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, 1997
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 [ ]
As of November 5, 1997, there were 10,347,064 Common Shares of Beneficial
Interest, par value $0.01 per share, outstanding.
<PAGE>
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
SEPTEMBER 30, 1997
INDEX
PART I. PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30,December 31,
1997 1996
(Unaudited)
----------- -----------
<S> <C> <C>
ASSETS:
Shopping center properties owned, at cost
Buildings and improvements 340,992,000 294,293,000
Land 102,016,000 76,198,000
----------- -----------
443,008,000 370,491,000
Less-accumulated depreciation 43,823,000 35,287,000
----------- -----------
399,185,000 335,204,000
Cash and cash equivalents 3,466,000 5,301,000
Restricted cash 743,000 329,000
Rents and other receivables, net of allowance of
$1,271,000 and $1,245,000, September 30, 1997 and December 31,1996 9,025,000 9,661,000
Prepaid expenses 2,843,000 1,729,000
Deferred financing costs, net of accumulated amortization of $652,000
and $203,000, September 30, 1997 and December 31,1996 2,156,000 1,893,000
Deferred costs, net of accumulated amortization of $903,000
and $888,000, September 30, 1997 and December 31,1996 2,158,000 1,793,000
Other assets 1,232,000 3,247,000
----------- -----------
Total assets 420,808,000 359,157,000
=========== ===========
LIABILITIES:
Mortgages and notes payable 250,424,000 212,590,000
Tenant security deposits 1,263,000 1,136,000
Accounts payable and accrued expenses 2,057,000 2,785,000
Other liabilities 1,256,000 527,000
Distributions payable 5,743,000 5,106,000
----------- -----------
Total liabilities 260,743,000 222,144,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED SHARES, SERIES C, $0.01 PAR VALUE; 267,300 SHARES,
SEPTEMBER 30, 1997, NONE AT DECEMBER 31, 1996 2,673,000 0
BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest, Series A-1,
$0.01 par value; 11,155 shares,
September 30, 1997 and December 31, 1996 1,000 1,000
Preferred shares of beneficial interest, Series B-1 and B-2,
$0.01 par value; 1,183,331 shares,
September 30, 1997, none at December 31, 1996 12,000 0
Common shares of beneficial interest, $0.01 par value;
authorized 100,000,000 shares; issued and
outstanding, 10,343,388 and 10,332,784 as of September 30,
1997 and December 31, 1996, respectively 103,000 103,000
Capital in excess of par value 216,777,000 187,177,000
Cumulative net income available for common shareholders 32,458,000 26,754,000
Cumulative distributions on common shares of beneficial interest (91,772,000) (76,891,000)
----------- -----------
157,579,000 137,144,000
Unearned compensation on restricted shares of beneficial interest (187,000) (131,000)
----------- -----------
Total beneficiaries' equity 157,392,000 137,013,000
Total liabilities and beneficiaries' equity 420,808,000 359,157,000
=========== ===========
<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,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Minimum rent 12,142,000 10,302,000 35,185,000 31,270,000
Percentage rent 282,000 283,000 831,000 726,000
Expense reimbursements 2,798,000 2,629,000 8,253,000 8,852,000
Interest income 64,000 82,000 180,000 523,000
Other 19,000 21,000 94,000 83,000
---------- ---------- ---------- ----------
Total revenues 15,305,000 13,317,000 44,543,000 41,454,000
---------- ---------- ---------- ----------
EXPENSES:
Interest 4,816,000 4,242,000 14,070,000 12,753,000
Depreciation and amortization 3,257,000 2,720,000 9,247,000 8,434,000
Real estate taxes 1,668,000 1,555,000 4,891,000 4,514,000
Operations and maintenance 2,023,000 1,915,000 6,062,000 7,099,000
General and administrative 768,000 834,000 2,190,000 2,357,000
---------- ---------- ---------- ----------
Total expenses 12,532,000 11,266,000 36,460,000 35,157,000
---------- ---------- ---------- ----------
INCOME BEFORE LOSS ON SALE OF
REAL ESTATE AND
EXTRAORDINARY ITEM 2,773,000 2,051,000 8,083,000 6,297,000
Loss on sale of real estate 0 0 0 63,000
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 2,773,000 2,051,000 8,083,000 6,234,000
Extraordinary loss on
debt refinancing 0 0 0 11,052,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) 2,773,000 2,051,000 8,083,000 (4,818,000)
Preferred Share Distributions 955,000 174,000 2,379,000 521,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) FOR COMMON
SHAREHOLDERS 1,818,000 1,877,000 5,704,000 (5,339,000)
========== ========== ========== ==========
