TYPE 10-Q
SEQUENCE: 1
DESCRIPTION: THIRD QUARTER REPORT FOR 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-13915
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UNITED INVESTORS REALTY TRUST
(Exact name of Registrant as Specified in its Charter)
TEXAS 76-0265701
------------------------ ----------------------
(State of Incorporation) (IRS Employer
Identification Number)
5847 San Felipe, Suite 850
Houston, TX 77057
-----------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(713) 781-2860
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(Registrant's Telephone Number Including Area Code)
Number of shares outstanding of the issuer's Common Share, no par value, as of
November 5, 1999: 9,131,392 shares.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No_____
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Balance Sheets
ASSETS
September 30,
1999 December 31,
(Unaudited) 1998
------------ -------------
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Investment real estate:
Land ......................................................... $ 48,658,045 $ 44,290,975
Buildings and improvements ................................... 127,171,632 114,716,718
Property under development ................................... - 1,321,823
---------- ----------
175,829,677 160,329,516
Less accumulated depreciation .................................... (10,407,374) (7,434,343)
---------- ----------
Investment real estate, net ...................................... 165,422,303 152,895,173
Cash and cash equivalents ........................................ 2,476,668 5,486,095
Accounts receivable, net of allowance ............................ 2,632,870 2,733,070
Prepaid expenses and other assets ................................ 5,312,040 3,509,771
---------- ----------
Total Assets ................................................. $175,843,881 $164,624,109
============ ============
LIABILITIES, MINORITY INTEREST, AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................... $ 50,996,389 $ 55,248,437
Capital lease obligations ........................................ 9,843,808 9,914,054
Construction note payable ........................................ 5,004,852 1,221,393
Short-term notes and lines of credit ............................. 19,553,000 7,500,000
Accounts payable,accrued expenses
and other liabilities ........................................... 7,997,410 4,999,920
Accrued distributions............................................. 2,036,940 2,045,702
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Total liabilities ................................................ 95,432,399 80,929,506
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Minority interest in consolidated partnerships.................... 2,780,977 2,825,284
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Commitments and contingencies
Common shareholders' equity:
Common shares of beneficial interest, no par value,
500,000,000 shares authorized; 9,514,889 shares issued;
9,393,392 and 9,434,889 shares outstanding in
1999 and 1998, respectively .................................. 86,353,269 86,571,108
Shareholder notes receivable...................................... (815,031) --
Accumulated deficit .............................................. (7,907,733) (5,701,789)
---------- -------------
Total common shareholders' equity ................................ 77,630,505 80,869,319
---------- -------------
Total liabilities, minority interest, and
common shareholders' equity .................................. $175,843,881 $164,624,109
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
--------------------------------------------------------
30-Sept-99 30-Sept-98 30-Sept-99 30-Sept-98
<S> <C> <C> <C> <C>
Revenues:
Rental ....................................... $5,126,314 $3,835,777 14,911,188 $9,262,001
Recoveries from tenants ...................... 1,392,914 1,118,663 4,138,090 2,610,559
Interest and other income .................... 83,662 73,180 205,760 364,826
--------- ---------- ---------- ----------
Total revenues ............................ 6,602,890 5,027,620 19,255,038 12,237,386
Property operating ............................. 704,748 553,722 2,034,604 1,282,944
Property taxes ................................. 939,115 682,127 2,691,968 1,637,342
Property management fees ....................... 51,846 85,150 217,119 212,098
General and administrative .................... 432,606 326,194 1,236,157 696,947
Advisory fees .................................. 301,532 223,624 920,689 545,609
Depreciation and amortization .................. 1,117,665 854,964 3,187,377 2,043,550
Interest (including write-off of $2,240,652
in unamortized bridge financing costs in
March, 1998) .................................. 1,725,168 1,018,714 4,856,568 5,009,675
---------- ---------- ---------- ----------
Total expenses ........................... 5,272,680 3,744,495 15,144,482 11,428,165
Income before minority interest,
extraordinary item,and preferred share
distribution requirement ............... 1,330,210 1,283,125 4,110,556 809,221
Minority interest in income of consolidated
partnerships .................................. (41,452) (31,033) (120,501) (92,494)
---------- ---------- ---------- ----------
Income before extraordinary item and
preferred share distribution requirement 1,288,758 1,252,092 3,990,055 716,727
Extraordinary item-prepayment penalties incurred on
early extinguishment of debt .................. - - - (232,532)
---------- ---------- ---------- ----------
Net income .............................. 1,288,758 1,252,092 3,990,055 484,195
Preferred share distribution requirement ....... - - - (20,670)
---------- ---------- ---------- ----------
Net income available
for common shareholders ....................... $1,288,758 $1,252,092 $3,990,055 $ 463,525
========== ========== ========== ==========
Basic and diluted per share amounts:
Income before extraordinary item and
preferred share distribution requirement ...... 0.14 0.13 0.42 0.10
Extraordinary item - prepayment penalties - - - (0.03)
incurred on early extinguishment of debt ......
