UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
Commission File Number 1-11478
KRANZCO REALTY TRUST
(Exact Name of Registrant as Specified in Charter)
Maryland
(State of Other Jurisdiction of
Incorporation or Organization)
23-2691327
(IRS Employer Identification No.)
128 Fayette Street, Conshohocken, Pennsylvania 19428
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code
(610) 941-9292
N/A
Former Name, Former Address and Former Fiscal Year, if Changes Since
Last Report.
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>
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
SEPTEMBER 30, 1996
INDEX
PART I. PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Mortgages and Notes Payable 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS:
Shopping center properties owned, at cost
Land $76,099,000 $75,386,000
Buildings and improvements 293,509,000 292,687,000
------------- -------------
369,608,000 368,073,000
Less-accumulated depreciation 32,738,000 25,152,000
------------- -------------
336,870,000 342,921,000
Cash and cash equivalents 7,195,000 6,129,000
Marketable securities 0 273,000
Restricted cash 278,000 216,000
Rents and other receivables, net of allowance of
$871,000 and $831,000, September 30,1996 and December 31, 1995 9,734,000 8,282,000
Prepaid expenses 2,776,000 1,875,000
Deferred financing costs, net of accumulated amortization of $119,000,
and $7,633,000, September 30,1996 and December 31, 1995 1,911,000 10,071,000
Other deferred costs, net of accumulated amortization of $761,000,
and $496,000, September 30,1996 and December 31, 1995 1,893,000 1,688,000
Other assets 1,011,000 1,528,000
------------- -------------
Total assets $361,668,000 $372,983,000
============= =============
LIABILITIES:
Mortgages and notes payable $212,716,000 $204,247,000
Tenant security deposits 1,126,000 1,129,000
Accounts payable and accrued expenses 1,732,000 1,875,000
Other liabilities 1,141,000 756,000
Distributions payable 5,106,000 5,094,000
------------- ------------
Total liabilities 221,821,000 213,101,000
COMMITMENTS AND CONTINGENCIES
BENEFICIARIES' EQUITY:
Shares of beneficial interest, $0.01 par value; authorized 100,000,000
shares; issued and outstanding, 11,155 preferred shares, September 30,
1996 and December 31, 1995; 10,331,475 and 10,322,858 common shares
September 30,1996 and December 31, 1995, respectively 104,000 104,000
Capital in excess of par value 187,129,000 186,914,000
Cumulative net income available for common shareholders 24,690,000 30,029,000
Cumulative distributions on common shares of beneficial interest (71,926,000) (57,061,000)
------------- ------------
139,997,000 159,986,000
Unearned compensation on restricted shares of beneficial interest (150,000) (104,000)
------------- ------------
Total beneficiaries' equity 139,847,000 159,882,000
Total liabilities and beneficiaries' equity $361,668,000 $372,983,000
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Operations
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Minimum rent $10,302,000 $10,434,000 $31,270,000 $29,735,000
Percentage rent 283,000 331,000 726,000 791,000
Expense reimbursements 2,629,000 2,595,000 8,852,000 7,741,000
Interest income 82,000 228,000 523,000 673,000
Other 21,000 122,000 83,000 199,000
-------------- ------------- ------------- -------------
Total revenues 13,317,000 13,710,000 41,454,000 39,139,000
-------------- ------------- ------------- -------------
EXPENSES:
Interest $4,242,000 $4,335,000 12,753,000 11,853,000
Depreciation and amortization 2,720,000 2,845,000 8,434,000 8,113,000
Real estate taxes 1,555,000 1,529,000 4,514,000 4,357,000
Operations and maintenance 1,915,000 1,793,000 7,099,000 5,217,000
General and administrative 834,000 760,000 2,357,000 2,282,000
-------------- ------------- ------------- -------------