Income Before Extraordinary Item
Per Common Share
of Beneficial Interest $0.18 $0.18 $0.55 $0.55
Extraordinary Loss on Debt
Refinancing Per Common
Share of Beneficial Interest $0.00 $0.00 $0.00 ($1.07)
---------- ---------- ---------- ----------
Net Income (Loss) Per Common
Share of Beneficial
Interest $0.18 $0.18 $0.55 ($0.52)
========== ========== ========== ==========
<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, September 30,
1997 1996
(Unaudited) (Unaudited)
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 8,083,000 (4,818,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,247,000 8,434,000
Amortization of deferred interest costs 0 675,000
Amortization of unearned compensation on restricted
shares of beneficial interest 69,000 47,000
Loss on sale of real estate 0 63,000
Extraordinary loss on debt refinancing 0 11,052,000
Changes in assets and liabilities:
(Increase) decrease in-
Rents and other receivables 636,000 (1,452,000)
Prepaid expenses (1,114,000) (901,000)
Other assets (150,000) (70,000)
Increase (decrease) in-
Accounts payable and accrued expenses (728,000) (132,000)
Tenant security deposits 127,000 (8,000)
Other liabilities 729,000 390,000
----------- ------------
Net cash provided by operating activities 16,899,000 13,280,000
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (72,517,000) (1,535,000)
Decrease in other assets 2,165,000 0
Proceeds from sale of real estate 0 524,000
Decrease in marketable securities 0 273,000
Increase in restricted cash (414,000) (62,000)
Increase in deferred costs (626,000) (469,000)
----------- ------------
Net cash used in investing activities (71,392,000) (1,269,000)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of beneficial interest (14,881,000) (14,865,000)
Distributions paid on preferred shares of beneficial interest (1,673,000) (431,000)
Issuance of common shares of beneficial interest, net 48,000 32,000
Issuance of preferred shares of beneficial interest, net 32,934,000 0
Redemption of redeemable preferred shares (891,000) 0
Proceeds from sale of interest rate protection agreements 0 3,935,000
Proceeds of mortgages and notes payable 38,630,000 181,700,000
Repayments of mortgages and notes payable (796,000) (179,374,000)
Increase in deferred financing costs (713,000) (1,942,000)
----------- ------------
Net cash provided by (used in) financing activities 52,658,000 (10,945,000)
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,835,000) 1,066,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,301,000 6,129,000
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 3,466,000 7,195,000
=========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate preferred shares 73,000 90,000
=========== ============
<FN>
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, 1995 and 1996
For the nine months ended September 30, 1997
<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, 1995 10,315,497 $103,000 0 0 $178,712,000 $20,637,000 ($37,248,000) $0
Issuance of common 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
of beneficial interest - - - - 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 common shares 9,949 - - - 145,000 - - (93,000)
Forfeiture of common shares (23) - - - - - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 118,000 (118,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 66,000
Net loss - - - - - (2,580,000) - -
Distributions
on preferred shares - - - - - (577,000) - -
Distributions
on common shares
of
beneficial
interest($1.92 per share) - - - - - - (19,830,000) -
BALANCE, DECEMBER 31, 1996 10,332,784 $103,000 11,155 1,000 $187,177,000 $26,754,000 ($76,891,000) ($131,000)
Issuance of common shares 10,658 - - - 174,000 - - (125,000)
Forfeiture of common shares (54) - - - (1,000) - - -
Issuance
of
preferred
shares-Series B-1, B-2 - - 1,183,331 12,000 29,354,000 - - -
Issuance
of
preferred shares-Series C - - 356,400 4,000 3,560,000 - - -
Redemption
of
preferred shares-Series C - - (89,100) (1,000) (890,000) - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 73,000 (73,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 69,000
Net income - - - - - 8,083,000 - -
Distributions
on preferred shares - - - - - (2,306,000) - -
Distributions
on common shares
of
beneficial
interest($1.44 per share) - - - - - - (14,881,000) -
BALANCE, SEPTEMBER 30, 1997 10,343,388 $103,000 1,461,786 16,000 $219,447,000 $32,458,000 ($91,772,000) ($187,000)
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
ii.
