TYPE 10-Q
SEQUENCE: 1
DESCRIPTION: THIRD 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 September 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
November 13,2000: 8,652,409 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,
2000 December 31,
(Unaudited) 1999
------------ -------------
<S> <C> <C>
Investment real estate:
Land ......................................................... $ 46,080,920 $ 48,964,963
Buildings and improvements ................................... 117,873,164 127,232,647
Property under development ................................... 388,608 1,105,343
---------- ----------
164,342,692 177,302,953
Less accumulated depreciation .................................... (11,726,417) (11,164,573)
---------- ----------
Investment real estate, net ...................................... 152,616,275 166,138,380
Cash and cash equivalents ........................................ 1,947,445 1,807,791
Accounts receivable, net of allowance ............................ 2,334,310 2,876,523
Prepaid expenses and other assets ................................ 5,282,169 4,143,068
---------- ----------
Total Assets ................................................. $162,180,199 $174,965,762
============ ============
LIABILITIES, MINORITY INTEREST, AND COMMON SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................... $ 48,547,077 $ 50,043,083
Capital lease obligations ........................................ 9,748,137 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 ........................................... 6,345,247 5,887,733
Accrued distributions............................................. 1,946,834 1,945,673
---------- -------------
Total liabilities ................................................ 95,385,227 97,557,366
---------- -------------
Minority interest in consolidated partnerships.................... 2,300,800 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;
8,652,292 and 9,043,892 shares outstanding in 2000 and 1999,
respectively ................................................. 87,281,503 87,233,173
Accumulated deficit............................................... (16,606,491) (8,517,310)
---------- -------------
70,675,012 78,715,863
Less:
Treasury shares, at cost, 872,997 and 470,997 in
2000 and 1999, respectively ...................................... (5,568,484) (3,238,227)
Shareholder notes receivable...................................... (612,356) (815,031)
---------- -------------
Total common shareholders' equity ................................ 64,494,172 74,662,605
---------- -------------
Total liabilities, minority interest and
common shareholders' equity ...................................... $162,180,199 $174,965,762
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
30-Sept-00 30-Sept-99 30-Sept-00 30-Sept-99
<S> <C> <C> <C> <C>
Revenues:
Rental ....................................... $4,873,376 $5,126,314 $14,692,705 $14,911,188
Lease termination fees........................ - - 380,000 -
Recoveries from tenants ...................... 1,278,303 1,392,914 4,100,134 4,138,090
Interest and other income .................... 139,553 83,662 266,334 205,760
--------- ---------- ---------- ----------
Total revenues ............................ 6,291,232 6,602,890 19,439,173 19,255,038
Property operating ............................. 666,677 704,748 2,078,995 2,034,604
Property taxes ................................. 916,931 939,115 2,871,403 2,691,968
Property management fees ....................... 51,609 51,846 165,238 217,119
General and administrative .................... 338,937 432,606 1,286,321 1,236,157
Advisory fees .................................. 298,232 301,532 912,472 920,689
Litigation expense.............................. 112,095 - 112,095 -
Depreciation and amortization .................. 1,064,475 1,117,665 3,330,931 3,187,377
Interest ....................................... 2,055,378 1,725,168 5,911,278 4,856,568
Impairment loss................................. - - 6,000,000 -
---------- ---------- ---------- ----------
Total expenses ........................... 5,504,334 5,272,680 22,668,733 15,144,482
Income (loss) before minority interest and
gain on sale of real estate............... 786,898 1,330,210 (3,229,560) 4,110,556
Minority interest in income of consolidated
partnerships .................................. (15,864) (41,452) (102,788) (120,501)
Gain on sale of real estate .................... 115,070 - 966,879 -
---------- ---------- ---------- ----------
Net income (loss)............................... $ 886,104 $ 1,288,758 $(2,365,469) $ 3,990,055
========== ========== ========== ==========
Basic and diluted per share amounts:
Net income per common share..................... $ 0.10 $ 0.14 $ (0.26) $ 0.42
========== ========== =========== ==========
Basic and diluted weighted average shares
outstanding ................................... 8,980,000 9,504,578 9,008,969 9,510,235
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
