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Pursuant to Rule 424(b)(1)
Registration Number: 333-29475
7,600,000 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 754,563 square feet of gross leasable area ("GLA") and were 94.7%
leased as of December 31, 1997. The Company plans to use $928,000 of the
offering proceeds to acquire the minority interest in one of the Original
Properties.
The Company has recently acquired or 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 989,178 square feet of GLA. As of December 31, 1997, the
Acquisition Properties were 96.9% leased. The Original Properties and
Acquisition Properties are sometimes hereinafter referred to as the
"Properties." The Company recently acquired four of the Acquisition Properties
and it is anticipated that three additional 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 will
be 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 1,743,741 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. The initial public offering price per share is $10.00. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
Prior to the Offering, there has been no public market for the Common
Shares. The Common Shares have been approved for inclusion on the Nasdaq
National Market under the symbol "UIRT." The Company intends to pay quarterly
cash distributions to its shareholders. See "Distribution Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON SHARES INCLUDING:
- The Company's expected payout ratio of cash available for distribution is
100.3%. If actual cash available for distribution is less than estimated
cash available for distribution, the Company may be required to borrow
funds to be able to make distributions at the expected payout level. The
Company does not currently have a line of credit from which it could draw
funds to make distributions. Any failure to make expected distributions
could result in a decrease in the market price of the Common Shares.
- 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.
- A conflict of interest with the Investment Manager exists.
- The Company's financial condition could be adversely affected if the
Company fails to manage rapid growth and integrate operations.
- Immediate dilution in the net tangible book value of Common Shares
purchased in the Offering will occur in the amount of $1.28 per share.
- The Properties are currently limited to the Sunbelt region of the United
States, and as a result of such concentration, any downturn in the economy
in the Sunbelt region could have a material adverse effect on the
business, results of operation and financial condition of the Company.
- The liquidation value of the Company may be less than the value of the
Company as a going concern.
- 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.
- 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.
- There is no limitation on the amount or type of indebtedness that may be
incurred by the Company.
- There is no prior public market for the Common Shares.
- The Company will be taxed as a corporation if it fails to continue to
qualify as a REIT, resulting in a loss of pass-through tax treatment which
would have a significant adverse effect on the return to shareholders.
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>
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===================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................................... $10.00 $0.70 $9.30
- -------------------------------------------------------------------------------------------------------------------
Total(3).......................................... $76,000,000 $5,320,000 $70,680,000
===================================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering estimated at $1,049,186 payable by
the Company.
(3) The Company has granted the Underwriters an option to purchase up to
1,140,000 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 $87,400,000,
$6,118,000 and $81,282,000, 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 March 13, 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.
DAIN RAUSCHER INCORPORATED
SCOTT & STRINGFELLOW, INC.
SOUTHWEST SECURITIES
The date of this Prospectus is March 6, 1998.
<PAGE> 2
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 OPEN MARKET. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M.
<PAGE> 3
TABLE OF CONTENTS
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PROSPECTUS SUMMARY.......................................... 1
The Company............................................... 1
Risk Factors.............................................. 2
Business Objectives and Strategies........................ 4
Industry.................................................. 5
The Properties............................................ 5
Distributions............................................. 7
Tax Status................................................ 7
The Offering.............................................. 8
Summary Financial Data.................................... 9
RISK FACTORS................................................ 12
High Distribution Payout Ratio............................ 12
Sole Reliance on Investment Manager....................... 12
Conflicts of Interest..................................... 12
Failure to Manage Rapid Growth and Integrate Operations;
Acquisition of Additional Properties................... 12
Immediate and Substantial Dilution........................ 13
Limited Geographic Diversification of the Portfolio....... 13
Limitations on Acquisition and Change in Control.......... 13
Liquidation Value of the Company May Be Less Than Value as
a Going Concern........................................ 13
Changes in Investment and Financing Policies Without
Shareholder Approval................................... 13
Ownership Limit; Anti-Takeover Effect..................... 13
No Limitation in Organizational Documents on the
Incurrence of Debt..................................... 14
Failure to Continue to Qualify as a REIT Would Reduce
Shareholder Returns.................................... 14
Absence of Prior Public Market for Common Shares.......... 14
Risks Associated with Development and Construction........ 14
Real Estate Investment Risks.............................. 15
Competition............................................... 16
Increase In Market Interest Rate May Cause a Common Share
Price Decrease......................................... 16
Increased Leverage May Result in Loss of Properties in the
Event of a Foreclosure................................. 16
Inability to Acquire Additional Properties; Acquisition
Properties May Not Perform as Expected................. 17
Environmental Matters..................................... 17
Uninsured Loss and Condemnation........................... 17
Sales of Previously Issued Shares May Cause Decreases In
Market Price........................................... 18
Investors Subject to ERISA................................ 18
Forward Looking Information............................... 18
Year 2000 Systems Issues.................................. 18
USE OF PROCEEDS............................................. 19
DISTRIBUTION POLICY......................................... 20
General................................................... 20
Dividend Reinvestment Plan................................ 22
CAPITALIZATION.............................................. 23
DILUTION.................................................... 24
SELECTED PRO FORMA AND HISTORICAL FINANCIAL AND PROPERTIES
INFORMATION............................................... 25
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 26
Overview.................................................. 26
Results of Operations..................................... 26
Liquidity and Capital Resources........................... 29
STRATEGY FOR FUTURE GROWTH.................................. 31
Growth Strategy........................................... 32
Operating Strategy........................................ 33
Financing................................................. 34
OVERVIEW OF THE COMPANY'S FIVE KEY U.S. MARKETS............. 34
General................................................... 34
BUSINESS AND PROPERTIES..................................... 38
Business.................................................. 38
Management and Leasing.................................... 39
The Properties............................................ 40
Significant Leases........................................ 43
National, Regional and Local Tenant Summary............... 44
Lease Expirations......................................... 44
Additional Information Concerning Certain Properties...... 45
Additional Information Concerning the Acquisition
Properties............................................. 51
Tenant Delinquencies and Bankruptcies..................... 61
Mortgage Indebtedness..................................... 62
Rental Revenues........................................... 63
Capital Expenditures...................................... 63
Competition............................................... 63
Employees................................................. 63
Legal Proceedings......................................... 63
Regulations and Insurance................................. 64
Environmental Matters..................................... 64
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................. 65
Investment Policies....................................... 65
Financing Policies........................................ 66
Affiliate Transaction Policy.............................. 67
Certain Other Policies.................................... 67
MANAGEMENT.................................................. 68
Trust Managers and Officers............................... 68
Committees of the Board of Trust Managers................. 69
Compensation of Trust Managers............................ 70
Executive Compensation.................................... 70
Advisory Board............................................ 71
Share Incentive Plan...................................... 72
Indemnification Agreements................................ 73
Limitation of Liability and Indemnification............... 73
CERTAIN RELATIONSHIPS AND TRANSACTIONS...................... 74
PRINCIPAL SHAREHOLDERS...................................... 76
</TABLE>
ii
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST................ 77
General................................................... 77
Restrictions on Transfer.................................. 77
Preemptive Rights......................................... 78
Share Distributions....................................... 78
Redemption of Company Shares.............................. 79
Voting Rights............................................. 79
Transfer Agent and Registrar.............................. 79
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF THE
COMPANY'S CHARTER AND BYLAWS.............................. 79
Board of Trust Managers................................... 79
Business Combinations..................................... 80
Shareholder Liability..................................... 81
Trust Manager Liability................................... 81
Special Shareholder Meetings.............................. 81
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
Proposed Legislation...................................... 89
Failure to Qualify........................................ 89
Taxation of Shareholders.................................. 89
Disclosure Regarding Dividend Reinvestment Plan........... 90
Taxation of Tax-Exempt Shareholders....................... 90
Taxation of Foreign Shareholders.......................... 91
Other Taxation............................................ 92
ERISA CONSIDERATIONS........................................ 93
UNDERWRITING................................................ 94
LEGAL MATTERS............................................... 96
EXPERTS..................................................... 96
ADDITIONAL INFORMATION...................................... 97
GLOSSARY.................................................... 98
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
iii
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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 97. 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 subsidiaries and controlled
affiliates.
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. The Company
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, small REITs,
and groups that will not have the resources of a relatively larger public REIT.
Further, the Company believes that larger public REITs generally seek to acquire
larger portfolios than the Company seeks to acquire. It is also the Company's
belief that its 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 H. Sandler as the Company's President and
Chief Executive Officer, and Daniel M. Jones, III as Chief Financial Officer,
and provided additional resources to accelerate the Company's growth plans. As
of February 13, 1998, the Company had acquired four of the Acquisition
Properties and had entered into contracts or had options to acquire four
additional Acquisition Properties located in Texas, Florida and Arizona. The
Acquisition Properties contain approximately 989,178 square feet of GLA. The
acquisitions represent a 131% increase in GLA over the 754,563 square feet
contained in the Company's properties held on December 31, 1997. 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, as a result,
conflicts between the Investment Manager and the Company's interests exist.
At December 31, 1997, the Company owned five and controlled three community
shopping center properties located in Texas, Tennessee and Arizona
(collectively, the "Original Properties" and, collectively with the Acquisition
Properties, the "Properties"). With respect to the three Original Properties
that are controlled by the Company, the Company owns the 5% general partner and
a 51% limited partner interest in a limited partnership which owns one property
and a 70% general partner interest in a limited partnership which owns two
properties. Upon completion of the acquisition of the Acquisition Properties,
the Company will have 16 properties with an aggregate GLA of approximately
1,743,741 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, drug stores and
retailers which offer everyday necessities to their neighborhood communities.
Approximately 93.1% (based on GLA) of the existing leases at the Properties are
triple net, i.e., the tenants under such leases are required to pay base rent
and their respective pro rata shares of the common area maintenance charges,
real estate taxes and insurance costs incurred annually at their respective
Properties. 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
1
<PAGE> 7
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 and viable alternative to management by Company
personnel, and the opportunity to manage future properties acquired by the
Company provides an 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. 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 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:
- The Company's expected payout ratio of Cash Available for Distribution is
100.3%. If the Properties fail to perform as expected or if the Company's
growth strategies are not implemented as expected, the Company may not be
able to make distributions at the expected level or it may be required to
borrow funds to be able to make distributions at the expected level.
2
<PAGE> 8
- 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.
- A conflict of interest with the Investment Manager exists.
- The Company's financial condition could be adversely affected if the
Company fails to manage rapid growth and integrate operations.
- Investors in the Offering will experience immediate dilution in the net
tangible book value of $1.28 per Common Share purchased in the Offering.
- The Properties are currently limited to the Sunbelt region of the United
States, and as a result of such concentration, any downturn in the
economy in the Sunbelt region could have a material adverse effect on the
business, results of operation and financial condition of the Company.
- The liquidation value of the Company may be less than the value of the
Company as a going concern.
- 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.
- The limitation on 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, may discourage a change in control and may limit
the opportunity for the Company's shareholders to receive a premium for
their Common Shares.
- 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.
- There is no prior public market for the Common Shares.
- The Company will be taxed as a corporation if it fails to continue to
qualify as a REIT, resulting in loss of pass-through tax treatment which
would have a significant adverse effect on the return to shareholders.
- There are certain real estate risks associated with an investment in the
Company, 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.
- 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.
- 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.
- Failure to make payments on secured indebtedness may result in the loss
of the property securing such indebtedness.
- Properties acquired by the Company may not perform as expected.
- The Company is potentially liable for unknown or future environmental
issues.
- The Company may suffer losses in the event of a casualty or other
liabilities that are not insured, are uninsurable or not economically
insurable.
- Future sales of Common Shares could adversely affect the prevailing
market price for Common Shares.
- An investment in the Common Shares may not be suitable for certain
investors subject to ERISA.
3
<PAGE> 9
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:
- 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. The Company's knowledge of
the real estate market is strongest in the Sunbelt region. The Company's
knowledge is dependent upon officers of the Company whose salaries are
paid by the Investment Manager.
- 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.
- 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.
- 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.
- Acquire, redevelop and re-tenant under-managed retail properties in areas
with strong prospects for future growth.
- Renovate and expand the Properties to meet the needs of existing or new
tenants.
- 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:
- Hold and maintain properties for long-term investment and place a strong
emphasis on aesthetics, regular maintenance, periodic renovation and
capital improvements.
- Maintain and diversify its core base of national and regional supermarket
and retail tenants.
- Aggressively market vacant space, renew existing leases at higher base
rents per square foot, and utilize base rent escalation provisions in its
leases.
4
<PAGE> 10
FINANCING
In order to most effectively pursue its business strategies, the Company's
financing strategy will be to:
- 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
December 31, 1997, after giving effect to the Offering, the Company would
have had a long-term debt to Total Market Capitalization ratio of
approximately 28.0%. See "Strategy For Future Growth -- Financing."
- 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 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 community shopping centers, strip shopping centers and regional malls
(collectively, "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 44% of that in community and 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
Properties are community shopping centers with an average size of 108,000 square
feet of GLA. According to ICSC, 36,683 shopping centers, or 87% of all shopping
centers, are under 200,000 square feet of GLA. Further, according to ICSC, over
the three year period of 1994 through 1996, 148.8 million square feet of
shopping center GLA was added nationally, 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. The Original Properties were built between 1970
and 1991, with the oldest property having been substantially expanded and
renovated in 1984. The Original Properties were 94.7% leased as of December 31,
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, Pembroke Pines (Fort Lauderdale area) and Phoenix. The
Acquisition Properties were built between 1973 and 1994, with most having
undergone substantial renovations in recent years. As of December 31, 1997, the
Acquisition Properties were 96.9% leased. As of February 13, 1998, the Company
had acquired four of the Acquisition Properties.
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,
drug stores and retailers which 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.
5
<PAGE> 11
Set forth below is information regarding the Properties as of December 31,
1997:
<TABLE>
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TOTAL BASE RENT YEAR
ENDED 12/31/97
GROSS -----------------------
YEAR LEASABLE TOTAL % OF
DEVELOPED/ AREA PERCENT NUMBER PORTFOLIO
PROPERTY LOCATION RENOVATED (SQ. FT.) LEASED OF TENANTS BASE RENT BASE RENT
-------- -------- ---------- --------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
TEXAS
Autobahn Shopping Center........... San Antonio 1984 28,878 97.2% 6 $ 316,545 2.4%
Bandera Festival Shopping Center... San Antonio 1989 189,438 98.2(6) 28 1,510,643 11.7
Benchmark Crossing Shopping
Center(4)......................... Houston 1986/1990/1994 58,384 100.0 5 642,743 5.0
Centennial Shopping Center......... Austin 1970/1984 80,492 90.9 12 600,768 4.6
El Campo Shopping Center........... El Campo 1985 83,330 90.0 16 294,932 2.3
Hedwig Shopping Centers(4)......... Houston 1974/1987/1989 69,554 98.2 11 815,989 6.3
The Market at First Colony(4)...... Houston 1988/1991/1994 94,241 96.6 31 1,311,102 10.1
Mason Park Centre(4)............... Houston 1985 160,047 92.6 33 1,649,580 12.8
Rosemeade Park Shopping
Center(4)......................... Carrollton 1986 49,554 86.6 17 513,935 4.0
University Park Shopping
Center(2)......................... College 1973-1991 91,654 98.0 5 745,843 5.8
Station
--------- ----- --- ----------- -----
TOTAL/WEIGHTED AVERAGE.......... 905,572 95.1% 164 $ 8,401,980 65.0%
ARIZONA
Park Northern Shopping Center(1)... Phoenix 1982 128,378 90.6(7) 23 640,424 5.0
Southwest/Walgreen's Shopping
Center(4)......................... Phoenix 1975 83,698 100.0 19 537,003 4.2
--------- ----- --- ----------- -----
TOTAL/WEIGHTED AVERAGE.......... 212,076 94.3% 42 $ 1,177,427 9.2%
FLORIDA
Town 'N Country Plaza(4)........... Tampa 1970/1986 158,104 100.0 17 641,419 5.0
University Mall Shopping
Center(4)......................... Pembroke Pines 1973/1984 315,596 98.0 36 1,953,254 15.1
--------- ----- --- ----------- -----
TOTAL/WEIGHTED AVERAGE.......... 473,300 98.4% 53 $ 2,594,673 20.1%
TENNESSEE
McMinn Plaza Shopping Center....... Athens 1982 99,969 98.0(8) 10 401,028 3.1
Twin Lakes Shopping Center......... Lenoir City 1986 52,424 91.4 10 355,453 2.6
--------- ----- --- ----------- -----
TOTAL/WEIGHTED AVERAGE.......... 152,393 95.7% 20 $ 756,481 5.7%
--------- ----- --- ----------- -----
GRAND TOTAL/WEIGHTED AVERAGE....... 1,743,741 95.9% 279 $12,930,561 100.0%
========= ===== === =========== =====
<CAPTION>
ANNUALIZED BASE RENT
-----------------------------
TOTAL NET EFFECTIVE
ANNUALIZED RENT PER
PROPERTY BASE RENT(3) SQUARE FOOT(5) MAJOR TENANT(S)
-------- ------------ -------------- -----------------
<S> <C> <C> <C>
TEXAS
Autobahn Shopping Center........... $ 318,202 $11.34 Blockbuster Music
Bandera Festival Shopping Center... 1,513,584 8.14 Kmart
Solo Serve
Benchmark Crossing Shopping
Center(4)......................... 663,571 11.37 Bally's
Centennial Shopping Center......... 633,646 8.66 Drug Emporium
Tuesday Morning
El Campo Shopping Center........... 300,947 4.01 David's
Supermarkets
Hedwig Shopping Centers(4)......... 850,185 12.45 Ross Stores
Blockbuster Music
The Market at First Colony(4)...... 1,295,168 14.23 T J Maxx
Eckerd Drugs
Mason Park Centre(4)............... 1,606,557 10.84 Palais Royal
Petco
Cinemark Cinema
Walgreen's
Rosemeade Park Shopping
Center(4)......................... 548,688 12.79 Blockbuster Video
Cosmopolitan Lady
University Park Shopping
Center(2)......................... 733,976 8.17 Albertson's Food
----------- ------
TOTAL/WEIGHTED AVERAGE.......... $ 8,464,524 $ 9.83
ARIZONA
Park Northern Shopping Center(1)... 687,253 5.91 Safeway
Southwest/Walgreen's Shopping
Center(4)......................... 550,597 6.58 Walgreen's
Southwest
Supermarket
----------- ------
TOTAL/WEIGHTED AVERAGE.......... $ 1,237,850 $ 6.19
FLORIDA
Town 'N Country Plaza(4)........... 705,692 4.46 Big Lots
T J Maxx
Autozone
University Mall Shopping
Center(4)......................... 2,078,255 6.72 Uptons
Sports Authority
Ross Stores
Office Max
Eckerd Drugs
----------- ------
TOTAL/WEIGHTED AVERAGE.......... $ 2,783,947 $ 5.97
TENNESSEE
McMinn Plaza Shopping Center....... 404,715 4.13 Ingles
Twin Lakes Shopping Center......... 336,097 7.01 Food City
----------- ------
TOTAL/WEIGHTED AVERAGE.......... $ 740,812 $ 5.08
----------- ------
GRAND TOTAL/WEIGHTED AVERAGE....... $13,227,133 $ 7.91
=========== ======
</TABLE>
6
<PAGE> 12
- ---------------
(1) This property is currently 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.
(2) This property is currently 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 December 31, 1997 rent rolls of the Original Properties and the
Acquisition Properties.
(4) All information on these properties was supplied to the Company by the
sellers of such properties.
(5) Net effective rent per square foot represents total annualized base rent on
December 31, 1997 divided by total leased square footage. The net effective
rent does not take into account any "give backs" or other concessions made
by the Company because no material "give backs" or other concessions have
been granted to any current tenant.
(6) Includes Eckerd Drugs (8,715 square feet or 4.6% of Bandera's GLA) which has
vacated its space, but is obligated to pay rent through October 31, 2008.
The percentage of Bandera's GLA leased without considering Eckerd is 93.6%.
(7) Includes Walgreen's (12,000 square feet or 9.35% of Park Northern's GLA)
which will vacate its space at the end of February 1998, but is obligated to
pay rent through April 30, 2011. The percentage of Park Northern's GLA
leased without considering Walgreen's is 81.3%.
(8) Includes Wal-Mart/Bud's (52,769 square feet or 52.8% of McMinn's GLA) which
has vacated its space but is obligated to pay rent through November 29,
2002. The percentage of McMinn's GLA leased without considering
Wal-Mart/Bud's is 45.2%.