Preferred share distribution requirement ....... - - - -
---------- ---------- ---------- ----------
Net income available for common
shareholders per share ........................ $ 0.14 $ 0.13 $ 0.42 $ 0.07
========== ========== ========== ==========
Basic and diluted weighted average shares
outstanding ................................... 9,504,578 9,513,639 9,510,235 7,102,747
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
-----------------------
30-Sept-99 30-Sept-98
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Cash flows from operating activities:
Net income ................................................. $ 3,990,055 $ 484,195
Adjustments to reconcile net income to net cash
provided by operating
activities:
Depreciation ............................................. 3,071,612 1,952,035
Amortization ............................................. 230,475 91,515
Extraordinary item ....................................... - 232,532
Amortization of bridge financing costs ................... - 2,240,652
Minority interest in income of consolidated partnerships . 120,501 92,494
Changes in operating assets and liabilities .............. 1,485,076 (750,528)
---------- ----------
Net cash provided by operating activities ............. 8,897,719 4,342,895
---------- ----------
Cash flows from investing activities:
Purchase of and capital improvements to investment
real estate ............................................. (16,075,884) (50,232,910)
Application of escrow deposits ........................... 10,000 1,493,389
---------- ----------
Net cash used in investing activities ................. (16,065,884) (48,739,521)
---------- ----------
Cash flows from financing activities:
Proceeds from bridge financing ........................... - 53,689,913
Payments on bridge financing ............................. - (53,689,913)
Proceeds from line of credit ............................. 12,053,000 50,000
Principal payments on mortgage notes payable.............. (4,252,048) (16,738,923)
Payments on capital lease obligations .................... (70,246) -
Proceeds from construction note payable .................. 3,783,459 -
Principal payments on short-term notes payable ........... - (3,275,000)
Preferred share retirement ............................... - (1,068,226)
Convertible note retirement .............................. - (212,400)
Proceeds from public offering ............................ - 86,000,000
Offering costs ........................................... (136,653) (7,189,750)
Payment of prepayment penalty ............................ - (232,532)
Payment of bridge financing costs ........................ - (2,240,652)
Preferred share distributions ............................ - (20,670)
Payment of distributions ................................. (6,128,397) (2,046,166)
Purchase of minority interest ............................ (59,788) -
Distribution to holders of minority interests ............ (172,622) (1,646,869)
Payment of loan acquisition costs ........................ - (147,789)
Purchase of treasury shares .............................. (857,967) (74,063)
---------- ----------
Net cash provided by financing activities ............. 4,158,738 51,156,960
---------- ----------
Increase (decrease) in cash and cash equivalents ............. (3,009,427) 6,760,334
Cash and cash equivalents at beginning of period ............. 5,486,095 346,149
---------- ----------
Cash and cash equivalents at end of period ................... $ 2,476,668 $ 7,106,483
---------- ----------
Supplemental disclosures:
Cash paid for for interest (including $2,240,652
in cash paid in 1998 for bridge financing costs) ...... 4,856,568 5,009,675
Assumption of mortgage debt in connection with
acquisition of properties ............................. - 40,124,467
Assumption of property tax and security deposit
liabilities in connection with acquisition of
properties ............................................ 102,001 641,834
Purchase of treasury shares by optionees with
purchase money notes .................................. 815,031 -
Purchase price adjustments held by third party ........ - 172,356
Issuance of down REIT units for property acquisitions . - 2,385,940
</TABLE>
<PAGE>
United Investors Realty Trust
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Organization
United Investors Realty Trust (the "Company") was organized on December 1,1988
as a Massachusetts business trust and subsequently converted to a Texas real
estate investment trust ("REIT"). The Company operates neighborhood and
community shopping centers in the sun belt states of Texas, Arizona, Florida and
Tennessee. In March and April of 1998, the Company completed an initial public
offering (the "IPO") of 8,600,000 common shares of beneficial interest (the
"Common Shares").
