manager for several months prior
thereto. Prior to that time, he served from June 1996 until February 1997 as
Vice President, Treasurer and Chief Financial Officer for SWP. Prior to SWP,
Mr. Jones spent over 25 years as a senior financial officer in the retail
industry with such companies as Dayton Hudson Department Stores (1979-81),
Federated Department Stores (1981-83), R.H. Macy & Company (1983-87), Wyatt
Cafeterias (1992-93) and Annie's Attic (1994-96). His work often included
strategic planning, site selection, real estate and legal responsibilities.
Mr. Jones also has an extensive background in contract and lease negotiations,
all from the tenant's side. He received his B.S. in Accounting from Virginia
Commonwealth University in Richmond, Virginia and is a CPA, licensed in Texas
and Virginia.
Randall D. Keith. Mr. Keith resides in Houston, Texas. He received a
B.B.A. in Accounting from the University of Texas and is a Texas CPA. He is a
member of the Houston Society of Financial Analysts, Texas Society of Certified
Public Accountants and the Association for Management and Research. Mr. Keith
has experience with Service Corporation International in equity research and
portfolio management in both the public and private markets and in auditing and
taxation with Grant Thorton. Mr. Keith currently serves as Vice President and
Chief Operating Officer of the Company. Mr. Keith has been involved with the
Company since its inception in 1988. He served as Secretary of the Company
from 1988 to 1990 and from 1993 to 1996, Treasurer from 1990 to 1993, Vice
President from 1993 to 1996, and as Vice President and Chief Operating Officer
from 1996 to the present. Mr. Keith is employed by the Investment Manager.
All officers and Trust Managers hold office until their respective
successors are elected and qualified or until their earlier resignation or
removal.
COMMITTEES OF THE BOARD OF TRUST MANAGERs
Audit Committee. The Board of Trust Managers has established an Audit
Committee consisting of Messrs. Coleman, Hermans, Brooks and Wender. The Audit
Committee makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
Executive Committee. The Board of Trust Managers will establish,
after completion of the Offering, an Executive Committee. The Executive
Committee will have the authority to acquire, dispose of and finance
investments for the Company and execute contracts and agreements, including
those related to the borrowing of money by the Company, and generally exercise
all other powers of the Board of Trust Managers except for those which require
action by all Trust Managers or the independent Trust Managers under the
Charter or Bylaws or under applicable law.
Compensation Committee. The Board of Trust Managers has established a
Compensation Committee, consisting of Messrs. Coleman, Hermans, Brooks and
Wender. The Compensation Committee has the authority to administer the Plan
and the DRIP. Although the Investment Manager determines the compensation for
the Company's officers, the Compensation Committee evaluates the performance of
the Company's officers and makes recommendations to the Investment Manager
regarding officer compensation.
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COMPENSATION OF TRUST MANAGERS
For services provided during fiscal 1997, each of the then three
independent Trust Managers received 800 Common Shares in August 1997 and in
connection with the Offering, each of the four independent Trust Managers were
awarded 2,000 Common Shares in December 1997.
Commencing in 1998, each independent Trust Manager will receive an
annual fee of $10,000 plus $250 per meeting attended. Trust Managers who are
employees of the Company or the Investment Manager will not be paid any Trust
Manager fees. In addition, the Company may reimburse the Trust Managers for
travel expenses incurred in connection with their activities on behalf of the
Company. Trust Managers who are not employees of the Company or the Investment
Manager will each receive a grant of options, upon completion of the Offering,
to purchase 8,000 Common Shares under the Plan. The options will vest over a
four year-period commencing January 1, 1999 and will be exercisable at a price
per Common Share equal to the initial public Offering price. The unaffiliated
Trust Managers will also be eligible to receive loans from the Company for
purposes of exercising vested options, all or a portion of which may be forgiven
over time. Additional options to purchase 2,000 Common Shares will be granted
annually to each independent Trust Manager commencing January 1, 2003. The
exercise price will be the fair market value on the date of option grant.
EXECUTIVE COMPENSATION
Under the Advisory Agreement, the Investment Manager has assumed the
responsibility for payment of all salaries and bonuses, if any, as well as
payroll taxes and other fringe benefits for each of the Executive Officers of
the Company and will make available at its own cost such other support
personnel as may be needed by the Company. The Investment Manager will also
supply the Company with office space and equipment, including telephones,
facsimile and duplicating machines, as well as access to conference rooms and
secretarial assistance. Should the advisory fee payable to the Investment
Manager prove insufficient to cover such costs and expenses, the Investment
Manager will bear the cost of any such overage. The Company will pay for its
own direct and variable expenses that are identifiable directly to the
Company's activities and operations. In this regard, the Company will bear its
own costs for long distance telephone charges, postage, travel expense,
printing costs and contract labor costs. See "Certain Relationships and
Transactions."
Each of Messrs. Sandler and Jones was hired by the Investment Manager
during the Company's 1997 fiscal year. Accordingly, neither the Company nor
the Investment Manager paid any cash compensation to either of them for the
year ended December 31, 1996. Although an officer of the Company during most of
1997, Mr. Jones was hired by the Company as an independent consultant for the
purpose of assisting the Company in connection with the Offering and his
monetary compensation was as a consultant. Mr. Keith was an officer of the
Company during 1996 but allocated his time among the Company, the Investment
Manager and several other entities affiliated within the Investment Manager.
Together Messrs. Sandler, Jones and Keith are the Company's executive officers
(the Named Executive Officers"). The following table sets forth the estimated
annualized base salary expected to be paid to each of the Named Executive
Officers by the Investment Manager for the 1997 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------
Annual Compensation Awards
----------------------------------------- --------------------------
Restricted Securities
Name and Principal Other Annual Share Underlying All Other
Position Salary Bonus Compensation Awards Options Compensation
- -------- ------ ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Lewis H. Sandler $67,166(1) $0 $ 0 10,000 - -
President and Chief
Executive Officer
Daniel M. Jones, III $63,750(2) $0 900 8,000 - -
Chief Financial
Officer
</TABLE>
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<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------
Annual Compensation Awards
----------------------------------------- --------------------------
Restricted Securities
Name and Principal Other Annual Share Underlying All Other
Position Salary Bonus Compensation Awards Options Compensation
- -------- ------ ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Randall D. Keith $67,548(3) $0 $4,463 8,000 -- --
Vice President and
Chief Operating
Officer
</TABLE>
- -----------------
(1) Represents the salary paid to Mr. Sandler by the Investment Manager.
Approximately $6,716 of such amount represents compensation paid for services
rendered to the Investment Manager and its affiliates.
(2) Represents sums paid to Mr. Jones in his capacity as a consultant to the
Company.
(3) Represents the salary paid to Mr. Keith by the Investment Manager. Mr. Keith
has been dedicated by the Investment Manager solely to perform services for the
Company.
None of the Company's executive officers has an employment agreement with
either the Company or the Investment Manager.
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ADVISORY BOARD
The Board of Trust Managers of the Company has established an advisory
board (the "Advisory Board") that primarily will include real estate and
securities industries professionals. The Trust Managers intend to appoint
approximately seven professionals to the Advisory Board. Such professionals are
expected to include shopping center developers and/or operators, regional or
national retail brokers (for leasing and/or sales), experienced builders,
securities underwriters, real estate attorneys, accountants and/or bankers. The
identity, number and/or expertise of the professionals serving on the Advisory
Board may vary from time to time at the discretion of the Trust Managers, at
whose pleasure such professionals will serve. Members of the Advisory Board
will be invited to all Board meetings and will be expected to lend their
expertise to matters under consideration at such meetings. Such Advisory Board
members, however, will have no vote on any matters brought before the Board of
Trust Managers nor will they receive any monetary compensation for their
service. The Company may, however, reimburse the Advisory Board members for
travel expenses incurred on behalf of the Company. In addition, the Company
intends to award each of the members of the Advisory Board options to purchase
up to 2,000 Common Shares under the Plan to be effective upon the later of
consummation of the Offering or joining the Advisory Board. The options will
vest on January 1, 1999 and will be exercisable for a period of five years from
the date of vesting at a price per Common Share equal to the initial public
Offering price or fair market value, as applicable. It is anticipated that
options will be awarded annually to each member of the Advisory Board to
purchase up to an additional 2,000 Common Shares per annum at an option
exercise price equal to the fair market value of the Common Shares on the date
of each option grant.
The first seat awarded by the Trust Managers on the Advisory Board was to
the group comprised of Loren M. Pollack, David J. Scher and James H. Shimberg.
These three experienced real estate developers/operators share one seat on the
Advisory Board. They bring to the Company an aggregate of more than 50 years of
retail development and operating experience. Information on the individual
members of the group is as follows:
Loren M. Pollack. Mr. Pollack, who resides in Clearwater, Florida,
received a degree in Business Administration from the University of Illinois in
1955. He joined Stuart S. Golding Company ("Golding") in 1964 and has been an
owner and President of Golding since 1975. Mr. Pollack has been actively
involved in all aspects of Golding's development, financing, leasing and
management of its retail shopping centers. He is a licensed real estate broker
in Florida, has served as Florida State Director for the International Council
of Shopping Centers and was a member of the Building Advisory and Examining
Committee for Pinellas County, Florida.
David J. Scher. Mr. Scher received a Bachelor of Science degree in
economics from the University of Wales and became a qualified chartered
accountant (England) in 1973. In 1987, Mr. Scher founded Major Video Canada
and expanded it into a chain of 41 stores by the time it became Blockbuster
Canada in 1989. In 1989, Mr. Scher joined Golding as a co-owner and has been
actively involved in the planning, development, operation and management of
more than eight retail (including mall and neighborhood) centers. Mr. Scher is
the immediate past President of the Tampa Jewish Federation.
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James H. Shimberg. Mr. Shimberg is a graduate of the University of
Chicago Law School and is a member of the New York and Florida Bars. He is the
President of Town 'N Country Park, Inc., one of Tampa's largest home builders
(over 8,000 homes) and a partner of Shimberg-Cross, one of Tampa's largest
residential land developers. He is past President of both the Florida Home
Builders Association and the Home Builders Association of Greater Tampa, and a
permanent Life- Time Director of the National Association of Home Builders. In
May 1985, he was inducted into the National Housing Hall of Fame in Washington,
DC and in 1989 was inducted into the State of Florida Housing Hall of Fame. Mr.
Shimberg has served as a member of a number of important state committees by
appointment of successive Governors of Florida, and as the first Chairman of
the Board of Trustees of the University Community Hospital of Tampa, Florida
from 1968 to 1977.
SHARE INCENTIVE PLAN
The Company has established an incentive compensation plan to enable
Trust Managers, executive officers and key employees of the Company (and
including any operating partnership of the Company) as well as key personnel of
the Investment Manager who contributed services to the Company to participate
in the ownership of the Company. The Plan is designed to attract and retain
executive officers, Trust Managers and other key employees of the Company and
the Investment Manager (collectively, "Plan Participants") and to provide
incentives to such persons to maximize the Company's growth and cash flow
available for distribution. The Plan provides for awards to the Plan
Participants of both grants and non-qualified stock options as well as
incentive stock options.
Under the Plan, the number of Common Shares reserved for issuance under
the Plan is equal to 10% of the Company's equity securities. The Compensation
Committee will administer the Plan and will determine the Plan Participants,
the number of shares to be granted, the number of options and shares covered
thereby to be granted and the terms and conditions of grant and/or option
exercise. The Compensation Committee is also authorized to adopt, amend and
rescind rules relating to the administration of the Plan. Loans, if any, to
facilitate the exercise of option grants will also be determined and
administered by the Compensation Committee.
Non-qualified stock options will provide for the right to purchase
Common Shares at a specified price which will not be less than the fair market
value on the date of the grant and usually will become exercisable in
installments for up to seven years after the grant date. Once vested, options
must generally be exercised within five to seven years.
Incentive stock options, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of the fair market value
of the Common Shares on the grant date and a ten year restriction on their
term. These options may be subsequently modified to disqualify them for
treatment as incentive stock options.
In anticipation of the completion of the Offering, the Company awarded
67,000 Common Shares to the Investment Manager for the benefit of Messrs.
Scharar, Sandler, Jones and Keith as well as other officers and key employees
of the Investment Manager who have contributed to and are expected to continue
to contribute to the Company's success, and awarded 2,000 Common Shares to
each of the Company's four independent Trust Managers. The Investment Manager
may transfer some or all of these Common Shares directly to the beneficiaries.
These Common Shares are restricted and are subject to divestiture over a two
year period in the event that the recipient or beneficial owner should
voluntarily cease to be an officer or key employee of the Investment Manager or
should be dismissed for cause during such vesting period. In addition, the
Company will grant options to purchase 300,000 Common Shares to the Investment
Manager upon the completion of the Offering for the benefit of certain
Investment Manager employees who contribute to the Company's success, including
the Company's executive officers. These options will be exercisable at the
public offering price of the Offering of the Common Shares and will vest evenly
over a four-year period commencing January 1, 1999. These options may also be
assigned, in whole or in part, directly to the beneficiaries for whom the
Investment Manager is holding them. The beneficiaries of these option grants
will be eligible to receive loans from the Company for purposes of exercising
vested options, all or a portion of which may be forgiven over time.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements requiring the
Company to indemnify its officers and Trust Managers, and advance expenses, to
the maximum extent permitted by Texas law. See "--Limitation of Liability and
Indemnification."
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LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 9.20 of the Texas REIT Act, subject to procedures and
limitations stated therein, allows the Company to indemnify any person who was,
is or is threatened to be made a named defendant or respondent in a proceeding
because the person is or was a trust manager or officer against judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable expenses actually incurred by the person in connection with the
proceeding. The Company is required by Section 9.20 of the Texas REIT Act to
indemnify a trust manager or officer against reasonable expenses incurred by
him in connection with a proceeding in which he is a named defendant or
respondent because he is or was a trust manager or officer if he has been
wholly successful, on the merits or otherwise, in the defense of the
proceeding. Under the Texas REIT Act, Trust Managers and officers are not
entitled to indemnification if (i) the trust manager or officer is found liable
to the real estate investment trust or is found liable on the basis that
personal benefit was improperly received and (ii) the trust manager or officer
was found liable for willful or intentional misconduct in the performance of
his duty to the real estate investment trust. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any provision of the
Charter, bylaws, agreements or otherwise. In addition, the Company has,
pursuant to Section 15.10 of the Texas REIT Act, provided in its Charter that,
to the fullest extent permitted by applicable law, a Trust Manager of the
Company shall not be liable for any act, omission, loss, damage or expense
arising from the performance of his duty under the Texas REIT Act, except for
his own willful misfeasance or gross negligence.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Effective as of June 9, 1997, the Company amended the Advisory
Agreement with the Investment Manager. Under the terms of the Advisory
Agreement, the Investment Manager is obligated to present an investment program
to the Company, use its best efforts to obtain investments suitable to such
program, provide administrative services for the Company and supervise, subject
to the direction of the Trust Managers, the Company's day-to-day affairs.
Subject to their duty of overall supervision, the Trust Managers have delegated
to the Investment Manager the power and duty to: (i) perform necessary
administrative functions in the management of the Company; (ii) serve as the
investment and financial investment manager and provide research, economic and
statistical data in connection with investments and financial policies; (iii)
investigate, select and conduct relations with accountants, attorneys, brokers,
investors, banks and other lenders, and others as necessary in connection with
investments; (iv) maintain bank accounts, and arrange for fidelity bonds with
respect to fraudulent and negligent acts, errors and omissions, in amounts
specified by the Trust Managers, covering all of the personnel handling funds
and other assets of the Company, with the Company named as an insured party;
(v) administer such day-to-day bookkeeping and accounting functions as are
required for the proper management of the assets of the Company, contract for
audits and prepare or cause to be prepared such reports as may be required by
any governmental authority in connection with the ordinary conduct of the
Company's business; (vi) provide office space and office equipment and the use
of accounting or computing equipment when required, and provide personnel
necessary for the performance of such services; (vii) obtain services that may
be required in acquiring and disposing of investments, disbursing and
collecting funds, paying debts and fulfilling the obligations and handling,
prosecuting and settling any claims of the Company; (viii) obtain the services
of property managers or management firms to perform customary property
management services with regard to real estate properties owned by it and as
may be required to supervise and monitor such property managers or management
firms as would be performed by a prudent owner; and (ix) advise in connection
with negotiations with real estate brokerage firms, investment banking firms,
securities brokers or dealers and other institutions or investors in connection
with the sale of securities and the purchase and sale of properties.
The initial term of the Advisory Agreement will expire on December 31,
1998, and will automatically be renewed for five successive one-year terms,
subject to a determination by a majority of the independent Trust Managers that
the performance of the Investment Manager has been satisfactory. If the
independent Trust Managers determine that the Investment Manager's performance
has been unsatisfactory or without cause, they may either (i) terminate the
Advisory Agreement upon six months prior notice, or (ii) pay the Investment
Manager a termination fee (the "Termination Fee") equal to 50% of the product
of the average monthly fee paid to the Investment Manager for the three full
calendar months immediately preceding the month in which termination notice is
given, times 12. The Investment Manager's performance will be measured, in
part, by the Company's growth in Funds From Operations, Funds From Operations
per share, Cash Available for Distribution, market conditions that may affect
each of its Properties and the Company's ability to acquire additional retail
properties on terms and conditions that should be accretive to the Company's
Funds From Operations over a reasonable period of time. The Company may
terminate the contract for cause at any time and without payment of a
termination fee. The Investment Manager may terminate the Advisory
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Agreement upon 90 days prior written notice without premium or penalty. If
such termination is for cause, however, the Company would be obligated to pay
the Termination Fee to the Investment Manager.
Pursuant to the terms of the Bylaws and the Advisory Agreement, the
Investment Manager is prohibited from performing similar functions for any real
estate entity other than the Company whose primary function is to own and
operate shopping centers in the United States. There is no limit on the right
of any Trust Manager or Advisory Board member, or any director, officer,
employee or shareholder of the Investment Manager to engage in any business
(including competitive business activities) or to render services of any kind
to any other entity.
Under the Advisory Agreement, effective July 1, 1997, the Investment
Manager is entitled to a fee equal to 6.8% of Advisory Funds From Operations.
Based upon revenues of the Company for the first three quarters of 1997, on a
pro forma basis, the fee payable to the Investment Manager for 1997 would be
approximately $258,750.
The Company is acquiring University Mall with $2,000,000 in proceeds
from two affiliates of the Investment Manager and a promissory note from the
seller of the shopping center. One of the affiliates is a mortgage REIT that
is also managed by the Investment Manager. The two notes to the affiliates
will each bear interest at the rate of 12% per annum and will mature 120 days
after funding. They will be secured by a second mortgage on the Autobahn
property. The seller of the University Mall will take back a purchase money
note in the amount of approximately $3,750,000 with a maturity of 120 after the
closing of the acquisition. The purchase money note will bear interest at the
rate of 10% per annum and will be secured by a pledge of the stock in the
special purpose entity that is wholly-owned by the Company and that was formed
for the sole purpose of acquiring title to this property.
Messrs. Scharar, Sandler, Jones and Keith are the Chairman of the
Board, President and Chief Executive Officer, Chief Financial Officer and the
Vice President and Chief Operating Officer, respectively, of the Company. They
are all employees of the Investment Manager. See "Risk Factors -- Sole
Reliance on Investment Manager."
In anticipation of the completion of the Offering, the Company awarded
67,000 Common Shares to the Investment Manager for the benefit of Messrs.
Scharar, Sandler, Jones and Keith, as well as other officers and key employees
of the Investment Manager who have contributed to and are expected to continue
to contribute to the Company's success, and awarded 2,000 Common Shares to
each of the Company's four independent Trust Managers. The Investment Manager
may transfer some or all of these Common Shares directly to the beneficiaries.
These Common Shares are restricted and are subject to divestiture over a two
year period in the event that the recipient or beneficial owner should
voluntarily cease to be an officer or key employee of the Investment Manager or
should be dismissed for cause during such vesting period. In addition, the
Company will grant options to purchase 300,000 Common Shares to the Investment
Manager upon the completion of the Offering for the benefit of certain
Investment Manager employees who contribute to the Company's success, including
the Company's executive officers. These options will be exercisable at the
public offering price of the Offering of the Common Shares and will vest evenly
over a four-year period commencing January 1, 1999. These options may also be
assigned, in whole or in part, directly to the beneficiaries for whom the
Investment Manager is holding them. The beneficiaries of these option grants
will be eligible to receive loans from the Company for purposes of exercising
vested options, all or a portion of which may be forgiven over time.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the outstanding Common Shares as of December 1, 1997,
by (i) the only shareholders known to the management of the Company to own
beneficially more than 5% of the outstanding Common Shares; (ii) the Investment
Manager; (iii) each Trust Manager and the executive officers of the Company;
and (iv) the Trust Managers and executive officers as a group. Unless
otherwise indicated, each person named in the table has sole voting and
investment power with respect to all of the Common Shares shown as beneficially
owned by such person:
<TABLE>
<CAPTION>
Number of Percent of Class Percent of
Common Shares Prior to Class After
Name of Beneficial Owner Beneficially Owned the Offering The Offering
- ------------------------ ------------------ ------------ ------------
<S> <C> <C> <C>
GAIA Visions Partners, Ltd. 83,737(1) 9.18% *%
c/o J.M. Haley
7149 Hillgreen
Dallas, TX 75214
FCA Corp 31,000(2) 3.40 *
5847 San Felipe, Suite 850
Houston, TX 77057
Alfred S. Ross 47,367 5.20 *
150 Elm Street
S. Dartmouth, MA 02748
Robert W. Scharar 55,338(3) 6.06 *
c/o FCA Corp
5847 San Felipe, Suite 850
Houston, TX 77057
Jerry M. Coleman 3,569(4)(6) * *
Josef C. Hermans 5,326(6) * *
William C. Brooks 2,800(6) * *
Ira T. Wender 2,000(6) *
Randall D. Keith 9,500(7) * *
Lewis H. Sandler 55,000(5) 6.02 *
Daniel M. Jones, III 10,000(8) 1.10 *
Trust Managers / Officers as a Group 143,533(2)(3)(4)(5)(6)(7)(8) 15.73 1.70
(8 persons)
</TABLE>
- --------------
* Less than 1%.