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 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 first cash
distribution after the completion of the Offering is expected to be $0.215 per
share, which is expected to be paid on July 28, 1998 to record holders on July
6, 1998. Initially, the Company intends to pay regular quarterly distributions
to its shareholders of $0.86 per share on an annualized basis. This would
represent an initial annualized yield of approximately 8.60%. 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 27% 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 -- Failure to Qualify as a REIT Would
Reduce Shareholder Returns" 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 ended 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.
7
<PAGE> 13
THE OFFERING
Shares Offered.......................... 7,600,000
Shares to be Outstanding After the
Offering................................ 8,514,889(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.
Nasdaq National Market Symbol........... UIRT
- ---------------
(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")
immediately prior to completion of the Offering. See "Management -- Share
Incentive Plan."
8
<PAGE> 14
SUMMARY FINANCIAL DATA
The following table sets forth summary selected pro forma and historical
financial and Properties information 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 and the purchase of the Acquisition Properties had
occurred as of January 1, 1997. The pro forma balance sheet data are presented
as if the Offering and the purchase of the Acquisition Properties had occurred
on December 31, 1997. The following pro forma information is not necessarily
indicative of what the Company's results of operations or financial condition or
property information would have been for the periods or at the date indicated.
9
<PAGE> 15
SUMMARY SELECTED PRO FORMA AND HISTORICAL
FINANCIAL AND PROPERTIES INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
PRO FORMA
1997 1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL INFORMATION:
Revenues:
Base rent.................... $ 13,374,146 $ 4,954,820 $ 4,097,911(1) $ 4,389,491 $ 3,794,711 $ 3,194,084
Percentage rent.............. 293,330 26,400 32,822 -- -- --
Tenant reimbursements........ 3,836,743 1,167,355 835,940 848,975 844,299 622,164
Interest and other income.... 49,087 27,278 67,409 44,224 10,344 13,886
------------ ----------- ----------- ----------- ----------- -----------
Total revenue............ 17,553,306 6,175,853 5,034,082 5,282,690 4,649,354 3,830,134
------------ ----------- ----------- ----------- ----------- -----------
Expenses:
Property operating and
maintenance................ 2,242,815 754,703 582,481 875,193 570,307 454,996
Real estate taxes............ 2,359,299 793,359 558,000 569,634 512,070 437,679
General and administrative... 333,777 179,933 89,529 63,225 23,710 6,551
Advisory and Trust Manager
fees....................... 802,822 345,000 312,000 296,000 253,000 231,891
Share grant to advisor and
officers................... 787,500 787,500 -- -- -- --
Other........................ 204,829 204,829 93,302 60,482 105,755 104,297
Interest..................... 2,929,978 2,435,538 2,132,390 2,177,447 2,101,762 1,923,640
Depreciation and amortization
and ground lease........... 3,351,107 1,309,180 967,111 986,129 756,914 631,567
------------ ----------- ----------- ----------- ----------- -----------
Total expenses........... 13,012,127 6,810,042 4,734,813 5,028,110 4,323,518 3,790,621
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before gain on sale
of investment real estate,
minority interest and
redeemable preferred share
dividend requirements.......... 4,541,179 (634,189) 299,269 254,580 325,836 39,513
Gain on sale of investment real
estate......................... -- -- -- 25,020 -- --
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before minority
interest and redeemable
preferred share dividend
requirements................... 4,541,179 (634,189) 299,269 279,600 325,836 39,513
Minority interest in net income
of real estate ventures........ -- (40,894) (51,941) (43,278) (48,435) (31,084)
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before redeemable
preferred share dividend
requirements................... $ 4,541,179 $ (675,083) $ 247,328 $ 236,322 $ 277,401 $ 8,429
Redeemable preferred share
dividend requirements.......... $ (96,633) $ (96,633) $ (96,296) $ (43,618) $ -- $ --
------------ ----------- ----------- ----------- ----------- -----------
Net income (loss) available for
common shareholders............ $ 4,444,546 $ (771,716) $ 151,032 $ 192,704 $ 277,401 $ 8,429
------------ ----------- ----------- ----------- ----------- -----------
Net income (loss) per share...... $ 0.52 $ (0.85) $ 0.17 $ 0.21 $ 0.32 $ 0.01
============ =========== =========== =========== =========== ===========
Weighted average common shares... 8,512,493 912,493 909,405 909,397 872,655 745,725
============ =========== =========== =========== =========== ===========
Cash distributions per common
share.......................... -- --(2) --(2) --(2) $ 0.40 $ 0.39
============ =========== =========== =========== =========== ===========
BALANCE SHEET INFORMATION:
Investment real estate,
gross........................ $111,984,713 $39,734,731 $39,327,929 $34,166,161 $33,852,985 $29,349,299
Total assets................... 109,617,933 39,286,969 37,201,773 32,461,433 32,702,850 28,773,597
Mortgage and other notes
payable...................... 32,832,881 28,363,899 26,542,992 22,484,845 23,826,831 21,690,375
Total liabilities.............. 34,262,114 29,793,132 27,406,859 23,407,145 24,647,866 23,113,687
Minority interest.............. -- 1,571,018 1,584,673 699,984 794,730 813,578
Preferred shares............... 1,068,226 1,068,226 1,068,226 1,068,226 -- --
Net equity..................... 74,287,593 6,854,593 7,142,015 7,286,078 7,260,254 5,578,532
OTHER DATA:
Funds From Operations(3)......... 8,546,134 1,361,839 1,291,047 1,260,709 1,082,750 671,080
Cash flows from:
Operating activities........... 8,692,879 1,688,057 1,062,002 958,510 993,272 504,103
Investing activities........... (48,769,503) (2,711,802) (1,319,213) (269,479) (2,240,884) (7,030,882)
Financing activities........... 46,868,312 1,250,578 (51,293) (384,637) 1,121,241 6,474,138
Number of Properties (at end of
period)........................ 16 8 8 6 6 5
GLA (sq. ft.) (at end of
period)........................ 1,743,741 754,563 753,790 542,095 542,095 442,126
Percentage of GLA leased (at end
of period)..................... 96% 95% 96% 95% 96% 96%
</TABLE>
10
<PAGE> 16
- ---------------
(1) Base rent was lower in 1996 as a result of the conveyance of the One West
Hills office building on January 1, 1996 to Ivy, an affiliated office REIT
managed by the Investment Manager.
(2) For 1997, 1996 and 1995, the Company distributed a dividend in kind of Ivy
shares with a value of $0.398, $0.40 and $0.20 per Common 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.
11
<PAGE> 17
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.
HIGH DISTRIBUTION PAYOUT RATIO
The estimated initial annual distribution per Common Share is $0.86. This
distribution amount represents 100.3% of the Company's estimated Cash Available
for Distribution for the 12 months ending December 31, 1998. There is a risk
that actual Cash Available for Distribution may be insufficient to permit the
Company to maintain its proposed initial distribution rate. If any of the
Properties fail to perform as expected, the Company's growth strategies are not
implemented as quickly or effectively as anticipated, operating expenses are
higher than currently expected, the Company incurs additional interest expense
in borrowing, or the Company incurs unanticipated capital expenditures, the
Company may not be able to make distributions at the level currently estimated
or the Company may be required to borrow funds to be able to make distributions
at such rate. Should actual Cash Available for Distribution be less than
estimated cash available for distribution, the Company may not be able to
achieve and maintain its proposed initial distribution rate. Any such failure to
make expected distributions could result in a decrease in the market price of
the Common Shares.
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's
business, results of operations and financial condition. 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 First 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
12
<PAGE> 18
future. A larger portfolio of properties would entail additional operating
expenses that would be payable by the Company.
IMMEDIATE AND SUBSTANTIAL DILUTION
The 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 $1.28 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), all
of which are in the Sunbelt region. The concentration of the portfolio in the
Sunbelt region creates the risk that should this region 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 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, 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 WITHOUT SHAREHOLDER APPROVAL
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
13
<PAGE> 19
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% 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.
FAILURE TO CONTINUE TO QUALIFY AS A REIT WOULD REDUCE SHAREHOLDER RETURNS
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
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 have been approved for inclusion on the
Nasdaq National Market, 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
14
<PAGE> 20
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. The inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy and other required governmental permits
and authorizations could result in the inability to develop a property or a
delay in completion of the project. Any delay in completion would delay cash
flow from such project needed to service debt, if any, on such project.
REAL ESTATE INVESTMENT RISKS
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
decrease.
The income from and market value of a leased property may be decreased 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 decrease 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 decrease if a single major tenant or a number of smaller tenants were
unable 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
15
<PAGE> 21
therefore funds may not be available to pay such claims. As of December 31,
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 decrease. 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 decrease 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 decrease 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.
INCREASE IN MARKET INTEREST RATE MAY CAUSE A COMMON SHARE PRICE DECREASE
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.
INCREASED LEVERAGE MAY RESULT IN LOSS OF PROPERTIES IN THE EVENT OF A
FORECLOSURE
At December 31, 1997, after giving effect to the Offering and the purchase
of the Acquisition Properties, the Company would have had a ratio of long-term
debt to Total Market Capitalization of approximately 28%. 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
16
<PAGE> 22
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
decreased. 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 have had
Phase I environmental audits (which involves inspection without soil sampling or
ground water analysis) by independent environmental consultants within the past
18 months. The 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 material 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 December 31,
1997, such non-recourse mortgage indebtedness represented 100% of the Company's
pro forma total mortgage indebtedness.
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.
17
<PAGE> 23
SALES OF PREVIOUSLY ISSUED SHARES MAY CAUSE DECREASE IN MARKET PRICE
Upon consummation of the Offering, the Company will have a total of
8,514,889 Common Shares outstanding, of which 914,889 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 914,889 shares, a total of 834,397 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, 78,092 Common Shares will be eligible for resale pursuant to Rule 144
and Rule 701 as promulgated under the Securities Act. An aggregate of 103,697
Common Shares, which are restricted securities, are subject to 180 day lock-up
agreements with the Underwriters. Of the 103,697 shares, 101,297 of such 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.
YEAR 2000 SYSTEMS ISSUES
Many existing computer programs use only two digits to identify a year in
the date field, and if not corrected, many computer applications could fail or
create erroneous results by or at the year 2000. Left uncorrected, year 2000
systems issues could have a material negative impact on the Company's operations
and its profitability.
In response to ongoing business needs, the Company has begun implementing a
new Timberline software system, and the year 2000 issue was one of the design
prerequisites for this new system. While the Company has taken every precaution
to ensure that the new information system will operate properly in the year
2000, management has relied on assurances by its software vendor. As such, the
Company cannot rule out the possibility of year 2000 issues. The Company will
test its new systems for year 2000 compliance throughout the implementation
process.
18
<PAGE> 24
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
$69,630,814.
The Company expects to use the net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Repay bridge loan........................................... $53,686,912
Break-up fee on bridge loan................................. 941,500(1)
Repay short-term borrowings used to acquire University
Mall...................................................... 4,500,000(2)
Purchase minority interest in University Park............... 928,000(3)
Purchase Town 'N Country Plaza.............................. 4,990,000
Repay 10% and 11% short-term notes.......................... 450,000
Repay 9% Redeemable Convertible Subordinated Notes.......... 212,400
Fees to Southwest Securities, Inc........................... 184,000(4)
Repay unsecured lines of credit............................. 300,000
Cash portion of Benchmark and Rosemeade acquisitions........ 3,113,088
Working capital............................................. 324,914
-----------
$69,630,814
===========
</TABLE>
- ---------------
(1) The break-up fee applies to that portion of the bridge loan that is not
replaced with permanent financing. Only $3,000,000 of the bridge loan will
be replaced with permanent financing secured by Southwest/Walgreen's.
(2) Of this amount, $1,400,000 will be repaid to FCMT and $3,100,000 will be
used to retire the purchase money note to the seller of the property.
(3) To be used to purchase 40% of the approximately 44% limited partnership
interests in University Park not presently owned by the Company.
(4) A fee of $284,000 was earned by Southwest Securities, Inc. for providing
services in connection with the procurement of the bridge loan for the
Company. The balance of the fee has already been paid.
The amount of $53,686,912 of the net proceeds of the Offering will be used
to repay a bridge loan, the proceeds of which were or are to be used, in
substantial part, to (i) repay existing mortgage indebtedness of $16,060,899 on
five of the eight Original Properties; and (ii) acquire four of the Acquisition
Properties for an aggregate consideration of approximately $34,786,200. The
bridge loan is secured by the following properties: Twin Lakes, Autobahn,
Centennial, Bandera, El Campo, Mason Park, Southwest/Walgreen's and The Market
at First Colony shopping centers. The bridge loan matures on August 11, 1998 and
has an interest rate of 30-day LIBOR plus 250 basis points. The bridge loan will
be repaid from the proceeds of the Offering.
The short-term borrowings incurred to acquire University Mall include a
note for $1,400,000 which matures on June 30, 1998 and has an interest rate of
12%, and a purchase money note to the seller for $3,100,000 which matures on
April 29, 1998 and has an interest rate of 10%.
The 10% and 11% short-term notes which will be repaid from the proceeds of
the Offering were issued in 1996 and 1997, and mature between March 1, 1998 and
July 19, 1998.
The 9% Redeemable Convertible Subordinated Notes mature on December 31,
2002.
As of December 31, 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 bears interest at prime (8.50% on December 31, 1997) plus 1.50%.
The second line matures on April 30, 1998 and bears interest at prime (8.50% on
December 31, 1997) plus 0.5%. These lines of credit will be repaid from the
proceeds of the Offering.
19
<PAGE> 25
DISTRIBUTION POLICY
GENERAL
Initially, the Company intends to pay regular quarterly distributions to
its shareholders of $0.215 per share or $0.86 per share on an annualized basis.
This would represent an initial annualized yield of approximately 8.60%. The
distribution rate was established based on an estimate of Cash Available for
Distribution after the Offering under present conditions. Approximately 27% 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 Underwriters'
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 $0.215 per share, which is expected to be paid on
July 28, 1998 to record holders on July 6, 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.
20
<PAGE> 26
The following table illustrates the adjustments made by the Company to its
pro forma Funds From Operations for the twelve months ended December 31, 1997,
in order to calculate estimated distributions:
<TABLE>
<CAPTION>
AMOUNTS
--------------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Pro forma income before minority interest and preferred
share dividend requirements for the twelve months ended
December 31, 1997......................................... $ 4,541
Non-cash share compensation............................... 787
Plus pro forma depreciation and amortization for the twelve
months ended December 31, 1997(1)......................... 3,218
--------
Pro forma Funds From Operations for the 12 months ended
December 31, 1997......................................... $ 8,546
Adjustments:
Net increases from new and renewed leases(2).............. 294
Net effect of any lease expirations, assuming no
renewals(3)............................................ (362)
--------
Estimated Pro forma Funds From Operations for the 12 months
ended December 31, 1998................................... $ 8,478
Net effect of straight-line rents(4)...................... (312)
--------
Estimated adjusted pro forma cash flows from operating
activities for the 12 months ended December 31, 1998...... $ 8,166
Estimated cash flows used in investing activities for the 12
months ending December 31, 1998:
Estimated capital expenditures(5)......................... (207)
Estimated pro forma cash flows used in financing activities
for the 12 months ending December 31, 1998:
Scheduled debt repayment (per amortization schedules)..... (565)
Preferred share distributions............................. (96)
--------
Estimated cash available for distribution for the 12 months
ending December 31, 1998.................................. $ 7,298
========
Total estimated initial annual distribution(6).............. $ 7,323
========
Estimated initial annual distribution per share............. $ 0.86
Expected Payout Ratio of Cash Available for Distribution.... 100.3%
========
</TABLE>
- ---------------
(1) Pro forma depreciation for the 12 months ended December 31, 1997 represents
actual 12 months depreciation on the Original Properties plus depreciation
on the Acquisition Properties, calculated on 85% of the purchase price (15%
allocated to land) depreciated over 30 years.
(2) Represents the incremental increase in Funds From Operations attributable to
rental revenue from new, fully executed leases commencing on or after
January 1, 1997, for the 12 months ending December 31, 1998 over rental
revenue included in pro forma Funds From Operations for the 12 months ended
December 31, 1997.
(3) Represents the incremental decrease in Funds From Operations attributable to
rental revenue from expiring leases ending on or after January 1, 1998 for
the 12 months ending December 31, 1998 as compared to rental revenue
included in pro forma Funds From Operations for the 12 months ended December
31, 1997.
(4) Represents the effect of adjusting straight-line rental income included in
the 12 months ended December 31, 1997 from an accrual basis under GAAP to a
cash basis.
(5) Includes capital expenditures (excluding tenant improvements) of $0.11 per
pro forma square feet of GLA (1,743,741) and $15,360 of tenant improvement
costs associated with obtaining the new or renewed leases described in note
2 for which the Company is contractually obligated. The Company's actual
tenant improvement costs may be significantly higher if additional lease
agreements are executed. Capital expenditures (excluding tenant
improvements) per square foot was calculated based upon the following
historical results of UIRT: total capital expenditures for the years ended
December 31, 1997, 1996 and 1995 were $50,056, $66,160 and $79,885,
respectively; the average number of square feet in the Company's properties
for the years ended December 31, 1997, 1996 and 1995 was 754,563, 594,457
and 542,095, respectively; capital expenditures per square foot for the
years ended December 31, 1997, 1996 and 1995 were $0.07, $0.11 and $0.15,
respectively, for an average of $0.11.
(6) The distributions for 1998 are based on 8,514,889 shares at $0.86 per share
per year.
21
<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 $0.398,
$0.40 and $0.20 per Common Share, respectively.
DIVIDEND REINVESTMENT PLAN
The Company intends to implement a Dividend Reinvestment Plan (the "DRIP")
as soon as practicable after consummation of the Offering. Pursuant to the DRIP,
a shareholder whose Common Shares are registered in his or her own name will be
able to 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 will be able to 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 will permit 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 will reserve 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 intends to reserve 1,000,000 Common Shares for issuance
pursuant to the DRIP.
22
<PAGE> 28
CAPITALIZATION
The following table sets forth, as of December 31, 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>
DECEMBER 31, 1997(1)
-------------------------------
HISTORICAL PRO FORMA
-------------- --------------
(IN THOUSANDS) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Mortgage notes payable.................................... $24,926 $ 32,832(2)
Short term notes and lines of credit...................... 3,225 0
Redeemable convertible subordinated notes................. 212 0
Minority interest in real estate joint ventures........... 1,571 0
Redeemable preferred shares, no par value, 20,000 shares
designated at $100 par value; 10,737 shares issued and
outstanding............................................. 1,068 1,068
Common shareholders' equity:
Common shares of beneficial interest, no par value,
914,889 shares issued and outstanding................... 8,345 77,976(3)
Accumulated deficit....................................... (1,490) (3,688)(4)
------- --------
Total common shareholders' equity......................... 6,855 74,287
------- --------
Total capitalization...................................... $37,857 $108,187
======= ========
</TABLE>
- ---------------
(1) Reflects capitalization of the Company as of December 31, 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 (except for
phase one of Hedwig) is secured by a first mortgage that will remain in
place in connection with the acquisition of the property secured thereby.
(3) Includes the offering of 7,600,000 Common Shares less Offering expenses of
8.38%. Assumes the Underwriters' over-allotment option to purchase up to
1,140,000 Common Shares is not exercised.
(4) Includes (i) prepayment penalties of $244,314 associated with the prepayment
of the above mortgages and (ii) fees and other costs of $1,953,500
associated with the $56,800,000 in bridge financing.
23
<PAGE> 29
DILUTION
At December 31, 1997, the pro forma net tangible book value of the Company
immediately prior to the Offering would have been $6,854,593, or $7.49 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
December 31, 1997 would have been $74,287,593, or $8.72 per Common Share. This
represents an immediate decrease in the net tangible book value per Common Share
of $1.28 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)........... $10.00
Pro forma net tangible book value before the Offering(2).... $7.49
Increase in net tangible book value per Common Share
attributable to the Offering.............................. $1.23
-----
Pro forma net tangible book value per Common Share after the
Offering(3)............................................... $ 8.72
------
Dilution per Common Share to new public investors........... $ 1.28
======
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and estimated expenses of the
Offering.
(2) Net tangible book value per Common Share before the Offering is determined
by dividing net tangible book value (total tangible assets less total
liabilities) of the Company by the number of Common Shares of the Company.
(3) Based on pro forma net tangible book value of $74,287,593 divided by
8,514,889 Common Shares 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 December 31, 1997
attributable to the outstanding shares and the book value of consideration per
Common Share.