United Investors Realty Trust
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
-----------------------
30-Sept-00 30-Sept-99
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $(2,365,469) $ 3,990,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................. 3,215,841 3,071,612
Amortization ............................................. 378,142 230,475
Impairment loss........................................... 6,000,000 -
Minority interest in income of consolidated partnerships.. 102,788 120,501
Gain on sale of real estate .............................. (966,879) -
Changes in operating assets and liabilities .............. (117,992) 1,485,076
---------- ----------
Net cash provided by operating activities ............. 6,246,431 8,897,719
---------- ----------
Cash flows from investing activities:
Purchase of and capital improvements to investment
real estate ............................................. (4,405,412) (16,075,884)
Proceeds from sale of real estate ........................ 2,988,139 -
Application (funding) of deposits ........................ (200,000) 10,000
---------- ----------
Net cash used in investing activities ................. (1,617,273) (16,065,884)
---------- ----------
Cash flows from financing activities:
Proceeds from mortgage note payable ...................... 3,650,000 -
Proceeds from short-term notes payable ................... 2,604,800 12,053,000
Collections from notes receivable ........................ 39,669 -
Principal payments on mortgage notes payable.............. (597,586) (4,252,048)
Payments on short-term notes payable...................... (1,638,000) -
Payments on capital lease obligations .................... (1,703,408) (70,246)
Proceeds from construction note payable .................. - 3,783,459
Principal payments on construction note payable........... (320,000) -
Offering costs ........................................... (6,851) (136,653)
Payment of distributions ................................. (5,795,092) (6,128,397)
Purchase of minority interest............................. (130,665) (59,788)
Distribution to holders of minority interests ............ (181,986) (172,622)
Payment of loan acquisition costs ........................ (139,465) -
Proceeds from issuance of DRIP shares..................... 55,180 -
Purchase of treasury shares .............................. (326,100) (857,967)
---------- ----------
Net cash provided by (used in)financing activities .... (4,489,504) 4,158,738
---------- ----------
Increase (decrease) in cash and cash equivalents ............. 139,654 (3,009,427)
Cash and cash equivalents at beginning of period ............. 1,807,791 5,486,095
---------- ----------
Cash and cash equivalents at end of period ................... $ 1,947,445 $ 2,476,668
---------- ----------
Supplemental disclosures
Cash paid for interest................................. $ 5,661,173 $ 4,856,568
Assumption of property tax and security deposit
liabilities in connection with acquisition of
properties ............................................ - $ 102,001
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.................................. $ 1,946,834 -
Distribution receivable ............................... $ 86,430 -
Sale of property in exchange for treasury shares,
minority interest partnership units and assumption of
mortgage note payable:
Treasury shares received............................. $ 2,004,156 -
Minority interest partnership units received......... 235,128 -
Mortgage note payable assumed........................ 4,548,420 -
---------- -----------
Total noncash consideration for property............. $ 6,787,704 -
</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 option. 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 1999
Annual Report on Form 10-K. 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.
Recent Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
provides that all derivative instruments be recognized as either assets or
liabilities on the balance sheet and that all derivative instruments be measured
at fair value. The effective date of SFAS No. 133 for the Company is January 1,
2001. The Company currently does not invest in derivative instruments;
therefore, the adoption of SFAS No. 133 will not immediately impact the Company.
2. Investment in Properties
At September 30, 2000, the Company owned controlling interests in 26 shopping
center properties containing approximately 3,000,000 total square feet of gross
leaseable area ("GLA"), of which the Company owned approximately 2,300,000
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.
As of September 30, 2000, 23% of the Company's owned GLA was in the Houston,
Texas area, 14% was in the Dallas, Texas area, 15% was elsewhere in Texas, 27%
was in Florida, 14% was in Arizona, and 7% was in Tennessee.
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. On September
29, 2000, the Company sold the 92,000 square foot University Park Shopping
Center (see Note 5-Disposition of Property).