Total expenses 11,266,000 11,262,000 35,157,000 31,822,000
-------------- ------------- ------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEMS 2,051,000 2,448,000 6,297,000 7,317,000
Extraordinary loss on debt refinancing 0 0 11,052,000 0
Extraordinary loss on sale of real estate 0 0 63,000 0
-------------- ------------- ------------- -------------
NET INCOME (LOSS) 2,051,000 2,448,000 (4,818,000) 7,317,000
Preferred Share Distribution 174,000 173,000 521,000 312,000
-------------- ------------- ------------- -------------
NET INCOME (LOSS) FOR COMMON SHAREHOLDERS 1,877,000 2,275,000 (5,339,000) 7,005,000
============== ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE
OF BENEFICIAL INTEREST $0.18 $0.22 ($0.52) $0.68
============== ============= ============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1996 September 30, 1995
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($4,818,000) $7,317,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,434,000 8,113,000
Amortization of deferred interest costs 675,000 1,340,000
Amortization of unearned compensation on restricted shares of
beneficial interest 47,000 0
Loss on sale of real estate 63,000 0
Loss on refinancing 11,052,000 0
Changes in assets and liabilities:
Increase in-
Rents and other receivables (1,452,000) (1,101,000)
Prepaid expenses (901,000) (705,000)
Other assets (70,000) (260,000)
Increase (decrease) in-
Accounts payable and accrued expenses (132,000) (239,000)
Tenant security deposits (8,000) 173,000
Other liabilities 390,000 606,000
------------- ------------
Net cash provided by operating activities 13,280,000 15,244,000
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (1,535,000) (3,806,000)
Proceeds from sale of real estate 524,000 0
Decrease in marketable securities 273,000 244,000
(Increase)decrease in restricted cash (62,000) 542,000
Increase in deferred costs (469,000) (210,000)
------------- ------------
Net cash used in investing activities (1,269,000) (3,230,000)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of beneficial interest (14,865,000) (14,854,000)
Distributions paid on preferred shares (431,000) (112,000)
Issuance of common stock, net 32,000 145,000
Proceeds from sale of interest rate protection agreements 3,935,000 0
Proceeds of mortgages and notes payable 181,700,000 5,000,000
Repayments of mortgages and notes payable (179,374,000) (1,032,000)
Increase in deferred costs (1,942,000) (393,000)
------------- ------------
Net cash used in financing activities (10,945,000) (11,246,000)
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,066,000 768,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,129,000 3,924,000
------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,195,000 $4,692,000
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate preferred shares 90,000 60,000
============= =============
Preferred shares issued as part of the purchase price for the acquisition of
real estate, subject to liabilities assumed as follows--
Net assets acquired - $44,969,000
Liabilities assumed, primarily mortgages - 36,966,000
------------- ------------
- $8,003,000
============= =============
<FN>
The Company declared a distribution of $0.48 per common share, payable to shareholders of
record as of September 27, 1996. The distribution of $4,959,000 was paid on October 17, 1996.
The Company declared a distribution of $0.48 per common share, payable to shareholders of
record as of September 19, 1995. The distribution of $4,955,000 was paid on October 17, 1995.
The Company recorded the quarterly distribution on the preferred shares as of September 30, 1996.
The distribution of $146,000 was paid on October 1, 1996.
The Company recorded the quarterly distribution on the preferred shares as of September 30, 1995.
The distribution of $139,000 was paid on October 1, 1995.