(1) Includes 12,832 Common Shares into which its 1,604 Preferred Shares are
convertible.
(2) Includes 31,000 Common Shares awarded under the Plan in December 1997 in
anticipation of the completion of the Offering.
(3) Includes 10,000 Common Shares awarded to Mr. Scharar and 31,000 Common
Shares awarded under the Plan to the Investment Manager in December 1997
in anticipation of the completion of the Offering. Mr. Scharar is
President and a Director and a 52.7% shareholder of the Investment
Manager. As a result of his control of the Investment Manager, the
31,000 Common Shares are required to be included in the number of shares
beneficially owned by Mr. Scharar. Also includes 9,838 Common Shares as
to which Mr. Scharar is a trustee, but has no beneficial interest. In
addition, Mr. Scharar expects to acquire 4,500 Common Shares in the
Offering.
(4) Includes 1,569 Common Shares which are registered to Azar-Coleman
Properties and controlled by Mr. Coleman.
(5) Incudes 10,000 Common Shares awarded under the Plan to Mr. Sandler in
December 1997 in anticipation of the completion of the Offering. In
addition, Mr. Sandler, on behalf of himself and trusts for the benefit
of his immediate family, expects to acquire at least 45,000 Common
Shares in the Offering.
(6) Includes 2,000 Common Shares awarded under the Plan to each independent
Trust Manager in December 1997 in anticipation of the completion of the
Offering.
(7) Includes 8,000 Common Shares awarded under the Plan in December 1997 in
anticipation of the completion of the Offering.
(8) Includes 8,000 Common Shares awarded under the Plan in December 1997 in
anticipation of the completion of the Offering. In addition, Mr. Jones
expects to acquire 2,000 Common Shares in the Offering.
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<PAGE> 80
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Charter authorizes the Company to issue up to 550,000,000 shares
of beneficial interest of the Company ("Trust Shares"), consisting of
500,000,000 Common Shares, no par value, 50,000,000 preferred shares of
beneficial interest, 20,000 of which are authorized to be issued at $100 par
value per share and the remainder of which are authorized to be issued at no
par value ("Preferred Shares"), and such other types of classes of shares of
beneficial interest as the Trust Managers may create and authorize from time to
time. Upon completion of the Offering, 7,979,625 Common Shares will be issued
and outstanding together with options to purchase 300,000 Common Shares issued
under the Plan. Not included in the issued and outstanding Common Shares are
1,125,000 Common Shares which may be purchased by the Underwriters to cover
over-allotments. After the Offering, no Preferred Shares will be issued or
outstanding.
As of December 1, 1997, there were 837,489 Common Shares and 10,737
shares of 9% Convertible Preferred Shares, Series 1995, par value $100 per
share ("9% Preferred Shares"), issued and outstanding. The Company plans to
redeem these 9% Preferred Shares from the proceeds of the Offering.
Common Shares of Beneficial Interest. Each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of Trust Managers. There is no cumulative
voting in the election of Trust Managers, which means that the holders of a
majority of the outstanding Common Shares can elect all of the Trust Managers
then standing for election. Holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Trust Managers out of
funds legally available therefor. See "Dividends and Distributions Policy."
Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding Common
Shares will be fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, holders of Common
Shares will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares, if any.
Preferred Shares. The Trust Managers are authorized (without any
further action by the shareholders) to issue Preferred Shares in one or more
series and to fix the voting rights, liquidation preferences, dividend rates,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences. Holders of Preferred
Shares would normally be entitled to receive a preference payment in the event
of any liquidation, dissolution or winding up of the Company before any payment
is made to the holders of Common Shares. The Company has no present intention
to issue any additional Preferred Shares or any other new class of securities.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, (i) not more than
50% in value of its outstanding Trust Shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year; (ii) the Trust Shares
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year; and (iii) certain percentages of the Company's gross income must be from
particular activities. See "Federal Income Tax Consequences." Because the
Trust Managers believe it is essential for the Company to continue to qualify
as a REIT, the Charter, subject to certain exceptions, provides that no holder
other than any person approved by the Trust Managers, at their option and in
their discretion (provided that such approval will not result in the
termination of the status of the Company as a REIT), may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% (the
"Ownership Limit") of the lesser of the number or value (in either case as
determined in good faith by the Trust Managers) of the total outstanding Trust
Shares. The Trust Managers may waive the Ownership Limit if evidence
satisfactory to the Trust Managers and the Company's tax counsel is presented
that such ownership will not then or in the future jeopardize the Company's
status as a REIT. As a condition of such waiver, the intended transferee must
give written notice to the Company of the proposed transfer and must furnish
such opinions of counsel, affidavits, undertakings, agreements and information
as may be required by the Trust Managers no later than the fifteenth day prior
to any transfer which, if consummated, would result in the intended transferee
owning Trust Shares in excess of the
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<PAGE> 81
Ownership Limit. The foregoing restrictions on transferability and ownership
will not apply if the Trust Managers determine that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT. Any transfer or issuance of Trust Shares or any security convertible
into Trust Shares that would (i) create a direct or indirect ownership of Trust
Shares in excess of the Ownership Limit; (ii) with respect to transfers only,
result in the Trust Shares being owned by fewer than 100 persons; or (iii)
result in the Company being "closely held" within the meaning of Section 856(h)
of the Code, shall be null and void, and the intended transferee will acquire
no rights to the Trust Shares. The Company's Charter provides that the Company,
by notice to the holder thereof, may purchase any or all Trust Shares (the
"Excess Shares") that are proposed to be transferred pursuant to a transfer
which, if consummated, would result in the intended transferee owning Trust
Shares in excess of the Ownership Limit or would otherwise jeopardize the REIT
status of the Company. The purchase price of any Excess Shares shall be equal
to the fair market value of such Excess Shares on the last trading day
immediately preceding the day on which notice of such proposed transfer was
sent, as reflected in the closing sales price for the Excess Shares, if then
listed on a national securities exchange, or such price for the Excess Shares
on the principal exchange if then listed on more than one national securities
exchange, or, if the Excess Shares are not then listed on a national securities
exchange, the latest bid quotation for the Excess Shares if then traded
over-the-counter, or, if no such closing sales prices or quotations are
available, the fair market value as determined by the Trust Managers in good
faith. From and after the date fixed for purchase by the Trust Managers, so
long as payment of the purchase price for the Excess Shares to be so redeemed
shall have been made or duly provided for, the holder of such Excess Shares to
be purchased by the Company shall cease to be entitled to distributions, voting
rights and other benefits with respect to such Excess Shares except the right
to payment of the purchase price for the Excess Shares. Any dividend or
distribution paid to a proposed transferee on Excess Shares prior to the
discovery by the Company that such Excess Shares have been transferred in
violation of the provisions of the Charter, shall be repaid to the Company upon
demand. If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Shares may be deemed, at the option of the
Company, to have acted as an agent on behalf of the Company in acquiring such
Excess Shares and to hold such Excess Shares on behalf of the Company.
PREEMPTIVE RIGHTS
The Common Shares issued by the Company shall have no preemptive
rights.
SHARE DISTRIBUTIONS
The Charter allows for the payment of Common Share distributions to be
paid in Common Shares of the Company, cash and property. The general effect of
the provision is to afford the Company greater flexibility in the means by
which it pays distributions to its shareholders. When making a determination
of whether to declare a distribution, the Trust Managers shall make the
determination consistent with their fiduciary duties as Trust Managers.
However, no distribution shall be declared or paid when the Company is unable
to pay its debts as they become due in the usual course of its business, or
when the payment of such distribution would result in the Company being unable
to pay its debts as they become due in the usual course of business.
REDEMPTION OF COMPANY SHARES
The Company may purchase or acquire its own shares, subject to the
limitations of the Texas REIT Act. The Texas REIT Act allows REITs formed
thereunder to redeem or purchase shares unless (i) after giving effect thereto,
the Company would be insolvent, or (ii) the amount paid therefor exceeds the
surplus of the Company. The term "surplus" is defined by reference to the
Texas Business Corporation Act as the excess of the net assets of a corporation
over its stated capital. Moreover, if the net assets of the Company are not
less than the proposed distribution, the Company may make a distribution to
purchase or redeem any of its shares if the purchase or redemption is made, for
example, to effect the purchase or redemption of redeemable shares in
accordance with the Texas REIT Act that requires rights of redemption to be
enumerated by a Texas REIT in its operative declaration of trust. The Charter
provision affords the Company a means of distributing assets of the Company by
acquiring outstanding Common Shares, as well as the ability to redeem shares in
transactions in which such a redemption may be beneficial to the Company and
its shareholders.
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VOTING RIGHTS
Each shareholder is entitled at each meeting of shareholders to one
vote on each matter submitted to a vote at such meeting for each share having
voting rights registered in his name on the books of the Company at the time of
the closing of the share transfer books (or at the record date) for such
meeting. When a quorum is present at any meeting (and not withstanding the
subsequent withdrawal of enough shareholders to leave less than a quorum
present), the votes of a majority of the Common Shares entitled to vote,
present in person or by proxy, shall decide any matter submitted to such
meeting, unless the matter is one upon which by law or by express provision of
the Charter or of the Bylaws the vote of a greater number is required, in which
case the vote of such greater number shall govern and control the decision of
such matter. In determining the number of Common Shares entitled to vote,
shares abstaining from voting or not voted on a matter (including elections)
will not be treated as entitled to vote.
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Texas law and
the Charter and Bylaws. The summary does not purport to be complete and
reference is made to Texas law and the Charter and Bylaws, copies of which are
exhibits to the registration statement of which this Prospectus is a part.
BOARD OF TRUST MANAGERS
The Bylaws provide that the number of Trust Managers of the Company
may not be fewer than two nor more than nine. In accordance with the terms of
the Charter and Bylaws, the Board of Trust Managers currently consists of five
persons. Trust Managers hold office until their successors are duly elected
and qualified or until their death, resignation or removal.
The Bylaws also provide that any vacancy (including a vacancy created
by an increase in the number of Trust Managers) may be filled by a majority of
the remaining Trust Managers or by a vote of the holders of at least a
majority of the outstanding Common Shares at an annual or special meeting of
the shareholders. In addition, the Bylaws also require the affirmative vote of
a majority of the outstanding Common Shares to elect new Trust Managers. Any
Trust Manager that has been previously elected as a Trust Manager by the
shareholders who is not re-elected by such majority vote at a subsequent annual
meeting shall nevertheless remain in office until his or her successor is
elected and qualified. The Charter and Bylaws require the affirmative vote of
two-thirds of the outstanding Common Shares to remove a Trust Manager, with or
without cause.
BUSINESS COMBINATIONS
The Charter requires that except in certain circumstances, a Business
Combination (as defined below) between the Company and a Related Person (as
defined below) must be approved by the affirmative vote of the holders of 80%
of the outstanding Common Shares of the Company, including the affirmative vote
of the holders of not less than 50% of the outstanding Common Shares not owned
by the Related Person. However, the 50% voting requirement referred to is not
applicable if the Business Combination is approved by the affirmative vote of
the holders of not less than 80% of the outstanding Common Shares.
The Charter provides that a "Business Combination" is: (i) any merger
or consolidation, if and to the extent permitted by law, of the Company or a
subsidiary, with or into a Related Person; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of more than 35% of the book
value of the total assets of the Company and its subsidiaries (taken as a
whole) as of the end of the fiscal year ending prior to the time the
determination is being made, to or with a Related Person; (iii) the issuance or
transfer by the Company or a subsidiary (other than by way of a pro rata
distribution to all shareholders) of any securities of the Company or a
subsidiary of the Company to a Related Person; (iv) any reclassification of
securities (including any reverse Share split) or recapitalization by the
Company, the effect of which would be to increase the voting power of the
Related Person; (v) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of a Related Person which
involves any transfer of assets, or any other transaction, in which the Related
Person has any direct or indirect interest (except proportionally as a
shareholder); (vi) any series or combination of transactions having, directly
or indirectly, the same or substantially the same effect as any of the
foregoing; and (vii) and agreement, contract or other arrangement providing,
directly or indirectly, for any of the foregoing.
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A "Related Person" generally is defined in the Charter to include any
individual, corporation, partnership or other person and the affiliates and
associates of any such individual, corporation, partnership or other person
which individually or together is the beneficial owner in the aggregate of more
than 50% of the outstanding Common Shares of the Company, except that an
individual, corporation, partnership or other person which individually or
together beneficially owned in excess of 30% of the outstanding Common Shares
at the time the Charter provision was adopted shall only be considered a
Related Person at such time as he, she, it or they acquire in the aggregate
beneficial ownership of more than 80% of the outstanding Common Shares.
The 80% and 50% voting requirements outlined above will not apply,
however, if: (i) the Trust Managers by a vote of not less than 80% of the Trust
Managers then holding office (a) have expressly approved in advance the
acquisition of Shares of the Company that caused the Related Person to become a
Related Person or (b) have expressly approved the Business Combination prior to
the date on which the Related Person involved in the Business Combination shall
have become a Related Person; or (ii) the Business Combination is solely
between the Company and another entity, 100% of the voting stock, shares or
comparable interests of which is owned directly or indirectly by the Company;
or (iii) the Business Combination is proposed to be consummated within one
year of the consummation of a Fair Tender Offer (as defined in the Charter) by
the Related Person in which Business Combination the cash or fair market value
of the property, securities or other consideration to be received per share by
all remaining holders of Common Shares of the Company in the Business
Combination is not less than the price offered in the Fair Tender Offer; or
(iv) all of the following conditions shall have been met: (a) the Business
Combination is a merger or consolidation, the consummation of which is proposed
to take place within one year of the date of the transaction pursuant to which
such person became a Related Person and the cash or fair market value of the
property, securities or other consideration to be received per share by all
remaining holders of Common Shares of the Company in the Business Combination
is not less than the highest per-share price, with appropriate adjustments for
recapitalizations and for share splits and share dividends, paid by the Related
Person in acquiring any of its holdings of the Company's Common Shares (a "Fair
Price"); (b) the consideration to be received by such holders is either cash
or, if the Related Person shall have acquired the majority of its holdings of
the Company's Common Shares for a form of consideration other than cash, in the
same form of consideration with which the Related Person acquired such
majority; (c) after such person has become a Related Person and prior to
consummation of such Business Combination: (1) there shall have been no
reduction in the annual rate of dividends, if any, paid per share on the
Company's Common Shares (adjusted as appropriate for recapitalizations and for
share splits, reverse share splits and share dividends), except any reduction
in such rate that is made proportionately with any decline in the Company's net
income for the period for which such dividends are declared and except as
approved by a majority of the Trust Managers continuing in office, and (2) such
Related Person shall not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Company prior to the consummation of such Business
Combination (other than in connection with financing a Fair Tender Offer); and
(d) a proxy statement that conforms in all respects with the provisions of the
Exchange Act and the rules and regulations thereunder shall be mailed to
holders of the Company's Common Shares at least 30 days prior to the
consummation of the Business Combination for the purpose of soliciting
shareholder approval of the Business Combination; or (v) the Rights (as
hereinafter defined) shall have become exercisable.
If a person has become a Related Person and within one year after the
date of the transaction pursuant to which the Related Person became a Related
Person (the "Acquisition Date"), (x) a Business Combination meeting all of the
requirements of clause (iv) above regarding the applicability of the 80% voting
requirement shall not have been consummated, and (y) a Fair Tender Offer shall
not have been consummated, and (z) the Company shall not have been dissolved
and liquidated, then, in such event the beneficial owner of each Common Share
(not including shares beneficially owned by the Related Person) (each such
beneficial owner being hereinafter referred to as a "Holder") shall have the
right (individually a "Right" and collectively the "Rights"), which may be
exercised subject to certain conditions, commencing at the opening of business
on the one-year anniversary date of the Acquisition Date and continuing for a
period of 90 days thereafter (the "Exercise Period"), subject to certain
extensions, to sell to the Company on the terms set forth herein one Share upon
exercise of such Right. At 5:00 P.M., Dallas, Texas time, on the last day of
the Exercise Period, each Right not exercised shall become void, all rights in
respect thereof shall cease as of such time and the Certificates shall no
longer represent Rights.
SHAREHOLDER LIABILITY
Both the Texas REIT Act and the Bylaws provide that shareholders of
the Company shall not be liable personally or individually in any manner
whatsoever for any debt, act, omission or obligation incurred by the Company or
Trust Managers and shall be under no obligation to the Company or its creditors
with respect to his or her shares other
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than the obligation to pay to the Company the full amount of the consideration
for which his shares were issued. The Trust Managers intend to conduct the
operations of the Company in such a way as to avoid, as far as practicable, the
ultimate liability of the shareholders of the Company.
TRUST MANAGER LIABILITY
Pursuant to the Texas REIT Act, the Charter provides that Trust
Managers shall be indemnified against all judgments, penalties (including
excise and similar taxes), fines, amounts paid in settlement and reasonable
expenses actually incurred by the Trust Manager in connection with any
Proceeding (as defined in the Charter) in which he or she was, is or is
threatened to be named defendant or respondent, or in which he or she was or is
a witness without being named a defendant or respondent, by reason, in whole or
in part, of his or her serving or having served, or having been nominated or
designated to serve, as a Trust Manager, to the fullest extent that
indemnification is permitted by Texas law in accordance with the Bylaws. This
indemnification shall not be deemed exclusive of, or to preclude, any other
rights to which those seeking indemnification may at any time be entitled under
the Bylaws, any law, agreement or vote of the shareholders or disinterested
Trust Managers.
SPECIAL SHAREHOLDER MEETINGS
The Charter allows for the holders of 5% of the Common Shares to call
a special meeting. This provision was specifically adopted in light of the
Company's Excess Shares provisions, which generally limit the ownership of
Company Shares by persons to 9.8% of the Company's outstanding Common Shares.
The Texas REIT Act provides that holders of 10% of the Shares entitled to vote
may call a special meeting of a REIT formed under the Texas REIT Act unless the
declaration of trust for such REIT provides for a number of shares greater than
or less than 10% of the shares entitled to vote. Without this provision in the
Charter, the Texas REIT Act might prevent special meetings from ever being
called by shareholders of the Company in light of the Excess Shares provision,
which itself is necessary to protect the Company's continued qualification as a
REIT.
TERMINATION OF THE COMPANY
The Charter permits the termination of the Company and the
discontinuation of the operations of the Company by the affirmative vote of the
holders of a majority of the outstanding voting Common Shares.
AMENDMENT OF CHARTER AND BYLAWS
The Charter may be amended from time to time by the affirmative vote
of the holders of at least two-thirds of the outstanding Common Shares.
However, certain provisions of the Charter that relate to Business
Combinations, number and removal of Trust Managers, certain investments and
share ownership requirements may not be amended or repealed, and provisions
inconsistent therewith may not be adopted, except by the affirmative vote of
the holders of at least 80% of the outstanding Common Shares. The Bylaws may
be amended by an affirmative vote of a majority of the Trust Managers. The
Bylaws may also be amended, to the extent not inconsistent with the Texas REIT
Act and the Charter and specified in the notice of the meeting, by an
affirmative vote of two-thirds of the outstanding Common Shares for Section
2.5 (business at the annual meeting), 3.3 (election of Trust Managers), 3.4
(nomination of Trust Managers), 3.6 (removal of Trust Managers) and 3.7
(vacancies on the Board) or Article XI (amendment of Bylaws), and a majority
vote for all other provisions.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of the Offering, there will be 8,412,489 Common Shares
issued and outstanding (9,537,489 if the Underwriters' over-allotment option is
exercised in full). All of the Common Shares issued in the Offering will be
freely tradeable without registration or other restrictions under the
Securities Act, except for any Common Shares purchased by "affiliates" of the
Company. The Common Shares issuable upon exercise of the options granted to
certain persons who are employees and/or Trust Mangers of the Company on the
date of, or immediately following, the Offering (collectively, the "restricted
securities"), will be "restricted" securities under the meaning of Rule 144
under the Securities Act and may be sold only pursuant to an effective
registration statement under the Securities Act or an applicable exemption,
including an exemption under Rules 144 and 144A under the Securities Act. The
Company intends to register the Common Shares available for issuance under the
Plan as soon as the Company is eligible to use Form S-8.
