TYPE 10-Q
SEQUENCE: 1
DESCRIPTION: SECOND QUARTER REPORT FOR 2000
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 June 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 001-13915
---------
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
---------------------------------------------------
(Registrant's Telephone Number Including Area Code)
Number of shares outstanding of the issuer's Common Shares, no par value, as of
August 11,2000: 8,979,292 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
June 30,
2000 December 31,
(Unaudited) 1999
------------ -------------
<S> <C> <C>
Investment real estate:
Land ......................................................... $ 48,201,135 $ 48,964,963
Buildings and improvements ................................... 118,605,893 127,232,647
Property under development ................................... 4,058,521 1,105,343
---------- ----------
170,865,549 177,302,953
Less accumulated depreciation .................................... (11,647,318) (11,164,573)
---------- ----------
Investment real estate, net ...................................... 159,218,231 166,138,380
Cash and cash equivalents ........................................ 3,922,861 1,807,791
Accounts receivable, net of allowance ............................ 2,432,961 2,876,523
Prepaid expenses and other assets ................................ 4,586,932 4,143,068
---------- ----------
Total Assets ................................................. $170,160,985 $174,965,762
============ ============
LIABILITIES, MINORITY INTEREST, AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................... $ 53,292,880 $ 50,043,083
Capital lease obligations ........................................ 9,771,735 11,529,745
Construction note payable ........................................ 4,878,132 5,198,132
Short-term notes and lines of credit ............................. 23,919,800 22,953,000
Accounts payable,accrued expenses
and other liabilities ........................................... 6,238,887 5,887,733
Accrued distributions............................................. 1,878,368 1,945,673
---------- -------------
Total liabilities ................................................ 99,979,802 97,557,366
---------- -------------
Minority interest in consolidated partnerships.................... 2,711,391 2,745,791
---------- -------------
Commitments and contingencies
Common shareholders' equity:
Common shares of beneficial interest, no par value,
500,000,000 shares authorized; 9,514,889 shares issued;
8,979,292 and 9,043,892 shares outstanding in 2000 and 1999,
respectively ................................................. 87,226,324 87,233,173
Accumulated deficit............................................... (15,579,849) (8,517,310)
---------- -------------
71,646,475 78,715,863
Less:
Treasury shares, at cost, 535,597 and 470,997 in
2000 and 1999, respectively ...................................... (3,564,327) (3,238,227)
Shareholder notes receivable...................................... (612,356) (815,031)
---------- -------------
Total common shareholders' equity ................................ 67,469,792 74,662,605
---------- -------------
Total liabilities, minority interest and
common shareholders' equity ...................................... $170,160,985 $174,965,762
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
30-June-00 30-June-99 30-June-00 30-June-99
<S> <C> <C> <C> <C>
Revenues:
Rental ....................................... $4,879,453 $4,888,597 $ 9,819,329 $ 9,784,874
Lease termination fees........................ 380,000 - 380,000 -
Recoveries from tenants ...................... 1,400,298 1,329,656 2,821,831 2,745,176
Interest and other income .................... 49,342 80,858 126,781 122,098
--------- ---------- ---------- ----------
Total revenues ............................ 6,709,093 6,299,111 13,147,941 12,652,148
Property operating ............................. 721,080 598,035 1,412,318 1,329,856
Property taxes ................................. 968,078 881,702 1,954,472 1,752,854
Property management fees ....................... 62,187 69,741 113,629 165,273
General and administrative .................... 482,666 435,967 947,384 803,551
Advisory fees .................................. 302,008 314,223 614,240 619,157
Depreciation and amortization .................. 1,146,271 1,047,945 2,266,456 2,069,712
Interest ....................................... 1,934,329 1,597,194 3,855,900 3,131,400
Impairment loss................................. 6,000,000 - 6,000,000 -
---------- ---------- ---------- ----------
Total expenses ........................... 11,616,619 4,944,807 17,164,399 9,871,803
Income (loss) before minority interest
and gain on sale of real estate .......... (4,907,526) 1,354,304 (4,016,458) 2,780,345
Minority interest in income of consolidated
partnerships .................................. (57,950) (36,794) (86,924) (79,048)
Gain on sale of real estate ................... 729,899 - 851,809 -
---------- ---------- ---------- ----------
Net income (loss).............................. $(4,235,577) $1,317,510 $(3,251,573) $ 2,701,297