<TABLE>
<CAPTION>
BOOK VALUE OF TOTAL
SHARES ISSUED CONSIDERATION TO
BY THE COMPANY(1) THE COMPANY BOOK VALUE OF
------------------- ----------------------- CONSIDERATION PER
NUMBER PERCENT AMOUNT PERCENT COMMON SHARE
--------- ------- ----------- ------- -----------------
<S> <C> <C> <C> <C> <C>
Current shareholders.............. 914,889 10.8% $ 6,854,593 8.9% $7.49
New public investors.............. 7,600,000 89.2 69,630,814(1) 91.1 $9.16
--------- ----- ----------- -----
Total................... 8,514,889 100.0% $76,485,407 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) After deducting the Underwriters' discounts and commissions and Offering
expenses estimated to be $6,369,186.
24
<PAGE> 30
SELECTED PRO FORMA AND HISTORICAL
FINANCIAL AND PROPERTIES INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
PRO FORMA
1997 1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL INFORMATION:
Revenues:
Base rent.......................... $ 13,374,146 $ 4,954,820 $ 4,097,911(1) $ 4,389,491 $ 3,794,711 $ 3,194,084
Percentage rent.................... 293,330 26,400 32,822 -- -- --
Tenant reimbursements.............. 3,836,743 1,167,355 835,940 848,975 844,299 622,164
Interest and other income.......... 49,087 27,278 67,409 44,224 10,344 13,886
------------ ----------- ----------- ----------- ----------- -----------
Total revenue.................. 17,553,306 6,175,853 5,034,082 5,282,690 4,649,354 3,830,134
------------ ----------- ----------- ----------- ----------- -----------
Expenses:
Property operating and
maintenance...................... 2,242,815 754,703 582,481 875,193 570,307 454,996
Real estate taxes.................. 2,359,299 793,359 558,000 569,634 512,070 437,679
General and administrative......... 333,777 179,933 89,529 63,225 23,710 6,551
Advisory and Trust Manager fees.... 802,822 345,000 312,000 296,000 253,000 231,891
Share grant to advisor and
officers......................... 787,500 787,500 -- -- -- --
Other.............................. 204,829 204,829 93,302 60,482 105,755 104,297
Interest........................... 2,929,978 2,435,538 2,132,390 2,177,447 2,101,762 1,923,640
Depreciation and amortization and
ground lease..................... 3,351,107 1,309,180 967,111 986,129 756,914 631,567
------------ ----------- ----------- ----------- ----------- -----------
Total expenses................. 13,012,127 6,810,042 4,734,813 5,028,110 4,323,518 3,790,621
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before gain on sale of
investment real estate, minority
interest and redeemable preferred
share dividend requirements.......... 4,541,179 (634,189) 299,269 254,580 325,836 39,513
Gain on sale of investment real
estate............................... -- -- -- 25,020 -- --
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before minority interest
and redeemable preferred share
dividend requirements................ 4,541,179 (634,189) 299,269 279,600 325,836 39,513
Minority interest in net income of real
estate ventures...................... -- (40,894) (51,941) (43,278) (48,435) (31,084)
------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before redeemable
preferred share dividend
requirements......................... $ 4,541,179 $ (675,083) $ 247,328 $ 236,322 $ 277,401 $ 8,429
Redeemable preferred share dividend
requirements......................... $ (96,633) $ (96,633) $ (96,296) $ (43,618) $ -- $ --
------------ ----------- ----------- ----------- ----------- -----------
Net income (loss) available for common
shareholders......................... $ 4,444,546 $ (771,716) $ 151,032 $ 192,704 $ 277,401 $ 8,429
------------ ----------- ----------- ----------- ----------- -----------
Net income (loss) per share............ $ 0.52 $ (0.85) $ 0.17 $ 0.21 $ 0.32 $ 0.01
============ =========== =========== =========== =========== ===========
Weighted average common shares......... 8,512,493 912,493 909,405 909,397 872,655 745,725
============ =========== =========== =========== =========== ===========
Cash distributions per common share.... -- --(2) --(2) --(2) $ 0.40 $ 0.39
============ =========== =========== =========== =========== ===========
BALANCE SHEET INFORMATION:
Investment real estate, gross........ $111,984,713 $39,734,731 $39,327,929 $34,166,161 $33,852,985 $29,349,299
Total assets......................... 109,617,933 39,286,969 37,201,773 32,461,433 32,702,850 28,773,597
Mortgage and other notes payable..... 32,832,881 28,363,899 26,542,992 22,484,845 23,826,831 21,690,375
Total liabilities.................... 34,262,114 29,793,132 27,406,859 23,407,145 24,647,866 23,113,687
Minority interest.................... -- 1,571,018 1,584,673 699,984 794,730 813,578
Preferred shares..................... 1,068,226 1,068,226 1,068,226 1,068,226 -- --
Net equity........................... 74,287,593 6,854,593 7,142,015 7,286,078 7,260,254 5,578,532
OTHER DATA:
Funds From Operations.................. 8,546,134 1,361,839 1,291,047 1,260,709 1,082,750 671,080
Cash flows from:
Operating activities................. 8,692,879 1,688,057 1,062,002 958,510 993,272 504,103
Investing activities................. (48,769,503) (2,711,802) (1,319,213) (269,479) (2,240,884) (7,030,882)
Financing activities................. 46,868,312 1,250,578 (51,293) (384,637) 1,121,241 6,474,138
Number of Properties (at end of
period).............................. 16 8 8 6 6 5
GLA (sq. ft.) (at end of period)....... 1,743,741 754,563 753,790 542,095 542,095 442,126
Percentage of GLA leased (at end of
period).............................. 96% 95% 96% 95% 96% 96%
</TABLE>
- ---------------
(1) Base rent was lower in 1996 as a result of the conveyance of the One West
Hills office building on January 1, 1996 to Ivy, an affiliated office REIT
managed by the Investment Manager.
(2) For 1997, 1996 and 1995, the Company distributed a dividend in kind of Ivy
shares with a value of $0.398, $0.40 and $0.20 per Common Share,
respectively.
25
<PAGE> 31
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
Twelve Months Ended December 31, 1997 Compared to the Twelve Months Ended
December 31, 1996
For the 12 months ended December 31, 1997, net income(loss) before gain on
sale of investment real estate was ($634,189) as compared to $299,269 in 1996.
During 1997, the Company awarded the Investment Manager and certain officers and
Trust Managers a grant of 75,000 Common Shares, for which the Company took a
charge of $787,500. There are no current plans for any future restricted share
grants, but the Plan permits the grant of additional restricted Common Shares.
It is anticipated that options for additional Common Shares will be granted from
time to time with an exercise price equal to the then fair market value of the
Common Shares. Also, the Company incurred $65,000 in additional professional
costs related to the employment of a contract Chief Financial Officer, and
$55,000 in fees related to a canceled bridge financing. After the Offering, the
compensation payable to the Chief Financial Officer will be the responsibility
of the Investment Manager and is included in the advisory fee. In December 1997,
the Company paid a $55,000 non-refundable loan application fee in connection
with a bridge financing that was not completed when the prospective lender
failed to raise the funds for the loan. Such fees would have been capitalized
and amortized over the term of the bridge financing had the transaction closed.
In January 1998, the Company successfully completed a bridge financing
transaction and capitalized the fees incurred. Without these charges, net income
(loss) for the twelve months ended December 31, 1997 would have been ($514,189)
($273,311 without the grant of 75,000 shares) as compared to $299,269 in 1996,
an 8.7% decrease.
The Company defines mature centers as those that were owned by the Company
for all of 1997 and 1996, which includes Autobahn, Twin Lakes, Centennial,
University Park, McMinn Plaza and Bandera Festival, or all of the Original
Properties excluding El Campo and Park Northern. The following table separates
new centers from mature centers, allowing a comparison of year-to-year results
on both a mature and total basis.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
EL CAMPO & EL CAMPO &
MATURE PARK NORTHERN TOTAL MATURE PARK NORTHERN TOTAL
---------- ------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues............. $4,853,225 $1,322,628 $6,175,853 $4,787,444 $246,638 $5,034,082
Expenses:
Operating and
maintenance........... 593,718 160,985 754,703 549,140 33,341 582,481
Real estate taxes........ 534,012 259,347 793,359 520,246 37,754 558,000
General and
administrative........ 137,646 42,287 179,933 86,730 2,799 89,529
Advisory and Trust
Manager fees.......... 291,073 53,927 345,000 308,996 3,004 312,000
Share grant to Investment
Manager............... 787,500 0 787,500 0 0 0
Other.................... 199,429 5,400 204,829 93,302 0 93,302
Interest................. 2,051,829 383,709 2,435,538 2,037,595 94,795 2,132,390
Depreciation,
amortization and
ground lease.......... 949,615 359,565 1,309,180 916,442 50,669 967,111
---------- ---------- ---------- ---------- -------- ----------
Total expenses... 5,544,822 1,265,220 6,810,042 4,512,451 222,362 4,739,814
Income(loss) before
gain on sale of
investment real
estate.............. (696,597) 57,408 (634,189) 274,993 24,276 299,269
========== ========== ========== ========== ======== ==========
</TABLE>
26
<PAGE> 32
Total revenues increased 23% to $6,175,853 for 1997 as compared to
$5,034,082 in 1996. Of the increase, $1,075,990 was attributable to the
additions of El Campo and Park Northern Shopping Centers in 1996. Revenues at
mature shopping centers increased by $65,781, or 1.4%, for the year.
Operating and maintenance expenses at mature properties increased $44,578
in 1997 due to higher painting and other maintenance costs at Bandera. Real
estate taxes were up by $13,766 at mature properties in 1997, reflecting higher
appraised values, and general and administrative costs at mature properties
increased $50,916, reflecting higher bad debt expense of $59,322.
Interest expense increased from $2,132,390 in 1996 to $2,435,538 in 1997,
an increase of 14.2%. Of this amount, $288,914 is directly attributable to
mortgages assumed at El Campo and Park Northern. The balance of the increase,
$14,234, is attributable to higher short-term borrowings in 1996 and 1997 to
finance acquisitions, offset by lower principal balances on mature mortgages.
Depreciation and amortization expenses increased 35.4% to $1,309,180 in
1997 from $967,111 in 1996; most of which is attributable to the additions of El
Campo and Park Northern. The increase of $33,174 at mature properties represents
higher amortization costs on higher leasing commissions and leasehold
improvements.
Trust Manager fees were $33,000 in each of 1997 and 1996. Advisory fees
increased from $279,000 in 1996 to $312,000 in 1997. 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. Effective the first
day of the calendar quarter in which the registration statement of which this
Prospectus is a part is declared effective, the method of 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. If the Advisory
Agreement had been in effect in 1997 and 1996, the Investment Manager would have
received $287,598 and $251,766, respectively.
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 $168,497 from the El Campo Shopping Center and
$78,141 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 $582,481 in
1996 as compared to $875,193 for 1995. The decrease in property operating and
maintenance expenses was primarily attributable to the conveyance of One West
Hills, which was partially offset by additional operating expenses of $33,341 in
1996 for El Campo and Park Northern.
Real estate taxes decreased 2% to $558,000 in 1996 as compared to $569,634
in 1995. The decrease was attributable to the conveyance of One West Hills to
Ivy, offset by the El Campo and Park Northern acquisitions.
Trust Manager fees were $33,000 in 1996 and $20,000 in 1995. 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
27
<PAGE> 33
with respect to the Properties acquired during the year. If the Advisory
Agreement had been in effect in 1996 and 1995, the Investment Manager would have
received advisory fees of $251,766 and $252,563, respectively.
Other expenses, primarily legal and accounting, increased 54% to $93,302 in
1996 as compared to $60,482 in 1995. The increase was primarily attributable to
professional fees associated with preparing the documentation of the
Partnership.
General and administrative expenses increased 42% to $89,529 in 1996 as
compared to $63,225 in 1995. The increase was attributable to additional
expenses associated with a larger asset base.
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
conveyance of One West Hills 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
conveyance 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.
Trust Manager fees were $20,000 in 1995 and no fees were paid to Trust
Managers in 1994. 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. If the Advisory Agreement had been in effect in
1995 and 1994, the Investment Manager would have received advisory fees of
$252,563 and $233,751, respectively.
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.
28
<PAGE> 34
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 December 31, 1997, the Company had total indebtedness of
approximately $28.2 million, which consisted of approximately $25.0 million in
indebtedness collateralized by the eight Original Properties and a recently
acquired unimproved outparcel, and $3.2 million of unsecured indebtedness. Of
such indebtedness, $506,250 is variable rate indebtedness and $27.7 million is
at a fixed rate. Under the current debt structure, in which only $506,250 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 12%, with a weighted average interest rate of 9.25%, and
will mature between 1998 and 2018, with a weighted average remaining term to
maturity of 5.8 years. See "Business and Properties -- Mortgage Indebtedness."
Most of the Company's indebtedness maturing in 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.
29
<PAGE> 35
The Company has received three letters of intent from lending institutions
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 $1,062,002 for the
12 months of 1996 to $1,688,057 in 1997 due primarily to the $335,585 positive
impact of El Campo and Park Northern. 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.
Net cash flow used in investing activities increased from $1,319,213 in
1996 to $2,711,802 in 1997 representing $2,305,000 in deposits on Acquisition
Properties plus $406,802 in capital investments. 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 conveyed
the 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 was $2,240,884, mostly
attributable to the acquisition of McMinn Shopping Center and the One West Hills
office building.
For the 12 months ended December 31, 1997, $1,250,578 was provided by
financing activities, representing $2,525,000 new-short-term financing minus
$799,964 in principal payments on mortgages and offering costs of $419,700. For
the same period in 1996, funds used by financing activities were $51,293 as the
Company assumed $1,600,000 in existing debt at El Campo and issued $740,000 in
new short-term notes payable to fund the purchase of El Campo and Park Northern
and repaid $604,574 in Mortgage Principle. 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 $500,000. 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 was $1.1 million.
Capital Expenditures
The Company's capital improvements have averaged approximately $.11 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.
30
<PAGE> 36
The Company capitalized $66,160 in capital expenditures (excluding tenant
improvements) during 1996 and $50,056 in 1997. The Company capitalized $117,964
in tenant improvements during 1996 and $319,226 in 1997.
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 ended December 31, 1997.
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.
31
<PAGE> 37
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 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
32
<PAGE> 38
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:
-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.
-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.
-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
33
<PAGE> 39
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.
-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 December 31, 1997, after
giving effect to the Offering, 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 28.0%. 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 three letters of intent from lending institutions
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.
OVERVIEW OF THE COMPANY'S FIVE KEY U.S. MARKETS
GENERAL
The Company believes that the five key U.S. markets in which most of the
Properties are located, Dallas, Houston, Phoenix, San Antonio and Tampa/St.
Petersburg, have been and will continue to be solid markets in which to own and
operate community shopping centers for long term investment. The Company's
Dallas market is composed of the 60-mile ring from the midpoint of the
intersection of Highway 360 and Interstate 30. Its Houston market is composed of
the 60-mile ring from the midpoint of the intersection of Interstate 10 and
Interstate 45. The Phoenix market is composed of the 30-mile ring from the
midpoint of the intersection of Interstate 10 and Interstate 17. The San Antonio
market is composed of the 30-mile ring from the midpoint of the intersection of
Interstate 10 and Interstate 35 and the Tampa/St. Petersburg market is composed
of the 75-mile ring from the midpoint of the intersection of Highway 41 and
Highway 672. With respect to regions in which the Company has more than one
Property, the parameters of each market were determined by first selecting a
point that was approximately equidistant from the Company's Properties in the
region, and then expanding the ring area to include all of the Company's
Properties and their surrounding
34
<PAGE> 40
areas. With respect to regions in which the Company has one Property, the
parameters were determined by selecting a major intersection that is central to
the region that encompasses the Property and then expanding the ring area to
include the Company's Property and its surrounding areas. The following
discussions of the economic and demographic characteristics of these five
submarkets where the Company has a concentration of Properties is taken from the
findings of Claritas. In the graphs below, the percentages reflect compounded
annual growth rates. While the Company believes Claritas' views of economic
trends are reasonable, there can be no assurance that these trends will in fact
continue.
POPULATION. Based on Claritas' findings for the periods from 1990 to 1997
and from 1997 to 2002, each of the Company's Sunbelt region markets has
experienced, and is expected to continue to experience, population growth.
[CHART]
35
<PAGE> 41
EMPLOYMENT. Based on Claritas' findings for the periods from 1990 to 1997
and from 1997 to 2002, each of the Company's Sunbelt region markets has
experienced, and is expected to continue to experience, employment growth.
[TOTAL EMPLOYMENT AND COMPOUNDED ANNUAL GROWTH RATES CHART]
36
<PAGE> 42
MEDIAN HOUSEHOLD INCOME. Based on Claritas' findings for the periods from
1989 to 1997 and from 1997 to 2002, each of the Company's Sunbelt region markets
has experienced, and is expected to continue to experience, growth in household
income.
[MEDIAN HOUSEHOLD INCOME AND COMPOUNDED ANNUAL GROWTH RATES CHART]
37
<PAGE> 43
RETAIL SALES. Based on Claritas' findings for the period from 1997 to 2002,
each of the Company's Sunbelt region markets is expected to experience retail
sales growth.
[CHART]
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. At December 31, 1997, the
Company owned or controlled eight community shopping center properties located
in Texas, Tennessee and Arizona. The Company has recently acquired four
community shopping centers and has under contract or option to purchase four
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
38
<PAGE> 44
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."
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
39
<PAGE> 45
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 believes it 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
At December 31, 1997, the Company owned or controlled the eight Original
Properties and has recently acquired four of the Acquisition Properties and has
contracts or options to purchase the four remaining Acquisition Properties. Each
of the Properties is designed to meet the needs of surrounding local communities
and is anchored by a supermarket, drug store and/or by one or more national
and/or regional tenants. The Properties are located in four states, Texas(10),
Florida(2), Tennessee(2) and Arizona(2).
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, southeast 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 community shopping center.
The Properties contain approximately 1,743,741 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 December 31, 1997, the Original Properties were approximately 94.7%
leased. Anchor space at the Original Properties, representing approximately
63.7% of total GLA, was 100% leased as of December 31, 1997, while non-anchor
space, accounting for the remaining 36.3% of total GLA, was approximately 85.3%
leased. National, regional and local tenants represented 48.4%, 26.4% and 19.8%
of total GLA, respectively.
Although the Company did not own any of the Acquisition Properties at
December 31, 1997, the Company believes that they were approximately 96.9%
leased, that the anchor space, representing 51.5% of the total GLA, was 100%
leased, and that non-anchor space was approximately 93.6% leased. National,
regional and local tenants at the Acquisition Properties accounted for
approximately 50.9%, 17.7% and 28.3% of total GLA, respectively.
Substantially all of the Company's revenues from the Properties consist of
base rents and percentage rents received under long-term leases. For the year
ended December 31, 1997, total base rents and percentage rents from the Original
Properties were $4,865,637 and $26,400, respectively. The total base rents and
percentage rents from the Acquisition Properties for the year ended December 31,
1997 were $8,064,924 and $266,930, respectively.