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In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted securities
from the Company or any "affiliate" of the Company, as that term is defined
under the Securities Act, the acquirer or subsequent holder thereof is entitled
to sell within any three-month period a number of Common Shares that does not
exceed the greater of 1% of the then-outstanding Common Shares or the average
weekly trading volume of the Common Shares on all exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale
is filed with the Securities and Exchange Commission (the "Commission"). Sales
under Rule 144 are also subject to a certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of restricted
securities from the Company or from any "affiliate" of the Company, and the
acquirer or subsequent holder thereof is deemed not to have been an affiliate
of the Company at any time during the three months preceding a sale, such
person would be entitled to sell such Common Shares in the public market under
Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements of Rule 144.
In addition, Rule 144A as currently in effect, in general, permits
unlimited resales of certain restricted securities of any issuer provided that
the purchaser is an institution that owns and invests on a discretionary basis
at least $100 million in securities or is a registered broker-dealer that owns
and invests at least $10 million in securities. Rule 144A allows the existing
shareholders of the Company to sell their Common Shares to such institutions
and registered broker-dealers without regard to any volume or other
restrictions. Unlike Rule 144, restricted securities sold under Rule 144A to
non-affiliates do not lose their status as "restricted securities."
The Trust Managers and certain officers of the Company and the Company
have agreed not to offer, sell, contract to sell or otherwise dispose of any
Common Shares for a period of 180 days from the closing of the Offering,
without the prior consent of Morgan Keegan & Company, Inc. The Company has
agreed that except under limited circumstances, it will not issue Common Shares
or securities convertible into Common Shares for a period of 90 days from the
closing of the Offering without the prior consent of Morgan Keegan & Company,
Inc.
FEDERAL INCOME TAX CONSEQUENCES
The Company elected to be taxed as a REIT for Federal income tax
purposes commencing with its tax year ended December 31, 1989. The following
general summary of the Federal tax rules governing a REIT and its shareholders
is based on the Code, judicial decisions, Treasury Regulations, rulings and
other administrative interpretations, all of which are subject to change.
Because many provisions of the Code have been revised substantially by recent
legislation, very few judicial decisions, Treasury Regulations, rulings or
other administrative pronouncements have been issued interpreting many of the
revisions to the Code. Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. has acted
as counsel to the Company and has reviewed this summary and has rendered an
opinion that the description of the law and the legal conclusions contained
herein are correct in all material respects, and that the discussion hereunder
fairly summarizes the federal income tax considerations that are likely to be
material to the Company and a holder of a Common Share. However, Investors
should be aware that Congress continues to consider new tax bills.
Accordingly, no assurance can be given that future legislation, administrative
regulations, rulings, or interpretations or court decisions will not alter
significantly the tax consequences described below or that such changes or
decisions will not be retroactive. The Company has not requested, nor does it
presently intend to request, a ruling from the Internal Revenue Service (the
"Service") with respect to any of the matters discussed below. Because the
provisions governing REITs are complex, no attempt is made in the following
discussion to discuss in detail all of the possible tax consequences applicable
to the Company or its shareholders, including state tax laws. ACCORDINGLY,
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH
SPECIFIC REFERENCE TO HIS OR HER OWN TAX SITUATION BEFORE PURCHASING COMMON
SHARES.
GENERAL
In general, as long as the Company qualifies as a REIT, it will not be
subject to Federal income tax on income or capital gain that it distributes in
a timely manner to shareholders. The Company will, however, be subject to tax
at normal corporate rates upon any taxable income or capital gain not
distributed.
In addition to the opinion filed as an exhibit to the registration
statement of which this Prospectus is a part, the Company and the Underwriters
will, prior to the closing of this offering, obtain an opinion of Liddell,
Sapp, Zivley, Hill & LaBoon, L.L.P., counsel to the Company, that the Company
has been organized in conformity with the requirements
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for qualification as a REIT for federal income tax purposes for the taxable
year ending December 31, 1989, and has continued to satisfy the requirements
for qualification as a REIT through the date of the opinion, and that its
anticipated investments and its plan of operation (which plan includes
complying with all of the REIT requirements described in this Prospectus) will
enable it to continue to satisfy the requirements for qualification as a REIT
for federal income tax purposes. Unlike a tax ruling (which will not be
sought), an opinion of counsel, which is based on counsel's review and analysis
of existing law, is not binding on the Service. Accordingly, no assurance can
be given that the Service would not successfully challenge the tax status of
the Company as a real estate investment trust. It must be emphasized that this
opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters. In addition, this
opinion is based upon the factual representations of the Company concerning its
business and properties as set forth in this Prospectus and assumes that the
actions described in this Prospectus are completed in a timely fashion.
Moreover, such qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, distribution levels,
diversity of stock ownership, and the various other qualification tests imposed
under the Code discussed below, the results of which will not be reviewed by
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Accordingly, no assurance can be
given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. See "-- Failure to Qualify."
If the Service successfully challenged the tax status of the Company
as a REIT, the Company's income and capital gains would become subject to
Federal income tax (including any applicable minimum tax) at corporate rates.
Consequently, the amount of after tax earnings available for distribution to
shareholders would decrease substantially. In addition, "net capital gain"
(net long-term capital gain in excess of net short-term capital loss)
distributed by the Company would be taxed as ordinary dividends to shareholders
rather than as long-term capital gain. The Company would not be eligible to
re-elect REIT status under the Code until the fifth taxable year beginning
after the taxable year in which it failed so to qualify, unless its failure to
qualify was due to reasonable cause and not to willful neglect and certain
other requirements were satisfied. Also, immediately prior to requalification
as a REIT under the Code, the Company could be taxed on any unrealized
appreciation in its assets.
Qualification of the Company as a REIT for Federal tax purposes will
depend on its continuing to meet various requirements governing, among other
things, the ownership of its Common Shares, the nature of its assets, the
sources of its income, and the amount of its distributions to shareholders.
Although the Trust Managers and the Investment Manager intend to cause the
Company to continue to operate in a manner that will enable it to comply with
such requirements, there can be no certainty that such intention will be
realized. In addition, because the relevant laws may change, compliance with
one or more of the REIT requirements may be impossible or impractical.
REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
Although the Company must meet certain qualifications to be a real
estate investment trust under the Texas REIT Act (see "Certain Provisions of
the Texas REIT Act and of the Company's Declaration of Trust and Bylaws"), the
Company must independently qualify as a REIT under the Code. To qualify as a
REIT under the Code, the Company must properly elect to be a real estate
investment trust and must satisfy various requirements in each taxable year.
Generally, for federal income tax purposes an entity will not qualify as a REIT
unless it is a corporation, trust or association (i) which is managed by one or
more trustees or directors; (ii) the beneficial ownership of which is evidenced
by transferable shares, or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation, but for Sections 856
through 859 of the Code; (iv) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, directly or constructively, by five or fewer individuals (as defined
in the Code to include certain entities) see "Requirements for Qualification as
a Real Estate Investment Trust - Share Ownership"; and (vii) which meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. See "Requirements for Qualification
as a Real Estate Investment Trust - Share Ownership". Conditions (v) and (vi)
will not apply until after the first taxable year for which an election is made
to be taxed as a REIT.
The Company believes that it will have issued sufficient shares
pursuant to this Offering to allow it to satisfy conditions (v) and (vi). In
addition, the Declaration of Trust provides for restrictions regarding the
transfer and ownership of shares, which restrictions are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
(v) and (vi) above. Those restrictions may not ensure that the Company in all
cases will be able to satisfy the share ownership requirements described above.
If the Company fails to satisfy those share ownership
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requirements, the Company's status as a REIT will terminate. See "-Failure to
Qualify". Pursuant to the Taxpayer Relief Act of 1997, enacted August 5, 1997,
starting with a REIT's first taxable year that begins after August 5, 1997, a
REIT that complies with Treasury Regulations for ascertaining the ownership of
its shares (see "Requirements for Qualification as a Real Estate Investment
Trust -- Share Ownership") and that does not know or, exercising reasonable
diligence would not have known, whether it failed condition (vi) will be
treated as meeting condition (vi). The provisions of the Taxpayer Relief Act
of 1997 will apply to each of the Company's taxable years which begin after
August 5, 1997.
Share Ownership. (a) The beneficial ownership of Common Shares of the
Company must be held by a minimum of 100 persons for at least 335 days of a
taxable year consisting of 12 months (or a proportionate part of a taxable year
consisting of less than 12 full months), and (b) Common Shares representing no
more than 50% (by value) of the Company may be owned (directly or under rules
of constructive ownership prescribed by the Code) by five or fewer individuals
at any time during the last half of a taxable year (the "50% Shareholder
Test"). Certain tax-exempt entities are treated as individuals for purposes of
the 50% Shareholder Test. In addition, the applicable constructive ownership
rules provide, among other things, that Common Shares held by a corporation,
partnership, trust or estate will be regarded as being held proportionately by
its shareholders, partners or beneficiaries, as the case may be, and Common
Shares owned by certain persons may be regarded as being owned by certain
members of their families. Common Shares held by a qualified pension plan will
be treated as held proportionately by its beneficiaries; however, Common Shares
held by a qualified pension plan will be treated as held by one individual if
persons related to the plan (such as the employer, employees, officers, or
Trust Managers) own in the aggregate more than 5% by value of the Common Shares
and the Company has accumulated earnings and profits attributable to any period
for which it did not qualify as a REIT.
To assure continued compliance with the 50% Shareholder Test, the
Company's Declaration of Trust prohibits any individual investor from acquiring
an interest in the Company such that the individual would own (or be deemed
under the applicable rules of constructive ownership to own) more than 9.8% of
the outstanding Common Shares, unless the Trust Managers (including a majority
of the independent Trust Managers) are provided evidence satisfactory to them
in their sole discretion that the qualification of the Company as a REIT will
not be jeopardized.
Treasury Regulations require the Company to maintain records of the
actual and constructive beneficial ownership of its Common Shares. Pursuant to
the Taxpayer Relief Act of 1997, if the Company fails to comply with
regulations to ascertain its ownership it will be subject to a penalty for
failing to do so. The penalty is $25,000 ($50,000 for intentional violations)
for any year in which the Company does not comply with the ownership
regulations. The Company will also be required, when requested by the IRS, to
send curative demand letters. In accordance with those Regulations, the Company
must and will demand from shareholders written statements concerning the actual
and constructive beneficial ownership of Common Shares. Any shareholder who
does not provide the Company with required information concerning share
ownership will be required to include certain information relating thereto with
his income tax return.
Asset Diversification. At the close of each quarter of the taxable
year, at least 75 % of the value of the Company's total assets must be
represented by "real estate assets" (which category includes interests in real
property, mortgages on real property and certain temporary investments), cash,
cash items and U.S. Government securities (the "75% Asset Test"). In addition,
no more than 25% of the value of the Company's total assets may consist, in
whole or in part, of securities that do not qualify under the 75% Asset Test
(the "25% Asset Test"). Further, the value of any one issuer's securities
owned by the Company may not exceed 5% of the value of the Company's total
assets (the "5% Asset Test"), and the Company may not own more than 10% of any
one issuer's voting securities (the "10% Test"). If the Company is in
violation of the foregoing requirements (due to a discrepancy between the value
of its investments and such requirements) after the acquisition of any security
or property, then the Company will be treated as not violating the requirements
if it cures the violation within 30 days of the close of the quarter during
which the Company acquires such asset.
While the Investment Manager intends to manage the Company to meet the
75% Asset Test, 25% Asset Test, 5% Asset Test and 10% Asset Test, no assurance
can be given that the Company will be able to do so.
The assets of the Company's wholly-owned subsidiaries will be
attributable directly to the Company for purposes of the asset diversification
rules. Additionally, the Company will be deemed to own a proportionate share
(based upon its capital interest) of the assets of any partnerships in which
the Company owns an interest.
Sources of Income. The Company must satisfy three distinct
income-based tests for each taxable year: the "75% Income Test," the "95%
Income Test" and the "30% Income Test."
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The 75% Income Test requires that at least 75% of the Company's gross
income (other than from certain "prohibited transactions") in each taxable year
consist of certain types of income identified in the Code, including qualifying
rents from real property; qualifying interest on obligations secured by
mortgages on real property or interests in real property; gain from the sale or
other disposition of real property (including interests in real property and
mortgages on real property) held for investment and not primarily for sale to
customers in the ordinary course of business; income and gain from certain
properties acquired by the Company through foreclosure; and income earned from
certain qualifying types of temporary investments. Income earned from
qualifying temporary investments means income that is (i) attributable to stock
or debt instruments, (ii) attributable to the temporary investment of capital
received by the Company from the issuance of shares of beneficial interest or
from a public offering of debt securities that have a maturity of at least five
years, and (iii) received or accrued within one year from the date the Company
receives such capital. Interest income and gain realized from the disposition
of loans which are secured solely by real property will constitute qualifying
income for purposes of the 75% Income Test, assuming that such interest income
is not excluded from the calculation of interest for purposes of the 75% Income
Test by reason of such interest being dependent on income or profits as
described in Code Section 856(f) and assuming that any such loan which is
disposed of is held for investment and not primarily for sale to customers in
the ordinary course of a trade or business.
Under the 95% Income Test, at least 95% of the Company's gross income
(other than from certain "prohibited transactions") in each taxable year must
consist of income which qualifies under the 75% Income Test as well as
dividends and interest from any other source, gain from the sale or other
disposition of Shares and other securities which is not dealer property, any
payment to the Company under an interest rate swap or cap agreement entered
into as a hedge against variable rate indebtedness incurred to acquire or carry
real estate assets, and any gain from the disposition of such an agreement.
Finally, under the 30% Income Test, the Company must limit its
realization of certain types of income so that, in each taxable year, less than
30% of its gross income is derived from sale or other disposition of (a) Shares
or securities held for less than one year (which includes an interest rate swap
or cap agreement entered into by the Company as a hedge against any variable
rate indebtedness incurred to acquire or carry real estate assets), (b) with
certain limited exceptions, real property (including interests in and mortgages
on real property) held for less than four years and (c) property in a
transaction treated as a "prohibited transaction" under the Code. Pursuant to
the Taxpayer Relief Act of 1997, the 30% Income Text is eliminated, starting
with a REIT's first taxable year that begins after August 4, 1997.
The income of the Company's wholly-owned subsidiaries will be
attributable to the Company for purposes of the income tests described above.
Additionally, a proportionate share of the items of income of any partnership
in which the Company owns an interest will be attributable to the Company
(based on the Company's capital interest in any such partnership).
If the Company fails to meet the requirements of either or both the
75% Income Test or the 95% Income Test in a taxable year but otherwise meets
the applicable requirements for qualification as a REIT, it may nevertheless
continue to qualify under the Code as a REIT if certain conditions are met.
While satisfaction of the conditions would prevent the Company from losing its
tax status as a REIT, the Company generally would be liable for a special tax
equal to 100% of the greater amount by which the Company fails the 75% Income
Test or the 95% Income Test. The Code does not provide for any mitigation
provisions with respect to the 30% Income Test. Accordingly, if the Company
failed to meet the 30% Income Test, if applicable, its tax status as a REIT
would terminate.
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of rent must not
be based in whole or in part on the income or profits of any person. However,
an amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, the Code provides that
rents received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the REIT, or an owner of 10% or more of
the REIT, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for rents received to qualify as "rents from real property," the REIT generally
must not operate or manage the property or furnish or render services to the
tenants of such property, other than through an independent contractor from
whom the REIT derives no revenue, provided, however, the Company may directly
perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. Moreover, pursuant to
the Taxpayer Relief Act of 1997, income derived by
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a REIT from non-qualifying services provided to tenants or from managing or
operating a property which it owns will not be treated as rent from real
property unless such income does not exceed one percent of the REIT's gross
income from the property. The Company does not and will not (i) charge rent
for any property that is based in whole or in part on the income or profits of
any person (except by reason of being based on a percentage of receipts or
sales, as described above), (ii) rent any property to a Related Party Tenant,
(iii) derive rental income attributable to personal property (other than
personal property leased in connection with the lease of real property, the
amount of which is less than 15% of the total rent received under the lease),
or (iv) perform services considered to be rendered to the occupant of the
property (unless the income from those services qualifies as rent from real
property pursuant to the Taxpayer Relief Act of 1997) other than through an
independent contractor from whom the Company derives no revenue. The Company
believes that the aggregate amount of any non-qualifying income in any taxable
year will not exceed the limit on non-qualifying income under the gross income
tests.
Distribution Requirements. With respect to each taxable year, the
Company must distribute to shareholders an amount at least equal to the sum of
95% of its "REIT taxable income," computed without regard to the dividends paid
deduction and by excluding any net capital gain ("net investment income"), and
95% of the excess of its net income from "foreclosure property" over the
Federal income tax imposed on such income, minus certain items of noncash
income. As noted under the caption "Distributions Policy," the Company
distributes substantially all of its net investment income annually. The
Company likewise distributes annually substantially all of its realized net
capital gains. The Service may waive the distribution requirements for any tax
year if the Company establishes that it was unable to meet such requirements by
reason of distributions previously made to meet the requirement of section 4981
of the Code (relating to the 4% Federal excise tax on undistributed income
discussed below).
Unlike net investment income, the Company's net capital gain need not
be distributed in order for the Company to maintain its status under the Code
as a REIT; however, the Company will be taxable on any net capital gain and net
investment income which it fails to distribute in a timely manner. Pursuant to
the Taxpayer Relief Act of 1997, a REIT may elect to retain and pay income tax
on net long-term capital gains that it receives during a taxable year. If a
REIT makes this election, its shareholders are required to include in their
income as long-term capital gain their proportionate share of the undistributed
long-term capital gains so designated by the REIT. A shareholder will be
treated as having paid his or her share of the tax paid by the REIT in respect
of long-term capital gains so designated by the REIT, for which the shareholder
will be entitled to a credit or refund. In addition, the shareholder's basis
in his or her REIT shares will be increased by the amount of the REIT's
designated undistributed long-term capital gains that are included in the
shareholder's long-term capital gains, reduced by the shareholder's
proportionate share of tax paid by the REIT on those gains that the shareholder
is treated as having paid. The earnings and profits of the REIT will be
reduced, and the earnings and profits of any corporate shareholder of the REIT
will be increased, to take into account amounts designated by the REIT pursuant
to this rule. A REIT must pay its tax on its designated long-term capital
gains within 30 days of the close of any taxable year in which it designates
long-term capital gains pursuant to this rule, and it must mail a written
notice of its designation to its shareholders within 60 days of the close of
the taxable year.
Distributions in excess of current and accumulated earnings and
profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions
exceed the adjusted basis of a shareholder's shares they will be included in
income as long-term capital gain (or short-term capital gain if the shares have
been held for one year or less) assuming the shares are a capital asset in the
hands of the shareholder.
While the Company expects to meet its distribution requirements, its
ability to make distributions may be impaired if it has insufficient cash flow
or otherwise has excessive noncash income or nondeductible expenditures.
Furthermore, the distribution requirement may be determined not to have been
met in a given year by reason of the Service later successfully challenging the
deductibility of a Company expenditure. In such event, however, it may be
possible to cure a failure to meet the distribution requirement with a
"deficiency dividend," but if the Company uses that procedure, it may incur
substantial tax penalties and interest.
The Company will be subject to a nondeductible 4% Federal excise tax
with respect to undistributed ordinary income and capital gain net income
unless it also meets a calendar year distribution requirement. To meet this
requirement, the Company must, in general, distribute with respect to each
calendar year an amount equal to the sum of (a) 85% of its ordinary income
(adjusted under the Code for various items), (b) 95% of its capital gains in
excess of its capital losses (subject to certain adjustments) and (c) any
ordinary income and capital gain net income not distributed in prior calendar
years. The Company intends to make distributions to shareholders so that it
will not incur this tax but, as noted above, various situations could make it
impractical to meet the prescribed distribution schedule.
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The Company is authorized to issue Preferred Shares. Should the
Company do so, and should the Company distribute a capital gain dividend while
Preferred Shares are outstanding, it may be required to designate a portion of
dividends entitled to be received by holders of the Preferred Shares as capital
gain dividends, thereby reducing the portion of total distributions paid to
holders of the Company's Common Shares which may be characterized as capital
gains dividends.
FEDERAL TAXATION OF THE COMPANY--SPECIFIC ITEMS
Dispositions of Assets. The Company may realize a gain or loss on the
disposition of an asset that it owns. The gain or loss may be capital or
ordinary in character, depending upon a number of factors and the tax rules
governing the type of disposition involved.
If the Company were deemed to be holding property (such as real
property or loans) primarily for sale to customers in the ordinary course of
business (I.E., as a "dealer"), then (a) any gains recognized by the Company
upon the disposition of such property would be subject to a 100% tax on
prohibited transactions and (b) depending on the composition of the Company's
total gross income, the Company could fail the 30% Income Test or the 75%
Income Test for qualification as a real estate investment trust.
Under existing law, whether property is held primarily for sale to
customers in the ordinary course of business must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The Company intends to hold all property for investment purposes and
to make occasional dispositions which are, in the opinion of the Trust Managers
and the Investment Manager, consistent with the Company's investment objectives
and in compliance with all the rules discussed above governing the
qualification of the Company for REIT status under the Code. Accordingly, the
Company does not expect to be treated as a "dealer" with respect to any of its
assets. No assurance, however, can be given that the Service will not take a
contrary position.
Alternative Minimum Tax. Under certain circumstances, the Company may
be subject to the alternative minimum tax on its items of tax preference.