========== ========== ========== ==========
Basic and diluted per share amounts:
Net income .................................... $ (0.47) $ 0.14 $ (0.36) $ 0.28
========== ========== =========== ==========
Basic and diluted weighted average shares
outstanding ................................... 9,003,332 9,511,392 9,023,612 9,513,112
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
-----------------------
30-June-00 30-June-99
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(3,251,573) $ 2,698,766
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................. 2,180,960 2,000,279
Amortization ............................................. 172,721 140,500
Impairment loss........................................... 6,000,000 -
Minority interest in income of consolidated partnerships . 86,924 79,048
Gain on sale of real estate .............................. (851,809) -
Changes in operating assets and liabilities .............. 416,199 (945,154)
---------- ----------
Net cash provided by operating activities ............. 4,753,422 3,973,439
---------- ----------
Cash flows from investing activities:
Purchase of and capital improvements to investment
real estate ............................................. (3,430,641) (9,807,995)
Proceeds from sale of real estate ........................ 2,933,228 -
Application of escrow deposits ........................... - 151,378
---------- ----------
Net cash used in investing activities ................. (497,413) (9,656,617)
---------- ----------
Cash flows from financing activities:
Proceeds from mortgage note payable ...................... 3,650,000 -
Proceeds from short-term notes payable ................... 2,604,800 7,738,000
Collections from notes receivable ........................ 39,669 -
Principal payments on mortgage notes payable.............. (400,203) (4,019,024)
Payments on short-term notes payable...................... (1,638,000) -
Payments on capital lease obligations .................... (1,679,810) (48,406)
Proceeds from construction note payable .................. - 3,126,436
Principal payments on construction note payable........... (320,000) -
Offering costs ........................................... (6,849) (135,378)
Payment of distributions ................................. (3,878,271) (4,091,348)
Purchase of minority interest............................. - (59,788)
Distribution to holders of minority interests ............ (121,324) (172,383)
Payment of loan acquisition costs ........................ (64,851) -
Purchase of treasury shares .............................. (326,100) (35,625)
---------- ----------
Net cash provided by (used in)financing activities .... (2,140,939) 2,302,484
---------- ----------
Increase (decrease) in cash and cash equivalents ............. 2,115,070 (3,380,694)
Cash and cash equivalents at beginning of period ............. 1,807,791 5,486,095
---------- ----------
Cash and cash equivalents at end of period ................... $ 3,922,861 $ 2,105,401
---------- ----------
Supplemental disclosures
Cash paid for interest................................. 3,664,267 3,062,863
Assumption of property tax and security deposit
liabilities in connection with acquisition of
properties ............................................ - 49,146
Purchase of treasury shares by optionees with
purchase money notes .................................. - 815,031
Reduction of capital lease obligation.................. 78,200 -
Forgiveness of shareholder notes receivable............ 163,006 -
Accrued distributions.................................. 1,878,368 -
Receivable from land sale.............................. - 562,500
</TABLE>
<PAGE>
United Investors Realty Trust and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Organization
United Investors Realty Trust and Subsidiaries (the "Company"), a Texas real
estate investment trust ("REIT") is engaged in the acquisition, development, and
management of neighborhood and community shopping centers in the Sunbelt states.
The tenants of the Company's shopping centers include national and regional
supermarkets and drug stores and other national, regional, and local retailers
that provide basic necessity and convenience goods and services to the
surrounding population.
The Company operated from 1989 until 1998 as a private REIT. On March 13, 1998,
the Company completed an initial public offering (the "IPO") of 7,600,000 common
shares of beneficial interest. In April 1998, the Company issued another
1,000,000 common shares of beneficial interest pursuant to the exercise of the
underwriters' overallotment options. Prior to the IPO, the Company had
outstanding approximately 915,000 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 15, 2000. 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 June 30, 2000, the Company owned controlling interests in 27 shopping center
properties containing approximately 3,100,000 total square feet of gross
leaseable area ("GLA"), of which the Company owned approximately 2,400,000
square feet of GLA. In addition, the Company owns a non-controlling 50% interest
in a partnership that is developing an 80,000 square foot shopping center in
Tampa, Florida.