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Beneficiaries' Equity
For the years ended December 31, 1994 and 1995
For the nine months ended September 30, 1996 (Unaudited)
<CAPTION>
Unearned
Cumulative Compensation
Preferred Cumulative Distributions on
Common Preferred Shares of Capital Net Income on Common Restricted
Shares of Shares of Beneficial In Excess Available Shares of Shares of
Beneficial Par Beneficial Interest of for Common Beneficial Beneficial
Interest Value Interest Par Value Par Value Shareholders Interest Interest
----------- --------- ----------- --------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $10,315,497 $103,000 0 $0 $178,712,000 $10,770,000 ($17,648,000) $0
Net income - - - - - 9,867,000 - -
Distributions
($1.90 per share) - - - - - - (19,600,000) -
----------- --------- ----------- --------- ------------ ----------- ------------ ----------
BALANCE, DECEMBER 31, 1994 10,315,497 $103,000 0 $0 $178,712,000 $20,637,000 ($37,248,000) $0
Issuance of shares 8,062 - - - 145,000 - - (104,000)
Forfeiture of common shares (701) - - - (14,000) - - -
Issuance of preferred
shares, net - - 11,155 1,000 7,976,000 - - -
Accretion of discount on
preferred shares - - - - 95,000 (95,000) - -
Net income - - - - - 9,877,000 - -
Distributions on preferred
shares - - - - - (390,000) - -
Distributions on common
shares of beneficial
interest
($1.92 per share) - - - - - - (19,813,000) -
----------- --------- ----------- --------- ------------ ----------- ------------ ----------
BALANCE, December 31, 1995 10,322,858 $103,000 11,155 $1,000 $186,914,000 $30,029,000 ($57,061,000) ($104,000)
Issuance of shares 8,617 - - - 125,000 - - (93,000)
Accretion of discount on
preferred shares - - - - 90,000 (90,000) - -
Accretion of unearned
compensation on restricted
shares of
beneficial interest - - - - - - - 47,000
Net loss - - - - - (4,818,000) - -
Distributions on preferred
shares - - - - - (431,000) - -
Distributions on common
shares of beneficial
interest
($1.44 per share) - - - - - - (14,865,000) -
----------- --------- ----------- --------- ------------ ----------- ------------ ----------
BALANCE, September 30, 1996
(unaudited) 10,331,475 $103,000 11,155 $1,000 $187,129,000 $24,690,000 ($71,926,000) ($150,000)
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
KRANZCO REALTY TRUST AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
1. BASIS OF PRESENTATION:
The financial statements are unaudited but reflect all adjustments which are, in
the opinion of management, necessary to fairly present the results for the
interim periods presented. These financial statements should be read in
conjunction with the financial statements and related notes contained in the
1995 Annual Report to Shareholders. Results from any interim period are not
necessarily indicative of the results for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND NATURE OF OPERATIONS
Kranzco Realty Trust (a Maryland real estate investment trust) and its
subsidiaries ("KRT" or the "Company") are engaged in the ownership, management,
leasing, operation, acquisition, development, investment and disposition of
neighborhood and community shopping centers. In addition to its own properties,
the Company may provide management services for shopping centers owned by
third parties. As of September 30, 1996, the Company owns 38 properties in seven
Northeastern and Mid-Atlantic states.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of KRT
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. The ultimate results could differ from those estimates.
REAL ESTATE
Real estate assets and improvements or replacements are carried at the lower of
depreciated cost or net realizable value. The Company adopted Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of"("SFAS No. 121") as of
January 1, 1996. No adjustment was necessary as a result of adopting SFAS No.
121. Depreciation is computed using the straight-line method over the
estimated useful life of thirty years for buildings and the related life of the
improvements or the related lease term. Maintenance and repairs are charged to
expense, as incurred.
CAPITALIZED INTEREST AND TAXES
Carrying charges, principally interest and taxes, of land under development and
buildings under construction are capitalized by the Company. Interest is
capitalized using an interest rate which equals a weighted average interest rate
on the Company's indebtedness. Capitalization ceases when construction
activities are completed and the property is available for occupancy by tenants
and the costs are depreciated over the estimated useful life of the property.
DEFERRED COSTS
Deferred costs relate to the organization of the Company, amounts related to
the placement of debt and costs of leasing the shopping centers. Organization
costs are amortized on a straight-line basis over
<PAGE>
five years. Financing costs are amortized using the effective interest method
over the term of the related debt. Leasing costs are amortized on a
straight-line basis over the term of the related lease.
REVENUE RECOGNITION
Minimum rental income is recognized on a straight-line basis over the term of
the lease agreements regardless of when payments are due and accrued rents are
included in rents receivable. Certain lease
agreements contain provisions which provide for additional rents based on
tenants' sales volume and
reimbursement of the tenants' share of real estate taxes and certain common area
maintenance costs. These additional rents are reflected on the accrual basis.