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<PAGE> 46
The following table presents certain information with respect to the
Properties:
LOCATIONS OF THE PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF TOTAL GLA PERCENTAGE OF
STATE PROPERTIES (SQ. FT.) TOTAL GLA
----- ---------- --------- -------------
<S> <C> <C> <C>
Texas.......................................... 10 905,572 51.9%
Arizona........................................ 2 212,076 12.2
Florida........................................ 2 473,300 27.1
Tennessee...................................... 2 152,393 8.8
-- --------- -----
Total................................ 16 1,743,341 100.0%
== ========= =====
</TABLE>
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<PAGE> 47
Set forth below is information regarding the Properties as of December 31,
1997:
<TABLE>
<CAPTION>
OWNERSHIP GROSS TOTAL
YEAR UPON LAND LEASEABLE ANNUALIZED
DEVELOPED/ COMPLETION AREA AREA BASE
PROPERTY LOCATION RENOVATED OF OFFERING (ACRES) (SQ. FT.) RENT(3)
-------- ---------------- -------------- ----------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
Autobahn Shopping Center........... San Antonio 1984 100% 2.4 28,878 $ 318,202
Bandera Festival Shopping Center... San Antonio 1989 100 18.5 189,438 1,513,584
Benchmark Crossing Shopping
Center(4)........................ Houston 1986/1990/1994 100 6.6 58,384 663,571
Centennial Shopping Center......... Austin 1970/1984 100(1) 6.3 80,492 633,646
El Campo Shopping Center........... El Campo 1985 100 7.4 83,330 300,947
Hedwig Shopping Centers(4)......... Houston 1974/1987/1989 100 4.1 69,554 850,185
The Market at First Colony(4)...... Houston 1988/1991/1994 100 9.7 94,241 1,295,168
Mason Park Centre(4)............... Houston 1985 100 13.6 160,047 1,606,557
Rosemeade Park Shopping
Center(4)........................ Carrollton 1986 100 5.2 49,554 548,688
University Park Shopping
Center(2)........................ College Station 1973-1991 96 9.3 91,654 733,976
----- ---------- -----------
TOTAL/WEIGHTED AVERAGE......... 83.3 905,572 $ 8,464,524
ARIZONA
Park Northern Shopping Center...... Phoenix 1982 100(1) 15.0 128,378 687,253
Southwest/Walgreen's Shopping
Center(4)........................ Phoenix 1975 100 10.0 83,698 550,597
----- ---------- -----------
TOTAL/WEIGHTED AVERAGE......... 25.0 212,076 $ 1,237,850
FLORIDA
Town 'N Country Plaza(4)........... Tampa 1970/1986 100 11.1 158,104 705,692
University Mall Shopping
Center(4)........................ Pembroke Pines 1973/1984 100 27.5 315,596 2,078,255
----- ---------- -----------
TOTAL/WEIGHTED AVERAGE......... 40.1 473,700 $ 2,783,947
TENNESSEE
McMinn Plaza Shopping Center....... Athens 1982 100 11.7 99,969 404,715
Twin Lakes Shopping Center......... Lenoir City 1986 100 6.8 52,424 336,097
----- ---------- -----------
TOTAL/WEIGHTED AVERAGE......... 18.5 152,393 $ 740,812
----- ---------- -----------
GRAND TOTAL/WEIGHTED AVERAGE....... 166.9 1,743,741 $13,227,133
===== ========== ===========
<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 Festival Shopping Center... 8.14 98.2(6) Kmart (2013)
Solo Serve (2004)
Benchmark Crossing Shopping
Center(4)........................ 11.37 100.0 Bally's (2006)
Centennial Shopping Center......... 8.66 90.9 Drug Emporium (2001)
Tuesday Morning
(2004)
El Campo Shopping Center........... 4.01 90.0 David's Supermarkets
(2002)
Hedwig Shopping Centers(4)......... 12.45 98.2 Ross Stores (2010)
Blockbuster Music
(2000)
The Market at First Colony(4)...... 14.23 96.6 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
Center(4)........................ 12.79 86.6 Blockbuster Video
(2003)
Cosmopolitan Lady
(2008)
University Park Shopping
Center(2)........................ 8.17 98.0 Albertson's (2023)
------ -----
TOTAL/WEIGHTED AVERAGE......... $ 9.83 95.1%
ARIZONA
Park Northern Shopping Center...... 5.91 90.6(7) Safeway (2003)
Southwest/Walgreen's Shopping
Center(4)........................ 6.58 100.0 Southwest Supermarket
(2000)
Walgreen's (2000)
------ -----
TOTAL/WEIGHTED AVERAGE......... $ 6.19 94.3%
FLORIDA
Town 'N Country Plaza(4)........... 4.46 100.0 Autozone (2002)
Big Lots (2002)
T J Maxx (1999)
University Mall Shopping
Center(4)........................ 6.72 98.0 Office Max (2003)
Ross Stores (2001)
Sports Authority
(2012)
Uptons (2002)
Eckerd Drugs(2002)
------ -----
TOTAL/WEIGHTED AVERAGE......... $ 5.97 98.4%
TENNESSEE
McMinn Plaza Shopping Center....... 4.13 98.0(8) Ingles (2002)
Twin Lakes Shopping Center......... 7.01 91.4 Food City (2007)
------ -----
TOTAL/WEIGHTED AVERAGE......... $ 5.08 95.7%
------ -----
GRAND TOTAL/WEIGHTED AVERAGE....... $ 7.91 95.9%
====== =====
</TABLE>
42
<PAGE> 48
- ---------------
(1) This property is currently 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.
(2) This property is currently 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 December 31, 1997 rent rolls of the Original Properties and the
Acquisition Properties.
(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
December 31, 1997 divided by total leased square footage. The net effective
rent does not take into account any "give backs" or other concessions made
by the Company because no material "give backs" or other concessions have
been granted to any current tenant.
(6) Includes Eckerd Drugs (8,715 square feet or 4.6% of Bandera's GLA) which has
vacated its space, but is obligated to pay rent through October 31, 2008.
The percentage of Bandera's GLA leased without considering Eckerd is 93.6%.
(7) Includes Walgreen's (12,000 square feet or 9.35% of Park Northern's GLA)
which will vacate its space at the end of February 1998, but is obligated to
pay rent through April 30, 2011. The percentage of Park Northern's GLA
leased without considering Walgreen's is 81.3%.
(8) Includes Wal-Mart/Bud's (52,769 square feet or 52.8% of McMinn's GLA) which
has vacated its space, but is obligated to pay rent through November 29,
2002. The percentage of McMinn's GLA leased without considering
Wal-Mart/Bud's is 45.2%.
SIGNIFICANT LEASES
The following table sets forth certain information as of December 31, 1997
with respect to certain of the Company's significant lessees.
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT
12/31/97
LEASED GLA ------------------------------------
AS OF % OF TOTAL ANN. BASE % OF TOTAL
NUMBER OF 12/31/97 LEASED TOTAL ANN. RENT/ ANN.
LESSEE LEASES (SQ. FT.) 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 2.5 315,000 7.69 2.4
Big Lots....................... 1 30,000 1.8 88,372 2.95 0.7
Blockbuster Video and Music.... 3 32,214 1.9 374,518 11.63 2.8
Cinemark Cinema................ 1 28,750 1.7 301,872 10.50 2.3
Cosmopolitan Lady.............. 1 14,000 0.8 137,060 9.79 1.0
David's Supermarkets........... 1 30,195 1.8 78,000 2.58 0.6
Drug Emporium.................. 1 31,050 1.9 194,063 6.25 1.5
Eckerd Drugs................... 2 17,355 1.0 175,673 10.12 1.3
Food City...................... 1 32,614 2.0 199,038 6.10 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 1.8 243,264 8.13 1.8
Petco.......................... 1 13,973 0.8 90,540 6.48 0.7
Ross Stores.................... 2 52,920 3.2 456,264 8.62 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 42,000 2.5 190,000 4.52 1.4
T J Maxx....................... 2 49,540 3.0 333,795 6.74 2.5
Tuesday Morning................ 1 23,493 1.4 140,958 6.00 1.1
Uptons......................... 1 90,815 5.4 320,250 3.53 2.4
Walgreen's..................... 3 38,998 2.3 218,679 5.61 1.7
Wal-Mart/Bud's................. 1 52,769 3.2 179,415 3.40 1.4
-- ------- ---- ---------- ------ ----
TOTAL.......................... 33 989,332 59.2% $5,895,176 $ 5.96 44.4%
== ======= ==== ========== ====== ====
</TABLE>
43
<PAGE> 49
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 December 31, 1997
and a breakdown of base rents in place at December 31, 1997 and for each
Property by type of retail tenant.
<TABLE>
<CAPTION>
NATIONAL TENANTS REGIONAL TENANTS LOCAL TENANTS
---------------------- ---------------------- ----------------------
% 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% 36.3% 35.4% 15.3% 13.0%
Bandera Shopping Center.......... 57.9 45.7 18.7 22.0 23.3 32.3
Benchmark Crossing............... 88.0 86.3 12.0 13.7 0.0 0.0
Centennial Shopping Center....... 36.4 39.0 44.4 33.4 19.2 27.5
El Campo Shopping Center......... 14.3 14.5 40.3 25.9 45.4 59.5
Hedwig Shopping Centers.......... 80.5 72.3 9.6 13.3 9.9 14.4
The Market at First Colony....... 48.3 36.3 14.4 19.2 37.3 44.5
Mason Park Centre................ 72.2 64.5 8.5 12.1 19.3 23.4
Rosemeade Park................... 20.9 36.1 3.3 3.3 75.9 60.6
University Park Shopping
Center......................... 90.9 84.1 6.8 12.0 2.3 3.9
---- ---- ---- ---- ---- ----
WEIGHTED AVERAGE....... 58.8% 55.0% 17.9% 17.6% 23.2% 27.4%
ARIZONA
Park Northern Shopping Center.... 59.2 41.0 17.9 18.7 23.0 40.3
Southwest/Walgreen's Shopping
Center......................... 27.6 20.7 34.2 18.9 38.2 60.4
---- ---- ---- ---- ---- ----
WEIGHTED AVERAGE....... 45.9% 32.0% 24.7% 18.8% 29.4% 49.2%
FLORIDA
Town 'N Country Plaza............ 55.1 74.4 7.0 5.7 37.9 19.9
University Mall Shopping
Center......................... 41.2 43.0 30.7 17.7 28.1 39.3
---- ---- ---- ---- ---- ----
WEIGHTED AVERAGE....... 45.9% 51.0% 22.7% 14.7% 31.4% 34.4%
TENNESSEE
McMinn Plaza Shopping Center..... 55.9 47.3 33.1 37.4 11.0 15.3
Twin Lakes Shopping Center....... 2.5 3.4 68.1 59.2 29.4 37.4
---- ---- ---- ---- ---- ----
WEIGHTED AVERAGE....... 38.4% 27.4% 44.6% 47.3% 17.1% 25.3%
PORTFOLIO TOTAL.................. 51.9% 50.5% 22.4% 18.8% 25.7% 30.8%
==== ==== ==== ==== ==== ====
</TABLE>
LEASE EXPIRATIONS
At December 31, 1997, anchor tenants leased approximately 59.1% of the
total leased GLA and 67.4% of anchor-leased GLA (39.8% of total leased GLA) is
scheduled to expire within the next 10 years.
44
<PAGE> 50
The following table sets forth certain information regarding lease
expirations for the Properties for each of the 10 years beginning with 1998,
assuming that none of the tenants exercises renewal options or termination
rights:
<TABLE>
<CAPTION>
GROSS LEASABLE AREA ANNUALIZED BASE RENT
--------------------- IN PLACE AT 12/31/97
SQUARE --------------------------------------
FOOTAGE % OF TOTAL % OF TOTAL
LEASE NUMBER UNDER PORTFOLIO PORTFOLIO ANN.
EXPIRATION OF LEASES 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>
1998................... 1 49 106,863 6.4% $ 1,188,546 9.0% $11.12
1999................... 2 51 133,215 8.0 1,435,481 10.9 10.78
2000................... 3 62 203,964 12.2 2,064,732 15.6 10.12
2001................... 4 32 130,003 7.8 1,314,681 9.9 10.11
2002................... 5 45 450,998 27.0 2,458,490 18.6 5.45
2003................... 6 8 106,601 6.4 554,807 4.2 5.20
2004................... 7 5 67,896 4.1 523,446 4.0 7.71
2005................... 8 2 19,173 1.1 179,720 1.4 9.37
2006................... 9 6 82,763 4.9 706,778 5.3 8.54
2007 and thereafter.... 10 19 371,251 22.1 2,800,452 21.1 7.54
--- --------- ----- ----------- ----- ------
Total................ 279 1,672,727 100.0% $13,227,133 100.0% $ 7.91
=== ========= ===== =========== ===== ======
</TABLE>
ADDITIONAL INFORMATION CONCERNING CERTAIN PROPERTIES
As of December 31, 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.
Bandera Festival Shopping Center
Bandera is a 189,438 square foot shopping center located at the northwest
corner of Bandera Road and Guilbeau Road in northwest San Antonio, Texas. The
property consists of 18.54 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 and high visibility.
Bandera was built in 1988 and is anchored by Kmart (86,479 square feet) and
Solo Serve (30,000 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 28 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. As of December 31, 1997 the center was 93.6% occupied.
In 1997, Bandera accounted for approximately 25.1% of the total GLA and
30.7% of the total annualized minimum rents from the Original Properties. As of
December 31, 1997, Bandera was 98.2% 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, 1997, 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 $2.81 per $100 of assessed value, resulting in a 1997 realty tax
of approximately $264,531.
45
<PAGE> 51
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, 1993........................................... 98.1%
December 31, 1994........................................... 98.1
December 31, 1995........................................... 95.5
December 31, 1996........................................... 98.5
December 31, 1997........................................... 98.2(1)
</TABLE>
- ---------------
(1) The percentage of Bandera's GLA leased without considering Eckerd Drugs is
93.6%. Although Eckerd Drugs continues to pay rent under its lease, it has
vacated its space.
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, 1993................................ $7.38
Year Ended December 31, 1994................................ 7.80
Year Ended December 31, 1995................................ 7.63
Year Ended December 31, 1996................................ 7.56
Year Ended December 31, 1997................................ 7.97
</TABLE>
The following table shows, as of December 31, 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>
Kmart................................... 86,479 $484,015 October 31, 2013
Solo Serve.............................. 30,000 282,267 January 31, 2004
</TABLE>
Scheduled lease expirations at Bandera during the next 10 years are as
follows:
<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>
1998................ 2 11,920 6.4% $ 105,360 7.0% $ 8.84
1999................ 3 3,150 1.7 42,274 2.8 13.42
2000................ 4 8,330 4.5 94,470 6.2 11.34
2001................ 4 8,630 4.6 109,617 7.2 12.70
2002................ 7 15,431 8.3 203,722 13.5 13.20
2003................ 3 5,884 3.2 68,336 4.5 11.61
2004................ 2 34,999 18.8 262,640 17.4 7.50
2005................ 0 0 0.0 0 0.0 0
2006................ 0 0 0.0 0 0.0 0
2007 and
thereafter....... 3 97,594 52.5 627,165 41.4 6.43
-- ------- ----- ---------- ----- ------
Total....... 28 185,938 100.0% $1,513,584 100.0% $ 8.14
== ======= ===== ========== ===== ======
</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 per square foot and $9.67 per square foot, 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.
46
<PAGE> 52
Although Eckerd Drugs has vacated its 8,715 square foot space, it is
obligated to pay annual minimum rent of $82,793 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. According to the
City of Austin Transportation Study, Burnet Road has a traffic count of over
30,000 cars daily. Centennial is located in the north/central Austin trade area,
which is considered an "in-fill" (i.e., a developed area with limited space
available for development by additional competition).
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 12
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
December 31, 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 December
31, 1997, Centennial was 90.9% leased, with approximately 67.8% 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,
1997, 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 $103,811.
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, 1993........................................... 80.0%
December 31, 1994........................................... 65.0
December 31, 1995........................................... 81.0
December 31, 1996........................................... 78.0
December 31, 1997........................................... 90.9
</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
INCOME PER
PERIOD: SQ. FT. OF GLA
------- --------------
<S> <C>
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
Year ended December 31, 1997................................ 7.46
</TABLE>
47
<PAGE> 53
The following table shows, as of December 31, 1997, Centennial's anchor
tenants, their GLA, gross annual rent for 1997 and lease expiration date, not
including renewal options:
<TABLE>
<CAPTION>
GROSS LEASE
TENANT GLA ANNUAL RENT EXPIRATION DATE
------ ------ ----------- -----------------
<S> <C> <C> <C>
Drug Emporium.............................. 31,050 $253,058 August 31, 2001
Tuesday Morning............................ 23,493 140,958 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>
1998.................... 1 1,420 1.9% $ 15,620 2.5% $11.00
1999.................... 1 3,155 4.3 106,380 16.8 33.72
2000.................... 5 10,479 14.3 135,235 21.3 12.91
2001.................... 2 32,450 44.4 211,913 33.4 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.................... 0 0 0.0 0 0.0 0
2007 and thereafter..... 0 0 0.0 0 0.0 0
-- ------ ----- -------- ----- ------
Total........... 12 73,157 100.0% $633,646 100.0% $ 8.66
== ====== ===== ======== ===== ======
</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 per square foot, $8.96 per square foot and
$10.32 per square foot, respectively. Drug Emporium has a one-time only option
to cancel which 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 per square foot.
Park Northern Shopping Center
Park Northern is a 128,378 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 general partner interests. The shopping center is located in
the Glendale area, which is the northwest quadrant of Phoenix.
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. According to the City of Phoenix, 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 total gross revenues. 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). 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.
48
<PAGE> 54
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 23 tenants ranging in size from 735 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 90.6% occupied.
In 1997, Park Northern accounted for approximately 17.0% of total GLA and
14.0% of the total annualized minimum rents from the Original Properties. As of
December 31, 1997, Park Northern was 90.6% 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,
1997, 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 $3.84 per $100 of assessed value, resulting in a 1997 realty tax
of approximately $217,717.
As of December 31, 1996 and December 31, 1997, 85.0% and 90.6%,
respectively, of the GLA at Park Northern was leased. The percentage of Park
Northern's GLA leased as of December 31, 1997, without considering Walgreen's is
81.3%.
For the years ended December 31, 1996, and December 31, 1997, the average
rental income per square foot of GLA at Park Northern was $4.86 and $4.99,
respectively.
The following table shows, as of December 31, 1997, Park Northern's anchor
tenant, its 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>
Safeway............................................... 53,037 $292,876 May 31, 2003
</TABLE>
Scheduled lease expirations at Park Northern during the next 10 years are
as follows:
<TABLE>
<CAPTION>
EFFECTIVE ANNUAL RENTAL INCOME
GROSS LEASEABLE AREA ---------------------------------
NO. OF ---------------------- AVERAGE
LEASE LEASES APPROXIMATE PERCENT PERCENT PER
EXPIRATION EXPIRING SQ. FT. OF TOTAL AMOUNT OF TOTAL SQ. FT.
---------- -------- ----------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1998...................... 2 4,079 3.5% $ 33,593 4.9% $ 8.24
1999...................... 4 4,935 4.2 59,220 8.6 12.00
2000...................... 4 10,126 8.7 94,604 13.8 9.34
2001...................... 5 12,616 10.8 136,619 19.9 10.83
2002...................... 5 6,650 5.7 79,235 11.5 11.92
2003...................... 2 65,921 56.7 228,782 33.3 3.47
2004...................... 0 0 0.0 0 0.0 --
2005...................... 0 0 0.0 0 0.0 --
2006...................... 0 0 0.0 0 0.0 0
2007 and thereafter....... 1 12,000 10.4 55,200 8.0 4.60
-- ------- ----- -------- ----- ------
Total.................. 23 116,327 100.0% $687,253 100.0% $ 5.91
== ======= ===== ======== ===== ======
</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.
Although Walgreen's has given notice that it plans to vacate its 12,000
square foot space, it is obligated to pay annual minimum rent of $85,697 through
the term of the lease, which expires April 30, 2011.
49
<PAGE> 55
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. According to the Bryan/College Station Metropolitan Planning
Organization, University Drive has a traffic count of over 38,000 cars daily.
The property includes 9.275 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 approximately 13,000
square feet of additional retail space. The shopping center was built in 1991.
University Park has five 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 98.0% occupied.
In 1997, University Park accounted for approximately 12.2% of total GLA and
14.9% of the total annualized minimum rents from the Original Properties. As of
December 31, 1997, University Park was 98.0% leased, with approximately 87.8% of
its GLA occupied by its anchor tenant.
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, 1997, 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 $152,013.
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, 1993........................................... 100.0%
December 31, 1994........................................... 100.0
December 31, 1995........................................... 100.0
December 31, 1996........................................... 100.0
December 31, 1997........................................... 98.0
</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
INCOME PER SQ. FT.
PERIOD: 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
Year ended December 31, 1997................................ 8.14
</TABLE>
The following table shows, as of December 31, 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 $823,790 April 12, 2023
</TABLE>
50
<PAGE> 56
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> <C>
1998............... 2 3,239 3.6% $ 44,914 6.1% $13.87
1999............... 0 0 0.0 0 0.0 --
2000............... 1 2,349 2.6 31,395 4.3 13.37
2001............... 0 0 0.0 0 0.0 --
2002............... 1 3,777 4.2 56,655 7.7 15.00
2003............... 0 0 0.0 0 0.0 0
2004............... 0 0 0.0 0 0.0 --
2005............... 0 0 0.0 0 0.0 --
2006 0 0 0.0 0 0.0 0
2007 and
thereafter...... 1 80,478 89.6 601,013 81.9 7.47
-- ------ ----- -------- ----- ------
Total...... 5 89,843 100.0% $733,976 100.0% $ 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 recently acquired four community shopping centers:
Southwest/Walgreen's Shopping Center, Hedwig Shopping Centers, The Market at
First Colony and Mason Park Centre. The Company has contracts or options to
acquire four additional community shopping centers: Rosemeade Park Shopping
Center, Benchmark Crossing Shopping Center, Town 'N Country Plaza and University
Mall Shopping Center. Set forth below is additional information with respect to
such properties.