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 February 29, 2000, at which time the Company, for no additional
consideration, obtained fee title to the shopping center.
On May 31, 2000, the 29,000 square foot Autobahn Center in San Antonio, Texas,
was sold resulting in a gain on sale of approximately $730,000.
As of June 30, 2000, 23% of the Company's owned GLA was in the Houston, Texas
area, 14% was in the Dallas, Texas area, 19% was elsewhere in Texas, 26% was in
Florida, 14% was in Arizona, and 4% was in Tennessee.
3. Impairment of Shopping Center
During the fourth quarter of 1999, the Company's Board of Trust Managers elected
to pursue strategies that included the possible disposition of one or more
properties in order to generate funds for recurring capital expenditures,
development and acquisition of new properties, redevelopment of existing
properties, and payment of distributions to shareholders. Since then, management
has evaluated whether certain properties have the investment characteristics
that the Company presently desires. Those properties that do not have such
characteristics have been evaluated for appropriate asset strategies, including
redevelopment, continued operation, and/or disposition.
During the quarter ended June 30, 2000, management determined that certain
conditions and events at one of the Company's properties indicate that estimated
future cash flows are not sufficient to allow the Company to recover its
carrying amount. This impairment of value is a result of several market factors
that have recently developed.
Several large tenants have vacated recently, or have given notice that they
intend to vacate in the near future. In October 1999, a tenant occupying 46,000
square feet (14% of GLA) vacated and the space has not been released. Effective
May 1, 2000, the center's largest tenant reduced its leased space by 54,000 feet
(17% of the center's total GLA).
In addition, other large tenants have provisions in their leases that allow them
to terminate their lease agreements in the event that the occupancy of the
center falls below a certain level, and management expects that these tenants
will also vacate in the near future. The occupancy of the center has declined to
approximately 63% as of June 30, 2000, and is expected to decline further as
leases expire.
A newly developed competing shopping center has recently opened within the same
market area. Certain of the tenants presently occupying space have notified the
Company of their intent to relocate to the new center. One such tenant will
relocate despite the fact that it is obligated to continue paying rent to the
Company for several years.
The newly developed center provides prospective tenants with an alternative that
provides more desirable aesthetic features, state of the art communications
infrastructure, and proximity to major retailers that attract large numbers of
shoppers. In order to compete effectively for tenants that will pay acceptable
rental rates, the Company will be required to incur substantial costs to
redevelop the center or subdivide and build out existing space. Moreover, there
is no assurance that the market demand will support such newly redeveloped or
rehabilitated space at profitable rental rates.
Because of the size and layout of the vacant space, the costs necessary to
prepare the space for new tenants, and the effect on potential rental rates of
the newly opened center, management believes that the future cash flows from
operating the shopping center will be less than its carrying value.
As a result of this impairment, a loss of $6,000,000 was recorded to reduce the
carrying amount of the shopping center to its estimated fair value. Fair value
was estimated based on management's assessment, after consultation with local
real estate brokers, of the sales price that might be achieved in an orderly
sale to an unrelated buyer. Results of operations for the property included in
net earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
30-Jun-00 30-Jun-99 30-Jun-00 30-Jun-99
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Property revenues (including
$380,000 lease termination
fee in 2000) $ 911,550 $ 673,399 $1,479,821 $1,320,316
----------- ----------- ----------- -----------
Property operating expenses.. 253,067 126,416 446,855 304,859
Advisory fees................ 42,801 37,195 67,143 69,051
Interest expense............. 275,556 278,330 551,800 557,181
Depreciation................. 115,054 108,860 229,736 217,409
Amortization................. 6,028 2,569 11,977 5,139
----------- ----------- ----------- -----------
Subtotal................... 692,506 553,370 1,307,511 1,153,639
Operating income from
impaired property........... $ 219,044 $ 120,029 $ 172,310 $ 166,677
=========== =========== =========== ===========
</TABLE>
4. Notes and Mortgages Payable
The Company's mortgage notes payable consist of fixed-rate debt with outstanding
principal balances aggregating $53,292,880 at June 30, 2000. The interest rates
range from 7.5% to 9.3% with a weighted average interest rate of 8.58%. The
notes mature at various times through 2018 with a weighted average term to
maturity of 7.3 years.