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 indicated that
estimated future cash flows will not be sufficient to allow the Company to
recover its carrying amount. This impairment of value was 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 September 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 has
relocated 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 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 during the
second quarter of 2000 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 Nine Months Ended
30-Sept-00 30-Sept-99 30-Sept-00 30-Sept-99
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Property revenues (including
$380,000 lease termination fee
in the nine months ended
September 30,2000) $ 521,784 $ 703,396 $2,001,605 $2,023,712
----------- ----------- ----------- -----------
Property operating expenses.. 166,112 252,959 634,476 557,818
Advisory fees................ 23,119 29,278 88,863 98,329
Interest expense............. 273,969 277,575 825,769 834,756
Depreciation................. 60,960 110,874 290,696 328,283
Amortization................. 6,028 6,285 18,005 11,424
----------- ----------- ----------- -----------
Subtotal................... 530,188 676,971 1,857,809 1,830,610
Operating income from
impaired property........... $ (8,404) $ 26,425 $ 143,796 $ 193,102
=========== =========== =========== ===========
</TABLE>
4. Notes and Mortgages Payable
The Company's mortgage notes payable consist of fixed-rate debt with outstanding
principal balances aggregating $48,547,077 at September 30, 2000. The interest
rates range from 7.5% to 9.25% with a weighted average interest rate of 8.51%.
The notes mature at various times through 2010 with a weighted average term to
maturity of 6.1 years.
Property under capital leases, consisting of two shopping centers, aggregated
$13.8 million at September 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 $14.8 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 $5.0 million.
The Company has a $36,500,000 revolving credit agreement with a bank. During the
quarter ended September 30, 2000 the Company and the bank executed an amended
loan agreement. In general, the amended loan agreement provides that the Company
may borrow up to 60% of a formula based calculation of the Company's value,
requires the Company to grant first lien deeds of trust on two additional (for a
total of seven) properties, and accelerates the maturity of the agreement to
January 31,2001.
Interest on outstanding borrowings under the agreement remains at approximately
155 basis points over LIBOR (approximately 8.2% at September 30, 2000), payable
monthly. In addition to approximately $23,920,000 in borrowings as of September
30, 2000, the Company is also contingently obligated under two unfunded letters
of credit totaling approximately $3,800,000. The Company expects to repay some
or all of the borrowings prior to January 31, 2001 with proceeds from property
sales and borrowings from alternate lenders. In the event the Company is unable
to sell or refinance properties sufficient to repay the revolver borrowings by
the loan's maturity date, management believes it will be able to negotiate a
further extension with the lender.
5. Disposition of Property
The Company completed the sale of its University Park Shopping Center ("UPSC")
on September 29, 2000 by exchanging the center for common shares of UIRT and
operating partnership units convertible into UIRT common shares, the assumption
of debt, and cash. UPSC, located in College Station, Texas, included
approximately 92,000 square feet of GLA, of which 80,500 square feet is leased
to Albertson's through 2023, and an adjacent 1.3 acre vacant lot. As of the
closing date, the Company's carrying value of UPSC approximated $6,500,000, and
the mortgage loan balance, which the purchaser assumed, was approximately
$4,548,000.
Management estimated the fair value of UPSC to be approximately $7,200,000,
after deduction of selling costs. This estimate is based on applying an assumed
market capitalization rate of 10.25% to property net operating income (estimated
to be $730,000 annually) plus the $300,000 estimated value of the 1.3 acre
vacant lot. Management believes that the property's value was negatively
impacted by a long-term, above market rate mortgage that the purchaser assumed
by paying a 1% fee to the lender. The Company's net equity in the property,
after assumption of debt, approximated $2,650,000.
As required by generally accepted accounting principles, the 337,400 shares
received in exchange for the net equity in the property were recorded based on
the market value of the shares on the date the parties agreed to the terms of
the transaction. On that date, UIRT's shares closed at $5.94, for an aggregate
value of approximately $2,004,000. In addition to the common shares, the
purchaser acquired and surrendered 43,555 downREIT partnership units that were
convertible into UIRT common shares, and paid approximately $115,000 in cash. As
a result of the transaction among the Company, the purchaser and the downREIT
partner, the Company avoided paying approximately $50,000 that it would have
otherwise been obligated to pay to the downREIT partner.