Benchmark Crossing
Benchmark Crossing is a 58,384 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 February 1998, the federal tax basis of Benchmark
Crossing will be its purchase price plus closing costs, estimated to be
$5,700,000. 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 $131,946.
51
<PAGE> 57
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, 1993........................................... 100.0%
December 31, 1994........................................... 100.0
December 31, 1995........................................... 100.0
December 31, 1996........................................... 100.0
December 31, 1997........................................... 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
INCOME PER SQ. FT.
PERIOD: OF GLA(1)
------- ------------------
<S> <C>
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
Year ended December 31, 1997................................ 11.30
</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>
ANNUALIZED BASE RENTAL INCOME
GROSS LEASABLE AREA ---------------------------------
---------------------- AVERAGE
LEASE NO. OF LEASES APPROXIMATE PERCENT PERCENT PER
EXPIRATION EXPIRING SQ. FT. OF TOTAL AMOUNT OF TOTAL SQ. FT.
- --------------------------- ------------- ----------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 0.00
2006..................... 2 44,041 75.4 387,571 58.4 8.80
2007 and thereafter...... 2 7,343 12.6 185,000 27.9 25.19
- ------ ----- -------- ----- ------
Total............ 5 58,384 100.0% $663,571 100.0% $11.37
= ====== ===== ======== ===== ======
</TABLE>
Two tenants, Bally's Fitness Center and Click's Billiards, 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.
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 is a major east/west thoroughfare. 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.
52
<PAGE> 58
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 $11.73.
The inner west submarket rates are substantially higher than Hedwig's because of
the higher rental rates at Memorial City Mall which has in excess of 1,000,000
square feet.
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.
The federal tax basis of Hedwig Shopping Centers is its purchase price plus
closing costs, or approximately $6,750,000. The realty tax rate on Hedwig
Shopping Centers is approximately $2.85 per $100 of assessed value, resulting in
a 1997 realty tax of approximately $134,647.
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, 1993........................................... 100.0%
December 31, 1994........................................... 98.0
December 31, 1995........................................... 100.0
December 31, 1996........................................... 80.9
December 31, 1997........................................... 98.2
</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
INCOME PER SQ. FT.
PERIOD: OF GLA(1)
------- ------------------
<S> <C>
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
Year ended December 31, 1997................................ 11.88
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the seller.
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>
1998.................. 1 6,612 9.7% $112,668 13.3% $17.04
1999.................. 0 0 0.0 0 0.0 0
2000.................. 5 22,965 33.6 309,193 36.4 13.46
2001.................. 1 2,564 3.8 41,024 4.8 16.00
2002.................. 3 9,188 13.4 164,820 19.4 17.94
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.................. 0 0 0.0 0 0.0 0
2007 and thereafter... 1 27,000 39.5 222,480 26.1 8.24
-- ------ ----- -------- ----- ------
Total......... 11 68,329 100.0% $850,185 100.0% $12.44
== ====== ===== ======== ===== ======
</TABLE>
53
<PAGE> 59
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 31 tenants
ranging in size from 825 square feet to 25,220 square feet.
The federal tax basis of The Market at First Colony is its purchase price
plus closing costs, or approximately $11,925,000. The realty tax rate on The
Market at First Colony is approximately $3.61 per $100 of assessed value,
resulting in a 1997 realty tax of approximately $277,941.
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, 1993........................................... 97.2%
December 31, 1994........................................... 93.4
December 31, 1995........................................... 100.0
December 31, 1996........................................... 95.0
December 31, 1997........................................... 96.6
</TABLE>
- ---------------
(1) Based on unaudited information provided by the seller.
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
INCOME PER SQ. FT.
PERIOD: OF GLA(1)
------- ------------------
<S> <C>
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
Year ended December 31, 1997................................ 13.93
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the seller.
54
<PAGE> 60
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>
1998................ 7 14,993 16.5% $ 271,993 21.0% $18.14
1999................ 7 13,440 14.8 235,850 18.2 17.55
2000................ 10 17,378 19.1 290,476 22.4 16.72
2001................ 2 3,781 4.2 68,058 5.3 18.00
2002................ 3 30,820 33.9 280,915 21.7 9.11
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 11.5 147,876 11.4 13.91
-- ------ ----- ---------- ----- ------
Total....... 31 91,041 100.0% $1,295,168 100.0% $14.23
== ====== ===== ========== ===== ======
</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. Schlotzsky'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 980 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 January 31, 2006, January 1, 2000, January 31, 2005 and October
31, 2015, respectively. The center is approximately 92.6% occupied.
The federal tax basis of Mason Park Centre is its purchase price plus
closing costs, or approximately $15,325,000. The realty tax rate on Mason Park
Centre is approximately $3.11 per $100 of assessed value, resulting in a 1997
realty tax of approximately $390,845.
The following table sets forth the percentage of GLA at Mason Park Centre
which was leased as of December 31 for each of the last three years:
<TABLE>
<CAPTION>
AS OF: PERCENTAGE LEASED(1)
------ --------------------
<S> <C>
December 31, 1995........................................... 97.7%
December 31, 1996........................................... 98.0
December 31, 1997........................................... 92.6
</TABLE>
- ---------------
(1) Based on unaudited information provided by the seller.
For the years ended December 31, 1996 and December 31, 1997, the average
rental income per square foot of GLA at Mason Park Centre was $9.91 and $10.05,
respectively.
55
<PAGE> 61
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>
1998.................. 3 4,623 3.1% $ 59,568 3.7% $12.88
1999.................. 7 13,999 9.4 170,732 10.6 12.20
2000.................. 9 41,092 27.7 463,982 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 51,024 3.2 10.00
2004.................. 1 2,404 1.6 28,848 1.8 12.00
2005.................. 2 19,173 12.9 179,720 11.2 9.37
2006.................. 2 31,522 21.4 272,064 16.9 8.63
2007 and thereafter... 1 10,998 7.5 115,479 7.2 10.50
-- ------- ------ ---------- ------ ------
Total......... 33 148,210 100.0% $1,606,557 100.0% $10.84
== ======= ====== ========== ====== ======
</TABLE>
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 5.2 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 has 16 tenants (and one ground lease) ranging in size
from 1,125 square feet to 14,000 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, 2008 and Blockbuster Video recently renewed its lease
through March 31, 2003. The center is approximately 86.6% occupied.
After its acquisition, anticipated for early March 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 $2.93 per $100 of assessed value, resulting in an
estimated 1997 realty tax of approximately $95,629.
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, 1993........................................... 84.0%
December 31, 1994........................................... 81.0
December 31, 1995........................................... 84.0
December 31, 1996........................................... 81.0
December 31, 1997........................................... 86.6
</TABLE>
- ---------------
(1) Based on unaudited information provided by the seller.
56
<PAGE> 62
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
INCOME PER SQ. FT.
PERIOD: OF GLA
------- ------------------
<S> <C>
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
Year ended December 31, 1997................................ 10.31
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the seller.
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>
1998..................... 4 7,670 17.9% $ 90,007 16.4% $11.73
1999..................... 2 3,280 7.6 35,152 6.4 10.72
2000..................... 6 9,232 21.5 92,668 16.9 10.04
2001..................... 1 1,200 2.8 15,600 2.8 13.00
2002..................... 2 1,332 3.1 100,776 18.4 75.66
2003..................... 1 6,194 14.4 77,425 14.1 12.50
2004..................... 0 0 0.0 0 0.0 0
2005..................... 0 0 0.0 0 0.0 0
2006..................... 0 0 0.0 0 0.0 0
2007 and thereafter...... 1 14,000 32.7 137,060 24.9 9.79
-- ------ ----- -------- ----- ------
Total 17 42,908 100.0% $548,688 100.0% $12.79
== ====== ===== ======== ===== ======
</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, 2008 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.
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.
The federal tax basis of Southwest/Walgreen's is its purchase price plus
closing costs, or approximately $4,800,000. The realty tax rate on
Southwest/Walgreen's is approximately $3.38 per $100 of assessed value,
resulting in a 1997 realty tax of approximately $113,323.
57
<PAGE> 63
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, 1993........................................... 85.0%
December 31, 1994........................................... 96.0
December 31, 1995........................................... 98.0
December 31, 1996........................................... 100.0
December 31, 1997........................................... 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 four years:
<TABLE>
<CAPTION>
AVERAGE RENTAL
INCOME PER SQ. FT.
PERIOD: 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
Year ended December 31, 1997................................ 6.52
</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
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>
1998........................ 4 5,040 6.0% $ 59,062 10.7% $11.72
1999........................ 6 13,764 16.4 155,264 28.2 11.28
2000........................ 5 49,514 59.2 188,826 34.3 3.81
2001........................ 4 15,380 18.4 147,446 26.8 9.59
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........................ 0 0 0.0 0 0.0 0
2007 and thereafter......... 0 0 0.0 0 0.0 0
-- ------ ----- -------- ----- ------
Total............... 19 83,698 100.0% $550,598 100.0% $ 6.58
== ====== ===== ======== ===== ======
</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.
Town 'N Country Plaza
Town 'N Country Plaza is a 158,104 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.
The shopping center has 17 tenants ranging in size from 320 square feet to
50,000 square feet. Additionally, separate buildings are leased to Checkers, a
fast food restaurant, and to NationsBank for an
58
<PAGE> 64
ATM. Kentucky Fried Chicken is located on a free-standing parcel within the
shopping center. 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, anticipated for March 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 $2.56 per
$100 of assessed value, resulting in an estimated 1997 realty tax of
approximately $97,271.
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, 1993........................................... 100.0%
December 31, 1994........................................... 100.0
December 31, 1995........................................... 67.7
December 31, 1996........................................... 100.0
December 31, 1997........................................... 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
RENTAL INCOME PER
PERIOD: SQ. FT.(1)
------- ------------------------
<S> <C>
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
Year ended December 31, 1997................................ 4.02
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the seller.
Scheduled lease expirations at Town 'N Country during the next 10 years are
as follows:
<TABLE>
<CAPTION>
EFFECTIVE ANNUAL RENTAL INCOME
GROSS LEASABLE AREA ----------------------------------
----------------------- AVERAGE
LEASE NO. OF LEASES APPROXIMATE PERCENT PERCENT PER
EXPIRATION EXPIRING SQ. FT. OF TOTAL AMOUNT OF TOTAL SQ. FT.
---------- -------------- ----------- --------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
1998................... 6 8,420 5.3% $ 86,700 12.3% $10.30
1999................... 3 27,120 17.2 169,120 24.0 6.24
2000................... 0 0 0.0 0 0.0 0
2001................... 0 0 0.0 0 0.0 0
2002................... 7 119,300 75.5 419,872 59.5 3.52
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................... 0 0 0.0 0 0.0 0
2007 and thereafter.... 1 3,264 2.0 30,000 4.2 9.19
-- ------- ----- -------- ----- ------
Total.......... 17 158,104 100.0% $705,692 100.0% $ 4.46
== ======= ===== ======== ===== ======
</TABLE>
59
<PAGE> 65
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 16,296 square feet and 26,625 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 36 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 February 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 $2.57 per $100 of
assessed value, resulting in an estimated 1997 realty tax of approximately
$324,339.
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, 1993........................................... 92.4%
December 31, 1994........................................... 90.7
December 31, 1995........................................... 94.8
December 31, 1996........................................... 97.6
December 31, 1997........................................... 98.0
</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
INCOME PER SQ. FT.
PERIOD: OF GLA(1)
------- ------------------
<S> <C>
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
Year ended December 31, 1997................................ 6.19
</TABLE>
- ---------------
(1) Based on unaudited, cash basis financial statements provided by the seller.
60
<PAGE> 66
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>
1998.................. 4 10,572 3.4% $ 132,895 6.4% $12.57
1999.................. 9 21,935 7.1 287,408 13.8 13.10
2000.................. 7 11,711 3.8 160,072 7.7 13.67
2001.................. 3 27,054 8.8 258,409 12.4 9.55
2002.................. 8 139,243 45.2 642,839 30.9 4.62
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.................. 0 0 0.0 0 0.0 0
2007 and thereafter... 4 73,831 24.1 467,392 22.6 6.33
-- ------- ----- ---------- ----- ------
Total......... 36 307,846 100.0% $2,078,255 100.0% $ 6.75
== ======= ===== ========== ===== ======
</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.
TENANT DELINQUENCIES AND BANKRUPTCIES
As of December 31, 1997 two tenants, representing 1.6% of the total GLA of
the Original Properties, were consistently delinquent with their rent.
Management expects these tenants to vacate and is actively seeking replacement
tenants. Management is not aware of any tenants that are currently in
bankruptcy.
61
<PAGE> 67
MORTGAGE INDEBTEDNESS
The following table sets forth certain information regarding the mortgage
indebtedness of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
PROJECTED
DEBT TO BE ANNUAL
REPAID UPON INTEREST RATE INTEREST
COMPLETION BALANCE TO ON BALANCE PAYMENTS
BALANCE AS OF THE REMAIN REMAINING MATURITY AS
PROPERTY OF 12/31/97 OFFERING OUTSTANDING OUTSTANDING DATES(1) OF 12/31/97
-------- ----------- ----------- ----------- ------------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ORIGINAL PROPERTIES:
- ----------------------------------
Twin Lakes Shopping Center(4)..... $ 1,735 $ 1,735 $ 0 --% 05/10/05 $ 0
Autobahn Shopping Center(4)....... 1,131 1,131 0 -- 11/30/98 0
Centennial Shopping
Center(3)(4).................... 3,744 3,744 0 -- 09/25/98 0
Centennial Shopping Center(4)..... 124 124 0 -- 09/25/98 0
Centennial Shopping Center(4)..... 7 7 0 -- 03/25/98 0
Bandera Festival Shopping
Center(2)(4).................... 7,772 7,772 0 -- 03/31/99 0
University Park Shopping Center... 4,798 0 4,798 9.30 04/01/18 443
McMinn Plaza Shopping Center...... 387 0 387 8.25 07/01/03 30
McMinn Plaza Shopping Center...... 703 0 703 7.63 11/01/02 49
Park Northern Shopping Center..... 2,743 0 2,743 8.37 12/01/06 227
El Campo Shopping Center(3)(4).... 1,576 1,576 0 -- 06/27/03 0
College Station land(5)........... 206 0 206 8.50 12/27/99 18
------- ------- ------- ------
Total Original
Properties............. $24,926 $16,089 $ 8,837 $ 767
ACQUISITION PROPERTIES:
- ----------------------------------
The Market at First Colony........ 0 0 0 -- -- 0
Hedwig Shopping Centers........... 3,577 0 3,577 10.75 06/10/99 383
Benchmark Crossing................ 3,695 0 3,695 9.25 08/01/05 340
University Mall Shopping Center... 13,347 0 13,347 8.44 12/01/06 1,122
Mason Park Centre................. 0 0 0 -- -- 0
Rosemeade Park Shopping Center.... 3,497 0 3,497 8.30 12/01/07 288
Town 'N Country Plaza............. 2,500 2,500 0 -- 11/01/02 0
Southwest/Walgreen's Shopping
Center.......................... 0 0 0 -- -- 0
------- ------- ------- ------
Total Acquisition
Properties............. $26,616 $ 2,500 $24,116 $2,133
------- ------- ------- ------
Total Mortgage Indebtedness....... $51,542 $18,589 $32,953 $2,900
======= ======= ======= ======
</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 a portion of McMinn Plaza Shopping Center may not
be prepaid until July 1999 and can be prepaid thereafter with a penalty of
5% in the first year thereafter, 4% in the second year, 3% in the third year
and 2% in the fourth and fifth 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 1999. 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) Mortgages on five properties, with a combined balance of approximately
$16,000,000, were repaid from the proceeds of a $56,800,000 bridge loan that
is 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.
(5) The interest rate accrues at the prime rate of Chase Bank of Texas, which
was 8.5% at December 31, 1997.
62
<PAGE> 68
As of December 31, 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
9.15% and a weighted maturity of 6.17 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. Percentage
rents represented approximately 0.54% of gross rental revenue from the Original
Properties, or approximately $26,400, for the year ended December 31, 1997.
CAPITAL EXPENDITURES
The following table sets forth information relating to historical capital
expenditures (excluding tenant improvements) on the Company's Original
Properties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Total capital expenditures......................... $ 50,056 $ 66,160 $ 79,885
Average number of square feet(1)................... 754,563 594,457 542,095
Capital expenditures per square foot............... $ 0.07 $ 0.11 $ 0.15
Three year average capital expenditure per square
foot............................................. $ 0.11
</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, private REITs, smaller public 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
63
<PAGE> 69
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 and
Condemnation."
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 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 within the past 18 months. See "Risk Factors -- Environmental
Matters." The purpose of the 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.
64
<PAGE> 70
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.
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.
65
<PAGE> 71
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
The organizational documents of the Company do not contain any limitations
on the amount or percentage of indebtedness the Company may incur, nor does the
Company have a policy limiting the amount of indebtedness that the Company may
incur. As a general policy, however, the Company intends to maintain a ratio of
total indebtedness to Total Market Capitalization of approximately 50%. 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 December 31, 1997, after giving effect to the
Offering, the Company had a ratio of long-term debt to Total Market
Capitalization of 28.0%. See "Capitalization." Assuming no change in the market
value of issued and outstanding Common Shares, the Company would be able to
incur approximately $52,200,000 of additional indebtedness and still maintain a
ratio of long-term debt to Total Market Capitalization of 50%. The Company,
however, may at any time and from time to time reevaluate and change 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 Trust Managers will
consider a number of factors when evaluating the Company's level of indebtedness
and when making decisions regarding the incurrence of indebtedness, including
the purchase price of properties to be acquired with debt financing, the
estimated market value of its properties upon refinancing, and the ability of
particular properties and the Company as a whole to generate cash flow to cover
expected debt service.
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
66
<PAGE> 72
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.
67
<PAGE> 73
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.
The following table sets forth the names and positions of the Trust
Managers and executive 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........................ 62 Trust Manager
Josef C. Hermans........................ 55 Trust Manager
William C. Brooks....................... 61 Trust Manager
Ira T. Wender........................... 71 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. The Investment Manager 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. Scharar 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. Mr. Coleman
also serves as a Trust Manager of Ivy and of FCMT.
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
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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 Massachusetts 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.
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, Webb
& Tyler, New York, New York, which he joined in January 1993. 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. He 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 Southwest 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
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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.
COMPENSATION OF TRUST MANAGERS
For services provided during fiscal 1997, Messrs. Coleman, Hermans and
Brooks received 800 Common Shares in December 1997. Messrs. Coleman, Hermans,
Brooks and Wender were each 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. 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. 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 1997 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 annualized
base salary paid to each of
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the Named Executive Officers by the Investment Manager for the 1997 fiscal year
and their estimated compensation for the 1998 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------
AWARDS
ANNUAL COMPENSATION -----------------------
---------------------------------- RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL SHARE UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
-------- ------ -------- ------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lewis H. Sandler 1997 $ 67,166(1) $ -- $ -- $100,000(5) -- --
President and Chief 1998 155,000(2) 25,000(2) -- -- 40,000(6) --
Executive Officer
Daniel M. Jones, III 1997 $ 63,750(3) $ -- $ 675 $ 80,000(5) -- --
Chief Financial
Officer 1998 106,667(3) 15,000(2) -- -- 32,000(6) --
Randall D. Keith 1997 $ 67,548(4) $ -- $7,480 $ 80,000(5) -- --
Vice President and 1998 93,334(2) -- -- -- 32,000(6) --
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 estimated compensation for fiscal 1998, assuming the Offering is
completed in early March 1998.
(3) The 1997 compensation and a portion of the 1998 compensation represent sums
paid to Mr. Jones in his capacity as a consultant to the Company. Upon
consummation of the Offering, Mr. Jones will become an employee of the
Investment Manager and his salary will be paid by the Investment Manager.
Mr. Jones will be dedicated by the Investment Manager solely to perform
services for the Company.
(4) 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.