Net Income From Foreclosure Property. If the Company has net income
from foreclosure property, it will be subject to tax on such income at the
highest corporate rate. Foreclosure property generally means real property
(and any personal property incident to such real property) which is acquired as
a result of a default either on a lease of such property or on indebtedness
which such property secured and with respect to which an appropriate election
is made.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income, and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF SHAREHOLDERS
Distributions by the Company of net investment income will be taxable
to shareholders as ordinary income to the extent of the current or accumulated
earnings and profits of the Company. Distributions of net capital gain, if any,
designated by the Company as capital gain dividends generally will be taxable
to shareholders as long-term capital gain, regardless of the length of time the
Common Shares have been held by the shareholders. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income pursuant to Section 291 of the Code. All
distributions are taxable, at least to the extent of the current or accumulated
earnings and profits of the Company, whether received in cash or invested in
additional Common Shares. Dividends declared by the Company in October,
November or December payable to shareholders of record on a date in such a
month and paid during the following January will be treated as having been
received by shareholders on December 31 in the year in which such dividends
were declared. Income (including dividends) from the Company normally will be
characterized
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as "portfolio" income (as opposed to "passive" income) for purposes of the tax
rules governing "passive" activities; accordingly, passive losses of the
shareholder may not be used to offset income derived by the shareholder from
the Company.
None of the distributions from the Company (as a REIT) received by
corporate shareholders, whether characterized as ordinary income or capital
gain, will qualify for the dividends received deduction generally available to
corporations.
The Company may be required to withhold and remit to the Service 31%
of the dividends paid to any shareholder who (a) fails to furnish the Company
with a properly certified taxpayer identification number, (b) has under
reported dividend or interest income to the Service or (c) fails to certify to
the Company that he is not subject to backup withholding. Any amount paid as
backup withholding will be creditable against the shareholder's income tax
liability. The Company will report to its shareholders and the Service the
amount of dividends paid during each calendar year and the amount of any tax
withheld.
In general, any gain or loss realized upon a taxable disposition of
Common Shares of the Company or upon receipt of a liquidating distribution by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Shares have been held for more than one year
and as short-term capital gain or loss if the Common Shares have been held for
one year or less. The Taxpayer Relief Act of 1997 has changed the tax rates and
holding periods applicable to long-term capital gains of individuals. In
general, under applicable provisions of the Taxpayer Relief Act of 1997, which
are generally effective for taxable years ending after May 1, 1997, the maximum
tax rate applicable to net capital gains of individuals realized upon the sale
of property held for 18 months or more is 20% (10% for individuals in a tax
bracket below 28%), and the maximum tax rate on net capital gains of
individuals realized upon the sale of property for more than one year and for
not more than 18 months is 28%. The taxpayer Relief Act of 1997 does not
affect the taxation of a corporation's capital gains. Because the tax rates
and applicable holding periods will vary depending upon a shareholder's
individual circumstances, investors should consult their own tax advisors
concerning the effect of these Taxpayer Relief Act of 1997 changes. If,
however, the shareholder receives any capital gain dividends with respect to
Common Shares held six months or less, any loss realized upon a taxable
disposition of such Common Shares shall, to the extent of such capital gain
dividends, be treated as a long-term capital loss. All or a portion of any loss
realized upon a taxable disposition of Common Shares of the Company may be
disallowed if other Common Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within 30 days before or after the
disposition.
DISCLOSURE REGARDING DIVIDEND REINVESTMENT PLAN
Shareholders participating in the DRIP will be deemed to have received
the gross amount of any cash distributions which would have been paid by the
Company to such shareholders had they not elected to participate. These deemed
distributions will be treated as actual distributions from the company to the
participating shareholders and will retain the character and tax effects
applicable to distributions from the Company generally. See "Taxation of
Taxable Domestic Shareholders" and "Taxation of Foreign Shareholders."
Participants in the DRIP are subject to federal income tax on the amount of the
deemed distributions to the extent that such distributions represent dividends
or gains, even though they receive no cash. Common Shares received under the
DRIP will have a holding period beginning with the day after purchase and a tax
basis equal to their cost (which is the gross amount of the deemed
distribution).
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Except as noted below, based upon a revenue ruling issued by the
Service, dividend distributions by the Company to a shareholder that is a
tax-exempt entity should not constitute "unrelated business taxable income"
("UBTI"), provided that the tax-exempt entity has not financed the acquisition
of its Common Shares with "acquisition indebtedness" within the meaning of the
Code and the Common Shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity. However, if a tax-exempt entity borrows
money to purchase its Common Shares, a portion of its income from the Company
will constitute UBTI pursuant to the "debt-financed property" rules of the
Code. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal service
organizations that are exempt from taxation under Code Sections 501(c)(7), (9),
(17) and (20), respectively, are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. Also, it should be noted that dividend distributions by a REIT to an
exempt organization that is a private foundation should constitute investment
income for purposes of the excise tax on net investment income of private
foundations imposed by Section 4940 of the Code. If an employee trust
qualified under Code Section 401(a)
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(a "qualified trust") owns more than 10% by value of the Common Shares in the
Company at any time during a tax year, then a portion of the dividends paid by
the Company to such trust may be treated as UBTI, but only if (i) the Company
would not have qualified as a REIT but for the provisions of the Code which
"look through" such a qualified trust for purposes of determining ownership of
a REIT and (ii) at least one qualified trust holds more than 25% (by value) of
the Common Shares in the Company or one or more qualified trusts (each of which
holds more than 10% of the Common Shares) hold in the aggregate more than 50%
(by value) of the Common Shares. If the Company were treated as a "taxable
mortgage pool," a substantial portion of the dividends paid to a tax-exempt
shareholder may be UBTI. Although the Company does not believe that the
Company, or any portion of its assets will be treated as a taxable mortgage
pool, no assurance can be given that the Service might not successfully
maintain that such a taxable mortgage pool exists.
Because of the complexity and variations of the UBTI rules, tax-exempt
entities should consult their own tax advisors.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States Federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "non-U.S. shareholders") are complex
and no attempt will be made herein to provide more than a summary of such
rules. Prospective non-U.S. shareholders should consult with their own tax
advisors to determine the impact of Federal, state and local income tax laws
with regard to an investment in Common Shares, including any reporting
requirements.
Distributions that are not attributable to gain from sales or
exchanges by the Company of "United States Real Property Interests" and not
designated by the Company as capital gain dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Generally, such distributions
will be subject to a U.S. withholding tax equal to 30% of the gross amount of
the distribution unless an applicable tax treaty reduces or eliminates that
tax. However, if income from the investment in the Common Shares is treated as
effectively connected with the non-U.S. shareholder's conduct of a United
States trade or business, the non-U.S. shareholder generally will be subject to
a tax at graduated rates, in the same manner as U.S. shareholders are taxed
with respect to such dividends (and may also be subject to the 30% branch
profits tax in the case of a shareholder that is a foreign corporation). The
Company expects to withhold United States income tax at the rate of 30% on the
gross amount of any such dividends made to a non-U.S. shareholder unless (a) a
lower treaty rate applies and the non-U.S. shareholder files an IRS Form 1001
or (b) the non-U.S. shareholder files an IRS Form 4224 with the Company
claiming that the distribution is effectively connected income. Any
distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a non-U.S. shareholder to the extent that they
do not exceed the adjusted basis of the shareholder's Common Shares, but rather
will reduce the adjusted basis of such Common Shares. To the extent that such
distributions exceed the adjusted basis of a non-U.S. shareholder's Common
Shares, they will give rise to tax liability if the non-U.S. shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Shares, as described below. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distributions will be subject
to withholding at the same rate as dividends. However, amounts thus withheld
are refundable if it subsequently is determined that such distribution was, in
fact, in excess of current and accumulated earnings and profits of the Company.
For any year in which the Company qualifies as a real estate
investment trust, distributions that are attributable to gain from sales or
exchanges by the Company of "United States real property interests" will be
taxed to a non-U.S. shareholder under the provisions of the Foreign Investment
in Real Property Tax Act of 1980, as amended ("FIRPTA"). Under FIRPTA, these
distributions are taxed to a non-U.S. shareholder as if such gain were
effectively connected with a United States business. Non-U.S. shareholders
would thus be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by the Company as a capital gain
dividend to the extent that such capital gain dividends are attributable to the
sale or exchange by the Company of United States real property interests. This
amount is creditable against the non-U.S. shareholder's Federal tax liability.
Fixed rate mortgage loans will not normally be classified as "United States
real property interests."
Gain recognized by a non-U.S. shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled real estate investment trust," defined generally as a real estate
investment trust in which at all times during a specified testing period less
than 50% in value of the Common Shares were held directly or indirectly by
non-U.S. persons. Additionally, gain recognized by a non-U.S. shareholder upon
a sale
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of Common Shares generally will not be taxed under FIRPTA unless the
shareholder beneficially owns more than 5% of the total fair market value of
the Common Shares at any time during the shorter of the five-year period ending
on the date of disposition or the period during which the shareholder held the
Common Shares. Gain not subject to FIRPTA will be taxable to a non-U.S.
shareholder if (a) investment in the Common Shares is effectively connected
with the non-U.S. shareholder's United States trade or business, in which case
the non-U.S. shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain or (b) the non-U.S. shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year, in which case the nonresident alien individual
will be subject to a 30% tax on his U.S. source capital gains. If the gain on
the sale of Common Shares becomes subject to taxation under FIRPTA, the
non-U.S. shareholder will be subject to the same treatment as U.S. shareholders
with respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
Subject to the provisions of any tax treaty that may exist between the
United States and the country in which the foreign holder is domiciled at the
time of his death, an individual foreign shareholder who owns Common Shares at
the time of his death will have the Common Shares subject to Federal estate
tax. The federal estate tax will be assessed on the fair market value of such
Common Shares at the time of the foreign holder's death.
OTHER TAXATION
Tax treatment of the Company and its shareholders under tax laws other
than those governing federal income tax may differ substantially from the
Federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISOR WITH REGARD TO
THE STATE, LOCAL AND OTHER TAX CONSEQUENCES (OTHER THAN FEDERAL TAX
CONSEQUENCES) OF AN INVESTMENT IN THE COMPANY.
ERISA CONSIDERATIONS
Because the Common Shares should qualify as a "publicly-offered
security," plans subject to ERISA, IRAs and H.R.10 Plans ("Keogh Plans") may
purchase Common Shares and treat such Common Shares, and not the Company's
assets, as plan assets. A fiduciary of an ERISA Plan should consider the
fiduciary standards under ERISA in the context of the plan's particular
circumstances before authorizing an investment of a portion of such plan's
assets in Common Shares. Accordingly, among other factors, such fiduciary
should consider (i) whether the plan's aggregate investments (including such an
investment) satisfy the diversification requirements of Section 404(a)(1)(C) of
ERISA, (ii) whether the investment is in accordance with ERISA, the Code and
the documents and instruments governing the plan (as required by Section
404(a)(1)(D) of ERISA), and (iii) whether the investment is prudent,
considering the role such an investment plays in the plan's portfolio, the
nature of the Company's business, the possible limitations on the marketability
of Common Shares and the anticipated earnings of the Company. Investors
proposing to purchase Common Shares for their IRAs and Keogh Plans should
consider that an IRA and a Keogh Plan may only make investments that are
authorized by the appropriate governing instruments. Moreover, Keogh Plans
that cover Common law employees are also subject to the ERISA fiduciary
standards described above.
Any ERISA Plan or Keogh Plan covering Common law employees should also
consider prohibitions in ERISA relating to improper delegation of control over
or responsibility for "plan assets," prohibitions in ERISA and in the Code
relating to an ERISA Plan's engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan, and other provisions in ERISA
dealing with "plan assets." The Code provisions relating to a plan's engaging
in certain transactions involving "plan assets" with persons who are
"disqualified persons" under the Code with respect to the plan also apply to
IRAs and all Keogh Plans.
If the assets of the Company were deemed to be "plan assets" of plans
that are holders of Common Shares, Subtitle A and Parts 1 and 4 of Subtitle B
of Title I of ERISA (the prudence and fiduciary standards) with respect to
ERISA Plans and Keogh Plans covering Common law employees, and Section 4975 of
the Code (the prohibitions on transactions involving disqualified persons) with
respect to ERISA Plans, IRAs and Keogh Plans, would extend to transactions
entered into and decisions made by the Company's management. Furthermore, the
Company's management would be deemed to be fiduciaries with respect to such
plans.
ERISA and the Code do not define "plan assets." On November 13, 1986,
the U.S. Department of Labor published a final regulation, amended on December
31, 1986 and effective March 13, 1987, relating to the definition
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of "plan assets," under which the assets of an entity in which employee
benefits plans, including ERISA Plans, IRAs and Keogh Plans, acquire interests
would be deemed "plan assets" under certain circumstances (the "Regulation").
The Regulation generally provides that when a plan acquires an equity interest
in an entity which is a "publicly-offered security," the plan's assets include
only the acquired equity interest and not any interest in the underlying assets
of the entity. The Regulation defines a "publicly-offered security" as a
security that is "widely held," freely transferable and registered pursuant to
certain provisions of the Federal securities laws. The Company believes that
the Common Shares offered hereby will be a "publicly-offered security," and
thus that the Company's assets will not be deemed to be assets of any employee
benefit plan that is a holder of Common Shares.
FIDUCIARIES OF EMPLOYEE BENEFIT PLANS THAT ARE PROSPECTIVE SHAREHOLDERS SHOULD
CONSULT WITH THEIR OWN COUNSEL AND FINANCIAL ADVISORS TO DETERMINE THE
CONSEQUENCES UNDER ERISA OF AN INVESTMENT IN THE COMPANY, AND TO DETERMINE THE
PROPRIETY OF SUCH AN INVESTMENT IN LIGHT OF THE CIRCUMSTANCES OF THAT
PARTICULAR PLAN AND CURRENT APPLICABLE LAW.
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UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement") entered into between the Company and the underwriters
named below (the "Underwriters"), each of the Underwriters, for whom Morgan
Keegan & Company, Inc. and Southwest Securities, Inc. are acting as
representatives (the ""Representatives"), has severally agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
respective number of Common Shares set forth opposite its name below:
<TABLE>
<CAPTION>
Number
of Common
Underwriter Shares
- ----------- ----------
<S> <C>
Morgan Keegan & Company, Inc.
Southwest Securities, Inc.
---------
Total 7,500,000
=========
</TABLE>
The Company has directed the Underwriters to reserve 80,000 Common
Shares offered in this Offering for sale to officers, Trust Managers and other
related persons and organizations.
The Underwriting Agreement provides that the obligations of the
several Underwriters thereunder are subject to approval of certain legal
matters by counsel, and to various other conditions. The nature of the
Underwriters' obligations is such that they are committed to purchase and pay
for all of the above Common Shares if any are purchased.
The Underwriters propose to offer the Common Shares in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price
less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may re-allow, concessions not in excess of $
per share to certain other dealers. After the Common Shares are released for
sale to the public, the offering price and other selling terms may be changed
by the Underwriters from time to time.
Prior to the Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price of the Common
Shares will be prevailing market and economic conditions, dividend yields and
financial characteristics of publicly-traded REITs that the Company and the
Representatives believe to be comparable to the Company, an assessment of the
Company's management, the expected results of operations of the Company and the
Properties, estimates of the future business potential and earnings prospects
of the Company as a whole and the current state of the real estate market in
the Company's target markets.
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Shares. As an exception to these
rules, the Representative is permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with this offering, that is, if they sell more Common Shares than
are set forth on the cover page of this Prospectus, the Representatives may
reduce that short position by purchasing Common Shares in the open market. The
Representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option described below.
The Representatives also may impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase Common Shares in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Shares, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of a
penalty bid might
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also have an effect on the price of a security to the extent that it were to
discourage resales of the security before the distribution is completed.
Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above might have on the price of the Common
Shares. In addition, neither the Company nor any of the Underwriters makes any
representations that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
1,125,000 additional Common Shares solely to cover overallotments, if any. If
the Underwriters exercise their overallotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of Common Shares to be purchased by
each of them, as shown in the table above, bears to the 7,500,000 Common Shares
offered hereby.
The Representatives of the Underwriters have informed the Company that
they do not expect the Underwriters to confirm sales of Common Shares offered
hereby to accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities
Act.
The Company has agreed that it will not offer, sell, grant any option
(other than pursuant to the Plan) for the sale of, or otherwise dispose of any
shares or any securities convertible into or exchangeable for, or rights to
purchase or acquire Common Shares, for a period of 90 days after the date
hereof without the prior written consent of Morgan Keegan & Company, Inc. Such
restriction shall not apply, however, to Common Shares issued in exchange for
real property or to Common Shares issued in exchange for units in any operating
partnership controlled by the Company, if such Common Shares are subject to a
restriction on transferability of at least six (6) months. In addition, the
officers and Trust Managers of the Company have agreed with the Underwriters
not to offer, sell or otherwise dispose of any Common Shares for a period of
180 days after the date hereof without the prior written consent of Morgan
Keegan & Company, Inc.
LEGAL MATTERS
The legality of the Common Shares offered hereby and certain tax
matters will be passed upon for the Company by Liddell, Sapp, Zivley, Hill &
LaBoon, L.L.P., Dallas, Texas. Certain legal matters will be passed on for the
Underwriters by Winstead Sechrest & Minick P.C., Dallas, Texas.
EXPERTS
The consolidated balance sheet of the Company as of December 31, 1996
and 1995, the consolidated statements of operations, changes in redeemable
preferred shares and common shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996, financial statement
schedule III as of December 31, 1996 and the statements of revenue and certain
expenses for Benchmark Crossing, Hedwig Centers, The Market at First Colony,
Rosemeade Park, Southwest/Walgreens, Town 'N Country, and University Mall for
the year ended December 31, 1996, have been included herein and in the
registration statement in reliance upon the reports of Ernst & Young LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The reports
on the statements of revenue and certain expenses for Benchmark Crossing,
Hedwig Centers, The Market at First Colony, Rosemeade Park,
Southwest/Walgreens, Town 'N Country, and University Mall contain a paragraph
that sates that the statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Commission, as
described in Note 1 to the statements of revenue and certain expenses. It is not
intended to be a complete presentation of revenue and expenses of Benchmark
Crossing, Hedwig Centers, The Market at First Colony, Rosemeade Park,
Southwest/Walgreens, Town 'N Country, and University Mall.
.
On October 29, 1997, the Company dismissed Coopers & Lybrand L.L.P. as
its independent accountants. Coopers & Lybrand's reports on the financial
statements for the past two years did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. The decision to dismiss Coopers &
Lybrand was unanimously approved by the Trust Managers. During the second
quarter of 1997, the Company and Coopers & Lybrand disagreed as to the
accounting treatment of the approximately $17,000 paid to Daniel M. Jones, III
in consulting fees. The Company believed that such fees should be recorded as
Offering costs whereas Coopers & Lybrand advised that they should be expensed.
The consulting fee is being accounted for as recommended by Coopers & Lybrand.
This issue was discussed by Coopers & Lybrand and management of the Company.
The Company has authorized Coopers & Lybrand to respond fully to the inquiries
of Ernst & Young concerning the subject matter of the disagreement. There were
no other disagreements or "reportable events" during the two most recent fiscal
years and the interim period preceding the dismissal of Coopers & Lybrand.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-11 under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder, with respect to the Common Shares offered
pursuant to this Prospectus. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and financial statement schedules
thereto. For further information with respect to the Company and the Common
Shares offered hereby, reference is made to the Registration Statement and such
exhibits and financial statement schedules, copies of which may be examined
without charge at, or obtained upon payment of prescribed fees from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company and other registrants
that have been filed electronically with the Commission. The address of such
site is http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any
contract or other document which is filed as an exhibit to the Registration
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information
with the Commission pursuant to the Exchange Act. In addition to applicable
legal or New York Stock Exchange requirements, if any, holders of the Common
Shares will receive annual reports containing audited financial statements with
a report thereon by the Company's independent certified public accountants, and
quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
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GLOSSARY
"Acquisition Properties" means the eight community shopping centers located in
Texas, Florida and Arizona that the Company has a contract or an option to
acquire.
"ADA" means the Americans with Disabilities Act of 1990.
"Advisory Agreement" means the Amended and Restated Advisory Agreement between
the Company and the Investment Manager.
"Advisory Funds From Operations" means Funds From Operations plus annual
interest payments on outstanding indebtedness and the fee payable to the
Investment Manager.
"Board of Trust Managers" means the Company's Board of Trust Managers.
"Bylaws" means the Company's Amended and Restated Bylaws.
"Cash Available for Distribution" is defined as net income (loss) as computed
in accordance with GAAP, excluding gains and losses from debt restructuring and
property sales, plus depreciation and amortization, less capital expenditures.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Charter" means the Company's Amended and Restated Declaration of Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the Company's common shares of beneficial interest, no
par value per share.
"Company" means United Investors Realty Trust, a Texas real estate investment
trust.
"DRIP" means the Company's Dividend Reinvestment Plan to be implemented by the
Company upon consummation of the Offering.
"EPS" means earnings per share.
"ERISA" means the Employee Retirement Income Securities Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excess Shares" means the shares into which shares of capital stock of the
Company owned, or deemed to be owned or transferred to the shareholders in
excess of the Ownership Limit will be automatically exchanged.
"FCMT" means First Commonwealth Mortgage Trust.