PER SHARE DATA
Net income per share is based on the weighted average number of common shares of
beneficial interest outstanding adjusted to give effect to common share
equivalents. The weighted average number of shares used in the computations was
10,326,086 and 10,318,184 for the nine months ended September 30, 1996 and
1995, respectively, and 10,331,475 and 10,323,559 for the three months ended
September 30, 1996 and 1995, respectively .
STATEMENTS OF CASH FLOWS
Cash and cash equivalents include all cash and liquid investments with original
maturities of three months or less, primarily consisting of money market
accounts and government investments. Cash paid for interest was $12,527,000
and $10,568,000 for the nine months ended September 30, 1996 and 1995,
respectively.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
KRT intends to maintain its election to be taxed as a Real Estate Investment
Trust ("REIT") under Sections 856 to 860 of the Internal Revenue Code.
Accordingly, no provision for Federal income taxes has been reflected in the
financial statements. The Company is subject to a Federal excise tax computed
on a calendar year basis. The excise tax equals 4% of the excess, if any, of
85% of the Company's ordinary income plus 95% of any capital gain income for the
calendar year over cash distributions during the calendar year, as defined. No
provision for excise tax has been reflected in the financial statements as no
tax was due.
Earnings and profits, which will determine the taxability of distributions to
stockholders, will differ from net income reported for financial reporting
purposes due to the differences in the cost basis for
Federal tax purposes and in the estimated useful lives used to compute
depreciation.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
3. INDEBTEDNESS:
At September 30, 1996 and December 31, 1995, the Company had mortgages and notes
payable outstanding of $212,716,000 and $204,247,000, respectively.
In June 1996, the Company completed a refinancing of substantially all of its
variable rate debt and a portion of its fixed rate debt with a new fixed rate
secured financing. The Company entered into a seven year, secured, fixed rate
real estate mortgage loan in the principal amount of $181,700,000 (the
"Mortgage Loan"), at a weighted average interest rate of 7.96%, which is
inclusive of trustee and servicer fees. The net proceeds of the refinancing
transaction of $177,662,000, after net costs of $4,038,000, were used to retire
the short-term funds borrowed to repurchase the $100 million adjustable rate
mortgage loan issued in conjunction with the Company's initial public offering
in November 1992 and pay off virtually all of the $60 million of additional
adjustable rate debt. The entire outstanding
<PAGE>
principal balance of the Mortgage Loan is due in June 2003. The extraordinary
loss on refinancing of $11,052,000 includes the write off of approximately
$8,844,000 of unamortized deferred costs related to the debt instruments repaid,
as well as other costs including prepayment fees, premium paid on repurchase of
the $100 million REMIC certificates and professional fees. In connection with
the repayment of the $100 million REMIC, the Company sold its interest rate
protection agreements. The proceeds received on the sale of the agreements of
approximately $3,935,000 were netted against the loss on refinancing. Interest
expense for the nine months ended September 30, 1996 and 1995 on the
accompanying statements of operations is shown net of reimbursements of $275,000
and $1,019,000, respectively, relating to the interest rate protection
agreements and capitalized interest of $185,000 and $246,000, respectively.
As a condition of the Mortgage Loan, the Company was required to establish a
Sinking Fund Account and a Capital and TI Reserve Account. On a monthly basis,
$11,000 is deposited into a Sinking Fund Account maintained with the Collateral
Agent until the aggregate amount in the account equals or exceeds $786,000. All
funds in the Sinking Fund Account are to be returned to the Company on the
earlier of the repayment in full of the Mortgage Loan and the date of release or
substitution of the mortgaged property located in Orange, CT. The balance in
the Sinking Fund Account as of September 30, 1996 was $33,000. Also on a
monthly basis, an amount equal to 1/12th of $0.25 per square foot of the gross
leasable area of the Mortgaged Properties will be deposited into the Capital and
TI Reserve Account. All funds in the Capital and TI Reserve Account may be used
on a current basis to fund capital improvements, repairs, alterations, tenant
improvements and leasing commissions at the Mortgaged Properties. The balance
in the Capital and TI Reserve Account was $245,000 as of September 30, 1996.