(5) Based solely upon the Offering price of $10.00 per share and does not
necessarily reflect the fair market value of the shares. The restricted
shares vest in 25% increments every six months, with the first vesting to
occur on June 30, 1998. The recipients of restricted share awards under the
Plan will receive distributions with respect to all of the shares. The only
restricted shares held by the Named Executive Officers are listed above.
(6) It is anticipated that the Investment Manager will award a portion of the
Options it receives to purchase 300,000 Common Shares in connection with the
Offering to the Named Executive Officers as listed above. The options will
vest in 25% annual increments beginning January 1, 1999. Vested options may
be exercised for a period of five years. Payment for the Common Shares upon
exercise will be made by the optionee's delivering to the Company a
four-year promissory note in the original principal amount equal to the
aggregate exercise price. The promissory note will bear interest at the
Mid-Term Annual Compounding Applicable Federal Rate (as defined in the
Code). The Mid-Term Annual Compounding Applicable Federal Rate on March 2,
1998 was 5.59%. Principal of the promissory note will be payable in four
equal annual installments, together with accrued but unpaid interest. If the
optionee is an employee or Trust Manager of the Company on the date an
annual installment of principal is due, 80% of the annual installment (20%
of the original principal amount) due will be forgiven by the Company, and
the optionee will only be required to make a payment to the Company in an
amount equal to 20% of the principal installment due, together with all
accrued but unpaid interest.
None of the Company's executive officers has an employment agreement with
either the Company or the Investment Manager.
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. It is currently anticipated that the
Advisory Board will have seven seats. In some instances, such as when a
partnership or corporation is awarded a seat, more than one representative of
such entity may share the board seat. In such cases, more than one
representative of such entity may attend meetings, but the expenses of only one
individual will be paid by the Company. The professionals on the Advisory Board
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
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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 to attend such
meetings. 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. In those instances where a partnership or
corporation holds a seat, the entity may direct the division of the award among
its representatives.
Under Texas law, Advisory Board members have no fiduciary duties to
shareholders. They will, however, obtain non-public information about the
Company by attending Board meetings. Accordingly, they must comply with
applicable federal and state securities laws.
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 in that although all three of them may attend all Advisory Board
meetings, the group will be compensated and reimbursed for the expenses of only
one member of the group. 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.
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
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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 of restricted shares and non-qualified share options as well as incentive
share options.
Under the Plan, 5,000,000 Common Shares are reserved for issuance;
provided, however, the number of shares subject to outstanding options may not
exceed 10% of the outstanding Common Shares. 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. Non-qualified stock options will expire not
more than 10 years from the date of grant.
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 December 1997, 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 immediately prior to
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. The Investment Manager has identified the following persons
to receive a portion of its options to purchase 300,000 shares: Messrs. Scharar
(40,000), Sandler (40,000), Jones (32,000) and Keith (32,000) and each of the
independent Trust Managers (2,000). The remaining options to purchase 156,000
shares will be held by the Investment Manager. These options will be exercisable
at $10.00 per share 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. See "Management -- Executive Compensation," note 6.
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."
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
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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 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.
The Company currently maintains director and officer liability insurance in
the amount of $1,000,000.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
As of June 9, 1997, the Company amended the Advisory Agreement with the
Investment Manager. The Advisory Agreement is effective the first day of the
quarter in which the Registration Statement of which this Prospectus is a part
is declared effective. Under the terms of the Advisory Agreement, the Investment
Manager is obligated to use its best efforts to administer the day-to-day
operations of the Company and to implement the directives of the Trust Managers
with respect to property operations, maintenance, rehabilitation, acquisitions,
financings, refinancings and dispositions. 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, property managers,
builders, developers, banks and other lenders, and others as necessary in
connection with investments; (iv) maintain bank accounts, and arrange for
fidelity bonds with respect to all of the personnel handling funds and other
liquid 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; (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) supervise and monitor the services of
all professionals and agents retained by or for the benefit of the Trust to
ensure that the Properties are operated and the business of the Trust is
conducted in a prudent and businesslike manner; and (ix) render advice, and
where appropriate, assist in the conduct of the Trust's business and affairs.
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 terminate the Advisory
Agreement upon six months prior notice, and pay the Investment Manager a
termination fee (the "Termination Fee") equal to 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,
less any sums paid or payable to the Investment Manager for the calendar months
(up to a maximum of six) following the giving of notice but prior to the
termination date. 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
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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
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 the first day of the calendar
quarter in which the Registration Statement of which this Prospectus is a part
is declared effective, the Investment Manager will be entitled to a fee equal to
6.8% of Advisory Funds From Operations. Based upon revenues of the Company for
fiscal 1997, on a pro forma basis, the fee payable to the Investment Manager for
fiscal 1997 would have been approximately $287,598. The Company believes that
the terms of the Advisory Agreement are as favorable as could be obtained from
an independent third party.
The Company is acquiring University Mall with $1,400,000 borrowed from
FCMT, an affiliate of the Investment Manager, and a purchase money promissory
note from the seller of the shopping center (not an affiliate of the Company).
FCMT is a mortgage REIT that is also managed by the Investment Manager. The note
to FCMT bears interest at the rate of 12% per annum and matures on June 30,
1998. It is secured by a second mortgage on the Autobahn property. The Company
believes the loan from FCMT is on terms as favorable as could be obtained from
an independent third party.
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 connection with services rendered in connection with 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 immediately prior to 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. See "Management -- Share Incentive
Plan." 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. See "Management -- Executive Compensation,"
note 6.
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<PAGE> 81
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Shares as of December 31, 1997 and the
Common Shares to be acquired in the Offering, 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 PERCENT OF
COMMON SHARES CLASS 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) 9.15% *%
c/o J.M. Haley
7149 Hillgreen
Dallas, TX 75214
FCA Corp (Investment Manager).. 31,000(2) 3.39 *
5847 San Felipe, Suite 850
Houston, TX 77057
Alfred S. Ross................. 47,367 5.18 *
150 Elm Street
S. Dartmouth, MA 02748
Robert W. Scharar.............. 65,302(3) 6.59 *
c/o FCA Corp
5847 San Felipe, Suite 850
Houston, TX 77057
Jerry M. Coleman............... 5,669(4)(6) * *
Josef C. Hermans............... 5,626(6)(9) * *
William C. Brooks.............. 8,600(6)(10) * *
Ira T. Wender.................. 7,000(6)(11) *
Randall D. Keith............... 10,000(7) 1.04 *
Lewis H. Sandler............... 60,000(5) 1.09 *
Daniel M. Jones, III........... 10,000(8) * *
Trust Managers / Officers as a
Group (8 persons)............ 172,197(3)(4)(5)(6)(7)(8) 11.33 2.02
(9)(10)(11)
</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.
(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.
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. Also
includes 5,000 Common Shares Mr. Scharar expects to acquire in the
Offering.
(4) Includes 1,569 Common Shares which are registered to Azar-Coleman
Properties and controlled by Mr. Coleman and 500 Common Shares which Mr.
Coleman plans to acquire in the Offering.
(5) Includes 10,000 Common Shares awarded under the Plan to Mr. Sandler in
December 1997. In addition, Mr. Sandler, on behalf of himself and trusts
for the benefit of his immediate family, expects to acquire at least 50,000
Common Shares in the Offering.
(6) Includes 2,000 Common Shares awarded under the Plan to each independent
Trust Manager in December 1997.
(7) Includes 8,000 Common Shares awarded under the Plan in December 1997 and
500 Common Shares that Mr. Keith plans to acquire in the Offering.
(8) Includes 8,000 Common Shares awarded under the Plan in December 1997 and
2,000 Common Shares that Mr. Jones plans to acquire in the Offering.
(9) Includes 500 Common Shares that Mr. Hermans plans to acquire in the
Offering.
(10) Includes 5,000 Common Shares that Mr. Brooks plans to acquire in the
Offering.
(11) Includes 5,000 Common Shares that Mr. Wender plans to acquire in the
Offering.
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<PAGE> 82
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, 8,514,889 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 1,140,000 Common Shares
which may be purchased by the Underwriters to cover over-allotments.
As of December 31, 1997, there were 914,889 Common Shares and 10,737 shares
of 9% Convertible Preferred Shares, Series 1995, par value $100 per share ("9%
Preferred Shares"), issued and outstanding.
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. The Company has no present intention to
issue any additional Preferred Shares or any other new class of securities.
The Company currently has outstanding 10,737, $100 par value, 9% Redeemable
Preferred Shares. Dividends on the 9% Redeemable Preferred Shares are cumulative
from date of issuance and payable on a quarterly basis. The 9% Redeemable
Preferred Shares are convertible at the option of the holder into Common Shares
at a conversion price of $12.50 per share, subject to adjustment under certain
conditions. The 9% Redeemable 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 9%
Redeemable Preferred Shares being redeemed and the premium. The premium is based
upon a declining scale beginning at 3% in 1998 and decreasing 1% each year
thereafter.
The Company is required to purchase and redeem 20% of the number of 9%
Redeemable Preferred Shares outstanding at a redemption price equal to par value
commencing on March 15, 2001 and annually thereafter until all such shares are
redeemed. Holders of 9% Redeemable Preferred Shares are entitled to limited
voting rights at one vote per share.
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
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<PAGE> 83
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 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.
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<PAGE> 84
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.
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.
TRANSFER AGENT AND REGISTRAR
The Company has appointed BankBoston, N.A. to act as transfer agent and
registrar for the Common Shares.
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.
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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.
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 20% 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
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<PAGE> 86
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 45
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 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
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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 consummation of the Offering, the Company will have a total of
8,514,889 Common Shares outstanding, of which 914,889 Common Shares will
constitute "restricted" securities as that term is defined in Rule 144 as
promulgated under the Securities Act. Of the 914,889 shares, a total of 834,397
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, 78,092 Common Shares will be eligible for
resale pursuant to Rule 144 and Rule 701 as promulgated under the Securities
Act. An aggregate of 103,697 Common Shares, which are restricted securities, are
subject to 180 day lock-up agreements with the Underwriters. Of the 103,697
shares, 101,297 of such 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.
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
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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 Investment Manager, 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 180
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 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) as 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
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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
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Company in all cases will be able to satisfy the share ownership requirements
described above. If the Company fails to satisfy those share ownership
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.
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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."
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 Test is eliminated, starting with a REIT's
first taxable year that begins after August 5, 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%
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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 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
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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.
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.
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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 that is not otherwise qualifying income for REIT purposes,
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.
PROPOSED LEGISLATION
President Clinton's budget proposal for 1999 includes several provisions
that would affect the tax treatment of REITs. Included among these provisions is
a call for a freeze on the grandfathered status of "stapled" or paired REITs.
Some REITs had previously bypassed certain REIT requirements, including the 95%
Income Test, by pairing or stapling REIT shares with management company shares.
These shares remained legally separate, but were traded as a pair. The Tax
Reform Act of 1984 changed the law governing REITs, and specified that entities
could no longer operate as stapled REITs. However, the law grandfathered several
entities which already were operating as stapled REITs. President Clinton has
also proposed that Code Section 856(c)(5)(B) be amended to prohibit REITs from
holding stock possessing more than 10 percent of the vote or value of all
classes of stock of a corporation. Further, another Clinton proposal would
impose an additional requirement for REIT qualification. Specifically, under the
Clinton proposal, no person could own stock of a REIT possessing more than 50%
of the total combined voting power of all classes of voting stock, or more than
50% of the total value of shares of all classes of stock.
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 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.
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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
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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) (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
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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 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.
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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 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., Dain Rauscher Incorporated, Scott & Stringfellow, 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>
DOMESTIC UNDERWRITER PARTICIPATION
-------------------- -------------
<S> <C>
Morgan Keegan & Company, Inc. .............................. 940,000
Dain Rauscher Incorporated ................................. 940,000
Scott & Stringfellow, Inc. ................................. 940,000
Southwest Securities, Inc. ................................. 940,000
Advest, Inc. ............................................... 160,000
Robert W. Baird & Co. Incorporated ......................... 160,000
J.C. Bradford & Co. ........................................ 160,000
Brean Murray & Co., Inc. ................................... 160,000
Crowell, Weedon & Co. ...................................... 160,000
Dominick & Dominick, Incorporated........................... 160,000
Suntrust Equitable Securities Corporation................... 160,000
EVEREN Securities, Inc. .................................... 160,000
Fahnestock & Co. Inc. ...................................... 160,000
Harris Webb & Garrison, Inc. ............................... 160,000
J.J.B. Hilliard, W.L. Lyons, Inc. .......................... 160,000
Interstate/Johnson Lane Corporation......................... 160,000
Legg Mason Wood Walker, Incorporated........................ 160,000
McDonald & Company Securities, Inc. ........................ 160,000
The Ohio Company............................................ 160,000
Piper Jaffray Inc. ......................................... 160,000
Ragen Mackenzie Incorporated................................ 160,000
Raymond James & Associates, Inc. ........................... 160,000
The Robinson-Humphrey Company, LLC.......................... 160,000
The Seidler Companies Incorporated.......................... 160,000
Stephens Inc. .............................................. 160,000
Stifel, Nicolaus & Company, Incorporated.................... 160,000
Tucker Anthony Incorporated................................. 160,000
Wheat, First Securities, Inc. .............................. 160,000
---------
Total............................................. 7,600,000
=========
</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 $0.40 per share. The Underwriters may allow, and
such dealers may re-allow, concessions not in excess of $0.10 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.
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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 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 1,140,000
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 7,600,000 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 180 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
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of at least six (6) months. In addition, the officers and Trust Managers of the
Company and the Investment Manager 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.
A fee of $284,000 has been earned by Southwest Securities, Inc. for
providing services in connection with the procurement of the bridge loan, of
which $100,000 has been paid and the balance of $184,000 will be paid from the
proceeds of the Offering. In addition, the Investment Manager has agreed to pay
Southwest Securities, Inc. a fee of $50,000 for financial consulting services in
connection with the structuring of the Offering.
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 sheets of the Company as of December 31, 1997 and
1996, 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, 1997, financial statement schedule III
as of December 31, 1997 and the statements of revenue and certain expenses for
Benchmark Crossing, Hedwig Centers, The Market at First Colony, Mason Park,
Rosemeade Park, Southwest/Walgreens, Town 'N Country, and University Mall for
the year ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the reports of Ernst & Young LLP,
independent auditors, 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, Mason Park, Rosemeade Park, Southwest/Walgreens, Town 'N
Country, and University Mall contain a paragraph that states 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, Mason Park, 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
LLP 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.
Ernst & Young LLP was engaged by the Company on October 29, 1997. During
fiscal 1996 and through October 29, 1997, the Company did not consult Ernst &
Young LLP regarding the application of accounting principles to a specified
transaction or any audit opinion.
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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. The Company's Registration Statement and the exhibits
thereto are accessible on the Commission's web site.
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
Nasdaq National Market 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 Market at First Colony, Hedwig Shopping
Centers, Benchmark Crossing, University Mall Shopping Center, Mason Park Centre,
Rosemeade Park Shopping Center, Town 'N Country Plaza and Southwest/Walgreen's
Shopping Center.
"ADA" means the Americans with Disabilities Act of 1990.
"Advisory Agreement" means the Amended and Restated Advisory Agreement
dated as of June 9, 1997, by and 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 and
non-cash share compensation expense plus or minus net cash provided by or used
in investing activities (including cash used for capital improvements) and
financing activities.
"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 entities in which the REIT holds an interest.
"GAAP" means generally accepted accounting principles in effect at date of
the Offering.
"GLA" means gross leasable area.
"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.
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"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 Autobahn Shopping Center, Bandera Festival
Shopping Center, Centennial Shopping Center, Twin Lakes Shopping Center,
University Park Shopping Center, McMinn Plaza Shopping Center, Park Northern
Shopping Center and El Campo Shopping Center.
"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 the 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.
"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.
99
<PAGE> 105
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES -- PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Introduction to Pro Forma Condensed Consolidated Financial
Statements............................................. F-3
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997...................................... F-4
Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1997................... F-5
Notes to Pro Forma Condensed Consolidated Financial
Statements............................................. F-6
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES -- FINANCIAL
STATEMENTS
Report of Independent Auditors............................ F-9
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995....................... F-11
Consolidated Statements of Redeemable Preferred Shares and
Common Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995....................... F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... F-13
Notes to Consolidated Financial Statements................ F-14
FINANCIAL STATEMENT SCHEDULE
Schedule III -- Real Estate and Accumulated Depreciation
as of December 31, 1997................................ F-23
Notes to Schedule III..................................... F-24
ACQUISITION PROPERTIES -- STATEMENTS OF REVENUE AND CERTAIN
EXPENSES
BENCHMARK CROSSING
Report of Independent Auditors............................ F-25
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-26
Notes to Statement of Revenue and Certain Expenses........ F-27
HEDWIG CENTERS
Report of Independent Auditors............................ F-29
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-30
Notes to Statement of Revenue and Certain Expenses........ F-31
MARKET AT FIRST COLONY
Report of Independent Auditors............................ F-33
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-34
Notes to Statement of Revenue and Certain Expenses........ F-35
MASON PARK
Report of Independent Auditors............................ F-37
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-38
Notes to Statement of Revenue and Certain Expenses........ F-39
ROSEMEADE PARK
Report of Independent Auditors............................ F-41
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-42
Notes to Statement of Revenue and Certain Expenses........ F-43
SOUTHWEST WALGREENS
Report of Independent Auditors............................ F-45
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-46
Notes to Statement of Revenue and Certain Expenses........ F-47
</TABLE>
F-1
<PAGE> 106
TOWN 'N COUNTRY
Report of Independent Auditors............................ F-49
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-50
Notes to Statement of Revenue and Certain Expenses........ F-51
UNIVERSITY MALL
Report of Independent Auditors............................ F-53
Statement of Revenue and Certain Expenses for the year
ended December 31, 1997................................ F-54
Notes to Statement of Revenue and Certain Expenses........ F-55
F-2
<PAGE> 107
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION:
The unaudited pro forma condensed consolidated balance sheet as of December
31, 1997 is presented as if the Acquisition Transactions, the Offering, and the
application of the net proceeds of the Offering all had occurred on December 31,
1997. The pro forma condensed consolidated statement of operations for the year
ended December 31, 1997 is presented as if the such transactions all had
occurred on January 1, 1997.