"Funds From Operations" means net income (loss) computed in accordance with
GAAP, excluding gains or losses from debt restructuring and sales of property,
plus real estate related depreciation and amortization and after adjustments
for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles in effect at date of the
Offering.
"GLA" means gross leasable area.
96
<PAGE> 99
"Gross Receipts" means the gross revenues generated by the Company during a
period of time from operations, including rents, percentage rents, tenant
reimbursements, interest and income, but excluding receipts from capital
transactions, including sales, financings, refinancings and the sale of equity
securities.
"ICSC" means International Council of Shopping Centers.
"Investment Manager" means FCA Corp, an affiliate of the Company, that provides
investment and management services to the Company pursuant to the terms of the
Advisory Agreement.
"Investment Advisors Act" means the Investments Advisors Act of 1974, as
amended.
"IRA" means an individual retirement account.
"Ivy" means Ivy Realty Trust, an affiliate of the Company.
"Keogh Plans" means plans subject to ERISA, IRAs and H.R. 10 Plans.
"Named Executive Officers" means Lewis H. Sandler, Daniel M. Jones, III and
Randall D. Keith, collectively.
"NAREIT" means National Association of Real Estate Investment Trusts.
"9% Preferred Shares" means the Company's 9% Convertible Preferred Shares,
Series 1995, par value $100 per share.
"Offering" means the initial public offering of the Common Shares as described
in this Prospectus.
"Original Properties" means the Company's eight community shopping centers
located in Texas, Tennessee and Arizona.
"Ownership Limit" means the restriction contained in the Charter providing
that, subject to certain exemptions, the holder may not own or be deemed to
own, by virtue of attribution rules of the Code, more than 9.8% of the total
outstanding Trust Shares.
"Partnership" means Park Northern/Centennial Partners L.P.
"Plan Agent" means , as agent for the DRIP.
"Plan" means the Company's 1997 Share Incentive Plan.
"Plan Participants" means those executive officers, Trust Managers and key
employees of the Company and the Investment Manager awarded grants under the
Plan.
"Preferred Shares" means the Company's preferred shares of beneficial interest,
of which 20,000 shares are authorized to be issued with a $100 par value per
share, the remainder to be issued at no par value.
"Properties" means the Acquisition Properties and the Original Properties,
collectively.
"REIT" means a real estate investment trust, as defined by Sections 856 through
860 of the Code.
"Service" means the Internal Revenue Service.
"Securities Act" means the Securities Act of 1933, as amended.
"SFAS" means Statement of Financial Accounting Standards.
"SWP" means South West Property Trust, Inc.
97
<PAGE> 100
"Termination Fee" means the fee payable to the Investment Manager under certain
circumstances upon termination of the Advisory Agreement.
"Texas REIT Act" means the Texas Real Estate Investment Trust Act.
"Total Market Capitalization" means the total number of Common Shares and
Preferred Shares outstanding times the current market price of such shares plus
long-term debt.
"Triple Net Lease" means a lease under which a tenant pays, in addition to base
rent, its pro rata share of the shopping centers common area maintenance
expenses, real estate taxes, insurance expenses and utilities.
"Trust Shares" means, collectively, the Common Shares and the Preferred Shares.
"UDR" means United Dominion Realty Trust, Inc.
98
<PAGE> 101
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES - FINANCIAL STATEMENTS
<S> <C>
Report of Independent Auditors.........................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 and
September 30, 1997 (unaudited)....................................................F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 and the nine months ended
September 30, 1997 and 1996 (unaudited)...........................................F-4
Consolidated Statements of Redeemable Preferred Shares and Common
Shareholders' Equity for the years ended December 31, 1996, 1995
and 1994 and the nine months ended September 30, 1997 (unaudited).................F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 and the nine months ended
September 30, 1997 and 1996 (unaudited)...........................................F-7
Notes to Consolidated Financial Statements.............................................F-9
FINANCIAL STATEMENT SCHEDULE
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1996.................................................................F-24
Notes to Schedule III..................................................................F-25
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES - PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Introduction to Pro Forma Condensed Consolidated Financial
Statements........................................................................F-26
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997................................................................F-27
Pro Forma Condensed Consolidated Statement of Operations for the
nine months ended September 30, 1997..............................................F-28
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1996......................................................F-29
Notes to Pro Forma Condensed Consolidated Financial Statements.........................F-30
BENCHMARK CROSSING
Report of Independent Auditors.........................................................F-34
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-35
Notes to Statement of Revenue and Certain Expenses.....................................F-36
HEDWIG CENTERS
Report of Independent Auditors.........................................................F-39
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-40
Notes to Statement of Revenue and Certain Expenses.....................................F-41
MARKET AT FIRST COLONY
Report of Independent Auditors.........................................................F-44
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-45
Notes to Statement of Revenue and Certain Expenses.....................................F-46
MASON PARK
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996 (unaudited).....................................................F-48
Notes to Statement of Revenue and Certain Expenses.....................................F-49
ROSEMEADE PARK
Report of Independent Auditors.........................................................F-51
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-52
Notes to Statement of Revenue and Certain Expenses.....................................F-53
SOUTHWEST WALGREENS
Report of Independent Auditors.........................................................F-56
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-57
Notes to Statement of Revenue and Certain Expenses.....................................F-58
TOWN 'N COUNTRY
Report of Independent Auditors.........................................................F-60
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-61
Notes to Statement of Revenue and Certain Expenses.....................................F-62
UNIVERSITY MALL
Report of Independent Auditors.........................................................F-64
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996.................................................................F-65
Notes to Statement of Revenue and Certain Expenses.....................................F-66
</TABLE>
F-1
<PAGE> 102
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of United
Investors Realty Trust and Subsidiaries (the "Company") as of December 31,
1996 and 1995 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996 and the financial statement schedule listed in the
index on page F-2. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Investors
Realty Trust as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-2
<PAGE> 103
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
------------------------------------
1997 1996 1995
(UNAUDITED)
-------------- --------------- ---------------
Investment real estate:
<S> <C> <C> <C>
Land $ 8,118,723 $ 8,118,723 $ 7,482,154
Buildings and improvements 31,553,011 31,209,206 26,684,007
--------------- --------------- ---------------
39,671,734 39,327,929 34,166,161
Less accumulated depreciation (4,580,372) (3,767,720) (2,988,030)
--------------- --------------- ---------------
Investment real estate, net 35,091,362 35,560,209 31,178,131
Cash and cash equivalents 256,483 119,316 427,820
Accounts receivable, net of allowance of $31,209, $31,209
and $22,989 for 1997, 1996 and 1995, respectively 768,765 885,157 572,219
Prepaid expenses and other assets 676,436 303,332 283,263
Investment in real estate venture -- 333,759 --
--------------- --------------- ---------------
Total assets $ 36,793,046 $ 37,201,773 $ 32,461,433
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 25,117,007 $ 25,590,592 $ 22,272,445
Redeemable convertible subordinated notes 212,400 212,400 212,400
Short-term notes and lines of credit 950,000 740,000 --
Accounts payable - trade 269,985 250,848 339,712
Accrued property taxes 565,699 500,918 454,842
Security deposits 107,651 112,101 127,746
--------------- --------------- ---------------
Total liabilities 27,222,742 27,406,859 23,407,145
--------------- --------------- ---------------
Minority interest in real estate ventures 1,585,419 1,584,673 699,984
--------------- --------------- ---------------
Commitments and contingencies (Note 7)
Redeemable preferred shares of beneficial interest, $100 par
value, 20,000 shares authorized, 10,737 shares issued and
outstanding at December 31, and 1995 1,068,226 1,068,226 1,068,226
--------------- --------------- ---------------
Common shareholders' equity:
Common shares of beneficial interest, no par value,
20,000,000 shares authorized, 837,489 and 834,397
shares issued and outstanding at December 31, and 1995,
respectively, and 837,489 shares issued and outstanding 7,527,577 7,527,577 7,488,913
at September 30, 1997
Accumulated deficit (610,918) (385,562) (202,835)
--------------- --------------- ---------------
Total common shareholders' equity 6,916,659 7,142,015 7,286,078
--------------- --------------- ---------------
Total liabilities and shareholders'
equity $ 36,793,046 $ 37,201,773 $ 32,461,433
=============== =============== ===============
</TABLE>
See accompanying notes.
F-3
<PAGE> 104
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Years ended December 31,
September 30,
------------------------------ -------------------------------------------------
1997 1996 1996 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Base rents $ 3,706,057 $ 2,973,056 $ 4,097,911 $ 4,389,491 $ 3,794,711
Percentage rents 19,800 24,617 32,822 -- --
Expense reimbursements 873,054 593,651 835,940 848,975 844,299
Interest and other income 20,870 64,303 67,409 44,224 10,344
----------- ----------- ----------- ----------- -----------
Total revenues 4,619,781 3,655,627 5,034,082 5,282,690 4,649,354
----------- ----------- ----------- ----------- -----------
Expenses:
Operating and
maintenance 556,975 304,202 582,481 875,193 570,307
Real estate taxes 565,698 398,193 558,000 569,634 512,070
Advisory fees to affiliate 258,750 231,150 279,000 276,000 253,000
General and
administrative 322,770 214,228 224,164 168,960 129,465
Interest 1,825,810 1,562,804 2,132,390 2,177,447 2,101,762
Depreciation and
amortization 870,972 688,187 958,778 960,876 756,914
----------- ----------- ----------- ----------- -----------
Total expenses 4,400,975 3,398,764 4,734,813 5,028,110 4,323,518
----------- ----------- ----------- ----------- -----------
Income before gain on sale
of investment real estate,
minority interest and
preferred share dividend
requirements 218,806 256,863 299,269 254,580 325,836
----------- ----------- ----------- ----------- -----------
Gain on sale of
investment real estate -- -- -- 25,020 --
----------- ----------- ----------- ----------- -----------
Income before
minority interest
and preferred
share dividend
requirements 218,806 256,863 299,269 279,600 325,836
Minority interest in net
income of real estate
ventures (38,482) (37,421) (51,941) (43,278) (48,435)
----------- ----------- ----------- ----------- -----------
</TABLE>
F-4
<PAGE> 105
CONSOLIDATED STATEMENTS OF OPERATIONS, (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Income before preferred share
dividend requirements $ 180,324 $ 219,442 $ 247,328 $ 236,322 $ 277,401
Preferred share dividend
requirements (72,474) (72,138) (96,296) (43,618) --
--------- --------- --------- --------- ---------
Net income available for
common shareholders $ 107,850 $ 147,304 $ 151,032 $ 192,704 $ 277,401
========= ========= ========= ========= =========
Net income per common
share $ .13 $ .18 $ .18 $ .23 $ .35
========= ========= ========= ========= =========
Weighted average shares
outstanding 837,489 834,397 834,655 834,397 797,655
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 106
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
SHARES AND COMMON SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
and the nine months ended September
<TABLE>
<CAPTION>
PREFERRED COMMON
SHARES OF BENEFICIAL SHARES OF BENEFICIAL
INTEREST INTEREST
----------------------------- ----------------------------- ACCUMULATED
NUMBER AMOUNT NUMBER AMOUNT DEFICIT
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993 -- -- 687,429 $ 5,751,784 $ (173,252)
Issuance of common shares
of beneficial interest -- -- 146,968 1,755,930 --
Offering expenses -- -- -- (18,801) --
Net income available for
common shareholders -- -- -- -- 277,401
Distributions -- -- -- -- (332,808)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 -- -- 834,397 7,488,913 (228,659)
Issuance of redeemable
preferred shares 10,737 $ 1,073,700 -- -- --
Offering expenses -- (5,474) -- -- --
Income before preferred share dividend
requirements -- -- -- -- 236,322
Distributions -- -- -- -- (166,880)
Redeemable preferred shares of beneficial
interest cash dividend, $6.75 per share -- -- -- -- (43,618)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 10,737 1,068,226 834,397 7,488,913 (202,835)
Issuance of common shares
of beneficial interest -- -- 3,092 38,664 --
Income before preferred
share dividend requirements -- -- -- -- 247,328
Distributions -- -- -- -- (333,759)
Redeemable preferred shares of beneficial
interest cash dividends, $9.00 per share -- -- -- -- (96,296
Balance at December 31, 1996 ------------ ----------- ----------- ----------- -----------
10,737 1,068,226 837,489 7,527,577 (385,562)
Income before preferred share dividend
requirements -- -- -- -- 180,324
Distributions -- -- -- -- (72,474)
Redeemable preferred shares of beneficial
interest distributions, $6.75 per share -- -- -- -- (333,206)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 (unaudited) 10,737 $ 1,068,226 837,489 $ 7,527,577 $ (610,918)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 107
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Income before preferred share dividend
requirements $ 180,324 $ 219,442 $ 247,328 $ 236,322 $ 277,401
Adjustments to reconcile net income available for common
shareholders to net cash provided by operating
activities:
Depreciation and amortization 870,972 688,188 956,778 960,876 756,914
Minority interest in net income of
real estate ventures
51,188 37,423 51,941 43,278 48,435
Equity in net income of investment in real estate
venture 4,668 --
Recognition of deferred rent (68,581) (61,651) (82,201) (44,677) (63,702)
Provision for uncollectible accounts 8,476 (22,989) 8,220 4,468 22,840
Gain on sale of investment real estate -- -- -- (25,020) --
Payment of common shares for services -- -- 38,664 -- --
Changes in operating assets and liabilities:
(Increase) decrease in
accounts receivable 176,497 69,993 (176,533) 16,530 (107,601)
Increase in prepaid
expenses and other (435,539) (170,773) (78,167) (167,660) (70,939)
assets
Increase (decrease) in
accounts payable - trade 19,138 (170,675) 191,717 (90,885) (15,759)
Increase (decrease) in
accrued property taxes 64,780 (35,393) (53,910) 12,025 108,360
Increase (decrease) in
security deposits (4,450) (41,221) (41,835) 13,253 37,323
----------- ----------- ----------- ----------- -----------
Net cash provided
by operating activities 867,473 512,344 1,062,002 958,510 993,272
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of and capital improvements
to investment real estate (343,805) (2,128,568) (1,374,675) (383,957) (2,240,884)
Proceeds from sale of investment -- -- 114,478 --
Payment received on affiliate note receivable -- 55,462 -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (343,805) (2,128,568) (1,319,213) (269,479) (2,240,884)
----------- ----------- ----------- ----------- -----------
</TABLE>
F-7
<PAGE> 108
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ ---------------------------------------
1997 1996 1996 1995 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from borrowings 133,859 1,600,000 740,000 2,021,210 1,608,900
Proceeds from short-term notes payable 250,000 600,000 -- -- 235,000
Principal payments on mortgage notes (607,444) (196,344) (604,574) (2,629,496) (392,785)
payable
Principal payments on short-term
notes payable (40,000) -- (23,103) (235,000) --
Proceeds from issuing common shares
of beneficial interest, net -- -- -- 70,219
Proceeds from issuing preferred
shares of beneficial interest, net -- -- 569,526 --
Cash dividends paid (72,474) (72,138) (96,296) (43,618) (332,808)
Distribution to holders of minority interests (50,442) (50,442) (67,320) (67,259) (67,285)
----------- ---------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities (386,501) 1,881,076 (51,293) (384,637) 1,121,241
----------- ---------- ----------- ----------- -----------
Increase (decrease) in cash and cash 137,167 264,852 (308,504) 304,394 (126,371)
equivalents
Cash and cash equivalents at beginning 119,316 427,820 427,820 123,426 249,797
of year
----------- ---------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 256,483 $ 692,672 $ 119,316 $ 427,820 $ 123,426
=========== ========== =========== =========== ===========
</TABLE>
F-8
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and September 30, 1997 (unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
United Investors Realty Trust and Subsidiaries (the "Company") was
organized on December 1, 1988, as a Massachusetts business trust and
subsequently converted to a Texas real estate investment trust. The
Company was formed for the purpose of investing directly in
income-producing real property and in partnerships formed to own such
real property.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company, its subsidiaries, and partnerships in which it owns
controlling interests.
Investments in 50% or less owned real estate ventures over which the
Company has the ability to exercise influence are accounted for using
the equity method.
The accompanying unaudited consolidated financial statements of and
Subsidiaries (the "Company") for the nine months ended September 30,
1997 and 1996 have been prepared for purposes of complying with
certain rules and regulations of the Securities and Exchange
Commission and should be read in conjunction with the consolidated
financial statements and notes thereto of the Company. Certain
information in the notes to the consolidated nine months financial
statements normally included in financial statements prepared in
accordance with generally accepted accounting principles has been
condensed or omitted pursuant to these rules and regulations. In the
opinion of management, adjustments consisting of normal recurring
accruals considered necessary for the fair presentation of interim
financial statements have been included. Operating results for interim
periods are not necessarily indicative of the results that may be
expected for the full year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
F-9
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
INVESTMENT REAL ESTATE
Investment real estate, consisting of eight shopping centers, is
recorded at cost. The cost of real estate acquired by the issuance of
shares of beneficial interest is determined by the estimated value of
the shares issued or the real estate acquired. The allocation of cost
between land and building is based on the estimated fair value at the
time of the purchase. Depreciation is computed using the straight-line
method over the estimated useful lives of 30 to 40 years for the
shopping centers and 5 to 10 years for building improvements.
Depreciation expense included in the statements of operations was
$886,173, $902,380 and $727,189 for the years ended December 31, 1996,
1995 and 1994, respectively.
Expenditures for repairs and maintenance are charged to operations as
incurred. Significant betterments are capitalized.
When assets are sold or retired, their costs and related accumulated
depreciation are removed from the accounts, with the resulting gains
or losses reflected in operations for the period.
Recoverability of investment real estate is evaluated periodically as
events or circumstances indicate a possible inability to recover its
carrying amount. Recoverability is determined on a
property-by-property basis utilizing the undiscounted cash flow
method. If undiscounted cash flows do not recover the carrying amount
of the real estate, the real estate is reduced to fair value.
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income
available for common shareholders by the weighted average number of
shares of beneficial interest outstanding during the year. The assumed
conversion of redeemable debt and redeemable preferred shares would be
antidilutive in all years presented.
CONCENTRATION OF RISK
The Company's primary business activity is investing in
income-producing real property. The Company's retail shopping center
properties are located in Austin, College Station, El Campo and San
Antonio, Texas; Lenoir City and Athens, Tennessee; and Phoenix,
Arizona.
F-10
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED):
During 1996, 1995 and 1994, the Company earned approximately
$1,151,000, $1,131,000 and $1,134,000, respectively, in rental revenue
from two tenants. These two tenants' revenues amounted to
approximately 23%, 21% and 24% of the Company's total revenue for the
years ended December 31, 1996, 1995 and 1994.
MANAGEMENT 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 dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share" which simplifies the standards for computing and presenting
earnings per share ("EPS") and makes them comparable to international
EPS standards. This statement is effective for the year ending
December 31, 1997. Earlier application is not permitted and
restatement of prior period earnings per share data is required. The
Company does not believe that implementation of SFAS No. 128 will have
a material impact on its EPS.
2. INVESTMENT REAL ESTATE:
MCMINN PLAZA SHOPPING CENTER
The Company purchased McMinn Plaza Shopping Center in June 1994 for
$221,282 in cash, 71,085 shares of beneficial interest valued at $12
per share and two notes payable totaling $1,608,900. This shopping
center is located in Athens, Tennessee and is managed by an unrelated
third party.
F-11
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
2. INVESTMENT REAL ESTATE, (CONTINUED):
EL CAMPO SHOPPING CENTER
The Company purchased El Campo Shopping Center in June 1996 for
$400,000 cash and a note payable of $1,600,000. The shopping center is
located in El Campo, Texas and is managed by an unrelated third party.
ONE WEST HILLS OFFICE BUILDING
The Company purchased One West Hills Office Building in September 1994
for $126,749 in cash, 60,365 shares of beneficial interest valued at
$12.00 per share and assumption of a note payable of $685,341. The
office building is located in Dallas, Texas and is managed by an
unrelated third party. On January 1, 1996, the Company transferred, at
its cost basis, its investment in the office building to an affiliated
real estate investment trust (See Note 5). At December 31, 1996 and
September 30, 1997, the Company owed 40% and 0%, respectively of the
affiliated REIT. The investment is accounted for by the equity method.
3. NOTES PAYABLE:
REDEEMABLE CONVERTIBLE SUBORDINATED NOTES
At December 31, 1996 and 1995, the Company had outstanding $212,400 of
redeemable convertible subordinated notes payable bearing interest at
9% with semiannual interest payments due June 30 and December 31 of
each year. The notes are due on December 31, 2002.
Holders of the notes may convert the notes at their option, in
multiples of $1,000, into common shares of beneficial interest at the
following conversion prices per share:
<TABLE>
<CAPTION>
YEAR PRICE
<S> <C>
Through 12/31/97 $12.00
1998 12.50
1999 13.00
2000 13.50
2001 14.00
2002 14.50
</TABLE>
During 1995, the holders of the notes were granted the option to
convert the notes to redeemable preferred shares of beneficial
interest at the conversion price of $100 per share and $498,700 of the
notes were converted to 4,987 shares of redeemable preferred shares
(See Note 4).
F-12
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
3. NOTES PAYABLE, (CONTINUED):
These notes can be redeemed by the Company at the redemption price of
$100 par value beginning in 1997.