Property under capital leases, consisting of two shopping centers, aggregated
$13.8 million at June 30, 2000 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 $15.0 million, with annual
payments due of approximately $.8 million in each of 2000 through 2004, and
$11.3 million thereafter. The amount of these total payments representing
interest is approximately $5.2 million.
The Company has a $36,500,000 revolving credit agreement with a bank. During the
quarter ended June 30, 2000 the Company and the bank agreed to amend the terms
of the agreement and to accelerate the maturity of the agreement to January 31,
2001. In general, the amended terms provide that the Company may borrow up to
60% of a formula based calculation of the Company's value and require the
Company to grant first lien deeds of trust on two additional (for a total of
six) properties.
Interest on outstanding borrowings under the agreement will remain at
approximately 155 basis points over LIBOR, (approximately 7.8% at June 30, 2000)
payable monthly. In addition to approximately $23,920,000 in borrowings as of
June 30, 2000, the Company is also contingently obligated under two unfunded
letters of credit totaling approximately $3,800,000. The Company expects to
repay the borrowings during the next six months with proceeds from property
sales and borrowings from alternate lenders.
5. 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 dilutive shares related to outstanding share options is computed by
application of the Treasury share method. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- -----------------------
Weighted Average Shares 2000 1999 2000 1999
----------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS ......................... 9,003,332 9,511,392 9,023,612 9,513,112
Effect of dilutive securities:
Employee share options ........... -- -- -- --
---------- ---------- ---------- ----------
Diluted EPS ....................... 9,003,332 9,511,392 9,023,612 9,513,112
========== ========== ========== ==========
Distributions per share declared .. $0.215 $0.215 $0.43 $0.43
========== ========== ========== ==========
</TABLE>
6. Advisory Agreement
The Company is managed and advised by an entity (the "Investment Manager")
affiliated with the Company's chairman and chief executive officer. The
Investment Manager is paid a fee based on an amount equivalent to 6.5% of
earnings before interest, depreciation, amortization, advisory fees, and
property transactions. The rate was reduced from 6.8% 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 six months ended June 30, 2000, the Company paid the
Investment Manager fees of approximately $285,000 and $581,000, respectively,
and reimbursed the Investment Manager $189,000 and $418,000 respectively for
salaries, benefits, occupancy, and other operational costs. For the
corresponding periods in 1999 the Investment Manager fees were $298,000 and
$586,000 and the salaries, benefits, occupancy, and other operational costs were
$196,000 and $359,000.
The Company forgave loans to the Investment Manager in the amount of $16,500 for
each of the quarters ended June 30, 2000 and 1999 and $33,000 for each of the
six month periods ended June 30, 2000 and 1999. Such loans were granted to
enable the Advisor to exercise previously granted options (see Note 7).
7. 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, up to 100% of which
may be borrowed from the Company. Such loans are included in shareholder notes
receivable. 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
ended June 30, 2000 and 1999 is $24,251 and for the six months ended June 30,
2000 and 1999 is $48,502 which represents the recognition of such loan
forgiveness with respect to loans made to the Company's officers and employees.
Included in advisory fees for the three months ended June 30, 2000 and 1999 is
$16,500 and for the six months ended June 30, 2000 and 1999 is $33,000, which
represents the recognition of such loan forgiveness with respect to loans made
to the Investment Manager.
8. Subsequent Event
Subsequent to June 30, 2000 the Company entered into a contract to sell all of
its interest in one of its shopping centers. Under terms of the contract, the
buyer will assume mortgage debt of approximately $4,600,000 (with a fixed
interest rate of 9.3%) and other property-related obligations, pay cash of
approximately $73,000, and exchange approximately 337,400 common shares and
43,555 partnership units that are convertible into common shares in return for
the property. The Company may also agree to manage the operations of the center
for the purchaser in return for a market-level management fee.
The shopping center is a 91,600 square foot shopping center anchored by an
Albertsons grocery store. In the six months ended June 30, 2000 the shopping
center generated approximately $500,000 and $365,000 in revenue and operating
income (before interest expense), respectively. Interest expense during the
period was approximately $216,000.