KRANZCO REALTY TRUST AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
1. BASIS OF PRESENTATION:
The financial statements are unaudited but reflect all adjustments which are,
in the opinion of management, necessary to present fairly the results for the
interim periods presented. These financial statements should be read in
conjunction with the financial statements and related notes contained in KRT's
Annual Report on Form 10-K for the year ended December 31, 1996. 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 and free-standing
properties. The Company completed its initial public offering of shares of
beneficial interest and commenced operations on November 19, 1992. In
addition to its own properties, the Company may provide management services
for shopping centers owned by third parties. As of September 30, 1997, the
Company owned 54 properties in sixteen 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 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 fair value. Depreciation is computed using the
straight-line method over the estimated useful life of thirty years for
buildings and the lesser of the useful life or lease term of the improvements.
Maintenance and repairs are charged to expense, as incurred. The Company
determines potential impairment losses in accordance with the provisions of
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of".
Capitalized Charges
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. The Company capitalizes certain direct
labor charges on identifiable projects, such as acquisitions and certain
significant tenant leases. Capitalization ceases when construction activities
are completed and the property is available for occupancy by tenants and the
costs are then 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 five years. Deferred
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 outstanding used in the
computations was 10,337,404 and 10,326,086 as of September 30, 1997 and 1996,
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
$14,594,000 and $12,527,000 for the nine months ended September 30, 1997
and 1996, 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
shareholders, will differ from net income reported for financial reporting
purposes due to the differences in the cost basis for Federal income tax
purposes and in the estimated useful lives used to compute depreciation.
3. INDEBTEDNESS:
At September 30, 1997 and December 31, 1996, the Company had mortgages and
notes payable outstanding of $250,424,000 and $212,590,000, 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 Mortgage Loan is secured by
twenty seven shopping center properties (the "Mortgaged Properties"). 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 (the "$100 million REMIC")
issued in conjunction with the Company's initial public offering in November
1992 and to pay off $60 million of additional adjustable rate debt. The
entire outstanding principal balance of the Mortgage Loan is due in June 2003.
The Company recorded an extraordinary loss on refinancing of $11,052,000
including the write off of approximately $8,844,000 of unamortized deferred
finance costs related to the debt instruments repaid, as well as other costs
including prepayment fees, premiums 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 reduced the extraordinary loss on debt refinancing.
Interest expense for the nine months ending September 30, 1997 and 1996 in the
accompanying statements of operations is shown net of reimbursements of $0
and $275,000, respectively, relating to the interest rate protection
agreements and capitalized interest of $632,000 and $185,000, 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 the Sinking Fund Account maintained with a
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, 1997 was
$169,000. The Company deposits 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 into the Capital and TI Reserve Account. All funds in the Capital
and TI Reserve Account may be used by the Company 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 $185,000 as of September 30, 1997.
In addition, the Company has eight fixed rate mortgages outstanding as of
September 30, 1997 totalling $37,924,000. These mortgages have maturity dates
ranging from 1999 through 2009 and interest rates ranging from 7.50% to
10.50%. The Company is required to make principal payments of $212,000 in
1997, $896,000 in 1998, $8,942,000 in 1999, $6,061,000 in 2000, $1,065,000 in
2001, and $3,437,000 in 2002, respectively, related to these mortgages.
The floating rate mortgages outstanding as of September 30, 1997 total
$12,800,000. These mortgages have maturity dates ranging from 2003 through
2004 and have interest rates ranging from 7.5% to 9.0% as of September 30,
1997. The Company is required to make principal payments of $71,000 in 1997,
$394,000 in 1998, $410,000 in 1999, $427,000 in 2000, $445,000 in 2001, and
$466,000 in 2002, respectively, related to these mortgages.
In February 1997, the Company obtained a secured line of credit of up to
$50.0 million from Salomon Brothers Realty, Corp. Amounts borrowed under the
line bear interest at the one month London Interbank Offering Rate ("LIBOR")
plus 175 basis points, which was 7.41% at September 30, 1997. As of
September 30, 1997, there was $17,000,000 outstanding under this facility
and an additional $7,000,000 available for future borrowing. The facility is
secured by fourteen properties and is due in February 1999. The Company has an
option to extend the facility for an additional year. As a condition of the
facility, the Company was required to establish a Repair Reserve Account for
immediate and ongoing capital expenditure reserves and replacement reserves.
The balance in the Repair Reserve Account was $389,000 as of September 30,
1997.