MORTGAGE NOTES PAYABLE
As of December 31, 1996 and 1995, mortgage notes payable consisted of
the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage note payable to a financial institution with
installments of principal and interest in the sum of $20,167
payable monthly. The note bears interest at 8%, and was
originally due and payable on December 4, 1994. In December
1994, the note was extended until June 4, 1995 at a rate of 9%,
with principal and interest payments of $21,086 payable monthly.
The note was refinanced in June 1995 with installments of
principal and interest in the amount of $20,835 payable monthly.
The note bears interest at 9%, is callable on May 10, 2000, but
otherwise due and payable on May 10, 2005, and is collateralized
by Twin Lakes Shopping Center land and building. $ 1,824,213 $ 1,905,556
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $20,285.
The note bears interest at 8.5%, is due on November 20, 1998 and
is collateralized by Autobahn Shopping Center land and building. 1,271,592 1,400,540
</TABLE>
F-13
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
3. NOTES PAYABLE, (CONTINUED):
MORTGAGE NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $31,541. The
note bears interest at 9%, is due on September 25, 1998 and is
collateralized by Centennial Shopping Center land and building. In
1998, the Company has the option to renew the note for three years
at 9.5% with monthly installments of principal and interest based
upon a 20-year amortization schedule. If renewed, $100,000 of
principal is due. 3,779,493 3,810,596
Mortgage note payable to a financial institution. The note bears
interest at 9.75%, is due and payable on March 31, 1999 and is
collateralized by Bandera Festival Shopping Center land and
building. Monthly installments of $73,519 are based on a 25-year
amortization schedule. Additional annual principal payments are due
as follows:
April 1, 1997 - 1% of the then outstanding
principal balance -- --
April 1, 1998 - 1/2% of 1% of the then outstanding
principal balance 7,957,094 8,094,411
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the amount of $43,852.
The note bears interest at 9.3%, amortizes over 25 years until
April 1, 2018 and is collateralized by the Randall's/University
Park Shopping Center, land and building. 4,874,155 4,943,538
</TABLE>
F-14
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
3. NOTES PAYABLE, (CONTINUED):
MORTGAGE NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the amount of $7,232. The
note bears interest of 8.25%, amortizes over the term of the note,
is due on July 1, 2003 and is collateralized by a portion of the
McMinn Plaza Shopping Center, land and building. $ 439,680 $ 484,126
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $14,238. The
note bears interest at 7.625%, amortizes over the term of the note,
is due on November 1, 2002 and is collateralized by a portion of
the McMinn Plaza Shopping Center, land and building. 814,647 917,957
Mortgage note payable to an affiliated trust with monthly installments
of principal and interest in the amount of $8,401. The note bears
interest at 12%, amortizes over 15 years, is due on November 15,
2000 and is collateralized by One West Hills office building. -- 660,426
Mortgage note payable to a financial institution with interest only
due through March 25, 1995. Thereafter, monthly installments of
principal and interest in the amount of $2,287 are due. The note
bears interest at 9%, amortizes over three years, is collateralized
by Centennial Shopping Center land and building and is due on March
25, 1998. 32,192 55,295
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $24,069. The
note bears interest at 8.37%, amortizes over 20 years, is due on
December 1, 2006, and is collateralized by the Park Northern
Shopping Center. 2,800,000 --
</TABLE>
F-15
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
3. NOTES PAYABLE, (CONTINUED):
MORTGAGE NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage note payable to a financial institution with monthly
installments of principal and interest in the sum of $13,427. The
note bears interest at 9%, amortizes over 25 years, is due on June
27, 2003 and is collateralized by the El Campo Shopping Center land
and buildings. The Company can extend the note for 3 years at a
lesser of prime plus 1/2% or 9% with a $150,000 principal
reduction. 1,591,276 --
Mortgage note payable to a financial institution with quarterly
installments of interest only. The note bears interest at the prime
rate, is due on December 27, 1999 and is collateralized by land in
College Station, Texas. 206,250 --
------------- ------------
$ 25,590,592 $ 22,272,445
============= ============
</TABLE>
Aggregate annual maturities of mortgage notes payable for each of the
five years ending December 31 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 787,355
1998 5,471,953
1999 8,313,593
2000 1,935,377
2001 441,044
Thereafter 8,641,270
----------------
$ 25,590,592
================
</TABLE>
F-16
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
3. NOTES PAYABLE, (CONTINUED):
MORTGAGE NOTES PAYABLE, CONTINUED
As of the Company's mortgage indebtedness was approximately $25
million, collateralized by investment real estate. The mortgage
indebtedness interest rates range from 7.63% to 9.75%, with a
weighted average interest rate of 9.06% and a weighted average
maturity of 7.2 years
SHORT-TERM NOTES PAYABLE
During 1996, the Company issued $600,000 of unsecured promissory notes
to individuals. The notes require quarterly payments of interest only,
at 11% and are due in 1997 and 1998. During the nine months ended
September 30, 1997 the Company's line of credit facility due in April
1997 was renewed and extended to April 1998. As of September 30, 1997
$200,000 was outstanding on the bank credit facility.
REVOLVING LINES OF CREDIT
Effective August 23, 1996, the Company entered into a $200,000
unsecured revolving line of credit facility with a bank. Interest of
prime (8.25% at December 31, 1996 and 8.5% at September 30, 1997)
plus 1/2% is payable quarterly until maturity in April 1997. As of
December 31, 1996, the Company had drawn $40,000 on the bank credit
facility. During the nine months ended September 30, 1997, the line
was renewed and extended to April 1998. At September 30, 1997,
$200,000 was outstanding.
The Company entered into a $100,000 unsecured revolving line of
credit facility with a bank in February 1996. Interest of prime
(8.25% at December 31, 1996 and 8.5% at September 30, 1997) plus 1.5%
is payable monthly until maturity in February 1997. As of December
31, 1996 the Company had drawn $100,000 on the bank credit facility.
In March 1997, the revolving line of credit was extended until May 5,
1998, under the same terms.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables,
accounts payable and accrued expenses are reasonable estimates of
their fair values because of the short maturities of these
instruments. Mortgage notes payable have aggregate carrying values
which approximate their estimated fair values based on comparison
to debt with similar terms and remaining maturities.
F-17
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
4. SHARES OF BENEFICIAL INTEREST:
REDEEMABLE PREFERRED SHARES OF BENEFICIAL INTEREST
In 1995, the Company authorized 20,000, $100 par value, 9% redeemable
preferred shares of beneficial interest ("preferred shares"). The
Company issued 5,750 preferred shares at par value and 4,987 shares
through conversion of the 9% redeemable convertible subordinated
notes (See Note 3). No shares were issued during 1996. Dividends on
the preferred shares are cumulative from date of issuance and payable
on a quarterly basis. The preferred shares are convertible at the
option of the holder into common shares of beneficial interest of the
Company at a conversion price of $12.50 per share, subject to
adjustment under certain conditions. The preferred shares are
redeemable at the option of the Company, in whole or in part, at any
time after January 1, 1996, at a redemption price equal to the sum of
par value of the amount of the preferred shares being redeemed and the
premium. The premium is based upon the following annual rate computed
and the par value of the preferred shares being redeemed, as set forth
in the following schedule:
<TABLE>
<CAPTION>
CALENDAR YEAR PREMIUM
<S> <C>
1997 4%
1998 3%
1999 2%
2000 1%
2001 and thereafter 0%
</TABLE>
REDEEMABLE PREFERRED SHARES OF BENEFICIAL INTEREST
The Company is required to purchase and redeem 20% of the number of
preferred shares outstanding at a redemption price equal to par value
commencing on March 15, 2001 and annually thereafter until all
preferred shares are redeemed. Holders of preferred shares are
entitled to limited voting rights at one vote per share.
COMMON SHARES OF BENEFICIAL INTEREST
During 1996, the Company issued 2,400 shares at $12.50 per share to
the trustees for payment of services rendered (See Note 8). The
Company issued an additional 692 shares at $12.50 per share for
payment of lease commissions.
During 1994, the Company issued 8,063 shares of beneficial interest at
$11.04 per share, and the Company exchanged 131,450 shares of
beneficial interest for investment real estate. In addition, the
Company exchanged 7,455 shares of beneficial interest for purchase of
an investment.
F-18
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
5. INVESTMENT IN REAL ESTATE VENTURE:
In December 1995 the Company formed a new real estate investment
trust, Ivy Realty Trust ("Ivy"). On January 1, 1996 the Company
transferred its investment in One West Hills office building, the
related mortgage note payable of $660,426 and net liabilities to Ivy
in exchange for 834,397 shares of Ivy stock, valued at one dollar per
share (based on the carryover basis of the assets contributed by the
Company) and a $55,462 promissory note. On January 15, 1996 the
Company distributed to its shareholders 500,638 shares of Ivy as a
dividend. One- third of the dividend was treated as a 1995 dividend
with the remainder treated as a 1996 dividend.
At December 31, 1996, the investment in Ivy is accounted for using the
equity method. At December 31, 1996, Ivy's financial statements
reflected the following:
<TABLE>
<S> <C>
Assets $ 2,239,000
Liabilities 843,000
Net Income 115,000
</TABLE>
6. FEDERAL INCOME TAXES:
The Company operates in such a manner so as to qualify as a "real
estate investment trust" under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and the Treasury
Regulations promulgated thereunder. Under those Sections, the Company
will not be taxed on that portion of its income distributed to
shareholders so long as at least 95 percent of the Company's otherwise
taxable income is distributed to shareholders each year and other
requirements of a qualified real estate investment trust are met. The
Company satisfied the income distribution and other requirements for
the year ended December 31, 1995. The Company intends to satisfy the
income distribution requirement for the year ended December 31, 1996
by allocating a portion of the 1997 distributions to 1996 pursuant to
an election under Section 858 of the Internal Revenue Code. Management
believes all other requirements of a qualified real estate investment
trust have been met.
The Company has approximately $385,000 of net operating losses that
may be carried forward to offset future taxable income. However, in
1990 sales of shares of beneficial interest resulted in a change of
ownership for federal income tax purposes. As a result of the
ownership change, the amount of net operating losses generated prior
to the ownership change, which may be used to offset federal taxable
income, is subject to an annual limitation imposed by the Internal
Revenue Code. These net operating losses expire from 2006 through
2010.
F-19
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
6. FEDERAL INCOME TAXES, (CONTINUED):
REDEEMABLE PREFER
The tax status of per-share dividend distributions relating to common
shares of beneficial interest declared attributable to the year
presented is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Ordinary income $.40 $.20 $.40
==== ==== ====
</TABLE>
7. LEASES:
TENANT LEASES
The Company leases commercial retail space generally under operating
leases which provide for minimum base rentals plus contingent rentals
based upon a percentage of gross receipts. Most leases also provide
that the tenant must pay as additional rent a pro rata share of real
property taxes, insurance and common area maintenance.
The future minimum base rents for the operating leases in existence at
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 4,612,581
1998 4,447,090
1999 4,091,333
2000 3,577,347
2001 3,320,955
Thereafter 24,060,411
---------------
$ 44,109,717
===============
</TABLE>
F-20
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
7. LEASES, (CONTINUED):
GROUND LEASE
The Company has a 40-year ground lease for Park Northern Shopping
Center with an unrelated third party. Rent of $8,333 plus 5% of total
gross revenues is payable monthly through the year 2035. The Company
has an option to extend this lease for four consecutive periods of ten
years each. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEARS AMOUNT
<S> <C>
1997 $ 100,000
1998 100,000
1999 100,000
2000 100,000
2001 through 2035 3,500,000
------------
$ 3,900,000
============
</TABLE>
Rental expense included in the statement of operations was $8,333,
$25,353 and $6,500 in 1996, 1995 and 1994, respectively.
8. ADVISORY AGREEMENT AND RELATED PARTY TRANSACTIONS:
The Company is managed and advised by an entity affiliated with
certain Trust managers (the "Advisor"). Advisory fee expenses were
$279,000, $276,000 and $253,000 for 1996, 1995 and 1994, respectively
and $259,000 and 231,000 for the nine months ended September 30, 1997
and 1996, respectively. Advisory fees are to be calculated at .8%, on
an annual basis, of the gross Company assets at year-end, increased by
noncash reserves. During 1996, 1995 and 1994, the Advisor reduced its
fee due from the Company under the agreement by approximately $50,600,
$9,200 and $26,500, respectively, to reflect the timing of
acquisitions made during the year.
Total fees paid to independent trust managers were approximately
$33,000, $20,000 and $15,500 in 1996, 1995 and 1994, respectively.
During 1996, the Company initiated a five-year program whereby each of
the three independent trust managers will be paid 800 shares of
beneficial interest per year. During 1996, $30,000 of the investment
management fees were satisfied by issuing a total of 2,400 shares of
beneficial interest at $12.50 per share. These shares are restricted as
to transfer or sale for two years after the issuance date.
F-21
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
9. SUPPLEMENTAL CASH FLOW INFORMATION:
The following supplemental information is related to the statement of
cash flows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Acquisition of land for mortgage note
payable $ 206,250
Assumption of mortgage notes payable
for acquisition of investment real
estate
4,400,000 $ 685,341
Net liabilities assumed in acquisition of
investment real estate 20,197
Minority interest granted in exchange
for investment real estate contributed 630,000
Net liabilities assumed in acquisition of
investment real estate 109,786
Exchange of investment real estate for
834,397 shares of Ivy Realty Trust,
an affiliated trust, transfer of
mortgage note payable, issuance of
mortgage note receivable and
transfer of net liabilities 1,640,465
Payment of dividend with shares of
affiliated trust 500,639
Cash paid for interest 2,112,038 $ 2,180,835 2,101,762
Issuance of 4,987 preferred shares of
beneficial interest for redeemable
convertible notes payable 496,700
Dividend declared but not paid 166,880
Issuance of shares of beneficial interest
for purchase of an investment 89,460
Exchange of shares of beneficial
interest for purchase of investment
real estate 1,577,450
</TABLE>
F-22
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
10. SUBSEQUENT EVENT (UNAUDITED):
Subsequent to December 31, 1996, the Company announced it expects to
register approximately 7,500,000 common shares of beneficial interest,
no par value, in a proposed public offering (the "Offering"). There is
no assurance that the Offering can be completed.
In December 1997, the Company expects to award 75,000 shares, at no
cost, to the Advisor and the Company's independent trust managers. As a
result, the Company will record a nonrecurring charge to compensation
expense of approximately $806,250 related to the share award subsequent
to the Offering. In addition, the Company intends to establish a share
incentive plan (the "Plan") for the Company's executives, key employees
and certain personnel of the Advisor. The Plan will provide that the
maximum number of share awards and share options granted will not
exceed 10% of the Company's outstanding common shares of beneficial
interest at any given time and will have exercise prices equal to or
greater than the fair market value on the date of grant.
In conjunction with the planned Offering, the Company has entered into
agreements with several unrelated parties to acquire eight community
shopping centers in Texas, Florida and Arizona for an aggregate
purchase price of approximately $74,000,000. The Company intends to
finance the purchase and retire certain existing debt with the
proceeds of a financing package. There is no assurance that the
financing can be obtained or that the acquisitions can be completed.
F-23
<PAGE> 124
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
COST GROSS AMOUNTS OF WHICH
DESCRIPTION INITIAL COST CAPITALIZED CARRIED AT CLOSE OF PERIOD
- ------------------------------------ --------------------------- SUBSEQUENT TO --------------------------
BUILDINGS AND ACQUISITION - BUILDINGS AND
PROPERTY LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
Shopping centers:
Autobahn San Antonio, TX $ 1,271,592 $ 515,205 $ 1,726,150 $ 26,635 $ 515,205 $ 1,752,785
Bandera San Antonio, TX 7,957,094 2,350,000 8,759,593 476,513 2,350,000 9,236,106
Centennial Austin, TX 3,811,685 1,400,000 3,527,909 428,862 1,400,000 3,956,771
El Campo El Campo, TX 1,591,276 360,000 1,640,350 43,099 360,000 1,683,449
McMinn Athens, TN 1,254,327 513,912 2,170,052 28,206 513,912 2,198,258
Park Northern Phoenix, AZ 2,800,000 0 4,410,691 0 0 4,410,691
Twin Lakes Lenoir City, TN 1,824,213 860,706 3,040,000 (31,094) 860,706 3,008,906
University Park College Station, TX 4,874,155 1,842,331 4,955,490 6,750 1,842,331 4,962,240
Undeveloped land:
University Park College Station, TX 206,250 276,569 0 0 276,569 0
----------- ----------- ----------- ----------- ----------- -----------
Totals $25,590,592 $ 8,118,723 $30,230,235 $ 978,971 $ 8,118,723 $31,209,206
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DESCRIPTION
- ------------------------------------
ACCUMULATED DATE OF DATE
PROPERTY LOCATION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
<S> <C> <C> <C> <C> <C>
Shopping centers:
Autobahn San Antonio, TX $ 2,267,990 $ 365,974 1984 1990
Bandera San Antonio, TX 11,586,106 1,230,559 1988 1992
Centennial Austin, TX 5,356,771 757,861 1970 1991
El Campo El Campo, TX 2,043,449 29,494 1985 1996
McMinn Athens, TN 2,712,170 281,760 1982 1994
Park Northern Phoenix, AZ 4,410,691 12,252 1982 1998
Twin Lakes Lenoir City, TN 3,869,612 628,320 1988 1995
University Park College Station, TX 6,804,571 461,500 1991 1993
Undeveloped land:
University Park College Station, TX 276,569 0 1991
----------- ----------
Totals $39,327,929 $3,767,720
=========== ==========
</TABLE>
F-24
<PAGE> 125
NOTES TO SCHEDULE III
(a) Initial cost for acquired property is cost at acquisition.
(b) The aggregate gross cost of land, buildings and improvements for
federal income tax and book purposes is substantially the same.
(c)
<TABLE>
<CAPTION>
RECONCILIATION OF REAL ESTATE
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 34,166,161 $ 33,852,975 $ 29,349,299
Additions - improvements 6,871,735 390,451 4,503,676
Deductions (1,709,967) (77,265)
-------------- -------------- --------------
Balance at end of year $ 39,327,929 $ 34,166,161 $ 33,852,975
============== ============== ==============
RECONCILIATION OF ACCUMULATED DEPRECIATION
1996 1995 1994
Balance at beginning of year $ 2,988,030 $ 2,085,650 $ 1,358,461
Depreciation expense 886,173 902,380 727,189
Deductions (106,483)
-------------- -------------- --------------
Balance at end of year $ 3,767,720 $ 2,988,030 $ 2,085,650
============== ============== ==============
</TABLE>
(d) See description of mortgage notes payable in Note 3 to consolidated
financial statements.
(e) Depreciation is computed based upon the following estimated lives:
Buildings 30 - 40 years
Improvements 5 - 10 years
F-25
<PAGE> 126
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION:
The unaudited pro forma condensed consolidated balance sheet as of September 30,
1997 is presented as if the Acquisition Transactions, the Offering, and the
application of the net proceeds of the Offering all had occurred on September
30, 1997. The pro forma condensed combined statements of operations for the nine
months ended September 30, 1997 and the year ended December 31, 1996 are
presented as if the such transactions all had occurred on January 1, 1996.
The pro forma condensed combined financial statements should be read in
conjunction with the consolidated financial statements of United Investors
Realty Trust ("UIRT"), including the notes thereto, included elsewhere in the
Prospectus. The pro forma condensed combined financial statements do not purport
to represent the Company's financial position as of September 30, 1997 or the
results of operations for the nine months ended September 30, 1997 or for the
year ended December 31, 1996 that would actually have occurred had such
transactions all been completed on September 30, 1997 or at the beginning of the
period presented, or to project the Company's financial position or results of
operations as of any future date or for any future period.