Closing of the transaction is conditional upon a number of matters, some of
which are beyond the Company's control. Accordingly, there is no assurance that
the sale will ultimately occur.
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.
We have 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. We focus on properties anchored
primarily by supermarkets, drug stores and major retail tenants located in this
region.
We owned controlling interests in 27 neighborhood and community shopping centers
at June 30, 2000. We also own a non-controlling 50% interest in a partnership
that is developing a shoping center in Tampa, Florida. Leases for our 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.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2000
Revenue increased by $410,000, or 7%, for the three months ended June 30, 2000
compared to the same period in 1999. This increase was primarily due to a
combination of a $380,000 one-time lease termination fee received in the second
quarter of 2000, acquisition of approximately 125,000 square feet of GLA since
the first quarter of 1999, and loss of rental revenue from several large tenants
(discussed elsewhere herein).
Net earnings declined from $1,317,510 in 1999's second quarter to a loss of
$4,235,577 in 2000's second quarter. The primary reason for the decline in net
earnings is the $6,000,000 impairment loss described in Note 3 to the
accompanying condensed consolidated financial statements. In addition, the
one-time receipt in May 2000 of a $380,000 lease termination fee had the effect
of reducing 2000's second quarter net loss as compared to 1999's second quarter
net earnings, revenue from new properties had the effect of increasing earnings
and loss of revenue from large vacancies had the effect of decreasing earnings
as compared to the 1999 periods.
We sold the Autobahn Shopping Center as of May 31, 2000 and recognized a gain of
approximately $730,000. Prior to the sale, Autobahn had provided approximately
$30,000 per month and $18,000 per month in revenue and net operating income,
respectively. We used proceeds from the sale to reduce debt in the amount of
$1,630,000 and for working capital.
Because of the effects of the one-time receipt of the lease termination fee, the
impairment loss, and the sale of the Autobahn center, 2000's second quarter
revenue, funds from operations (see below) and net loss may not be indicative of
or comparable to results that may otherwise be expected in future periods. In
addition, our portfolio of properties as of June 30, 2000 includes properties
that may be sold in the near future. If we sell these properties and do not
acquire replacement properties, our future results of operations will be even
less comparable. Following is an analysis of the occupancy of our portfolio of
properties as of June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
30-June-00 30-June-99
--------------------------------
<S> <C> <C>
Total GLA 2,361,013 2,397,669
Total occupied GLA 2,030,471 2,229,832
Total vacant GLA 330,542 167,837
Total rental revenue per square foot $2.07 $2.04
</TABLE>
As the above table describes, we have approximately 330,500 square feet vacant
space on June 30, 2000. The reasons for this vacancy level are described
elsewhere in this Quarterly Report on Form 10-Q. Approximately 135,000 square
feet of this space was vacated in 1999 and early 2000. In May 2000 another
54,000 square feet was vacated.
As of June 30, 2000 we had leased approximately 31,000 square feet of the space,
although the tenant has not yet occupied its space. This space is currently
undergoing build-out and we expect the tenant to accept and occupy the space
during the third quarter of 2000. If we are able to successfully lease some or
all of the remaining vacant space at rates that approximate the average rates of
our portfolio, our revenue and net earnings will increase accordingly.
However, there are several risks and uncertainties with respect to such
potential increases in revenue and net earnings. (1) Approximately 100,000
square feet (or 30% of the total vacancy) is part of the shopping center that
was recognized as impaired as of June 30, 2000. We have not formulated a
specific plan for this shopping center, and accordingly, we are not actively
marketing the vacancies. (2) Approximately 30,000 square feet (or 10% of the
total) is part of a shopping center that may be sold. If we sell the shopping
center, we will not benefit from any possible increased rental revenue.
Moreover, if we sell the shopping center and do not acquire new GLA to replace
the sold shopping center, our revenue will also decline. (3) Approximately
28,000 square feet (or 9% of the total) is space formerly occupied by a
multi-screen cinema. This space is relatively more difficult to lease and
requires substantially more costs to make the space acceptable to non-cinema
users. (4) There is no assurance that, even if we retain the shopping centers,
we will be able to lease the vacancies at rates that provide acceptable returns.