In November 1996, the Company obtained a $3.0 million secured line of credit
from Bank Leumi Trust Company of New York. Amounts borrowed under the line
bear interest at 50 basis points above that bank's reference rate, which was
8.5% as of September 30, 1997. There was $1.0 million of outstanding
borrowings under this facility as of September 30, 1997. The line has been
renewed through June 30, 1998.
The Company has 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, 1997 and the facility expires December 31, 1997. The Company
is in discussions with the lender to extend this line.
4. ACQUISITION:
On February 27, 1997, the Company acquired, through a merger, Union Property
Investors, Inc. ("UPI"). UPI owned sixteen properties located in eleven
states that have a total of approximately 1.3 million square feet of gross
leasable area. The purchase price was paid by the Company by the assumption
of approximately $30.2 million of debt, the issuance of approximately $29.6
million of convertible preferred stock and approximately $3.6 million of
preferred stock and the payment of approximately $1.6 million of cash. The
transaction was accounted for by the purchase method and the results of
operations of each center are included from the respective purchase date.
The pro forma financial information presented below may not be indicative of
results that would have been reported if the acquisition had occurred on
January 1, 1997 and 1996, respectively. The extraordinary loss of $11,052,000
on refinancing recorded in the second quarter of 1996 and the loss of $63,000
on the sale of real estate recorded in the first quarter of 1996 by the
Company have been excluded from the pro forma presentation.
For the nine months ended September 30, 1997
Pro forma total revenues $45,892,000
Pro forma net income for common shareholders $5,621,000
Pro forma net income per common share $0.54
For the nine months ended September 30, 1996
Pro forma total revenues $47,627,000
Pro forma net income for common shareholders $4,966,000
Pro forma net income per common share $0.48
5. 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-1 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 have 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, 1997, the distribution
rate on the Preferred Shares was 5.50%. 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 through a
charge to cumulative net income available for common shareholders. 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"), at a rate of 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 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, up to a maximum of the greater of 500,000
Common Shares or 5% of the then outstanding Common Shares.
In connection with the UPI acquisition, the Company issued 1,183,331 shares
of Series B-1 and Series B-2 Cumulative Convertible Preferred Shares
of Beneficial Interest (the "Series B Preferred Shares"), par value $0.01 per
share, each with a $25.00 per share liquidation preference. These shares were
recorded, net of issuance costs, at approximately $29,358,000. The Series B
Preferred Shares have a distribution rate of 9.75% per annum and distributions
are paid quarterly in arrears for each calendar quarter on January 20, April
20, July 20 and October 20 of each year. The Company also issued 356,400
shares of Series C Cumulative Redeemable Preferred Shares of Beneficial
Interest (the "Series C Preferred Shares"), par value $0.01 per share, each
with a $10.00 liquidation preference. These shares were recorded, net of
issuance costs, at approximately $3,560,000. The Series C Preferred Shares
have a distribution rate of 8% per annum and distributions are payable
quarterly on the last day of January, April, July and October of each year
with respect to the immediately preceding calendar quarter. The Company is
required to redeem, commencing April 1997, in eight equal quarterly
installments all of the outstanding Series C Preferred Shares at a redemption
price equal to the $10.00 liquidation price plus an amount equal to the
accrued and unpaid distributions, if any, allocable to the Series C Preferred
Shares.
6. DISTRIBUTIONS:
On September 3, 1997, the Trustees declared a cash distribution of $0.48 per
common share, payable to shareholders of record on September 26, 1997. The
distribution of $4,965,000 was paid on October 22, 1997. On September 17,
1996, the Trustees declared a cash 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 accrued the quarterly distribution on the Series A-1 preferred
shares of beneficial interest of $153,000 and $146,000 as of September 30,
1997 and 1996, respectively. These distributions were paid on October 1, 1997
and 1996, respectively.
The Company accrued $571,000 of the distribution on the Series B-1 and B-2
preferred shares of beneficial interest as of September 30, 1997. The entire
distribution of $722,000 was paid on October 20, 1997.
The Company accrued $53,000 of the distribution on the Series C preferred
shares of beneficial interest as of September 30, 1997. The entire
distribution of $53,000 was paid on October 31, 1997.
7. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, Earnings per Share, and Statement 129, Disclosure of
Information about Capital Structure (collectively, the "Statements"). These
Statements establish standards for computing and presenting Earnings per Share
as well as standards for disclosing information about an entity's capital
structure. The Statements are effective for financial statements for periods
ending after December 15, 1997. The Company believes the effect of these
Statements will not have a material financial statement impact upon
implementation.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements are based on assumptions and expectations which may not be realized
and are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated.