Basis of Presentation
These unaudited consolidated financial statements include the accounts of the
Company, its subsidiaries and partnerships in which it owns controlling
interests. The accompanying consolidated financial statements have been prepared
by the Company's management in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles for complete financial
statements. These statements should be read in conjunction with the Company's
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K dated March 16, 1999. In the opinion of management, the
financial statements contain all adjustments (which consist of normal and
recurring adjustments) necessary for a fair presentation of financial results
for the interim periods.
2. Investment in Properties
At September 30, 1999, the Company owned controlling interests in 28 shopping
center properties containing approximately 3,200,000 total square feet of gross
leaseable area ("GLA"), of which the Company owned approximately 2,400,000
square feet of GLA.
In January 1999, the Company entered into a master lease agreement with the
developer/seller of the Albertson's Bissonnet Shopping Center. The center is
comprised of 15,000 square feet of GLA and 63,000 square feet of space owned and
occupied by Albertson's. Pursuant to this agreement the Company assumed all of
the economic risks and rewards of operating the 15,000 square foot shopping
center until August 31, 1999, at which time the Company, for no additional
consideration, obtained fee title to the shopping center. The cost of the center
is included in investment real estate.
In May 1999, the Company completed the acquisition of the Skipper Palms Shopping
Center in Tampa, Fla. The center has GLA of approximately 83,400 square feet
including a 53,000-square-foot Winn Dixie grocery store. The center was acquired
with proceeds from the Company's revolving line of credit.
In late June 1999, the Company substantially completed construction of the Lake
St. Charles Shopping Center in Tampa, Florida. The center is anchored by a
46,000 square foot Kash N Karry grocery store and includes 10,000 square feet of
additional store space. Two vacant pad sites are available for future
development.
In July 1999, the Company entered into a master lease agreement with the seller
of the Spring Shadows Albertson's Center in Houston, Texas. The center is
comprised of approximately 100,000 square feet of GLA, of which the Company
purchased approximately 37,000 square feet and 63,000 square feet is owned and
occupied by Albertson's. Pursuant to this agreement the Company assumed all of
the economic risks and rewards of operating the 37,000 square foot shopping
center until no later than February 29, 2000, at which time the Company, for no
additional consideration, expects to obtain fee title to the shopping center.
As of September 30, 1999, 22% of the Company's owned GLA was in the Houston,
Texas area, 14% was in the Dallas, Texas area, 19% was elsewhere in Texas, 25%
was in Florida, 14% was in Arizona, and 6% was in Tennessee.
3. Notes and Mortgages Payable
The Company's mortgage notes payable consist of fixed-rate debt with outstanding
principal balances aggregating $50,996,389 at September 30, 1999. The interest
rates range from 7.5% to 9.3% with a weighted average interest rate of 8.56%.