The pro forma condensed consolidated 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 consolidated financial statements do not
purport to represent the Company's financial position of December 31, 1997 that
would actually have occurred had such transactions all been completed on
December 31, 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-3
<PAGE> 108
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
UNITED INVESTORS PRO FORMA TOTAL
REALTY TRUST ADJUSTMENTS PRO FORMA
---------------- ------------ ------------
<S> <C> <C> <C>
Investment real estate:
Land...................................... $ 8,118,723 $ 10,810,200(A) $ 18,928,923
Buildings and improvements................ 31,616,008 61,257,800(A) 93,055,790
181,982(B)
----------- ------------ ------------
39,734,731 72,249,982 111,984,713
Less accumulated depreciation............. (4,861,957) (4,861,957)
----------- ------------ ------------
Investment real estate, net............ 34,872,774 72,249,982 107,122,756
Cash and cash equivalents................... 346,149 (45,845,719)(A) 682,131
(1,753,000)(B)
69,630,814(C)
(3,225,000)(D)
(212,400)(E)
(16,305,213)(F)
(1,953,500)(G)
Accounts receivable, net.................... 797,696 797,696
Prepaid expenses and other assets........... 3,270,350 (2,255,000)(A) 1,015,350
----------- ------------ ------------
Total assets...................... $39,286,969 $ 70,330,964 $109,617,933
=========== ============ ============
LIABILITIES, MINORITY INTEREST, REDEEMABLE PREFERRED SHARES
AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable.................... $24,926,499 $ 23,967,281(A) $ 32,832,881
(16,060,899)(F)
Redeemable convertible subordinated
notes.................................. 212,400 (212,400)(E) --
Short-term notes and lines of credit...... 3,225,000 (3,225,000)(D) --
Accounts payable and accrued expenses..... 1,322,739 1,322,739
Security deposits......................... 106,494 106,494
----------- ------------ ------------
Total liabilities................. 29,793,132 4,468,982 34,262,114
----------- ------------ ------------
Minority interest in real estate joint
ventures.................................. 1,571,018 (1,571,018)(B) --
----------- ------------ ------------
Redeemable preferred shares of beneficial
interest, $100 par value, 50,000,000
shares authorized, 10,737 shares issued
and outstanding at December 31, 1997...... 1,068,226 1,068,226
----------- ------------ ------------
Common shareholders' equity:
Common shares of beneficial interest, no
par value, 500,000,000 shares
authorized, 914,889 shares issued and
outstanding at December 31, 1997....... 8,345,077 69,630,814(C) 77,975,891
Accumulated deficit....................... (1,490,484) (1,953,500)(G) (3,688,298)
(244,314)(F)
----------- ------------ ------------
Total common shareholders'
equity.......................... 6,854,593 67,433,000 74,287,593
----------- ------------ ------------
Total liabilities, minority
interest, redeemable preferred
shares and common shareholders'
equity.......................... $39,286,969 $ 70,330,964 $109,617,933
=========== ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 109
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNITED INVESTORS PRO FORMA TOTAL
REALTY TRUST ADJUSTMENTS PRO FORMA
---------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Base rents..................................... $4,954,820 $ 8,419,326(J) $13,374,146
Percentage rents............................... 26,400 266,930(J) 293,330
Expense reimbursements......................... 1,167,355 2,669,388(J) 3,836,743
Interest and other income...................... 27,278 21,809(J) 49,087
---------- ----------- -----------
Total revenues......................... 6,175,853 11,377,453 17,553,306
---------- ----------- -----------
Expenses:
Operating and maintenance...................... 754,703 1,488,112(J) 2,242,815
Real estate taxes.............................. 793,359 1,565,940(J) 2,359,299
General and administrative..................... 179,933 153,844(J) 333,777
Advisor and trustee fees....................... 345,000 457,822(L) 802,822
Stock grants to Advisor and officers........... 787,500 -- 787,500
Other.......................................... 204,829 -- 204,829
Interest....................................... 2,435,538 494,440(N) 2,929,978
Depreciation, amortization and ground leases... 1,309,180 2,041,927(J) 3,351,107
---------- ----------- -----------
Total expenses......................... 6,810,042 6,202,085 13,012,127
---------- ----------- -----------
Income (loss) before minority interest and
preferred share dividend requirements.......... (634,189) 5,175,368 4,541,179
Minority interest in net income of real estate
ventures....................................... (40,894) 40,894(M) --
---------- ----------- -----------
Income (loss) before preferred share dividend
requirements................................... (675,083) 5,216,262 4,541,179
Preferred share dividend requirements............ (96,633) (96,633)
---------- ----------- -----------
Net income (loss) available for common
shareholders................................... $ (771,716) $ 5,216,262 $ 4,444,546
========== =========== ===========
Net income (loss) per common share (basic and
diluted)....................................... $ (.85) $ .52
========== ===========
Weighted average shares outstanding.............. 912,493 8,512,493
========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 110
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The pro forma adjustments to the Pro Forma Condensed Consolidated Balance
Sheet as of December 31, 1997 are as follows:
<TABLE>
<S> <C> <C>
(A) Acquisition of Acquisition Properties (land)................ $ 10,810,200
Acquisition of Acquisition Properties (improvements)........ 61,257,800
------------
$ 72,068,000
============
Escrow...................................................... $ (2,255,000)
Cash........................................................ (45,845,719)
Mortgage notes payable...................................... (23,967,281)
------------
$(72,068,000)
============
(B) Minority interests.......................................... 1,571,018
Cash........................................................ (1,753,000)
Acquisition of property from minority interests............. $ 181,982
============
(C) Sale of 7,600,000 shares of beneficial interest............. $ 76,000,000
Costs associated with sale of shares........................ (6,369,186)
------------
$ 69,630,814
============
(D) Repay short term notes...................................... $ 3,225,000
============
(E) Redeem convertible subordinated notes....................... $ 212,400
============
(F) Repay existing mortgage notes............................... $ 16,060,899
Accumulated deficit (prepayment fees)....................... 244,314
------------
Cash........................................................ $(16,305,213)
============
(G) Accumulated deficit (pay bridge loan financing fees)........ $ 1,953,500
============
</TABLE>
F-6
<PAGE> 111
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma adjustments to the Pro Forma Condensed Consolidated Statement
of Operations for the year ended December 31, 1997, are as follows:
<TABLE>
<S> <C> <C>
(J) Acquisition of Acquisition Properties:
Base rents................................................ 8,419,326
Percentage rents.......................................... 266,930
Expense reimbursements.................................... 2,669,388
Other income.............................................. 21,809
Operating and maintenance................................. 1,488,112
Real estate taxes......................................... 1,565,940
General and administrative................................ 153,844
Depreciation and amortization............................. 2,041,927
(K) Decrease in interest expense related to repayment of
mortgage debt and lines of credit........................... $ 1,644,257
===========
(L) Increase in Advisory Fees related to revenue from
Acquisition Properties and amendment of advisory
agreement................................................... $ 457,822
===========
(M) Decrease in minority interest in earnings of consolidated
partnerships................................................ $ 40,894
===========
(N) Interest expense; net pro forma adjustment to interest
expense is comprised of the following:
Decrease in interest related to mortgage and other loans
to be repaid with IPO proceeds.......................... $(1,644,257)
Interest on mortgage loans to be assumed.................. 2,138,697
-----------
Total pro forma adjustment................................ $ 494,440
===========
</TABLE>
NOTE 3 -- RENTAL INCOME FROM ACQUISITION PROPERTIES
The statements of revenue and certain expenses of the Acquisition
Properties included elsewhere in this registration statement present rental
revenue adjusted for scheduled increases from the inception of the respective
lease agreements. The pro forma adjustments to rental revenue included in the
unaudited pro forma condensed consolidated statement of operations recognize
anticipated remaining rental receipts as of January 1, 1997 (pursuant to
executed lease agreements) ratably over the remaining terms of the respective
leases.
NOTE 4 -- ADVISORY AGREEMENT
In conjunction with the Offering, the Company will amend its agreement with
the Advisor to change the method by which the advisory fee is calculated. Under
the new and old methods, the pro forma advisory fee for the year ended December
31, 1997 would be approximately $770,000 and $904,000, respectively.
F-7
<PAGE> 112
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LONG-TERM DEBT
Pro forma principal payments on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998............................................. $ 565,500
1999............................................. 4,132,364
2000............................................. 635,791
2001............................................. 691,022
2002............................................. 745,426
Thereafter......................................... 26,056,778
-----------
$32,832,881
===========
</TABLE>
NOTE 6 -- EARNINGS PER SHARE
Pro forma weighted average basic and diluted common shares outstanding is
consolidated as follows:
<TABLE>
<CAPTION>
PRO FORMA SHARES
WEIGHTED AVERAGE
OUTSTANDING
DECEMBER 31, 1997
<S> <C>
Total shares issued and outstanding at December 31, 1996.... 837,489
Offering of 7,600,000 shares (assumed January 1, 1997)...... 7,600,000
Grant of 75,000 shares on December 30, 1997 (assumed January
1, 1997).................................................. 75,000
Grant of 2,400 shares on December 30, 1997.................. 4
----------
Basic and Diluted Weighted Average Shares
Outstanding..................................... 8,512,493
==========
</TABLE>
NOTE 7 -- NON-RECURRING CHARGES
Pro forma accumulated deficit as of December 31, 1997 is increased for the
amount of loan fees and other costs related to obtaining, funding, and repaying
the Bridge Loan ($1,953,500); fees related to mortgage debt prepayments
($244,314).
F-8
<PAGE> 113
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, 1997
and 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997 and the financial statement schedule listed in the index on page F-1.
These financial statements and financial statement schedule 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 and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, 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
February 11, 1998
F-9
<PAGE> 114
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Investment real estate (Note 2):
Land...................................................... $ 8,118,723 $ 8,118,723
Buildings and improvements................................ 31,616,008 31,209,206
----------- -----------
39,734,731 39,327,929
Less accumulated depreciation............................. (4,861,957) (3,767,720)
----------- -----------
Investment real estate, net............................... 34,872,774 35,560,209
Cash and cash equivalents................................... 346,149 119,316
Accounts receivable, net of allowance of $41,771 and $31,209
for 1997 and 1996, respectively........................... 797,696 885,157
Prepaid expenses and other assets (Notes 7 and 10).......... 3,270,350 303,332
Investment in real estate venture (Note 5).................. -- 333,759
----------- -----------
Total assets...................................... $39,286,969 $37,201,773
=========== ===========
LIABILITIES, MINORITY INTEREST, REDEEMABLE
PREFERRED SHARES AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable (Note 3)........................... $24,926,499 $25,590,592
Redeemable convertible subordinated notes (Note 3)........ 212,400 212,400
Short-term notes and lines of credit (Note 3)............. 3,225,000 740,000
Accounts payable -- trade................................. 552,996 250,848
Accrued property taxes.................................... 769,743 500,918
Security deposits......................................... 106,494 112,101
----------- -----------
Total liabilities................................. 29,793,132 27,406,859
----------- -----------
Minority interest in real estate ventures................... 1,571,018 1,584,673
----------- -----------
Commitments and contingencies (Note 7)
Redeemable preferred shares of beneficial interest, $100 par
value, 50,000,000 shares authorized, 10,737 shares issued
and outstanding at December 31, 1997 and 1996 (Note 4).... 1,068,226 1,068,226
----------- -----------
Common shareholders' equity:
Common shares of beneficial interest, no par value,
500,000,000 shares authorized, 914,889 and 837,489
shares issued and outstanding at December 31, 1997 and
1996, respectively (Note 4)............................ 8,345,077 7,527,577
Accumulated deficit....................................... (1,490,484) (385,562)
----------- -----------
Total common shareholders' equity................. 6,854,593 7,142,015
----------- -----------
Total liabilities, minority interest, redeemable
preferred shares and common shareholders'
equity......................................... $39,286,969 $37,201,773
=========== ===========
</TABLE>
See accompanying notes.
F-10
<PAGE> 115
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Base rents........................................... $4,954,820 $4,097,911 $4,389,491
Percentage rents..................................... 26,400 32,822 --
Expense reimbursements............................... 1,167,355 835,940 848,975
Interest and other income............................ 27,278 67,409 44,224
---------- ---------- ----------
Total revenues............................... 6,175,853 5,034,082 5,282,690
---------- ---------- ----------
Expenses:
Operating and maintenance............................ 754,703 582,481 875,193
Real estate taxes.................................... 793,359 558,000 569,634
General and administrative........................... 179,933 89,529 63,225
Advisory and trustee fees............................ 345,000 312,000 296,000
Share grant to Advisor and officers.................. 787,500 -- --
Other................................................ 204,829 93,302 60,482
Interest............................................. 2,435,538 2,132,390 2,177,447
Depreciation, amortization and ground lease.......... 1,309,180 967,111 986,129
---------- ---------- ----------
Total expenses............................... 6,810,042 4,734,813 5,028,110
Income (loss) before gain on sale of investment real
estate, minority interest and preferred share
dividend requirements................................ (634,189) 299,269 254,580
---------- ---------- ----------
Gain on sale of investment real estate................. -- -- 25,020
---------- ---------- ----------
Income (loss) before minority interest and preferred
share dividend requirements.......................... (634,189) 299,269 279,600
Minority interest in net income of real estate
ventures............................................. (40,894) (51,941) (43,278)
---------- ---------- ----------
Net income (loss)...................................... (675,083) 247,328 236,322
Preferred share dividend requirements.................. (96,633) (96,296) (43,618)
---------- ---------- ----------
Net income (loss) available for common shareholders
(basic and diluted).................................. $ (771,716) $ 151,032 $ 192,704
========== ========== ==========
Net income (loss) per common share..................... $ (.85) $ .17 $ .21
========== ========== ==========
Weighted average shares outstanding.................... 912,493 909,405 909,397
========== ========== ==========
</TABLE>
See accompanying notes.
F-11
<PAGE> 116
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
SHARES AND COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PREFERRED SHARES OF COMMON SHARES OF
BENEFICIAL INTEREST BENEFICIAL INTEREST
------------------- -------------------- ACCUMULATED
NUMBER AMOUNT NUMBER AMOUNT DEFICIT
------ ---------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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
Dividends............................. -- -- -- -- (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
Dividends............................. -- -- -- -- (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)
Issuance of common shares of
beneficial interest................. -- -- 77,400 817,500 --
Loss before preferred share dividend
requirements........................ -- -- -- -- (675,083)
Dividends............................. -- -- -- -- (333,206)
Redeemable preferred shares of
beneficial interest distributions,
$9.00 per share..................... -- -- -- -- (96,633)
------ ---------- ------- ---------- -----------
Balance at December 31, 1997.......... 10,737 $1,068,226 914,889 $8,345,077 $(1,490,484)
====== ========== ======= ========== ===========
</TABLE>
See accompanying notes.
F-12
<PAGE> 117
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ (675,083) $ 247,328 $ 236,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 1,175,528 956,778 960,876
Minority interest in net income of real estate
ventures........................................ 40,894 51,941 43,278
Recognition of deferred rent...................... (89,184) (82,201) (44,677)
Provision for uncollectible accounts.............. 10,562 8,220 4,468
Gain on sale of investment real estate............ -- -- (25,020)
Payment of common shares for services............. 817,500 38,664 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable...... 166,083 (176,533) 16,530
Increase in prepaid expenses and other assets... (323,609) (78,167) (167,660)
Increase (decrease) in accounts
payable -- trade............................. 302,148 191,717 (90,885)
Increase (decrease) in accrued property taxes... 268,825 (53,910) 12,025
Increase (decrease) in security deposits........ (5,607) (41,835) 13,253
----------- ----------- -----------
Net cash provided by operating activities.... 1,688,057 1,062,002 958,510
----------- ----------- -----------
Cash flows from investing activities:
Purchase of and capital improvements to investment
real estate....................................... (406,802) (1,374,675) (383,957)
Escrow deposits...................................... (2,305,000) -- --
Proceeds from sale of investment..................... -- -- 114,478
Payment received on affiliate note receivable........ -- 55,462 --
----------- ----------- -----------
Net cash used in investing activities........ (2,711,802) (1,319,213) (269,479)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings............................. 135,871 740,000 2,021,210
Proceeds from short-term notes payable............... 2,525,000 -- --
Principal payments on mortgage notes payable......... (799,964) (604,574) (2,629,496)
Principal payments on short-term notes payable....... (40,000) (23,103) (235,000)
Preferred share dividends............................ (96,633) (96,296) (43,618)
Proceeds from issuing preferred shares of beneficial
interest, net..................................... -- -- 569,526
Offering costs (Note 10)............................. (419,700) -- --
Distribution to holders of minority interests........ (53,996) (67,320) (67,259)
----------- ----------- -----------
Net cash provided by (used in) financing
activities................................. 1,250,578 (51,293) (384,637)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents....... 226,833 (308,504) 304,394
Cash and cash equivalents at beginning of year......... 119,316 427,820 123,426
----------- ----------- -----------
Cash and cash equivalents at end of year............... $ 346,149 $ 119,316 $ 427,820
=========== =========== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE> 118
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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.
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.
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 20 to
40 years for the shopping centers and over the lease term for tenant
improvements (generally 5 to 15 years). Depreciation expense included in the
statements of operations was $1,094,237, $886,173 and $902,380 for the years
ended December 31, 1997, 1996 and 1995, 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.
REVENUE RECOGNITION
Rent revenue is recognized on a straight-line basis over the terms of the
individual leases.
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.
F-14
<PAGE> 119
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
During 1997, 1996 and 1995, the Company earned approximately $1,155,000,
$1,151,000 and $1,131,000, respectively, in rental revenue from two tenants.
These two tenants' revenues amounted to approximately 19%, 23% and 21% of the
Company's total revenue for the years ended December 31, 1997, 1996 and 1995.
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 (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. The Company has
implemented SFAS No. 128.
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based
Compensation which requires a fair value based method of accounting for
stock-based employee compensation plans. The Company has recorded stock-based
compensation under Accounting Principles Board Opinion No. 25.
2. INVESTMENT REAL ESTATE
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, 1997 and 1996, the Company owned 0% and 23.8%, respectively of the
affiliated REIT, which is accounted for by the equity method.
3. NOTES PAYABLE
REDEEMABLE CONVERTIBLE SUBORDINATED NOTES
At December 31, 1997 and 1996, 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.
F-15
<PAGE> 120
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
These notes can be redeemed by the Company for 100% of the redemption price
of $100 par value beginning in 1997.
MORTGAGE NOTES PAYABLE
As of December 31, 1997 and 1996, mortgage notes payable consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<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................... $ 1,734,717 $ 1,824,213
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 30, 1998 and is collateralized by Autobahn
Shopping Center land and building......................... 1,130,916 1,271,592
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....................................... 3,744,425 3,779,493
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 $72,419
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..................... 7,771,827 7,957,094
</TABLE>
F-16
<PAGE> 121
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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................................. 4,798,038 4,874,155
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.................. 387,218 439,680
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........................ 702,858 814,647
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 9.5%,
amortizes over three years, is collateralized by
Centennial Shopping Center land and building and is due on
March 25, 1998............................................ 6,758 32,192
Mortgage note payable to a financial institution with
monthly installments of principal and interest in the sum
of $3,220. The note bears interest at 9.0%, amortizes over
4 years, is due on September 25, 1998 and is
collateralized by Centennial shopping center land and
building. The Company can extend the note for 3 years..... 124,103 --
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....... 2,743,391 2,800,000
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................................................. 1,575,998 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... 206,250 206,250
----------- -----------
$24,926,499 $25,590,592
=========== ===========
</TABLE>
F-17
<PAGE> 122
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate annual maturities of mortgage notes payable for each of the five
years ending December 31 and thereafter are as follows:
<TABLE>
<S> <C>
1998............................................. $ 5,600,728
1999............................................. 8,304,048
2000............................................. 1,934,971
2001............................................. 440,627
2002............................................. 473,564
Thereafter....................................... 8,172,561
-----------
$24,926,499
===========
</TABLE>
As of December 31, 1997, 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 9.15% and a weighted average maturity of 6.17 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 1998. During 1997, the Company issued an additional $400,000 of
unsecured promissory notes to individuals. The notes require quarterly payments
of interest only, at 10% and are due in 1998.
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 December 31, 1997) plus 1/2% is payable quarterly
until maturity in April 1998. At December 31, 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 December 31, 1997) plus 1.5% is payable monthly until maturity
in May 1998. As of December 31, 1997 the Company had drawn $100,000 on the bank
credit facility.
The Company entered into short-term mortgage loan agreements with an
affiliate of the Advisor (see Note 8) in December 1997. The loan proceeds, which
bear interest at 12% and total $1,925,000, are repayable in April 1998. The
loans are collateralized by second lien mortgages on a shopping center which the
Company owns.
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 and interest rates for debt with similar terms and
remaining maturities.
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") and issued 5,750
preferred shares at par value and 4,987 shares through conversion from the 9%
redeemable convertible subordinated notes (See Note 3). Dividends on the
preferred shares are cumulative from date of issuance and payable on a quarterly
basis. The preferred shares are
F-18
<PAGE> 123
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 rates:
<TABLE>
<CAPTION>
CALENDAR YEAR PREMIUM
------------- -------
<S> <C>
1998............................................. 3%
1999............................................. 2%
2000............................................. 1%
2001 and thereafter.............................. 0%
</TABLE>
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
In December 1997 the Company issued 75,000 shares to the Advisor (see Note
8) and certain officers in compensation for past services. The shares were
valued at $10.50 for a total of $787,500 which is charged to expense in 1997.
The shares issued to the Advisor and certain officers have certain restrictions
as to the timing of any resale, and accordingly, are valued at an amount lower
than the unrestricted shares issued to the Trust Managers (see note 8).
The Company issued 2,400 shares in each of 1997 and 1996 to the Trust
Managers for payment of services rendered (See Note 8). The Company issued an
additional 692 shares for payment of lease commissions in 1996.
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 valued at one dollar
per share of Ivy stock (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. On August 1, 1997, the Company distributed to its shareholders
333,644 shares of Ivy as a dividend. The dividend was treated as a 1997
dividend.
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. Management
believes the Company has satisfied the income distribution and other
requirements through the year ended December 31, 1997 and believes all other
requirements of a qualified real estate investment trust have been met.
The Company has approximately $545,000 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
F-19
<PAGE> 124
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2009 through 2016.
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>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Ordinary income......................................... $ 0 $ .40 $ .20
===== ===== =====
Return of capital....................................... $ .40 $ 0 $ 0
===== ===== =====
</TABLE>
7. COMMITMENTS
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, 1997, are as follows:
<TABLE>
<S> <C>
1998............................................ $ 4,751,001
1999............................................ 4,360,174
2000............................................ 3,771,158
2001............................................ 3,374,711
2002............................................ 2,813,054
Thereafter...................................... 20,571,229
-----------
$39,641,327
===========
</TABLE>
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>
1998.............................................. $ 100,000
1999.............................................. 100,000
2000.............................................. 100,000
2001.............................................. 100,000
2002 through 2035................................. 3,400,000
----------
$3,800,000
==========
</TABLE>
Rental expense included in the statement of operations was $133,652, $8,333
and $25,353 in 1997, 1996 and 1995, respectively.