F-26
<PAGE> 127
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO-FORMA
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
ASSETS UNITED INVESTORS PRO-FORMA TOTAL
REALTY TRUST ADJUSTMENTS PRO-FORMA
<S> <C> <C> <C>
Investment real estate:
Land $ 8,118,723 $ 10,933,500 (A) $ 19,052,223
Buildings and improvements 31,553,011 61,782,470 (A) 93,773,062
437,581 (B)
------------- ------------- -------------
39,671,734 73,153,551 112,825,285
Less accumulated depreciation (4,580,372) -- (4,580,372)
------------- ------------- -------------
Investment real estate, net 35,091,362 73,153,551 108,244,913
Cash and cash equivalents 256,483 (48,585,155)(A) 4,501,614
(2,023,000)(B)
74,376,536 (C)
(1,068,226)(D)
(950,000)(E)
(212,400)(F)
(16,243,067)(G)
(1,049,557)(H)
Accounts receivable, net 768,765 768,765
Prepaid expenses and other assets 676,436 676,436
------------- ------------- -------------
Total assets $ 36,793,046 $ 77,640,581 $ 114,191,728
============= ============= =============
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 25,117,007 $ 24,130,815 (A) $ 33,246,627
Redeemable convertible subordinated notes 212,400 (16,001,195)(G) --
Short-term notes and lines of credit 950,000 (212,400)(F) --
Accounts payable and accrued expenses 835,684 (950,000)(E) 835,684
Security deposits 107,651 107,651
------------- ------------- -------------
Total liabilities 27,222,742 6,967,220 34,189,962
------------- ------------- -------------
Minority interest in real estate joint ventures 1,585,419 (1,585,419)(B) --
------------- ------------- -------------
Redeemable preferred shares of beneficial interest,
$100 par value, 20,000 shares authorized,
10,737 shares issued and outstanding at
September 30, 1997 1,068,226 (1,068,226)(D) --
------------- ------------- -------------
Common shareholders' equity:
Common shares of beneficial interest, no par
value, 20,000,000 shares authorized, 837,489
shares issued and outstanding at September 30, 806,250 (I)
1997 7,527,577 74,376,536 (C) 82,710,363
Accumulated deficit (610,918) (1,049,557)(H) (2,708,597)
(241,872)(G)
(806,250)(I)
------------- ------------- -------------
Total common shareholders' equity 6,916,659 73,327,006 80,001,766
------------- ------------- -------------
Total liabilities, minority interest,
redeemable preferred shares and common
shareholders' equity $ 36,793,046 $ 77,640,581 $ 114,191,728
============= ============= =============
</TABLE>
F-27
<PAGE> 128
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
AUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the nine months ended September 30, 1997
<TABLE>
<CAPTION>
UNITED INVESTORS PRO FORMA TOTAL
REALTY TRUST ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Revenues:
Base rents $ 3,706,057 6,118,757(J) $ 9,824,814
Percentage rents 19,800 245,541(J) 265,341
Expense reimbursements 873,054 2,028,301(J) 2,901,355
Interest and other income 20,870 6,164(J) 27,034
----------- ----------- -----------
Total revenues 4,619,781 8,398,763 13,018,544
----------- ----------- -----------
Expenses:
Operating and maintenance 556,975 1,164,412(J) 1,721,387
Real estate taxes 565,698 1,120,634(J) 1,686,332
General and administrative 347,520 98,661(J) 446,181
Advisory fees 234,000 385,000(L) 619,000
Interest 1,825,810 162,641(O) 1,988,451
Depreciation and amortization 870,972 1,600,000(J) 2,470,972
----------- ----------- -----------
Total expenses 4,400,975 4,531,348 8,932,323
----------- ----------- -----------
Income before minority interest and preferred share
dividend requirements 218,806 3,867,415 4,086,221
Minority interest in net income of real estate
ventures (38,482) 38,482(M) --
----------- ----------- -----------
Income before preferred share dividend requirements
180,324 3,905,897 4,086,221
Preferred share dividend requirements (72,474) 72,474(N) --
----------- ----------- -----------
Net income available for common shareholders $ 107,850 $ 3,978,371 $ 4,086,221
=========== =========== ===========
Net income per common share $ 0.13 $ 0.49
=========== ===========
Weighted average shares outstanding 837,489 8,412,489
=========== ===========
</TABLE>
F-28
<PAGE> 129
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
AUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<CAPTION>
UNITED INVESTORS PRO FORMA TOTAL
REALTY TRUST ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Revenues:
Base rents $ 4,097,911 7,607,868(J) $11,705,779
Percentage rents 32,822 259,915(J) 292,737
Expense reimbursements 835,940 2,468,371(J) 3,304,311
Interest and other income 67,409 34,952(J) 102,361
----------- ----------- -----------
Total revenues 5,034,082 10,371,106 15,405,188
----------- ----------- -----------
Expenses:
Operating and maintenance 582,481 1,526,073(J) 2,108,554
Real estate taxes 558,000 1,427,226(J) 1,985,226
Advisory fees 279,000 333,000(J) 612,000
General and administrative 224,164 137,403(L) 361,567
Interest 2,132,390 168,120(O) 2,300,510
Depreciation and amortization 958,778 2,050,000(J) 3,008,778
----------- ----------- -----------
Total expenses 4,734,813 5,641,822 10,376,635
----------- ----------- -----------
Income before minority interest and preferred share
dividend requirements 299,269 4,729,284 5,028,553
Minority interest in net income of real estate
ventures (51,941) 51,941(M) --
----------- ----------- -----------
Income before preferred share dividend requirements
247,328 4,781,225 5,028,553
Preferred share dividend requirements (96,296) 96,296(N) --
----------- ----------- -----------
Net income available for common shareholders $ 151,032 4,877,521 $ 5,028,553
=========== =========== ===========
Net income per common share $ 0.18 $ 0.60
=========== ===========
Weighted average shares outstanding 834,656 8,412,489
=========== ===========
</TABLE>
F-29
<PAGE> 130
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The pro forma adjustments to the Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 1997 are as follows:
<TABLE>
<S> <C>
(A) Acquisition of Acquisition Properties (land) $ 10,933,500
Acquisition of Acquisition Properties (improvements) 61,782,470
------------
$ 72,715,970
============
Cash $ 48,585,155
Mortgage notes payable 24,130,815
------------
$ 72,715,970
============
(B) Acquisition of property from minority interests $ 437,581
============
Minority interest 1,585,419
Cash (2,023,000)
------------
$ 437,581
============
(C) Sale of $7,500,000 shares of beneficial interest $ 80,625,000
Costs associated with sale of shares (6,248,437)
------------
$ 74,376,563
============
(D) Redeem preferred shares $ 1,068,226
============
(E) Repay short term notes $ 950,000
============
(F) Redeem convertible subordinated notes $ 212,400
============
(G) Repay existing mortgage notes $ 16,001,195
Pay prepayment fees 241,872
------------
$16,243,067
============
Cash $16,243,067
============
(H) Pay bridge loan financing fee $ 1,049,557
============
(I) Grant 75,000 shares to certain management at $10.75/share $ 806,250
============
</TABLE>
F-30
<PAGE> 131
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The pro forma adjustments to the Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended September 30, 1997 and the year ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
<S> <C> <C>
J) Acquisition of Acquisition Properties:
Base rents 7,607,868 6,118,757
Percentage rents 259,915 245,541
Expense reimbursements 2,468,371 2,028,301
Operating and maintenance 1,526,073 1,164,412
Real estate taxes 1,427,226 1,120,674
General and administrative 137,403 98,661
Depreciation and amortization 1,630,000 1,600,000
Interest expense 1,976,494 1,513,273
Other income 34,952 6,164
K) Decrease in interest expense related to repayment
of mortgage debt and lines of credit 1,973,374 1,474,382
L) Increase in Advisory Fees related to revenue from
Acquisition Properties and amendment of advisory
agreement 333,000 385,000
M) Decrease in minority interest in earnings of
consolidated partnerships 51,941 38,482
N) Decrease in preferred dividends related to
redemption of preferred shares 96,296 72,474
</TABLE>
F-31
<PAGE> 132
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
O) Interest expense
Net pro forma adjustment to interest expense is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
<S> <C> <C>
Decrease in interest related to mortgage and
other loans to be prepaid (see entry C above) $ (1,808,374) $(1,350,632)
Interest on mortgage loans to be assumed 1,976,494 1,513,273
-------------------------------
Total pro forma adjustment $ 168,120 $ 162,641
</TABLE>
F-32
<PAGE> 133
UNITED INVESTORS REALTY TRUST, INC.
COMBINING SCHEDULE OF REVENUE AND CERTAIN EXPENSES OF THE ACQUISITION PROPERTIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
BENCHMARK HEDWIG MARKET AT MASON ROSEMEADE SOUTHWEST TOWN 'N UNIVERSITY
CROSSING CENTERS FIRST COLONY PARK PARK WALGREENS COUNTRY MALL TOTAL
--------- ------- ------------ ---- ---- ---------- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rent $509,996 $591,163 $982,033 $1,254,804 $383,563 $408,665 $497,641 $1,490,892 $6,118,757
Percentage rent - - - 39,571 - 11,116 93,669 101,185 245,541
Recoveries from tenants 156,540 169,979 317,698 523,246 128,252 148,707 76,209 507,670 2,028,301
Other 100 - - - 3,030 213 1,558 1,263 6,164
---------------------------------------------------------------------------------------------------------
666,636 761,142 1,299,731 1,817,621 514,845 568,701 669,077 2,101,010 8,398,763
---------------------------------------------------------------------------------------------------------
Certain expenses:
Interest 258,499 289,943 - - 115,694 - - 849,137 1,513,273
Property taxes 95,686 110,041 145,348 299,414 65,823 88,115 72,953 243,254 1,120,634
Property operating 95,244 97,501 198,929 223,908 78,293 69,939 128,244 251,446 1,143,504
G & A 2,282 2,164 3,398 35,771 7,495 15,463 14,677 17,411 98,661
Other - - - 20,415 - - - 493 20,908
---------------------------------------------------------------------------------------------------------
451,711 499,649 347,675 579,508 267,305 173,517 215,874 1,361,741 3,896,980
---------------------------------------------------------------------------------------------------------
Revenues in excess of
certain expenses $214,925 $261,493 $952,056 $1,238,113 $247,540 $395,184 $453,203 $739,269 $4,501,783
=========================================================================================================
</TABLE>
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1996 (1)
(AUDITED)
<CAPTION>
BENCHMARK HEDWIG MARKET AT MASON ROSEMEADE SOUTHWEST TOWN 'N UNIVERSITY
CROSSING CENTERS FIRST COLONY PARK PARK WALGREENS COUNTRY MALL TOTAL
-------- ------- ------------ ---- ---- --------- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rent $679,995 $767,442 $1,283,936 $1,618,725 $571,279 $528,565 $552,256 $1,605,670 $7,607,868
Percentage rent - - - 52,200 - 8,717 102,374 96,624 259,915
Recoveries from tenants 187,186 191,662 381,322 599,704 124,144 223,018 100,685 657,629 2,468,371
Other - 492 3,021 2,194 (1,066) 674 1,858 30,800 34,952
------------------------------------------------------------------------------------------------------
867,181 959,596 1,668,279 2,272,823 694,357 760,974 757,173 2,390,723 10,371,106
------------------------------------------------------------------------------------------------------
Certain expenses:
Interest 348,210 389,101 - - 155,046 - - 1,084,137 1,976,494
Operating and Maintenance 112,989 125,303 260,232 274,255 117,455 97,629 150,393 386,980 1,526,073
Real Estate Taxes 119,938 130,837 193,843 364,821 87,765 104,893 96,997 328,132 1,427,226
G & A 2,777 10,144 16,306 35,367 20,708 9,406 26,942 28,650 149,464
Other - - 836 (13,522) - - 625 - (12,061)
------------------------------------------------------------------------------------------------------
583,914 655,386 471,217 660,921 380,974 211,928 274,957 1,827,899 5,067,196
------------------------------------------------------------------------------------------------------
Revenues in excess of
certain expenses $283,267 $304,210 $1,197,062 $1,611,902 $313,383 $549,046 $482,216 $562,824 $5,303,910
======================================================================================================
</TABLE>
F-33
<PAGE> 134
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
Benchmark Crossing for the year ended December 31, 1996. This statement is the
responsibility of the seller's management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form
S-11 of United Investors Realty Trust, as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Benchmark Crossing's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Benchmark Crossing for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-34
<PAGE> 135
BENCHMARK CROSSING
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $ 679,995
Recoveries from tenants 187,186
----------
867,181
----------
Certain expenses:
Interest (Note 3) 348,210
Property taxes 119,938
Property operating 62,385
Management fees 50,604
General and administrative 2,777
----------
583,914
----------
Revenue in excess of certain expenses $ 283,267
==========
</TABLE>
See accompanying notes.
F-35
<PAGE> 136
BENCHMARK CROSSING
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Benchmark Crossing (the "Property"), a
58,341-square-foot shopping center located in Houston, Texas.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Benchmark
Crossing for the year ended December 31, 1996 due to the exclusion of
the following expenses, which may not be comparable to the proposed
future operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future
operations of the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-36
<PAGE> 137
3. Mortgage Note Payable
A loan in the amount of $3,672,501, secured by a first trust deed and
an assignment of rents, was executed by the current owners of the
Property on September 1, 1995. United Investors Realty Trust intends
to assume the loan as part of its acquisition of the Property. The loan
bears interest at an annual rate of 9.25% with principal and interest
payments of $32,543 due monthly through July 1, 2005, at which time the
outstanding principal balance (expected to be approximately $2,884,649
and any accrued interest thereon is due. The principal balance of the
loan at December 31, 1996 was $3,605,453.
4. RENT REVENUE
The Property consists of five separate buildings. The anchor tenant,
Bally's Total Fitness, leases a two-story building built in 1986,
consisting of 40,966 square feet. Click's Billiards and the
International House of Pancakes are single-story buildings built in
1994, consisting of 7,000 square feet and 4,543 square feet,
respectively. Burger King and Jack in the Box are single-story
buildings built in 1990 and 1986, respectively. All parking lots are
constructed of concrete.
Retail space is leased to tenants under various operating leases with
terms ranging from 10 to 20 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $-0-.
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $659,488
1998 663,571
1999 672,271
2000 676,646
2001 699,461
Thereafter 4,678,040
----------
$8,049,477
==========
</TABLE>
F-37
<PAGE> 138
Notes to Statement of Revenue and Certain Expenses, (contined)
5. Concentration of Risk
At December 31, 1996, 5 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Click's Billiards No. 20 11.9%
IHOP 7.8%
Presidents First Lady 70.2%
Jack-in-the-Box 3.3%
Burger King 4.8%
</TABLE>
F-38
<PAGE> 139
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
Hedwig Centers for the year ended December 31, 1996. This statement is the
responsibility of the seller's management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form
S-11 of United Investors Realty Trust, as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Hedwig Centers' revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all material
respects, the revenue and certain expenses, as described in Note 1, of Hedwig
Centers for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-39
<PAGE> 140
HEDWIG CENTERS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $ 767,442
Recoveries from tenants 191,661
Other 492
----------
959,595
----------
Certain expenses:
Interest (Note 3) 389,101
Property taxes 130,837
Property operating 68,354
Management fees 56,949
General and Administrative 10,144
----------
655,385
----------
Revenue in excess of certain expenses $ 304,210
==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 141
HEDWIG CENTERS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Hedwig Centers (the "Property"), a 69,554-square-foot
shopping center located within Hedwig Village, an independent
municipality surrounded by Houston, Texas.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Hedwig Centers
for the year ended December 31, 1996 due to the exclusion of the
following expenses, which may not be comparable to the proposed future
operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future
operations of the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-41
<PAGE> 142
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. MORTGAGE NOTE PAYABLE
A loan in the amount of $3,700,000, secured by a first trust deed and
an assignment of rents, was executed by the current owners of the
Property on June 10, 1992. United Investors Realty Trust intends to
assume the loan as part of its acquisition of the Property. The loan
bears interest at an annual rate of 10.75% with principal and interest
payments of $34,546 due monthly through 6-10-99, at which time the
outstanding principal balance (expected to be approximately $3,537,946)
and any accrued interest thereon is due. The principal balance of the
loan at December 31, 1996 was $3,605,530.
4. RENT REVENUE
The Property is adjacent to and complemented by Target and Marshall's
department stores, which are owned by a third party. The center has 11
tenants ranging in size from 1,050 square feet to 27,000 square feet.
The center is anchored by Ross Dress For Less (27,000 square feet) and
Blockbuster Music (13,664 square feet). Ross's lease expires March 31,
2010 and Blockbuster's lease expires July 31, 2000. The center is
approximately 98% occupied.
Retail space is leased to tenants under various operating leases with
terms ranging from 3 to 20 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $-0-.
F-42
<PAGE> 143
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
4. RENT REVENUE (CONTINUED)
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 759,674
1998 592,543
1999 575,348
2000 494,689
2001 272,206
Thereafter 2,116,305
------------
$ 4,810,765
============
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1996, 3 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Eye Masters 9.5%
Ross Dress for Less 38.8%
Blockbuster Music 19.7%
</TABLE>
F-43
<PAGE> 144
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
Market at First Colony for the year ended December 31, 1996. This statement is
the responsibility of the seller's management. Our responsibility is to express
an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form
S-11 of United Investors Realty Trust, as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Market at First Colony's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Market at First Colony for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-44
<PAGE> 145
MARKET AT FIRST COLONY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $ 1,283,936
Recoveries from tenants 381,322
Other 3,021
-------------
1,668,279
-------------
Certain expenses:
Property taxes 193,843
Property operating 153,843
Management fees 106,389
General and administrative fees 16,306
Other 836
-------------
471,217
-------------
Revenue in excess of certain expenses $ 1,197,062
=============
</TABLE>
See accompanying notes.
F-45
<PAGE> 146
MARKET AT FIRST COLONY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Market at First Colony (the "Property"), a
94,241-square-foot shopping center located in Houston, Texas.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Market at First
Colony for the year ended December 31, 1996 due to the exclusion of
the following expenses, which may not be comparable to the proposed
future operations of the Property:
Depreciation and amortization
Interest on mortgage not to be assumed by the Owner
Federal and state income taxes
Other costs not directly related to the proposed future operations of
the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-46
<PAGE> 147
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. RENT REVENUE
The Property is adjacent to and complemented by a 62,000-square-foot
Kroger Supermarket, which is owned by a third party. Taco Bell is a
freestanding building within the shopping center which the Company is
acquiring. Stop N Go, World Savings, Burger King, McDonalds,
Applebee's and Kentucky Fried Chicken are situated on outparcels and
are owned by third parties. The center has 31 tenants ranging in size
from 825 square feet to 25,200 square feet. The center is anchored by
TJ Maxx (25,200 square feet), an off-price apparel store, and Eckerd
Drugs (8,640 square feet). TJ Maxx's lease expires April 30, 2002,
and Eckerd's lease expires March 31, 2014. The center is approximately
98% occupied.
Retail space is leased to tenants under various operating leases with
terms ranging from 3 to 20 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $-0-.
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 1,314,432
1998 1,182,279
1999 954,778
2000 724,592
2001 467,397
Thereafter 2,387,383
------------
$ 7,030,861
============
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1996, 1 tenant individually accounted for more than
10% of total revenue. Percentage GLA for this tenant for the year
ended December 31, 1996 was as follows:
TJ Maxx 26.7%
F-47
<PAGE> 148
MASON PARK
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996 (unaudited)
<TABLE>
<S> <C>
Revenue:
Rent $ 1,670,925
Recoveries from tenants 599,704
Other 2,194
------------
2,272,823
------------
Certain expenses:
Property taxes 364,821
Property operating 198,712
Management fees 75,543
General and administrative 35,367
Other (13,522)
------------
660,921
------------
Revenue in excess of certain expenses $ 1,611,902
============
</TABLE>
See accompanying notes.
F-48
<PAGE> 149
MASON PARK
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Mason Park (the "Property"), a 160,047-square-foot
shopping center located in Houston, Texas.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Mason Park for
the year ended December 31, 1996 due to the exclusion of the following
expenses, which may not be comparable to the proposed future
operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future
operations of the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-49
<PAGE> 150
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. RENT REVENUE
The shopping center is adjacent to and complemented by a
58,800-square-foot Kroger Supermarket, which is owned by a third
party. Scholtzky's is a freestanding building within the shopping
center which the Company is acquiring. World Savings and an Exxon
Service Station are situated on outparcels and are owned by third
parties. The center has 33 tenants ranging in size from 997 square
feet to 29,922 square feet. The center is anchored by Palais Royal
(29,922 square feet), a woman's apparel store; Cinemark Cinema (28,750
square feet), an eight-screen, first-run theater; Petco (13,973 square
feet), an upscale pet supply store, and Walgreens Drug store (10,998
square feet). Palais Royal's, Cinemark's, Petco's and Walgreens leases
expire January 31, 2006; January 1, 2000; January 31, 2005 and October
31, 2015, respectively. The center is 93% occupied.
Retail space is leased to tenants under various operating leases with
terms ranging from 5 to 30 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $52,200.
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $1,570,624
1998 1,642,465
1999 1,520,462
2000 1,060,074
2001 820,016
Thereafter 3,641,550
-----------
$10,255,191
===========
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1996, 2 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Cinemark Cinema 8 17.9%
Palais Royal 18.7%
</TABLE>
F-50
<PAGE> 151
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
Rosemeade Park for the year ended December 31, 1996. This statement is the
responsibility of the seller's management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of United Investors Realty Trust, as described in Note 1 to the statement of
revenue and certain expenses. It is not intended to be a complete presentation
of Rosemeade Park's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Rosemeade Park for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-51
<PAGE> 152
ROSEMEADE PARK
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $ 571,279
Recoveries from tenants 124,144
Other (1,066)
----------
694,357
----------
Certain expenses:
Interest (Note 3) 155,046
Property taxes 87,765
Property operating 87,916
Management fees 29,539
General and administrative 20,708
----------
380,974
----------
Revenue in excess of certain expenses $ 313,383
==========
</TABLE>
See accompanying notes.
F-52
<PAGE> 153
ROSEMEADE PARK
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Rosemeade Park (the "Property"), a
49,554-square-foot shopping center located in Carrollton, Texas.
United Investors Realty Trust entered into a contract to acquire this
Property.
The accompany statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Rosemeade Park
for the year ended December 31, 1996 due to the exclusion of the
following expenses, which may not be comparable to the proposed future
operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future
operations of the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-53
<PAGE> 154
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. MORTGAGE NOTE PAYABLE
A loan in the amount of $3,500,000, secured by a first trust deed and
an assignment of rents, was executed by the current owners of the
Property on November 10, 1997. United Investors Realty Trust intends
to assume the loan as part of its acquisition of the Property. The
loan bears interest at an annual rate of 8.30% with principal and
interest payments of $27,980 due monthly through January 1, 2008, at
which time the outstanding principal balance (expected to be
approximately $2,856,302) and any accrued interest thereon is due.