The notes mature at various times through 2018 with a weighted average term to
maturity of 7.8 years.
Property under capital leases, consisting of two shopping centers, aggregated
$13.7 million at September 30, 1999 and is included in investment real estate.
Depreciation of the property under capital leases is combined with depreciation
of owned properties in the accompanying financial statements. Future minimum
lease payments under these capital leases total $15.6 million, with annual
payments due of approximately $.8 million in each of 1999 through 2003, and
$12.1 million thereafter. The amount of these total payments representing
interest is approximately $5.8 million.
In August 1998, the Company executed an agreement with a bank for a $30,000,000
revolving line-of-credit at 150 basis points over LIBOR. The term is for two
years, with a one year extension at the Company's option. The line is secured by
first liens on the Market at First Colony, Mason Park, Autobahn, and Bandera
shopping centers. At September 30, 1999 the Company had utilized $23,308,200
under the line, including $3,755,200 represented by irrevocable letters of
credit expiring from January 31, 2000 through August 16, 2000.
4. Per Share Data
Basic earnings per share is computed based upon the weighted average number of
common shares outstanding during the period presented. Diluted earnings per
share is computed based upon the weighted average number of common shares and
dilutive common share equivalents outstanding during the periods presented. The
number of diluted shares related to outstanding share options is computed by
application of the Treasury share method. In January 1999 the Company issued all
treasury shares in connection with the exercise of options as discussed in Note
6. An additional 5,000 treasury shares were purchased by the Company in March
1999 and an additional 115,000 treasury shares were purchased in September 1999.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
Weighted Average Shares 1999 1998 1999 1998
- ----------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS ......................... 9,504,578 9,513,639 9,510,235 7,102,747
Effect of dilutive securities:
Employee share options ........... -- -- -- --
---------- ---------- ---------- ----------
Diluted EPS ....................... 9,504,578 9,513,639 9,510,235 7,102,747
========== ========== ========== ==========
Distributions per share declared .. $0.215 $0.215 $0.645 $0.430
========== ========== ========== ==========
</TABLE>
5. Advisory Agreement
The Company is managed and advised by an entity (the "Investment Manager")
affiliated with the Company's chairman. The Investment Manager is paid a fee
based on an amount equivalent to 6.8% of earnings before interest, taxes,
depreciation, amortization, and advisory fees. The rate was reduced to 6.5%
effective July 1, 1999. In addition, the Company reimburses the Investment
Manager for the salaries, benefits, and occupancy costs of employees who perform
property management, leasing, property level accounting, and other operational
duties for the Company.
During the three months and nine months ended September 30, 1999, the Company
paid the Investment Manager fees of approximately $285,000 and $871,000,
respectively, and reimbursed the Investment Manager $142,000 and $502,000
respectively for salaries, benefits, occupancy, and other operational costs. For
the corresponding periods in 1998 the Investment Manager fees were $224,000 and
$546,000, and the salaries, benefits, occupancy, and other operational costs
were $69,000 and $126,000.
6. Incentive Share Option Plan
During 1998, the Company granted options to purchase 337,000 common shares to
certain officers, employees, Trust Managers, and the Investment Manager. The
recipients are eligible to exercise 25% of their options each January 1,
beginning in 1999. The exercise price is $10.00 per share, 100% of which may be
borrowed from the Company. The total amount borrowed in 1999 by the recipients
is included in shareholder notes receivable at September 30, 1999. Loans are
repayable over four years and require annual payments of 25% of the initial
principal and interest calculated at the Applicable Federal Rate published by
the IRS. The Applicable Federal Rate as of January 1, 1999 was 4.64%.