As calculated pursuant to the GAAP requirements, the transaction resulted in a
potential gain on sale of approximately $330,000. The Company deferred $200,000
of this potential gain and deposited $200,000 cash into an escrow account
pending the execution of a ground lease for a portion of the property. Should
the prospective lessee execute the lease, the terms of which were being
negotiated at the time of closing, the escrowed amount will be released to the
Company and the deferred gain recognized.
Prior to closing, the Company, its trust managers and executive officers and the
purchaser of UPSC were served with a lawsuit that, among other things attempted
to enjoin the Company and the purchaser from completing the transaction (see
note 11 - Litigation). The plaintiff also filed a Lis Pendens, which effectively
notifies any person examining title records that the property is the subject of
a lawsuit. As part of the terms of the sale, the Company has agreed with the
purchaser to use its best efforts to defend the lawsuit and to remove the Lis
Pendens.
6. 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 Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------
Weighted Average Shares 2000 1999 2000 1999
----------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS ......................... 8,980,000 9,504,578 9,008,969 9,510,235
Effect of dilutive securities:
Employee share options ........... -- -- -- --
---------- ---------- ---------- ----------
Diluted EPS ....................... 8,980,000 9,504,578 9,008,969 9,510,235
========== ========== ========== ==========
Distributions per share declared .. $0.215 $0.215 $0.645 $0.645
========== ========== ========== ==========
</TABLE>
<PAGE>
7. Advisory Agreement
The Company is managed and advised by an entity (the "Investment Manager")
controlled by the Company's chairman and chief executive officer. The Investment
Manager is paid a fee based on an amount equivalent to 6.5% (6.8% prior to July
1, 1999)of net income of the Company excluding gains or losses from debt
restructurings and property sales plus real estate related depreciation and
amortization, as adjusted by adding back interest expense and the advisory fee,
defined in the Advisory Agreement as Adjusted Funds from Operations ("AFFO").
Subsequent to September 30, 2000, the independent trust managers agreed to amend
the Advisory Agreement's definition of AFFO to include provisions for potential
losses, including impairment losses, related to depreciable operating property.
The purpose of amending the definition is to reflect a similar change in the
definition of Funds from Operations made by the National Association of Real
Estate Investment Trusts that was effective as of January 1, 2000. In addition
to this fee, the Company reimburses the Investment Manager for certain salaries,
benefits, and occupancy costs of employees of the Investment Manager who perform
property management, leasing, accounting, and other operational duties for the
Company.
During the three months and nine months ended September 30, 2000, the Company
paid the Investment Manager fees of approximately $282,000 and $863,000,
respectively, and reimbursed the Investment Manager $157,000 and $575,000,
respectively, for salaries, benefits, occupancy, and other operational costs.
For the corresponding periods in 1999 the Investment Manager fees were $285,000
and $871,000 and the salaries, benefits, occupancy, and other operational costs
were $142,000 and $502,000.
The Company forgave loans to the Investment Manager in the amount of $16,500 for
each of the quarters ended September 30, 2000 and 1999 and $49,500 for each of
the nine month periods ended September 30, 2000 and 1999. Such loans were
granted to enable the Investment Manager to exercise previously granted options
(see Note 8).
8. 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 become 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 annual 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 September 30, 2000 and 1999 is $24,251 and for the nine
months ended September 30, 2000 and 1999 is $72,754 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
September 30, 2000 and 1999 is $16,500 and for the nine months ended September
30, 2000 and 1999 is $49,500, which represents the recognition of such loan
forgiveness with respect to loans made to the Investment Manager.
9. Property Operating Expenses
The Company classifies as property operating expenses those direct expenses that
are specifically identifiable with particular properties. Certain other expenses
incurred by the Company that are necessary to maintain the physical quality of
and revenue from the properties, but that are not specifically identifiable with
particular properties, are classified as general and administrative expenses.