In addition, the Company has four mortgages outstanding as of September 30,
1996 which were assumed in 1995 in connection with the acquisition of certain
shopping centers. These mortgages have maturity dates ranging from 1999 through
2004. Three of the four mortgages assumed have fixed interest rates ranging
from 8.0% to 10.5%. The outstanding principal balance on these mortgages at
September 30, 1996 was approximately $25,399,000. The other mortgage has an
interest rate payable at prime plus 1/2%. The outstanding principal balance
on this mortgage at September 30, 1996 was approximately $5,617,000.
In 1995, the Company obtained a $1.0 million unsecured line of credit from
Corestates Bank, N.A. Amounts borrowed under the line will bear interest at
that bank's prime rate. There were no outstanding borrowings under this
facility as of September 30, 1996 and the facility was extended through
December 31, 1996.
4. PREFERRED SHARES OF BENEFICIAL INTEREST:
In connection with the purchase of five shopping centers in April 1995, the
Company issued 11,155 shares of Series A Increasing Rate Cumulative
Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share,
of Kranzco Realty Trust (the "Preferred Shares") at a face amount of
$11,155,000. The Preferred Shares were valued for accounting purposes based
on the fair value of the assets acquired and recorded at approximately
$7,976,000, net of issuance costs. The Preferred Shares had an initial
distribution rate of 5.0% per annum with increases of 0.25% per annum up to a
maximum rate of 6.5% per annum. As of September 30, 1996, the distribution
rate on the Preferred Shares is 5.25%. The Company recorded a discount of
approximately $467,000 at the time of issuance which represents the present
value of the difference between the total distributions to be paid in the seven
year period prior to commencement of the perpetual distribution and the
perpetual distribution amount for that same seven year period. This amount is
accreted on an effective interest method over the seven years. The Preferred
Shares are redeemable by the Company at any time at their liquidation preference
and are convertible into the Company's Common Shares of Beneficial Interest (the
"Common Shares"), 16.67% annually commencing in the fifth year, with a maximum
of 50% convertible in any one year. The Preferred Shares are convertible into
that number of Common Shares as would result in the
<PAGE>
holder receiving the same amount of distributions from the Common Shares at the
applicable conversion dates as they received as a holder of the Preferred
Shares.
5. LOSS ON SALE OF REAL ESTATE:
In March 1996, the Company completed the sale of a parcel of land located in
Philadelphia, Pennsylvania. The 3.4 acre parcel of land was sold for the
purchase price of $600,000 and the Company recorded a loss of approximately
$63,000 related to the sale. The parcel of land was initially owned by
partnership of which the Company was the General Partner.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996 the Company had $7,473,000 of cash and restricted
cash on hand.
As of September 30, 1996 the Company had total mortgages payable of
$212,716,000 of which $207,099,000 bear interest at fixed rates ranging from
7.96% to 10.5%. As of September 30, 1996, the Company is required to make
principal payments on these fixed rate mortgages payable of $76,000 in 1996,
$321,000 in 1997, $352,000 in 1998, $6,812,000 in 1999 and $365,000 in 2000.
In June 1996, the Company successfully completed the refinancing of
substantially all of its variable rate debt and a portion of its fixed rate debt
with a new fixed rate secured financing. The Company entered into a seven year,
secured, fixed rate real estate mortgage loan in the principal amount of
$181,700,000 (the "Mortgage Loan"), at a weighted average interest rate of
7.96%, which is inclusive of trustee and servicer fees. The net proceeds of the
refinancing transaction of $177,662,000, after net costs of $4,038,000, were
used to retire the short-term funds borrowed to repurchase the $100 million
adjustable rate mortgage loan issued in conjunction with the Company's initial
public offering in November 1992 and pay off virtually all of the $60 million of
additional adjustable rate debt. The entire principal balance of the Mortgage
Loan is due in June 2003. As a result of the refinancing, 97% of the Company's
debt is at fixed rates with a weighted average interest rate of 8.17%. The
Company recognized an extraordinary loss on refinancing of $11,052,000 in the
second quarter of 1996, primarily due to the write off of unamortized deferred
costs as well as premiums paid to repurchase the original REMIC certificates.