With respect to options that became exercisable on January 1, 1999, the Board of
Trust Managers elected to forgive 80% of the borrowed amount. The loan will be
forgiven in equal installments over a four-year period, at the rate of 20% per
year, conditioned upon continued employment by the Company or the Investment
Manager. Included in general and administrative expenses for the three months
and nine months ended September 30, 1999 is $24,251 and $72,754, which
represents the accrual of such loan forgiveness with respect to loans made to
the Company's officers and employees. Included in advisory fees for the three
months and nine months ended September 30, 1999 is $16,500 and $49,500, which
represents the accrual of such loan forgiveness with respect to loans made to
the Investment Manager.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and notes thereto. Historical
results and trends which might appear should not be taken as indicative of
future operations.
The Company has been operating since 1989 as a Texas 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 primarily by supermarkets, drug stores and
major retail tenants located in this region.
The Company owned 28 neighborhood and community shopping centers at September
30, 1999. Of the Company's properties, 19 are located in Texas (including eight
in Houston). The remaining properties are located in Arizona (three), Florida
(four), and Tennessee (two). Leases for the Company's properties range from less
than a year for smaller spaces to over 25 years for larger tenants. Leases
generally provide for minimum lease payments plus payments for the tenants'
portion of taxes, insurance, and common area maintenance expenses; some leases
also provide for contingent payments based on a tenant's sales volume. Most of
the Company's properties are anchored by grocery stores, drug stores, or other
national or regional credit-worthy tenants.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999
Net income for the third quarter of 1999 was $1,289,000 ($0.14 per basic and
diluted share) versus $1,252,000 ($0.13 per basic and diluted share) for the
third quarter of 1998. Net income increased in 1999 due primarily to (a)
increased revenue related to properties acquired since October 1, 1998, less
associated operating expenses ($1,201,000), partially offset by (b) increased
depreciation and amortization expense related to such acquired properties
($263,000), (c) increased interest expense related to proceeds of borrowing
under the Company's credit line and mortgage loans assumed in conjunction with
property acquisitions ($706,000), (d) increased general and administrative costs
and advisory fees ($184,000), and (e) increased minority interest ($11,000).
Of the Company's 28 properties owned as of September 30, 1999, 17, comprising
approximately 77% of the Company's GLA, were owned during the entire third
quarter of both 1998 and 1999. During 1999, several significant tenants in these
17 centers have defaulted on their lease obligations, and during the third
quarter, revenue from these tenants was not recognized. However, as a result of
rental rate increases and the positive impact of other leasing activities,
rental revenue related to these properties was essentially the same in both
periods. Management believes the space vacated by the defaulting tenants can be
re-leased and generating revenue by the second half of 2000.
With respect to these 17 properties, management believes that, under present
business and economic conditions, increases in base rental rates for renewal and
replacement leases of three to six percent are reasonable expectations. Based on
current scheduled lease expirations, the expected rental rate increases are
projected to result in annual increases in EBITDA of approximately two to three
percent. However, events, including unanticipated tenant business failures,
could affect the Company's ability to achieve such increases. In addition,
management is presently considering several redevelopment and re-tenanting
strategies that, if implemented, may have the short-term effect of reducing
rental revenues from these properties. Substantially all of the increase in
total EBITDA in the third quarter of 1999 versus 1998 is a result of operations
of the 11 operating properties acquired since June 1998. Based on the Company's
limited operating history with these properties, and on management's evaluation
of present business and economic conditions, management anticipates that EBITDA
will not increase appreciably in 2000 for these 11 properties.
General and administrative expenses increased from $326,000 in 1998 to $433,000
in 1999. Of the 1999 total, $106,000 was comprised of salaries and benefits
compared to $69,000 for 1998's third quarter salaries and benefits. The Company
reimburses the Investment Manager for the salaries and benefits of those
employees of the Investment Manager who are responsible for property management,
leasing, and property level accounting. Substantially, all of the remaining
difference is related to occupancy cost increases reimbursed to the Investment
Manager and professional fees related to public company filing and other
compliance expenses.