We do not anticipate significant increases in revenue from sources other than
these spaces until early in 2000's fourth quarter. At that time, we anticipate
the receipt of revenue from the new McMinn Center Ingles grocery store, a 60,000
square foot replacement of Ingle's present 27,000 square foot location in the
same center. We believe the net effect on revenue of this opening will initially
be approximately $20,000 of additional revenue each month. We also believe that
the FishHawk Kash N Karry Shopping Center will open in 2000's fourth quarter. We
own a 50% interest in this project, and believe that our share of its revenue
will approximate $30,000 per month when it is substantially leased.
Interest expense increased by approximately $337,000 to $1,934,000 in 2000's
second quarter as compared to the year earlier period. Increases in interest
expense were a result of additional total debt (average of $93,000,000 in 2000
versus $77,000,000 in 1999) and increased interest rates on variable rate debt
(average of $25,000,000 in 2000 versus average of $11,000,000 in 1999). We
anticipate additional interest expense increases because we plan to refinance
our revolving credit line and expect an increase in its rates. We also presently
intend to substantially finance our FishHawk center upon completion, and
accordingly, our interest expense may increase at that time.
SIX MONTHS ENDED JUNE 30, 2000
Revenue increased by $496,000, or 4%, for the six months ended June 30, 2000
compared to the year earlier period. This increase was primarily the result of
the one-time $380,000 lease termination fee received in the six months ended
June 30, 2000, revenue from properties acquired since January 1, 1999, and
decreased revenue related to additional vacancies.
Net earnings decreased from $2,701,297 for the six months ended June 30, 1999 to
a loss of $3,251,573 for the six months ended June 30, 2000. The decline in net
earnings is primarily due to the $6,000,000 impairment loss recorded in the six
months ended June 30, 2000 (see Note 3 to the condensed consolidated financial
statements), loss of rental revenue related to termination of leases of several
large tenants and increased general and administrative and interest expenses.
Liquidity and Capital Resources
Demands for our capital, as described below, will exceed our ability to meet
those demands solely from operating cash flows until we are able to increase our
revenues. However, we believe there are other sources of capital available to
us, including proceeds from possible property sales. We have identified several
properties that we believe no longer have the investment characteristics we
desire and we are attempting to sell these properties in order to provide
capital resources.
In 1999, these properties accounted for approximately $3,700,000 in revenue and
had a carrying value of approximately $21,600,000 at June 30, 2000. We believe
the sale of some or all of these properties may provide additional resources to
enable us to meet the demands on our capital described below. As noted, we
completed the sale of one such property in May 2000. We also believe we are able
to raise debt and some forms of equity or joint venture capital, but presently
we believe these sources may be relatively expensive. Demands on our capital are
described below.
In order to maintain the tax benefits of operating as a REIT, we are required to
distribute to our shareholders at least 95% (90% beginning in 2001) of our
taxable income. The Board of Trust Managers has distributed in excess of that
amount since our initial public offering in March 1998, and presently intends to
maintain the quarterly distribution level of $0.215 per share.
As previously noted, several large tenants have vacated their leased spaces and
we have not yet released these spaces. We anticipate that releasing three of the
four large spaces, aggregating approximately 90,000 square feet, will require as
much as $2,400,000 in construction costs, other tenant inducement costs, and
leasing commissions. In addition, if we elect to redevelop the shopping center
mentioned above (wherein is the fourth large vacancy), we will need an
undetermined, but substantial amount of capital, and we may terminate existing
leases which will further reduce our revenue.
We are in the development and construction phases of two new centers, in one of
which we own a 50% interest. Our portion of the costs of these two projects
approximates $6,000,000.
Our Board of Trust Managers has approved a share repurchase program for the
possible repurchase of as many as 1,000,000 common shares of beneficial
interest. Our Board believes that at recent market prices, our shares represent
a compelling real estate investment, and to the extent capital is available and
prices are attractive, we intend to execute the repurchase plan. In addition, we
will consider selling properties for consideration that includes our shares. Any
such purchases may require the consent of our lenders.
Cash flows from operating activities were $4,753,400 for the six months ended
June 30, 2000, compared to $3,973,400 for the comparable year, earlier period.