As a condition of the Mortgage Loan, the Company was required to establish
a Sinking Fund Account and a Capital and TI Reserve Account. On a monthly
basis, $11,000 is deposited into a Sinking Fund Account maintained with the
Collateral Agent until the aggregate amount in the account equals or exceeds
$786,000. All funds in the Sinking Fund Account are to be returned to the
Company on the earlier of the repayment in full of the Mortgage Loan and the
date of release or substitution of the mortgaged property located in Orange, CT.
The balance in the Sinking Fund Account was $33,000 as of September 30, 1996.
Also on a monthly basis, an amount equal to 1/12th of $0.25 per square foot of
the gross leasable area of the Mortgaged Properties will be deposited into the
Capital and TI Reserve Account. All funds in the Capital and TI Reserve Account
may be used on a current basis to fund capital improvements, repairs,
alterations, tenant improvements and leasing commissions at the Mortgaged
Properties. The balance in the Capital and TI Reserve Account was $245,000 as
of September 30, 1996.
In addition, as of September 30, 1996, the Company has one floating rate
mortgage where the interest rate is based on the prime rate, with principal
outstanding of $5,617,000. The interest rate on the mortgage is the prime rate
plus 50 basis points with the principal balance being amortized at the rate of
$200,000 per year. The prime rate was 8.25% at September 30, 1996.
In 1995 the Company obtained a $1.0 million unsecured line of credit from
Corestates Bank, N.A. Amounts borrowed under the line will bear interest at the
bank's prime rate, which was 8.25% at September 30, 1996. The facility was
extended through December 31, 1996, and there were no borrowings outstanding
under this facility as of September 30, 1996.
<PAGE>
Effective January 1, 1996, The National Association of Real Estate
Investment Trusts (NAREIT) revised the definition of funds from operation to
income before depreciation and amortization of real estate assets and
significant non-recurring events, less gains on sale of real estate (the "new
definition"). Funds from operations does not represent cash flows from
operations as defined by generally accepted accounting principles and is not
necessarily indicative as a measure of liquidity of the Company. Also, funds
from operations should not be construed as an alternative to net income as
defined by generally accepted accounting principles as an indicator of the
Company's operating performance. Funds from operations under the new definition
decreased $316,000 or 7% from $4,832,000 for the third quarter of 1995 to
$4,516,000 for the third quarter of 1996 and decreased $701,000 or 5% from
$14,287,000 for the first nine months of 1995 to $13,586,000 for the first nine
months of 1996.
The Company has several tenants who are operating under Chapter 11 of the
United States Bankruptcy code. Among the tenants are Bradlee's (three stores
representing approximately $2.2 million of the Company's annual revenues),
Caldor (three stores representing approximately $2.5 million of the Company's
annual revenues) and Rickel's (two stores representing approximately $1.4
million of the Company's annual revenues). To date Bradlee's and Caldor have not
taken any action to reject these leases and continue to pay current rent and
operate their stores located in the Company's centers. Rickel's has indicated
that they will close and cease paying rent on the store located at the Hillcrest
Mall in Phillipsburg, NJ on November 30, 1996. The rental for this store amounts
to approximately $0.3 million per year including reimbursements for operating
expenses. Rickel's has also indicated that the lease for The Mall at Cross
County will be assumed prior to the end of the year. The rental for this store
amounts to approximately $1.1 million per year including reimbursements for
operating expenses. Other tenants in the Company's portfolio that are continuing
to pay current rent and operate their stores under Chapter 11 are individually
less than 1% of annual revenues but in the aggregate are approximately 2.6% of
the Company's annual revenues, none of which has taken any action to reject
these leases.