Payments to the Investment Manager in 1999's third quarter were $285,000 versus
$224,000 paid in 1998's third quarter. Advisory fees were calculated based on
6.8% of the Company's earnings before interest, taxes, depreciation,
amortization and advisory fees. The rate was reduced to 6.5% effective July 1,
1999. In 1999, additional advisory fees were recorded for approximately $16,500
related to the forgiveness of debt pursuant to the Company's 1997 Share
Incentive Plan (see note 6 to the accompanying financial statements).
Interest expense increased from $1,019,000 in 1998's third quarter to $1,725,000
in 1999. This increase was the result of the increase in the average debt
outstanding between periods, from $44,500,000 for 1998 to $83,000,000 for 1999.
The increase in debt outstanding is primarily a result of expenditures for
acquisitions since June 1998. See note 3 to the accompanying financial
statements and Liquidity and Capital Resources below for a description of the
Company's debt.
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net income was $3,990,000 or $0.42 per share in 1999, compared to net income in
1998 of $464,000, or $0.07 per share. Included in net income for 1998 is
$2,241,000 in non-recurring amortization of bridge financing costs and $233,000
of extraordinary charges, or an aggregate of $0.35 per share in non-recurring
and extraordinary expenses. Net income in 1998 before such charges was
$2,937,000 or $0.41 per share. There were no non-recurring extraordinary charges
in 1999. The increase in net income before non-recurring and extraordinary
charges is primarily a result of operating income generated by properties
acquired since December 31, 1997.
Rental revenues increased 57% to $19,255,000 in 1999, compared with $12,237,000
for the same period of the prior year. This increase relates almost totally to
acquisitions since December 31, 1997.
Interest expense, before non-recurring amortization of bridge financing costs,
increased by $2,088,000 from $2,769,000 in 1998 to $4,857,000 in 1999. Weighted
average debt outstanding increased from $40,000,000 for 1998 to $78,000,000 for
1999. The increase in weighted average debt outstanding is primarily a result of
expenditures for acquisitions, including the amounts borrowed and repaid under
the bridge financing arrangement.
The increases in depreciation and amortization, operating expenses and property
taxes were primarily the result of the Company's acquisitions since December 31,
1997.
Liquidity and Capital Resources
The Company generates sufficient cash from operations to satisfy its operating
costs and expenses, debt service payments, and dividend distribution
requirements. In addition, the Company has a $30,000,000 revolving line of
credit with a bank (approximately $6,700,000 available at September 30, 1999)
which is available for short and medium term cash needs, including for property
acquisitions. The Company also owns several properties that are currently
unencumbered and which are available to serve as first mortgage collateral for
additional short or long term borrowings.
At September 30, 1999, the Company's weighted average interest rate on its
permanent mortgage debt was 8.56%. Borrowings under the Company's revolving line
of credit bear interest at various rates (see Note 3 to the accompanying
financial statements). At September 30, 1999, the weighted average rate on such
borrowings was 6.8%.
Cash flows provided by operations for the nine months ended September 30, 1999
were $8,898,000 versus $4,343,000 for the year earlier period. Substantially all
of the year to year difference is the result of operating income from properties
acquired since December 31, 1997 and the effect of changes in the amounts of and
interest rates on mortgage debt in connection with the acquisitions.
During the third quarter, a plan was announced to repurchase up to 500,000, or
approximately 5%, of the Company's common shares. As of September 30, 1999,
115,000 shares had been repurchased under this plan. Additionally, the Company
has obtained Board approval for a review of the current portfolio to identify
and market properties which may not fit with long-term strategies. Proceeds from
the sales of any properties may be used to facilitate the share repurchase plan.
No properties have been specifically identified for sale.
In connection with its intention to continue to qualify as a REIT for Federal
income tax purposes, the Company expects to continue paying regular
distributions to its shareholders. These distributions will be paid from
operating cash flows that are expected to increase due to property acquisitions
and growth in rental revenues in the existing portfolio and from other sources.