These other expenses (see note 10 below) include the salaries, benefits and
travel expenses of leasing, property management and certain accounting
personnel.
Property operating expenses include the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
30-Sept-00 30-Sept-99 30-Sept-00 30-Sep-99
------------------------- -------------------------
<S> <C> <C> <C> <C>
Repairs and maintenance.................. $121,158 $113,254 $415,869 $402,911
Utilities................................ 189,200 169,170 527,442 417,090
Landscaping.............................. 92,649 83,411 287,359 228,382
Waste disposal........................... 47,063 42,767 140,434 122,703
Insurance................................ 84,685 98,334 261,337 261,405
Ground lease............................. 33,799 33,539 101,691 99,322
Bad debt expense......................... 11,109 97,236 95,721 289,639
Other.................................... 87,014 67,037 249,142 213,152
-------- -------- ---------- ----------
Total.................................. $666,677 $704,748 $2,078,995 $2,034,604
======== ======== ========== ==========
</TABLE>
10. General and Administrative Expenses
General and administrative expenses include the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
30-Sept-00 30-Sept-99 30-Sept-00 30-Sept-99
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Salaries and benefits.................... $151,310 $144,778 $547,309 $505,302
Professional fees........................ 95,951 167,551 370,112 301,541
Rent and office administration........... 29,759 36,218 100,163 84,508
Travel and entertainment................. 11,249 25,541 61,659 91,003
Other.................................... 50,668 58,518 207,078 253,803
-------- -------- ---------- ----------
Total.................................. $338,937 $432,606 $1,286,321 $1,236,157
======== ======== ========== ==========
</TABLE>
11. Litigation
On August 14, 2000, a derivative lawsuit was filed in the District Court of
Dallas County, Texas by a shareholder purporting to represent all UIRT
shareholders, asserting claims on behalf of the Company. The petition, which was
amended on September 27, 2000, is filed against the Company's trust managers,
its executive officers, the Investment Manager, and the purchaser of UPSC (see
Note 5 - Disposition of Property), and alleges breach of fiduciary duties, waste
of trust assets, mismanagement, and fraud. The plaintiff's seek recission of the
Advisory Agreement and the sale of UPSC, a declaration that the Advisory
Agreement and sale of UPSC are void, an accounting, a constructive trust,
inspection of the Company's books and records, injunctive relief or,
alternatively, unspecified compensatory damages alleged to be not less than
$10,000,000 and punitive damages in an amount not less than $20,000,000,
attorneys' fees and costs.
One of the allegations in the derivative action is that the sale of UPSC was
preferential to one group of shareholders. When the lawsuit was filed on August
14, the plaintiff obtained a temporary restraining order and asked the Court for
an injunction barring the Company from completing the sale of UPSC. Based on
evidence the Company presented during an emergency hearing on August 28, the
judge of the Dallas Court dissolved the temporary restraining order and denied
the plaintiff's Application for a Temporary Injunction. As described in Note 5
above, the Company completed the sale of UPSC on September 29, 2000.
As of the date of this Quarterly Report on Form 10-Q, the Company had not filed
its answer to the Amended Petition. With respect to these matters, the plaintiff
has generally alleged that the Investment Manager has charged excessive fees for
its services to the Company, has charged the Company for salaries and other
expenses that should have been paid by the Investment Manager, and that it and
management have mismanaged the company's assets. The claims are currently being
investigated by the Company's Board of Trust Managers and an appropriate
response will be filed with the Court. At the present stage of the proceeding,
management is unable to determine a likely outcome. Management believes the
Company's directors and officers liability insurance will pay substantially all
related legal fees incurred through the date of this report in excess of policy
retention levels.
In April 2000, the Company's former President and Chief Executive Officer filed
a lawsuit against the Company, the Investment Manager, and the Company's
Chairman and Chief Executive Officer, who is also the Investment Manager's Chief
Executive Officer. The former executive is seeking an unspecified severance
compensation package with a value in excess of what was offered by the
Investment Manager. It is the position of the Company that the Investment
Manager was the employer of the former executive, and that the Company had no
employment relationship with him. The Investment Manager has indemnified the
Company against the costs of defending this lawsuit and any judgements. The
Company believes the suit to be without merit and intends to vigorously defend
itself against these allegations, and has not recorded any loss provision with
respect thereto.