In the first nine months of 1996, the Company invested approximately
$1,535,000 in the expansion and improvement of existing shopping center
properties. The Company has budgeted approximately $300,000 for the balance of
1996 for capital expenditures to expand and improve its existing portfolio of
shopping centers. The Company expects to meet its short-term liquidity
requirements through net cash flow provided from operations, existing cash,
long-term or short-term borrowings and the Capital and TI Reserve account. The
Capital and TI Reserve account may be utilized by the Company for the funding of
costs related to capital improvements, repairs, alterations, tenant improvements
and leasing commissions in the centers secured by the new REMIC. To meet its
long-term liquidity requirements, such as refinancing its balloon mortgages,
financing acquisitions and major capital improvements, the Company intends to
either utilize long-term borrowings, issue debt securities and/or offer
additional equity securities.
Management believes it has adequate access to capital to continue to meet
its short-term and long-term requirements and objectives.
RESULTS OF OPERATIONS
Net income for common shareholders decreased $398,000 from $2,275,000, or
$0.22 per common share for the three months ended September 30, 1995 to
$1,877,000, or $0.18 per common share for the three months ended September 30,
1996. Net income(loss) for common shareholders decreased $12,344,000 from
$7,005,000, or $0.68 per common share, for the first nine months of 1995 to
($5,339,000), or ($0.52) per common share, for the corresponding period in 1996.
Excluding the extraordinary loss on refinancing, the net income for common
shareholders
<PAGE>
decreased $1,292,000 or 18% from $7,005,000, or $0.68 per common share, for the
first nine months of 1995 to $5,713,000, or $0.50 per common share, for the
corresponding period in 1996. Excluding the extraordinary loss on refinancing,
the decrease was primarily due to the unusually high snow removal costs incurred
in the first quarter of 1996 as a result of the severe winter weather
experienced in the Northeastern portion of the United States and a loss of
tenants at the Company's properties resulting in a reduction in the leased
percentage of the portfolio from 93% at September 30, 1995 to 89% at September
30, 1996. The Company also recognized a loss of $63,000 on the sale of real
estate in the first quarter of 1996 in connection with the sale of a 3.4 acre
parcel of land located in Philadelphia, Pennsylvania.
Minimum rent decreased $132,000 or 1% from $10,434,000 in the third quarter
of 1995 to $10,302,000 in the third quarter of 1996 and increased $1,535,000 or
5% from $29,735,000
for the first nine months of 1995 to $31,270,000 for the corresponding period in
1996. The decrease for the three months was primarily due to the decrease in
the leased percentage of the portfolio from 93% at September 30, 1995 to 89% at
September 30, 1996. The increase for the nine months was primarily due to the
additional rents from the five centers purchased by the Company in April 1995
($1,450,000).
Percentage rent decreased $48,000 or 15% from $331,000 for the three months
ended September 30, 1995 to $283,000 for the three months ended September 30,
1996 and decreased $65,000 or 8% from $791,000 for the first nine months of 1995
to $726,000 for the corresponding period in 1996, primarily due to the closing
of the Jamesway store at the Valley Forge Mall as well as the reduction of
percentage rent amounts paid by one of the Company's tenants currently in
bankruptcy.
Expense reimbursements increased $34,000 or 1% from $2,595,000 for the three
months ended September 30, 1995 to $2,629,000 for the three months ended
September 30, 1996 and increased $1,111,000 or 14% from $7,741,000 for the first
nine months of 1995 to $8,852,000 for the corresponding period in 1996. The
increase for the quarter was primarily due to the acquisition of the five
centers purchased in April 1995 combined with an increase in operating expenses
at the centers and the increased recovery of common area maintenance expenses
for the nine months was primarily due to the unusually high snow removal costs
incurred as a result of the severe winter experienced in the first quarter of
1996 in the Northeastern portion of the United States.