The increase from 1999 to 2000 is substantially the result of the timing of
receipt of cash on accounts receivable and payment of operating expenses and a
$380,000 lease termination fee, reduced by increased interest expense, general
and administrative expenses and reduced revenue as a result of lease
terminations.
As described in Note 4 to the accompanying financial statements, we have a
$36,500,000 revolving credit agreement with a bank. As of June 30, 2000 we had
drawn approximately $27,800,000 (including unfunded letters of credit
approximating $3,800,000) under the line. This amount represents approximately
58% of a formula based calculation of our assets' values. Because the credit
agreement limits our borrowings to 50% of this value, we have agreed in
principle with our lender to modify the terms of the credit agreement.
The Company and the bank agreed in principle to amend the terms of the agreement
and to accelerate the maturity of the agreement to January 31, 2001. Upon
execution of the amended credit agreement, we will file a Current Report on Form
8-K. In general, the amended terms will provide that the Company may borrow up
to 60% of a formula based calculation of the Company's value and require the
Company to grant first lien deeds of trust on two additional (for a total of
six) properties.
Interest on outstanding borrowings under the amended agreement will remain at
approximately 155 basis points over LIBOR, (approximately 7.8% at June 30, 2000)
payable monthly. In addition to approximately $23,920,000 in borrowings as of
June 30, 2000, the Company is also contingently obligated under two unfunded
letters of credit totaling approximately $3,800,000. The Company expects to
repay the borrowings during the next six months with proceeds from property
sales and borrowings from alternate lenders.
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 Six Months Ended
30-June-00 30-June-99 30-June-00 30-June-99
--------------------------- --------------------------
Funds from operations:
<S> <C> <C> <C> <C>
Net income (loss)............................ $(4,235,577) $1,317,510 $(3,251,573) $2,701,297
Plus real estate related
depreciation and amortization ............ 1,146,271 1,047,945 2,266,456 2,069,762
Plus impairment loss......................... 6,000,000 - 6,000,000 -
Less gain on sale of real estate ............ (729,899) - (851,809) -
Plus minority interest in down REIT
partnerships ............................. 57,950 36,794 86,924 79,048
---------- ---------- ---------- ----------
Funds from operations ....................... $2,238,745 $2,402,249 $4,249,998 $4,850,107
========== ========== ========== ==========
Funds from operations per share and downReit
unit ....................................... $ 0.24 $ 0.25 $ 0.46 $ 0.50
========== ========== ========== ==========
Funds available for distribution:
Funds from operations ....................... $2,238,745 $2,402,249 $4,249,998 $4,850,107
Plus amortization of financing costs ........ 48,041 39,284 95,616 83,015
Less tenant improvements and leasing
commissions ................................ (166,490) (149,395) (251,392) (246,060)
Less non-recoverable recurring capital
improvements ............................... (113,736) (98,375) (134,468) (140,095)
Less straight line rents, net of
$80,000 bad debt write-off in
March 1999 ................................. (61,249) (94,997) (160,372) (110,612)
Plus forgiveness of option loans ............ 40,751 40,751 81,502 81,502
Other ....................................... - 14,338 - 43,014
---------- ---------- ---------- ----------
Funds available for distribution ............ $1,986,062 $2,153,855 $3,880,884 $4,560,871
========== ========== ========== ==========
Funds available for distribution per share
and downReit unit .......................... $ 0.21 $ 0.22 $ 0.42 $ 0.47
========== ========== ========== ==========
Basic and diluted weighted average number of
shares and downReit partnership units ...... 9,284,926 9,792,986 9,305,206 9,794,706
</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 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. An increase or decrease of 100 basis points in interest rates
would have approximately a $239,000 effect on interest expense based on the
amount of variable rate debt outstanding at June 30, 2000. All such variable
rate borrowings have original maturities through 2001. The Company does not have
any significant foreign operations and thus is 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
The Company's Current Report on Form 8-K dated May 12, 2000 for
the purpose of disclosing the termination of strategic talks.
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: August 14, 2000 /s/ R. Steven Hamner
----------------------------
R. Steven Hamner,
Vice President,Chief Financial Officer