In June 2000, an individual who claims to be a client of the Investment
Manager's individual financial planning business amended a lawsuit originally
filed in July 1999 to include the Company as a defendant. The original petition
alleged that the Investment Manager and one of its financial planning employees
breached certain duties in the management of the plaintiff's financial affairs.
The amended petition also alleges that the Company is legally responsible for
the acts of the Investment Manager and its financial planning employee because
they allegedly all operate as a single business enterprise. The plaintiff seeks
unspecified monetary damages, attorney fees and costs. The Investment Manager
has indemnified the Company against the costs of defending this lawsuit and any
judgements. The Company believes the suit to be without merit and intends to
vigorously defend itself against these allegations, and has not recorded any
loss provision with respect thereto.
The Company is also subject to other legal proceedings and claims that arise in
the ordinary course of its business. It is the opinion of the Company's
management that the outcome of such matters will not have a material adverse
effect on the Company's financial statements or its business.
12. Subsequent Events
Subsequent to September 30, 2000, the Company sold a 35% undivided partial
interest in its Centennial Shopping Center in Austin, Texas to an unrelated
party for approximately $2,300,000. The terms of the sale agreement provide that
the purchaser may require the Company to repurchase the undivided partial
interest upon 90 days notice. Accordingly, the Company has recorded the
transaction as a financing.
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 26 neighborhood and community shopping centers
at September 30, 2000. We also own a non-controlling 50% interest in a
partnership that is developing a shopping 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 SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
Revenue decreased by $311,658 (4.7%) in the third quarter of 2000 as compared to
the same quarter in 1999. Substantially all of the reduction of revenue was
caused by several significant vacancies that existed in 2000 but not in 1999,
and by the loss of revenue related to one shopping center that was sold in May
2000.
Net income decreased by $402,654 (31%) in the third quarter of 2000 as compared
to the same quarter in 1999. This reduction is caused primarily by the reduction
in revenue described above and an increase in quarterly interest expense of
$330,210. Included in 2000's interest expense is approximately $150,700 of loan
fee amortization that is related to our revolving line of credit (see Liquidity
and Capital Resources). In 1999's third quarter, approximately $43,700 in
revolver loan fees was amortized. The increase is the result of accelerating the
maturity of the revolving line of credit from August 2002 to January 2001.
In addition, we reduced our operating expenses, including property operations,
property taxes, general and administrative, and advisory fees by $157,461.
However, these savings were substantially offset by legal expenses and costs of
$112,095 related to the shareholder derivative lawsuit discussed elsewhere in
this Quarterly Report on Form 10-Q. The reduction in quarterly net income from
1999 to 2000 was partially offset by gains on sales of real estate of $115,070
in 2000 as compared to $0 in 1999.
Following is an analysis of the occupancy of our portfolio of properties as of
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
30-September-00 30-September-99
--------------- ---------------
<S> <C> <C>
Total GLA 2,329,359 2,434,280
Total occupied GLA 1,956,662 2,239,538
Total vacant GLA 372,697 194,742
Total rental revenue per square foot $2.09 $2.11
</TABLE>
As the above table indicates, we had approximately 372,700 square feet of vacant
space on September 30, 2000. Approximately 135,000 square feet of this space was
vacated in 1999 and early 2000 and comprised four large spaces. In May 2000
another 54,000 square feet related to a single space was vacated.
As of September 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 first quarter of 2001. 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 committed to a
specific plan for this shopping center, and accordingly, we are not actively
marketing the vacancies. (2) We are attempting to sell several shopping centers,
including the center in which we have leased 31,000 feet as noted above. If we
sell one or more of these centers, and we do not successfully reinvest the sale
proceeds in other shopping centers, we will lose the related revenue and net
income expected to be generated by the centers. (3) Approximately 28,000 square
feet 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.