F-20
<PAGE> 125
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PURCHASE COMMITMENTS
The Company has entered into commitments to acquire eight shopping centers
(see Note 10) from unrelated parties. In connection with these agreements, the
Company has non-refundable earnest money deposits made into escrow of
$2,305,000.
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 $312,000, $279,000
and $276,000 for 1997, 1996 and 1995, respectively. Advisory fees are calculated
at .8%, on an annual basis, of the gross Company assets, as defined, at
year-end, increased by noncash reserves. During 1997, 1996 and 1995, the Advisor
reduced its fee due from the Company under the agreement by approximately
$42,500, $50,600 and $9,200, respectively, to reflect the timing of acquisitions
made during the year.
In conjunction with the Offering (see Note 10), the Company will amend the
advisory agreement to provide that the advisory fee be based on 6.8% of adjusted
funds from operations as defined. Had the advisory fee been calculated pursuant
to the amended agreement in 1997, the fee would have approximated $224,000.
Total fees paid to independent trust managers were approximately $33,000,
$33,000 and $20,000 in 1997, 1996 and 1995, respectively. During 1996 and 1997,
$30,000 of the investment management fees were satisfied by issuing a total of
2,400 shares of beneficial interest (based on an estimated value of $12.50 per
share). Subsequent to the Offering (see Note 10), such stock compensation will
be valued at the market price per share.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information is related to the statement of cash
flows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<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
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..... 333,206 500,639
Cash paid for interest.................................. 2,433,278 2,112,038 $2,180,835
Issuance of 4,987 preferred shares of beneficial
interest for redeemable convertible notes payable..... -- 496,700
Dividend declared but not paid.......................... -- 166,880
</TABLE>
10. SUBSEQUENT EVENT (UNAUDITED)
The Company expects to issue approximately 7,600,000 common shares of
beneficial interest, no par value, in a proposed public offering (the
"Offering"). The Company had incurred and capitalized approximately $420,000 in
offering costs as of December 31, 1997. There is no assurance that the Offering
can be completed.
F-21
<PAGE> 126
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $72,000,000.
Subsequent to December 31, 1997 acquisition of certain of the eight
properties was completed and certain mortgage loans were prepaid. Prepayment
penalties approximated $241,000. The Company entered into a loan agreement for
$56,800,000 (of which approximately $52,217,000 was funded as of February 11,
1998) for the purpose of acquiring the aforementioned properties and retiring
certain existing debt. There is no assurance that the remaining acquisitions can
be completed.
11. SUPPLEMENTAL EARNINGS PER SHARE INFORMATION
Weighted average shares outstanding includes 75,000 shares granted to the
Advisor and certain officers on December 30, 1997 as if such shares had been
outstanding for the entirety of each year.
F-22
<PAGE> 127
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
COST
INITIAL COST CAPITALIZED
DESCRIPTION -------------------------- SUBSEQUENT TO
- ---------------------------------------------- BUILDINGS AND ACQUISITION --
PROPERTY LOCATION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS
-------- -------- ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Shopping centers:
Autobahn San Antonio, TX $ 1,130,915 $ 515,205 $ 1,726,150 $ 26,634
Bandera San Antonio, TX 7,771,826 2,350,000 8,759,593 544,035
Centennial Austin, TX 3,875,287 1,400,000 3,527,909 579,502
El Campo El Campo, TX 1,575,998 360,000 1,640,350 51,499
McMinn Athens, TN 1,090,077 513,912 2,170,052 83,705
Park Northern Phoenix, AZ 2,743,391 -- 4,410,691 120,792
Twin Lakes Lenoir City, TN 1,734,717 860,706 3,040,000 (27,144)
University Park College Station, TX 4,798,038 1,842,331 4,955,490 6,750
Undeveloped land:
University Park College Station, TX 206,250 276,569 -- --
----------- ---------- ----------- ----------
Totals $24,926,499 $8,118,723 $30,230,235 $1,385,773
=========== ========== =========== ==========
<CAPTION>
GROSS AMOUNTS OF WHICH
CARRIED AT CLOSE OF PERIOD
DESCRIPT --------------------------
- ------------------------- BUILDINGS AND ACCUMULATED DATE OF DATE
PROPERTY LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
-------- ---------- ------------- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Shopping centers:
Autobahn $ 515,205 $ 1,752,784 $ 2,267,989 $ 427,055 1984 1990
Bandera 2,350,000 9,303,628 11,653,628 1,528,808 1989 1992
Centennial 1,400,000 4,107,411 5,507,411 942,641 1970 1991
El Campo 360,000 1,691,849 2,051,849 93,772 1985 1996
McMinn 513,912 2,253,757 2,767,669 403,627 1982 1994
Park Northern -- 4,531,483 4,531,483 169,038 1982 1996
Twin Lakes 860,706 3,012,856 3,873,562 710,278 1986 1989
University Park 1,842,331 4,962,240 6,804,571 586,738 1991 1993
Undeveloped land:
University Park 276,569 -- 276,569 --
---------- ----------- ----------- ----------
Totals $8,118,723 $31,616,008 $39,734,731 $4,861,957
========== =========== =========== ==========
</TABLE>
F-23
<PAGE> 128
UNITED INVESTORS REALTY TRUST AND SUBSIDIARIES
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)
RECONCILIATION OF REAL ESTATE
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........ $39,327,929 $34,166,161 $33,852,975
Additions -- acquisitions........... 37,520 6,687,611 --
Additions -- tenant improvements.... 319,226 117,964 304,073
Additions -- capital expenditures... 50,056 66,160 79,884
Deductions.......................... -- (1,709,967) (70,771)
----------- ----------- -----------
Balance at end of year............ $39,734,731 $39,327,929 $34,166,161
=========== =========== ===========
</TABLE>
RECONCILIATION OF ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year........... $3,767,720 $2,988,030 $2,085,650
Depreciation expense................... 1,094,237 886,173 902,380
Deductions............................. -- (106,483) --
---------- ---------- ----------
Balance at end of year............... $4,861,957 $3,767,720 $2,988,030
========== ========== ==========
</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:
<TABLE>
<S> <C>
Buildings................................................... 20-40 years
Improvements................................................ 5-10 years
</TABLE>
F-24
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-25
<PAGE> 130
BENCHMARK CROSSING
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $642,743
Expense reimbursements.................................... 200,686
Other income.............................................. 100
--------
843,529
--------
Certain expenses:
Operating and maintenance................................. 134,211
Real estate taxes......................................... 131,946
General and administrative................................ 9,440
Interest (Note 3)......................................... 331,024
--------
606,621
--------
Revenue in excess of certain expenses....................... $236,908
========
</TABLE>
See accompanying notes.
F-26
<PAGE> 131
BENCHMARK CROSSING
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Benchmark Crossing (the "Property"), a 58,384-square-foot shopping
center located in Houston, Texas.
United Investors Realty Trust (the "Company") 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, 1997 due to the exclusion of the following expenses, which may not
be comparable to the proposed future operations of the Property:
- Depreciation and amortization
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
3. MORTGAGE NOTE PAYABLE
A loan in the amount of $3,800,000, secured by a first trust deed and an
assignment of rents, was executed by the current owners of the Property on
September 1, 1995. The Company 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 August 1,
2005, at which time the outstanding principal balance (expected to be
approximately $3,169,957 and any accrued interest thereon is due. The principal
balance of the loan at December 31, 1997 was $3,698,824.
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. The center is 100% occupied.
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
F-27
<PAGE> 132
BENCHMARK CROSSING
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
maintenance and certain other operating expenses. Certain leases also contain
provisions for percentage rent. Percentage rent earned for the year ended
December 31, 1997 was $-0-.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998........................................... $ 663,571
1999........................................... 672,271
2000........................................... 676,646
2001........................................... 699,461
2002........................................... 699,461
Thereafter..................................... 3,978,579
----------
$7,389,989
==========
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1997, 5 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 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............................................. 5.3%
Burger King................................................. 4.8%
</TABLE>
F-28
<PAGE> 133
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-29
<PAGE> 134
HEDWIG CENTERS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $ 815,989
Expense reimbursements.................................... 219,187
Other income.............................................. --
----------
1,035,176
----------
Certain expenses:
Operating and maintenance................................. 128,468
Real estate taxes......................................... 134,646
General and administrative................................ 12,002
Interest (Note 3)......................................... 386,226
----------
661,342
----------
Revenue in excess of certain expenses....................... $ 373,834
==========
</TABLE>
See accompanying notes.
F-30
<PAGE> 135
HEDWIG CENTERS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (the "Company") entered into a contract to
acquire this property. Subsequent to December 31, 1997, the Company completed
the acquisition of one of three phases.
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, 1997 due to the exclusion of the following expenses, which may not be
comparable to the proposed future operations of the Property:
- Depreciation and amortization
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
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. The Company 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 June 10, 1999, 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, 1997 was $3,577,204.
4. RENT REVENUE
The Property is adjacent to 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' 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
F-31
<PAGE> 136
HEDWIG CENTERS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
and certain other operating expenses. Certain leases also contain provisions for
percentage rent. Percentage rent earned for the year ended December 31, 1997 was
$-0-.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1998........................................... $ 592,363
1999........................................... 575,349
2000........................................... 494,688
2001........................................... 272,206
2002........................................... 246,780
Thereafter..................................... 1,869,525
----------
$4,050,911
==========
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1997, 3 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C>
EyeMasters............................................ 9.5%
Ross Dress for Less................................... 38.8%
Blockbuster Music..................................... 19.6%
</TABLE>
F-32
<PAGE> 137
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-33
<PAGE> 138
MARKET AT FIRST COLONY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $1,311,002
Expense reimbursements.................................... 421,663
Other income.............................................. 11,434
----------
1,744,099
----------
Certain expenses:
Operating and maintenance................................. 281,288
Real estate taxes......................................... 277,941
General and administrative................................ 15,045
----------
574,274
----------
Revenue in excess of certain expenses....................... $1,169,825
==========
</TABLE>
See accompanying notes.
F-34
<PAGE> 139
MARKET AT FIRST COLONY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (the "Company") entered into a contract to
acquire this property. Subsequent to December 31, 1997, the Company completed
the acquisition.
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, 1997 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 which was not assumed by the Owner
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
3. RENT REVENUE
The Property is adjacent to 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 97% 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.
No percentage rent was earned for the year ended December 31, 1997.
F-35
<PAGE> 140
MARKET AT FIRST COLONY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1998........................................... $1,182,279
1999........................................... 954,778
2000........................................... 724,592
2001........................................... 467,397
2002........................................... 263,504
Thereafter..................................... 2,123,879
----------
$5,716,429
==========
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1997, one tenant individually accounted for more than 10%
of total revenue. Percentage GLA for such tenant for the year ended December 31,
1997 was as follows:
<TABLE>
<S> <C>
TJ Maxx.............................................. 26.7%
</TABLE>
F-36
<PAGE> 141
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Investors Realty Trust
We have audited the accompanying statement of revenue and certain expenses
of Mason Park for the year ended December 31, 1997. 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 Mason 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
Mason Park for the year ended December 31, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-37
<PAGE> 142
MASON PARK
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $1,649,580
Percentage rents.......................................... 60,000
Expense reimbursements.................................... 533,055
----------
2,242,635
----------
Certain expenses:
Operating and maintenance................................. 303,311
Real estate taxes......................................... 390,845
General and administrative................................ 71,175
----------
765,331
----------
Revenue in excess of certain expenses....................... $1,477,304
==========
</TABLE>
See accompanying notes.
F-38
<PAGE> 143
MASON PARK
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (the "Company") entered into a contract to
acquire this property. Subsequent to December 31, 1997, the Company completed
the acquisition.
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,
1997 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 which was not assumed by the Owner
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
3. RENT REVENUE
The shopping center is adjacent to a 58,800-square-foot Kroger Supermarket,
which is owned by a third party. Schlotzsky'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 approximately 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, 1997 was $60,000.
F-39
<PAGE> 144
MASON PARK
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998........................................... $1,880,878
1999........................................... 1,642,820
2000........................................... 1,015,778
2001........................................... 815,390
2002........................................... 697,139
Thereafter..................................... 3,028,889
----------
$9,080,394
==========
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1997, 2 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C>
Cinemark Cinema 8.................................... 18.0%
Palais Royal......................................... 18.7%
</TABLE>
F-40
<PAGE> 145
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-41
<PAGE> 146
ROSEMEADE PARK
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $513,935
Expense reimbursements.................................... 150,340
Other income.............................................. 6,086
--------
670,361
--------
Certain expenses:
Operating and maintenance................................. 107,905
Real estate taxes......................................... 95,629
General and administrative................................ 5,268
Interest (Note 3)......................................... 40,265
--------
249,067
--------
Revenue in excess of certain expenses....................... $421,294
========
</TABLE>
See accompanying notes.
F-42
<PAGE> 147
ROSEMEADE PARK
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (the "Company") 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 Rosemeade Park for the year ended December
31, 1997 due to the exclusion of the following expenses, which may not be
comparable to the proposed future operations of the Property:
- Depreciation and amortization
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
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. The Company 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 December 1,
2007, at which time the outstanding principal balance (expected to be
approximately $2,856,302) and any accrued interest thereon is due. The principal
balance of the loan at December 31, 1997 was $3,496,228.
4. RENT REVENUE
The Property has 17 tenants ranging in size from 1,125 square feet to
14,000 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, 2008 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
F-43
<PAGE> 148
ROSEMEADE PARK
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
and certain other operating expenses. Certain leases also contain provisions for
percentage rent. Percentage rent earned for the year ended December 31, 1997 was
$-0-.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998........................................... $ 565,795
1999........................................... 487,589
2000........................................... 382,913
2001........................................... 338,113
2002........................................... 289,483
Thereafter..................................... 863,156
----------
$2,927,049
==========
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1997, 3 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C>
Cosmopolitan Lady.............................. 28.3%
Blockbuster Video.............................. 12.5%
Mobil Oil Corporation.......................... Ground lease
</TABLE>
F-44
<PAGE> 149
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-45
<PAGE> 150
SOUTHWEST WALGREENS
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $537,003
Percentage rents.......................................... 12,076
Expense reimbursements.................................... 237,196
Other income.............................................. 213
--------
786,488
--------
Certain expenses:
Operating and maintenance................................. 129,416
Real estate taxes......................................... 113,323
General and administrative................................ 16,941
--------
259,680
--------
Revenues in excess of certain expenses...................... $526,808
========
</TABLE>
See accompanying notes.
F-46
<PAGE> 151
SOUTHWEST WALGREENS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (the "Company") entered into a contract to
acquire this property. Subsequent to December 31, 1997, the Company completed
the acquisition.
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, 1997 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 which was not assumed by the Owner
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
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, 1997 was $12,076.
F-47
<PAGE> 152
SOUTHWEST WALGREENS
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998............................................ $375,421
1999............................................ 325,593
2000............................................ 179,990
2001............................................ 23,123
2002............................................ --
Thereafter...................................... --
--------
$904,127
========
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1997, 3 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C>
Southwest Supermarkets............................... 32.3%
Walgreens............................................ 19.1%
Renal West........................................... 7.2%
</TABLE>
F-48
<PAGE> 153
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-49
<PAGE> 154
TOWN 'N COUNTRY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenue:
Base rents................................................ $641,419
Percentage rents.......................................... 93,669
Expense reimbursements.................................... 132,585
Other income.............................................. 1,648
--------
869,321
--------
Certain expenses:
Operating and maintenance................................. 75,275
Real estate taxes......................................... 97,271
General and administrative................................ 2,394
--------
174,940
--------
Revenues in excess of certain expenses...................... $694,381
========
</TABLE>
See accompanying notes.
F-50
<PAGE> 155
TOWN 'N COUNTRY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying statement of revenue and certain expenses relates to the
operations of Town 'N Country (the "Property"), a 158,104-square-foot shopping
center located in Tampa, Florida.
United Investors Realty Trust (the "Company") 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, 1997 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 which was not assumed by the Owner
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
3. RENT REVENUE
The Property has 17 tenants ranging in size from 320 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 TJ 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 TJ 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, 1997 was $93,669.
F-51
<PAGE> 156
TOWN 'N COUNTRY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1998........................................... $ 630,350
1999........................................... 548,089
2000........................................... 425,372
2001........................................... 412,872
2002........................................... 142,531
Thereafter..................................... 140,000
----------
$2,299,214
==========
</TABLE>
4. CONCENTRATION OF RISK
At December 31, 1997, 3 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C>
TJ Maxx............................................... 15.4%
Big Lots.............................................. 19.0%
Holiday Wonderland.................................... 31.6%
</TABLE>
F-52
<PAGE> 157
INDEPENDENT AUDITORS' REPORT
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, 1997. 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, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
February 11, 1998
F-53
<PAGE> 158
UNIVERSITY MALL
STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Base rents................................................ $1,953,254
Percentage rents.......................................... 101,185
Expense reimbursements.................................... 774,676
Other income.............................................. 2,328
----------
2,831,443
----------
Certain expenses:
Operating and maintenance................................. 328,238
Real estate taxes......................................... 324,339
General and administrative................................ 21,579
Interest (Note 3)......................................... 1,131,260
----------
1,805,416
----------
Revenues in excess of certain expenses...................... $1,026,027
==========
</TABLE>
See accompanying notes.
F-54
<PAGE> 159
UNIVERSITY MALL
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
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 (the "Company") 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, 1997 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 which was not assumed by the Owner
- Federal and state income taxes
- Other costs not directly related to the proposed future operations of the
Property
The Company is not aware of any material factors which would cause the
reported financial information not to be indicative of future operating results.
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.
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
November 27, 1996. The Company 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 December 1,
2006, at which time the outstanding principal balance (expected to be
approximately $11,922,232) and any accrued interest thereon is due. The
principal balance of the loan at December 31, 1997 was $13,347,096.
4. RENT REVENUE
The Property has 32 tenants ranging in size from 750 square feet to 90,815
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 (90,815 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
F-55
<PAGE> 160
UNIVERSITY MALL
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
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.
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, 1997 was $101,185.
Future minimum rentals to be received under noncancelable operating leases
in effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998.......................................... $ 1,729,090
1999.......................................... 1,621,869
2000.......................................... 1,426,310
2001.......................................... 1,061,825
2002.......................................... 984,655
Thereafter.................................... 7,930,317
-----------
$14,754,066
===========
</TABLE>
5. CONCENTRATION OF RISK
At December 31, 1997, 3 tenants individually accounted for more than 10% of
total revenue. Percentage GLA for these tenants for the year ended December 31,
1997 were as follows:
<TABLE>
<S> <C>
Ross Stores.......................................... 8.2%
Uptons............................................... 28.8%
Sports Authority..................................... 13.3%
</TABLE>
F-56
<PAGE> 161
=========================================================
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>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 12
Use of Proceeds.......................... 19
Distribution Policy...................... 20
Capitalization........................... 23
Dilution................................. 24
Selected Pro Forma and Historical
Financial and Properties Information... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 26
Strategy for Future Growth............... 31
Overview of the Company's Five Key U.S.
Markets................................ 34
Business and Properties.................. 38
Policies with Respect to Certain
Activities............................. 65
Management............................... 68
Certain Relationships and Transactions... 74
Principal Shareholders................... 76
Description of Shares of Beneficial
Interest............................... 77
Certain Provisions of the Texas REIT Act
and of the Company's Charter and
Bylaws................................. 79
Shares Available for Future Sale......... 82
Federal Income Tax Consequences.......... 83
ERISA Considerations..................... 93
Underwriting............................. 94
Legal Matters............................ 96
Experts.................................. 96
Additional Information................... 97
Glossary................................. 98
Index to Financial Statements............ F-1
</TABLE>
UNTIL APRIL 4, 1998 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING) 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.
=========================================================
=========================================================
7,600,000 SHARES
UNITED INVESTORS
REALTY TRUST
COMMON SHARES OF BENEFICIAL INTEREST
---------------------
PROSPECTUS
---------------------
MORGAN KEEGAN & COMPANY, INC.
DAIN RAUSCHER INCORPORATED
SCOTT & STRINGFELLOW, INC.
SOUTHWEST SECURITIES
MARCH 6, 1998
=========================================================