Since cash used to pay distributions reduces amounts available for capital
investment, the Company generally intends to maintain a conservative
distribution payout ratio, reserving such amounts as it considers necessary for
the expansion and renovation of shopping centers in its portfolio, debt
reduction, and the acquisition of interests in new properties as suitable
opportunities arise.
It is management's intention that the Company continually have access to the
capital resources necessary to expand and develop its business. Accordingly, the
Company may seek to obtain funds through additional equity offerings or debt
financing in a manner consistent with its intention to operate with a
conservative debt capitalization policy. The Company anticipates that adequate
cash will be available from operations to fund its operating and administrative
expenses, regular debt service obligations and the payment of distributions in
accordance with REIT requirements in both the short-term and long-term.
The Year 2000 Issue
Many computer systems were designed and programmed in such a manner as to be
unable to recognize dates beyond December 31, 1999. In such cases, computer
applications could fail or create erroneous results by or at the year 2000.
Management has completed an evaluation of the risks of a material effect on the
Company's results of operations and financial condition with respect to its
management information systems and the Year 2000 issue. The Company uses
application software, including its accounting and property management software,
which has been certified by vendors as being Year 2000-compliant. Accordingly,
management does not believe that the Company's results of operations or
financial condition have been or will be materially affected by any future costs
to make its management information systems Year 2000-compliant. Additionally,
management does not expect to incur any material costs to correct Year 2000
deficiencies in its management information systems.
In addition to management information systems, the Year 2000 risks include those
related to "embedded technology," such as micro-controllers, and to the Year
<PAGE>
2000 issues of other parties with which the Company has material relationships.
UIRT has completed the process of assessing these risks. With respect to
embedded technology, the assessment process included surveying each of the
properties to determine which systems may be subject to disruptions.
These systems may include climate control, lighting, security, and
telecommunications. Management believes that substantially all such systems, if
not Year 2000-compliant, can be controlled by manual operation and monitoring
for the remainder of their economic lives. Accordingly, management believes the
Company will not be forced to replace or upgrade non-compliant components (if
any) of such systems and has no present plans for replacement or upgrade. Should
such systems require manual operation and monitoring, the Company may experience
an immaterial increase in labor costs for its property management operations
until such time as the non-compliant components are replaced in the ordinary
course of business. If incurred, management believes that most of such costs
will be recaptured from tenants through CAM billings.
Management is not presently aware of any Year 2000 issues related to other
parties that may adversely affect the Company. Based on the relatively small
number of properties and a low level of reliance on technology for property
operations, revenue collections, and cash disbursements, management believes
that documentation of transactions that might otherwise be disrupted will be
available to recreate transaction records if necessary.
Funds From Operations
Following is a reconciliation of net income to funds from operations and
funds available for distribution.
<TABLE>
<CAPTION>
United Investors Realty Trust
Calculation of Funds From Operations
and Funds Available for Distribution
Three Months Ended Nine Months Ended
30-Sept-99 30-Sept-98 30-Sept-99 30-Sept-98
--------------------------- ---------------------------
Funds from operations:
<S> <C> <C> <C> <C>
Net income .................................. $1,288,758 $1,252,092 3,990,055 $ 463,525
Plus real estate related
depreciation and amortization ............ 1,117,665 808,468 3,187,377 1,922,346
Plus write-off of costs associated
with unsuccessful acquisition ............ - 115,000 - 115,000
Plus loss on early extinguishment of debt . - - - 232,532
Plus write-off of unamortized bridge
financing costs .......................... - - - 2,240,652
Plus minority interest in down REIT
partnerships ............................. 41,452 29,280 120,501 49,280
---------- ---------- ---------- ----------
Funds from operations ....................... $2,447,875 $2,204,840 $7,297,933 $5,023,335
========== ========== ========== ==========