As of late in 2000's third quarter, we began receiving rental revenue from the
new McMinn Center Ingles Grocery Store, a 60,000 square foot replacement of
Ingle's former 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 late in the fourth quarter.
Interest expense increased by approximately $330,000 to $2,055,000 in 2000's
third quarter as compared to the year earlier period. Increases in interest
expense were a result of additional total debt (average of $89,000,000 in 2000
as compared to $83,000,000 in 1999) and increased interest rates (approximately
8.2% in 2000 and 7.0% in 1999) on increased variable rate debt (average
outstanding of $24,000,000 in 2000 compared to average outstanding of
$17,000,000 in 1999). Also included in interest expense is amortization of loan
fees as discussed above. We anticipate additional interest expense increases
because we plan to refinance our revolving credit line and expect an increase in
its rates.
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenue increased by $184,135, or less than 1%, for the nine months ended
September 30, 2000 compared to the year earlier period. This net increase was
primarily the result of the one-time $380,000 lease termination fee received in
May 2000, revenue from properties acquired since January 1, 1999, and decreased
revenue related to the vacancies and property sales discussed above.
Net earnings decreased from $3,990,055 for the nine months ended September 30,
1999 to a loss of $2,365,469 for the nine months ended June 30, 2000. The
decline in net earnings is primarily due to the $6,000,000 impairment loss
recorded in June 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 interest expense, including the increased loan fee
amortization described above. The reduction in nine month net income from 1999
to 2000 was partially offset by gain on sales of real estate of $966,879 in 2000
as compared to $0 in 1999.
Liquidity and Capital Resources
Cash flows from operating activities were $6,246,431 for the nine months ended
September 30, 2000, compared to $8,897,719 for the comparable year, earlier
period. The decrease from 1999 to 2000 is substantially the result of lost
revenue related to increased vacancies, increased interest expense, and the
timing of receipt of cash on accounts receivable and payment of operating
expenses.
Demands for our capital, as described below, will continue to exceed our ability
to meet those demands solely from operating cash flows. 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
those properties in order to provide capital resources.
As noted, we completed the sale of one such property in May 2000 and another in
September 2000. The four properties we presently are willing to sell accounted
for approximately $2,186,000 in 1999 in revenue and had a carrying value of
approximately $13,163,000 at September 30, 2000. We also believe we may be 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. We have distributed in excess of that amount since our initial
public offering in March 1998.
As previously noted, several large tenants have vacated their leased spaces and
we have not yet released all of these spaces. We anticipate that releasing three
of the four large spaces (including the vacant cinema space), aggregating
approximately 90,000 square feet, will require as much as approximately
$1,800,000 in construction costs, other tenant inducement costs, and leasing
commissions. In addition, if we elect to redevelop the impaired shopping center
mentioned above (which includes 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. Releasing the numerous smaller
tenant spaces comprising the remainder of our vacant space will also require an
undetermined but substantial amount of capital.
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, of which we have acquired approximately 402,000 shares. We acquired
337,400 of such shares in connection with a property sale (see Note 5 to the
accompanying financial statements). Our authority to repurchase shares expires
on December 31, 2000, and we do not anticipate further cash share repurchases
under the current plan. However, we will consider selling properties for
consideration that includes our shares. Any such purchases may require the
consent of our lenders.
In January 2001, we will be required to make ad valorem tax payments of
approximately $1,800,000. As of September 30, 2000, we had not funded any of
this liability. As required by our revolving loan agreement, on November 1, 2000
we funded into escrow approximately $400,000 of such liability. We are required
to fund approximately another $1,000,000 into this escrow by December 31, 2000.
In addition to the approximately $1,400,000 that will be paid through this
escrow, we are obligated to pay directly to taxing authorities approximately
$400,000 during January 2001.
We hold an option to acquire a parcel of land adjacent to our Colony Plaza
Shopping Center near Sugar Land, Texas. We believe acquisition of the parcel is
important to creating incremental value of Colony Plaza, and we intend to
exercise the option. Of the $1,040,000 option price, we have previously paid
$200,000, and the remaining $840,000 is due December 31, 2000.