4. RENT REVENUE
The Property has 17 tenants ranging in size from 1,200 square feet to
13,000 square feet. Additionally, the shopping center leases the land
on the corner of the shopping center to Mobil Oil for a service
station. The center is anchored by Cosmopolitan Lady (13,000 square
feet), a health club, and Blockbuster Video (6,194 square feet).
Cosmopolitan Lady's lease expires July 31, 2007 and Blockbuster
recently renewed its lease through March 31, 2003. The center is
approximately 87% occupied.
Retail space is leased to tenants under various operating leases with
terms ranging from 2 to 15 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $0.
F-54
<PAGE> 155
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
4. RENT REVENUE (CONTINUED)
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 513,061
1998 495,103
1999 440,489
2000 368,274
2001 338,113
Thereafter 1,165,473
-----------
$ 3,320,513
===========
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1996, 3 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Cosmopolitan Lady 26.2%
Blockbuster Video 12.5%
Mobil Oil Corporation 0.0%
</TABLE>
F-55
<PAGE> 156
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
Southwest Walgreens for the year ended December 31, 1996. This statement is the
responsibility of the seller's management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form
S-11 of United Investors Realty Trust, as described in Note 1 to the statement
of revenue and certain expenses. It is not intended to be a complete
presentation of Southwest Walgreens revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Southwest Walgreens for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-56
<PAGE> 157
SOUTHWEST WALGREENS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $ 537,282
Recoveries from tenants 223,018
Other 674
----------
760,974
----------
Certain expenses:
Property taxes 104,893
Property operating 97,629
Management fees -
General and administrative 9,406
----------
211,928
----------
Revenues in excess of certain expenses $ 549,046
==========
</TABLE>
See accompanying notes.
F-57
<PAGE> 158
SOUTHWEST WALGREENS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Southwest Walgreens (the "Property"), an
83,698-square-foot shopping center located in Phoenix, Arizona.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Southwest
Walgreens for the year ended December 31, 1996 due to the exclusion of
the following expenses, which may not be comparable to the proposed
future operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future operations of
the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-58
<PAGE> 159
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. RENT REVENUE
The Property is occupied by 19 tenants ranging in size from 968 square
feet to 27,064 square feet. The shopping center is anchored by
Southwest Supermarket (27,064 square feet) and Walgreens (16,000 square
feet). Southwest Supermarket is a 38-store chain owned by the New York
investment firm of Kohlberg & Company. Southwest Supermarket's lease
expires May 31, 2000 and Walgreens lease expires January 31, 2000. The
shopping center is 100% occupied.
Retail space is leased to tenants under various operating leases with
terms ranging from 3 to 25 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $87,714.
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 472,747
1998 410,041
1999 352,236
2000 197,307
2001 54,670
Thereafter --
------------
$ 1,487,001
============
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1996, 3 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Southwest Supermarkets 32.3%
Walgreens 19.1%
Renal West 7.2%
</TABLE>
F-59
<PAGE> 160
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
Town 'N Country for the year ended December 31, 1996. This statement is the
responsibility of the seller's management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of United Investors Realty Trust, as described in Note 1 to the statement of
revenue and certain expenses. It is not intended to be a complete presentation
of Town 'N Country's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
Town 'N Country for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-60
<PAGE> 161
TOWN 'N COUNTRY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $ 654,630
Recoveries from tenants 100,685
Other 1,858
----------
757,173
----------
Certain expenses:
Property taxes 96,997
Property operating 130,480
Management fees 19,913
General and administrative 26,942
Other 625
----------
274,957
----------
Revenues in excess of certain expenses $ 482,216
==========
</TABLE>
See accompanying notes.
F-61
<PAGE> 162
TOWN 'N COUNTRY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of Town 'N Country (the "Property"), a
157,704-square-foot shopping center located in Tampa, Florida.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of Town 'N Country
for the year ended December 31, 1996 due to the exclusion of the
following expenses, which may not be comparable to the proposed future
operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future operations
of the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-62
<PAGE> 163
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. RENT REVENUE
The Property has 15 tenants ranging in size from 700 square feet to
50,000 square feet. Additionally, separate buildings are leased to
Checkers, a fast food restaurant, and to NationsBank for an ATM.
Kentucky Fried Chicken is located on a ground lease parcel and owned
by a third party. The shopping center is anchored by Big Lots (30,000
square feet) and T J Maxx (24,320 square feet), a clothing store.
Holiday Wonderland occupied 50,000 square feet, but is not considered
an anchor tenant because it may not be considered a credit tenant. Big
Lot's lease expires January 31, 2002, and T J Maxx's lease expires
October 31, 1999. The shopping center is 100% occupied.
Retail space is leased to tenants under various operating leases with
terms ranging from 2 to 10 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $102,374.
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 636,125
1998 630,350
1999 548,088
2000 425,372
2001 412,872
Thereafter 282,531
------------
$ 2,935,338
============
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1996, 2 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
T J Maxx 15.4%
Big Lots 19.0%
</TABLE>
F-63
<PAGE> 164
Report of Independent Auditors
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses of
University Mall for the year ended December 31, 1996. This statement is the
responsibility of the seller's management. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission and for inclusion in the registration statement on Form S-11
of United Investors Realty Trust, as described in Note 1 to the statement of
revenue and certain expenses. It is not intended to be a complete presentation
of University Mall's revenue and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenue and certain expenses, as described in Note 1, of
University Mall for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
December 17, 1997
F-64
<PAGE> 165
UNIVERSITY MALL
STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
<TABLE>
<S> <C>
Revenue:
Rent $1,702,294
Recoveries from tenants 657,629
Other 30,800
----------
2,390,723
----------
Certain expenses:
Interest (Note 3) 1,084,137
Property taxes 328,132
Property operating 362,980
Management fees 24,000
General and administrative 28,650
----------
1,827,899
----------
Revenues in excess of certain expenses $ 562,824
==========
</TABLE>
See accompanying notes.
F-65
<PAGE> 166
UNIVERSITY MALL
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
for the year ended December 31, 1996
1. BASIS OF PRESENTATION:
The accompanying statement of revenue and certain expenses relates to
the operations of University Mall (the "Property"), a
315,596-square-foot shopping center located in Pembroke Pines,
Florida.
United Investors Realty Trust entered into a contract to acquire this
property.
The accompanying statement of revenue and certain expenses has been
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission and, accordingly, is not
representative of the actual results of operations of University Mall
for the year ended December 31, 1996 due to the exclusion of the
following expenses, which may not be comparable to the proposed future
operations of the Property:
o Depreciation and amortization
o Interest on mortgage not to be assumed by the Owner
o Federal and state income taxes
o Other costs not directly related to the proposed future
operations of the Property
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of
the individual leases.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting and disclosure of revenue and certain expenses during
the reporting period to prepare the statement of revenue and certain
expenses in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
F-66
<PAGE> 167
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
3. MORTGAGE NOTE PAYABLE
A loan in the amount of $13,450,000, secured by a first trust deed and
an assignment of rents, was executed by the current owners of the
Property as of December 31, 1996. United Investors Realty Trust intends
to assume the loan as part of its acquisition of the Property. The loan
bears interest at an annual rate of 8.44% with principal and interest
payments of $102,847 due monthly through November 1, 2006, at which
time the outstanding principal balance (expected to be approximately
$12,025,317) and any accrued interest thereon is due. The principal
balance of the loan at December 31, 1996 was $13,450,000.
4. RENT REVENUE
The Property has 33 tenants ranging in size from 750 square feet to
91,500 square feet. Additionally, separate buildings are leased to TGI
Fridays, WAG's, Taco Bell and a Federal Express kiosk. Also, Pollo
Tropical and Red Lobster are situated on outparcels and are owned by
third parties. University Mall is anchored by Upton's (91,500 square
feet), whose lease expires December 1, 2002; Sports Authority (42,00
square feet), whose lease expires April 30, 2012; Ross Stores (25,920
square feet), whose lease expires January 31, 2001; OfficeMax (23,500
square feet), whose lease expires January 31, 2003, and Eckerd Drugs
(12,000 square feet), whose lease expires December 31, 2002.
Additionally, 46,246 square feet in the rear of the shopping center is
leased to University Self Storage, a climate-controlled, self-storage
facility, and the lease expires December 12, 2007. The shopping
center is approximately 98% leased.
F-67
<PAGE> 168
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES, (CONTINUED)
4. RENT REVENUE (CONTINUED)
Retail space is leased to tenants under various operating leases with
terms ranging from 5 to 30 years. The leases generally provide for
minimum rent and reimbursement of real estate taxes, common area
maintenance and certain other operating expenses. Certain leases also
contain provisions for percentage rent. Percentage rent earned for the
year ended December 31, 1996 was $96,624.
Future minimum rentals to be received under noncancelable operating
leases in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1997 $ 1,994,883
1998 1,960,369
1999 1,859,759
2000 1,603,267
2001 1,265,075
Thereafter 4,579,199
------------
$ 13,262,552
============
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1996, 3 tenants individually accounted for more than
10% of total revenue. Percentage GLA for these tenants for the year
ended December 31, 1996 were as follows:
<TABLE>
<S> <C>
Ross Stores 8.7%
Uptons 30.5%
Sports Authority 12.7%
</TABLE>
F-68
<PAGE> 169
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company, the Company's Investment Manager or any of the
Underwriters. This Prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
an offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Selected Pro Forma and Historical Financial
and Properties Information . . . . . . . . . . . . . . . . . . . . . . 28
Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . . . . . . . . 30
Strategy for Future Growth . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Policies with Respect to Certain Activities . . . . . . . . . . . . . . . . . . 66
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Certain Relationships and Transactions . . . . . . . . . . . . . . . . . . . . 75
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Description of Shares of Beneficial Interest . . . . . . . . . . . . . . . . . 78
Certain Provisions of the Texas REIT Act and of
the Company's Charter and Bylaws . . . . . . . . . . . . . . . . . . . . 80
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . . . . . . 82
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . 83
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
Until , 1998 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
7,500,000 SHARES
UNITED INVESTORS
REALTY TRUST
COMMON SHARES OF
BENEFICIAL INTEREST
--------------------
PROSPECTUS
--------------------
MORGAN KEEGAN & COMPANY, INC.
SOUTHWEST SECURITIES, INC.
, 1998
<PAGE> 170
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the offering of the Common Shares being registered. All of the
amounts shown are estimates except the Securities and Exchange Commission
registration fee, the NASD fee and the New York Stock Exchange listing fee.
<TABLE>
<CAPTION>
Item Amount
- ---- --------
<S> <C>
Registration Fee - Securities and Exchange Commission $27,352
NASD Fee 9,771
New York Stock Exchange Listing Fee
Transfer Agent's and Registrar's Fees
Printing and Engraving Fees
Legal Fees and Expenses (other than Blue Sky)
Accounting Fees and Expenses
Blue Sky Fees and Expenses (including fees of counsel)
Miscellaneous Expenses
--------
TOTAL
$
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On December 31, 1996, the Company issued 692 Common Shares to Fulcrum
Property Group, Inc., which manages and acts as leasing agent for Autobahn
Shopping Center and Bandera Festival Shopping Center. The shares were issued
to Fulcrum Property Group, Inc. as partial payment for its leasing commission.
Pursuant to the management agreements, the Company valued the Common Shares at
$12.00 per share, for an aggregate price of $8,304. The issuance of these
shares was effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving
a public offering.
On December 31, 1996, the Company issued 800 Common Shares to each of
Jerry M. Coleman, Josef C. Hermans and William C. Brooks (an aggregate of 2,400
Common Shares) for services provided as an independent Trust Manager during the
1996 fiscal year. The issuance of these shares was effected in reliance upon
an exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
From January 1995 through December 1997, the Company issued to 15
holders $1,150,000 of short term notes. The issuance of these notes was
effected in reliance upon an exemption from registration under Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering.
During 1995, the Company issued to 34 holders an aggregate of 10,737
9% Convertible Preferred Shares. Of the aggregate number of shares issued,
5,750 Preferred Shares were sold to accredited investors for $100 per share,
for a total purchase price of $575,000. The remaining 4,987 Preferred Shares
were issued in connection with the redemption of the Company's Convertible
Subordinated Notes, Series 1992, at a value of $100 per share, for an aggregate
price of $498,700. The issuance of these shares was effected in reliance upon
an exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
II-1
<PAGE> 171
ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS
Section 9.20 of the Texas Real Estate Investment Trust Act (the "Texas
REIT Act"), subject to procedures and limitations stated therein, allows the
Company to indemnify any person who was, is or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a Trust
Manager or officer against judgments, penalties (including excise and similar
taxes), fines, settlements and reasonable expenses actually incurred by the
person in connection with the proceeding. The Company is required by Section
9.20 to indemnify a Trust Manager or officer against reasonable expenses
incurred by him or her in connection with a proceeding in which he is a named
defendant or respondent because he or she is or was a Trust Manager or officer
if he or she has been wholly successful, on the merits or otherwise, in the
defense of the proceeding. Under the Texas REIT Act, Trust Managers and
officers are not entitled to indemnification if (i) the Trust Manager or
officer is found liable to the real estate investment trust or is found liable
for willful or intentional misconduct in the performance of his duty to the
real estate investment trust and (ii) the Trust Manager or officer was found
liable for willful or intentional misconduct in the performance of his or her
duty to the real estate investment trust. The statute provides that
indemnification pursuant to its provisions is not exclusive of the rights of
indemnification to which a person may be entitled under any provision of the
Amended and Restated Declaration of Trust, bylaws, agreements, or otherwise.
In addition, the Company has, pursuant to Section 15.10 of the Texas REIT Act,
provided in its Amended and Restated Declaration of Trust that, to the fullest
extent permitted by applicable law, a Trust Manager of the Company shall not be
liable for any act, omission, loss, damage or expense arising from the
performance of his or her duty under the real estate investment trust, except
for his or her own willful misfeasance, malfeasance or negligence.
The Company's Amended and Restated Declaration of Trust and Bylaws
provide for indemnification by the Company of its Trust Managers and officers
to the fullest extent permitted by the Texas REIT Act. In addition, the
Company's Bylaws provide that the Company may pay or reimburse, in advance of
final disposition of a proceeding, reasonable expenses incurred by a present or
former Trust Manager or officer made a party to a proceeding by reason of his
or her status as a Trust Manager or officer provided that (i) the Trust
Managers have consented to the advancement of expenses (which consent shall not
be unreasonably withheld) and (ii) the Company shall have received (a) a
written affirmation by the Trust Manager or officer of his or her good faith
belief that he or she has met the standard of conduct necessary for
indemnification by the Company under the Texas REIT Act and (b) a written
undertaking by or on his or her behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of
conduct was not met or it is ultimately determined that indemnification of the
Trust Manager against expenses incurred by him in connection with that
proceeding is prohibited by Section 9.20 of the Texas REIT Act.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities Act
of 1933, or to contribute to payments that the Underwriters may be required to
make in respect thereof.
ITEM 35. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995 and
September 30, 1997 (unaudited)
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994 and the nine months ended September 30, 1997
and 1996 (unaudited)
II-2
<PAGE> 172
Consolidated Statements of Redeemable Preferred Shares and Common
Shareholders' Equity for the Years Ended December 31, 1996,
1995 and 1994 and the nine months ended September 30, 1997
(unaudited)
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994 and the nine months ended September 30, 1997
(unaudited)
Notes to Consolidated Financial Statements
Schedule III. Real Estate and Accumulated Depreciation as of
December 31, 1996
Notes to Schedule III
Introduction to Pro Forma Condensed Consolidated Financial
Statements
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997
Pro Forma Condensed Consolidated Statement of Operations for the
nine months ended September 30, 1997
Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1996
Notes to Pro Forma Condensed Consolidated Financial Statements
BENCHMARK CROSSING
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
HEDWIG CENTERS
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
THE MARKET AT FIRST COLONY
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
MASON PARK
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996 (unaudited)
Notes to Statement of Revenue and Certain Expenses
ROSEMEADE PARK
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
SOUTHWEST/WALGREENS
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
TOWN 'N COUNTRY
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
UNIVERSITY MALL
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the year ended
December 31, 1996
Notes to Statement of Revenue and Certain Expenses
b. SCHEDULES TO FINANCIAL STATEMENTS
Report of Independent Accountants
Schedule II -- Valuation of Qualifying Accounts and Reserves
All other schedules are omitted or the required information is
inapplicable or the information is presented in the Company's
consolidated financial statements or related notes included in
the prospectus.
c. EXHIBITS
<TABLE>
<S> <C>
*1.1 Form of Underwriting Agreement
*3.1 First Amended and Restated Declaration of Trust
*3.2 First Amended and Restated Bylaws
4.1 Instruments defining the rights of security holders. The instruments are
filed in response to items 3.1 and 3.2 above and are incorporated herein
by reference.
4.2 Common share certificate
*5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding the
legality of the Common Shares.
*8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding tax
matters.
*10.1 First Amended and Restated Advisory Agreement between the Company and
Investment Manager
*10.2 1997 Share Incentive Plan
*10.3 Dividend Reinvestment Plan
11.1 Statement Regarding Computation of Per Share Earnings
**16.1 Letter regarding change in certifying accountant
**23.1 Consent of Ernst & Young LLP
*23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Included in
responses to Items 5.1 and 8.1.
24.1 Powers of Attorney
**27.1 Financial Data Schedule
</TABLE>
- ------------------
* To be filed by amendment.
** Filed herewith.
ITEM 37. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
representatives of the underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the representatives of the
underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE> 173
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trust Managers, officers,
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule
424(b)(1) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it
was declared effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE> 174
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, United Investors Realty Trust certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on Form S-11 and
has duly caused this Amendment No. 1 to its registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on December 18, 1997.
UNITED INVESTORS REALTY TRUST
/s/ Lewis H. Sandler
------------------------------------------
Lewis H. Sandler, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the registration statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S><C> <C> <C>
* /s/ Robert W. Scharar Chairman of the Board and December 18, 1997
------------------------------------- Trust Manager
Robert W. Scharar
/s/ Lewis H. Sandler Chief Executive Officer,
------------------------------------- (principal executive officer) December 18, 1997
Lewis H. Sandler
/s/ Daniel M. Jones, III Chief Financial Officer December 18, 1997
------------------------------------- (principal financial and
Daniel M. Jones, III accounting officer)
* /s/ William C. Brooks Trust Manager December 18, 1997
-------------------------------------
William C. Brooks
* /s/Jerry M. Coleman Trust Manager December 18, 1997
-------------------------------------
Jerry M. Coleman
* /s/Josef C. Hermans Trust Manager December 18, 1997
-------------------------------------
Josef C. Hermans
* /s/ Ira T. Wender Trust Manger December 18, 1997
-------------------------------------
Ira T. Wender
* /s/ Lewis H. Sandler December 18, 1997
-------------------------------------
Lewis H. Sandler, as attorney-in-fact
</TABLE>
II-5
<PAGE> 175
EXHIBIT INDEX
<TABLE>
<S> <C>
*1.1 Form of Underwriting Agreement
*3.1 First Amended and Restated Declaration of Trust
*3.2 First Amended and Restated Bylaws
4.1 Instruments defining the rights of security holders. The instruments are
filed in response to items 3.1 and 3.2 above and are incorporated herein
by reference.
4.2 Common share certificate
*5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding the
legality of the Common Shares.
*8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding tax
matters.
*10.1 First Amended and Restated Advisory Agreement between the Company and
Investment Manager
*10.2 1997 Share Incentive Plan
*10.3 Dividend Reinvestment Plan
11.1 Statement Regarding Computation of Per Share Earnings
**16.1 Letter regarding change in certifying accountant
**23.1 Consent of Ernst & Young LLP
*23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Included in
responses to Items 5.1 and 8.1.
24.1 Powers of Attorney
**27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Filed herewith.
II-6
<PAGE> 1
EXHIBIT 16.1
COOPERS & LYBRAND LETTERHEAD
December 17, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by United Investors Realty Trust (copy
attached), which has been filed with the Commission, pursuant to Item 11(i) of
Form S-1, as part of the Company's Amendment No. 1 to Form S-1. We agree with
the statements concerning our Firm in such Amendment No. 1 to Form S-1.
However, we have no basis to agree or disagree with the statements made about
events subsequent to our dismissal.
Very truly yours,
Coopers & Lybrand L.L.P.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated December 17, 1997 listed in the index to financial
schedules on page F-1 in Amendment No. 1 to the Registration Statement (Form
S-11 No. 333-29475) for the Registration of 7,500,000 shares of beneficial
interest.
/s/ ERNST & YOUNG LLP
Houston, Texas
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 256,483
<SECURITIES> 0
<RECEIVABLES> 768,765
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,025,248
<PP&E> 39,671,734
<DEPRECIATION> (4,580,372)
<TOTAL-ASSETS> 36,793,046
<CURRENT-LIABILITIES> 1,893,335
<BONDS> 25,329,407
1,068,226
0
<COMMON> 7,527,577
<OTHER-SE> (610,918)
<TOTAL-LIABILITY-AND-EQUITY> 36,793,046
<SALES> 0
<TOTAL-REVENUES> 4,619,781
<CGS> 0
<TOTAL-COSTS> 4,400,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,825,810
<INCOME-PRETAX> 107,850
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,850
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.51
</TABLE>