Interest expense decreased $93,000 or 2% from $4,335,000 for the three
months ended September 30, 1995 to $4,242,000 for the three months ended
September 30, 1996 and increased $900,000 or 8% from $11,853,000 for the first
nine months of 1995 to $12,753,000 for the corresponding period in 1996. The
decrease for the three months is due to the refinancing of the majority of the
Company's debt in June 1996 and the elimination of amortized interest included
in 1995. The increase for the nine months is primarily due to the interest on
mortgages on the centers purchased in 1995. Interest expense was offset by
capitalized interest of $82,000 and $63,000 for the third quarter of 1995 and
1996, respectively, and $246,000 and $185,000 for the first nine months of 1995
and 1996, respectively.
Depreciation and amortization decreased $125,000 or 4% from $2,845,000 in
1995 in the third quarter to $2,720,000 in the third quarter of 1996 and
increased $321,000 or 4% from $8,113,000 for the first nine months of 1995 to
$8,434,000 for the corresponding period in 1996. The decrease for the three
months is due to the refinancing of the majority of the Company's debt in June
1996 and the elimination of amortized financing costs included in 1995. The
increase for the nine months is primarily due to the acquisition of the five
centers in April 1995 as well as the
<PAGE>
additional depreciation recorded for building and tenant improvements completed
in the second half of 1995 and the first half of 1996.
Real estate taxes increased $26,000 or 2% from $1,529,000 in the third
quarter of 1995 to $1,555,000 in the third quarter of 1996 and increased
$157,000 or 4% from $4,357,000 for the first nine months of 1995 to $4,514,000
for the corresponding period in 1996 primarily due to the acquisition of five
centers during 1995. Real estate tax expense was offset by capitalized real
estate taxes of $37,000 and $29,000 for the third quarter of 1995 and 1996,
respectively, and $110,000 and $93,000 for the first nine months of 1995 and
1996, respectively.
Operations and maintenance expenses increased $122,000 or 7% from $1,793,000
in the third quarter of 1995 to $1,915,000 in the third quarter of 1996 and
increased $1,882,000 or 36% from $5,217,000 for the first nine months of 1995 to
$7,099,000 for the corresponding period in 1996. This increase was primarily
due to the unusually high snow removal costs incurred as a result of the severe
winter experienced in the first quarter of 1996 in the Northeast portion of the
United States (approximately $1 million), as well as the additional costs
incurred at the five centers acquired in 1995.
General and administrative expenses increased $74,000 or 10% from $760,000
in the third quarter of 1995 to $834,000 in the third quarter of 1996 and
increased $75,000 or 3% from $2,282,000 for the first nine months of 1995 to
$2,357,000 for the corresponding period in 1996 primarily due to an increase in
payroll expense due to the amortization of stock bonus amounts.
INFLATION
Most of the retail tenant leases at the shopping center properties contain
provisions which will entitle the Company to receive percentage rents based on
the tenants' gross sales. Such percentage rents minimize the risk to the Company
of the adverse effects of inflation. Most of the leases at the shopping center
properties require the tenants to pay a substantial share of operating expenses,
such as real estate taxes, insurance and common area maintenance costs, and
thereby
reduce the Company's exposure to increased costs. In addition, many of the
leases at the shopping center properties are for terms of less than ten years,
which may enable the Company to seek increased rents upon renewal of existing
leases.
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
Item 3. Defaults upon Mortgages and Notes Payable
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
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.
KRANZCO REALTY TRUST
Date: November 11, 1996 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: November 11, 1996 /S/Robert H. Dennis
Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 9-MOS
<CASH> 7,195,000
<SECURITIES> 0
<RECEIVABLES> 10,605,000
<ALLOWANCES> 871,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,776,000
<PP&E> 369,608,000
<DEPRECIATION> 32,738,000
<TOTAL-ASSETS> 361,668,000
<CURRENT-LIABILITIES> 7,979,000
<BONDS> 212,716,000
<COMMON> 131,685,000
0
8,162,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 361,668,000
<SALES> 0
<TOTAL-REVENUES> 41,454,000
<CGS> 0
<TOTAL-COSTS> 22,925,000
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<INTEREST-EXPENSE> 12,753,000
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<EXTRAORDINARY> 11,115,000
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<NET-INCOME> (5,339,000)
<EPS-PRIMARY> (.52)
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