As described in Note 4 to the accompanying financial statements, we have a
$36,500,000 revolving credit agreement with a bank. As of September 30, 2000 we
had drawn approximately $27,800,000 (including unfunded letters of credit
approximating $3,800,000) under the line.
The Company and the bank executed an amended agreement in August 2000. In
general, the amended terms provide that the Company may borrow up to 60% of a
formula based calculation of the Company's value, require the Company to grant
first lien deeds of trust on two additional (for a total of seven) properties
and accelerate the maturity of the agreement to January 31, 2001. Under the
amended terms the bank is not obligated to make any further advances, and we
believe the bank will elect not to make any further advances.
Interest on outstanding borrowings under the amended agreement will remain at
approximately 155 basis points over LIBOR, (approximately 8.2% at September 30,
2000) payable monthly. In addition to approximately $23,920,000 in borrowings as
of September 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 four 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 Nine Months Ended
30-Sept-00 30-Sept-99 30-Sept-00 30-Sept-99
--------------------------- --------------------------
Funds from operations:
<S> <C> <C> <C> <C>
Net income (loss)............................ $ 886,104 $1,288,758 $(2,365,469) $3,990,055
Plus real estate related
depreciation and amortization ............ 1,064,475 1,117,665 3,330,931 3,187,377
Plus impairment loss......................... - - 6,000,000 -
Less gain on sale of real estate ............ (115,070) - (966,879) -
Plus (less) minority interest in earnings (loss)
of down REIT partnerships................. 15,864 41,452 102,788 120,501
---------- ---------- ---------- ----------
Funds from operations ....................... $1,851,373 $2,447,875 $6,101,371 $7,297,933
========== ========== ========== ==========
Funds from operations per share and downReit
unit ....................................... $ 0.20 $ 0.25 $ 0.66 $ 0.75
========== ========== ========== ==========
Funds available for distribution:
Funds from operations ....................... $1,851,373 $2,447,875 $6,101,371 $7,297,933
Plus amortization of financing costs ........ 167,436 31,695 263,052 114,710
Less tenant improvements and leasing
commissions ................................ (332,050) (66,540) (583,442) (312,600)
Less non-recoverable recurring capital
improvements ............................... (82,975) (74,631) (217,443) (214,726)
Less straight line rents, net of
$80,000 bad debt write-off in
March 1999 ................................. (54,078) (90,162) (214,450) (200,775)
Plus forgiveness of option loans ............ 40,752 40,751 122,254 122,253
Other ....................................... - - - 43,014
---------- ---------- ---------- ----------
Funds available for distribution ............ $1,590,458 $2,288,988 $5,471,342 $6,849,809
========== ========== ========== ==========
Funds available for distribution per share
and downReit unit .......................... $ 0.17 $ 0.23 $ 0.59 $ 0.70
========== ========== ========== ==========
Basic and diluted weighted average number of
shares and downReit partnership units ...... 9,260,659 9,786,172 9,290,249 9,791,829
</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 plus estimated losses on
depreciable operating 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 September 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
Material pending legal proceedings in which we are involved are described in
Note 11 to the accompanying condensed consolidated financial statements in Part
I of this Quarterly Report on Form 10Q, which is incorporated herein by
reference.
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
Mr. Frederick E. Fisher resigned his position as Trust Manager on and effective
as of October 17, 2000. In a letter to the Board of Trust Managers, Mr. Fisher
cited as reason for his resignation that the responsibilities of serving on
UIRT's Board had grown to the extent that they were taking too much time away
from the substantial charitable support and fundraising efforts that have
occupied almost all of his time for the last twenty years. The remaining
independent Trust Managers are evaluating candidates for addition to the Board
of Trust Managers.
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 August 17, 2000
describing the amendment of the Company's revolving credit agreement.
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 13, 2000 /s/ R. Steven Hamner
----------------------------
R. Steven Hamner,
Vice President,Chief Financial Officer