Funds from operations per share and downReit
unit ....................................... $ 0.25 $ 0.23 $ 0.75 $ 0.70
========== ========== ========== ==========
Funds available for distribution:
Funds from operations ....................... $2,447,875 $2,204,840 $7,297,933 $5,023,335
Plus amortization of financing costs ........ 31,695 45,014 114,710 91,258
Less tenant improvements and leasing
commissions ................................ (66,540) (103,960) (312,600) (195,686)
Less non-recoverable recurring capital
improvements ............................... (74,631) (49,440) (214,726) (67,470)
Less straight line rents, net of
$80,000 bad debt write-off in
March 1999 ................................. (90,162) (42,472) (200,775) (176,823)
Plus forgiveness of option loans ............ 40,751 - 122,253 -
Other ....................................... - 57,352 43,014 91,915
---------- ---------- ---------- ----------
Funds available for distribution ............ $2,288,988 $2,111,334 $6,849,809 $4,766,529
========== ========== ========== ==========
Funds available for distribution per share
and downReit unit .......................... $ 0.23 $ 0.22 $ 0.70 $ 0.66
========== ========== ========== ==========
Basic and diluted weighted average number of
shares and downReit partnership units ...... 9,786,172 9,752,233 9,791,829 7,223,355
</TABLE>
Note 1-Definitions
The Company considers funds from operations to be an alternate measure of the
performance of an equity REIT since such measure does not recognize depreciation
and amortization of real estate assets as operating expenses. Management
believes that reductions for these charges are not meaningful in evaluating
income-producing real estate, which historically has not depreciated. The
National Association of Real Estate Investment Trusts defines funds from
operations as net income plus depreciation and amortization of real estate
assets, less gains and losses on sales of properties. Funds from operations does
not represent cash flows from operations as defined by generally accepted
accounting principles and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash flows
as a measure of liquidity. Funds from operations increased to $2,448,000 for the
third quarter of 1999, as compared to $2,205,000 for the same period of 1998.
Funds available for distribution is FFO adjusted for the cash effects of certain
transactions. In accordance with generally accepted accounting principles, the
Company capitalizes and depreciates or amortizes over various useful lives
expenditures for tenant improvements, leasing commissions, and recurring
improvements to fixed assets. To the extent these amounts do not improve the
value of the real estate or are not recoverable as additional rent, the Company
believes that FFO as a measure of performance is more meaningful if it is
adjusted for these amounts. In addition, adjustments are made for non-cash
charges related to the forgiveness by the Company of loans made to facilitate
the exercise of options, and for cash receipts from the seller of one of the
Company's shopping centers.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has limited exposure to financial market risks, including changes in
interest rates. The fair value of the Company's investment portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of the Company's investment portfolio. Based on the amount of variable
rate debt outstanding at September 30, 1999, a sustained 100 basis point change
in interest rates for the next 12 months could result in as much as a $150,000
difference in interest expense. The Company does not have any significant
foreign operations and thus are not materially exposed to foreign currency
fluctuations.
PART II - Other Information
Item 1 - Legal Proceedings - None
Item 2 - Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submisson of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED INVESTORS REALTY TRUST
Dated: November 9, 1999 /s/ R. Steven Hamner
----------------------------
R. Steven Hamner,
Vice President,Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000868196
<NAME> United Investors Realty Trust
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 2,476,668
<SECURITIES> 0
<RECEIVABLES> 2,632,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,421,578
<PP&E> 175,829,677
<DEPRECIATION> (10,407,374)
<TOTAL-ASSETS> 175,843,881
<CURRENT-LIABILITIES> 10,034,350
<BONDS> 0
0
0
<COMMON> 86,353,269
<OTHER-SE> (8,722,764)
<TOTAL-LIABILITY-AND-EQUITY> 175,843,881
<SALES> 0
<TOTAL-REVENUES> 19,255,038
<CGS> 0
<TOTAL-COSTS> 4,423,534
<OTHER-EXPENSES> 5,864,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,856,568
<INCOME-PRETAX> 3,990,055
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,990,055
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,990,055
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.42
</TABLE>