Future events and actual results, financial and otherwise, may differ
materially from the results discussed in the forward-looking statements.
Risks and other factors that might cause such a difference include, but are
not limited to, the effect of economic and market conditions; risks that the
Company's acquisition and development projects will fail to perform as
expected; financing risks, such as the inability to obtain debt or equity
financing on favorable terms; the level and volatility of interest rates; loss
or bankruptcy of one or more of the Company's major retail tenants; failure of
the Company's properties to generate additional income to offset increases in
operating expenses, as well as other risks listed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 under Item 1.
Business and from time to time in the Company's reports filed with the
Securities and Exchange Commission or otherwise publicly disseminated by the
Company.
Liquidity and Capital Resources
At September 30, 1997 the Company had $3,466,000 of cash on hand. In addition
to its cash reserve, unused capacity under credit facilities totaled
$10,000,000 at September 30, 1997.
In February 1997, the Company acquired, in a merger, Union Property Investors,
Inc. ("UPI") for approximately $65 million. UPI owned 16 properties located
in 11 states that have a total of approximately 1.3 million square feet of
gross leasable area. The Company funded this purchase through the assumption
of approximately $30.2 million of debt, the issuance of approximately $29.6
million of Kranzco Series B-1 and Series B-2 Cumulative Convertible Preferred
Shares (together the "Kranzco Series B Preferred Shares") and approximately
$3.6 million of Kranzco Series C Redeemable Preferred Shares and the payment
of approximately $1.6 million of cash. The Kranzco Series B Preferred Shares
and the Kranzco Series C Redeemable Preferred Shares have distribution rates
of 9.75% and 8.0%, respectively. The Kranzco Series C Redeemable Preferred
Shares are required to be redeemed in eight equal quarterly installments
commencing in April 1997. The merger with UPI resulted in a 22% increase in
the Company's gross leasable square feet and enabled the Company to expand
into nine additional states and diversify its geographic presence and tenant
base.
As of September 30, 1997 the Company had total mortgages and notes payable of
$250,424,000 of which $219,624,000 bears interest at fixed rates ranging from
7.50% to 10.5%. As of September 30, 1997, the Company is required to make
principal payments of $1,283,000 in 1997, $1,290,000 in 1998, $26,352,000 in
1999, $6,488,000 in 2000, $1,510,000 in 2001 and $3,903,000 in 2002.
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. 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 entire principal balance of the Mortgage Loan is due in
June 2003.
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 a property for the mortgaged property
located in Orange, CT. The balance in the Sinking Fund Account was $169,000
as of September 30, 1997. 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
is 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 $185,000 as of September 30, 1997.
As of September 30, 1997, the Company had eight fixed rate mortgages
outstanding totalling $37,924,000. These mortgages have maturity dates
ranging from 1999 through 2009 and interest rates ranging from 7.5% to 10.5%.
The Company is required to make principal payments of $212,000 in 1997,
$896,000 in 1998, $8,942,000 in 1999, $6,061,000 in 2000, $1,065,000 in 2001,
and $3,437,000 in 2002.
In addition, the Company had floating rate mortgages outstanding as of
September 30, 1997 totalling $12,800,000. These mortgages have maturity dates
ranging from 2003 through 2004 and have interest rates ranging from 7.5% to
9.0% at September 30, 1997. The Company is required to make principal
payments of $71,000 in 1997, $394,000 in 1998, $410,000 in 1999, $427,000 in
2000, $445,000 in 2001, and $466,000 in 2002.
In February 1997, the Company obtained a secured first mortgage loan facility
of up to $50 million from Salomon Brothers Realty Corp. (the "Salomon
Facility"). Amounts borrowed under the line bear interest at the one-month
London Interbank Offering Rate ("LIBOR") plus 175 basis points, which was
7.41% at September 30, 1997. As of September 30, 1997, there was
$17,000,000 outstanding under this facility with $7,000,000 available for
future borrowings. The facility is secured by 14 properties and is due in
February 1999. The Company has an option to extend the facility for an
additional year. The proceeds of the Salomon Facility will be used by the
Company for funding property acquisitions, general corporate purposes and
capital needs. As a condition of the Salomon facility, the Company was
required to establish a Repair Reserve Account for immediate and ongoing
capital expenditure reserves and replacement reserves. The balance in the
Repair Reserve Account was $389,000 as of September 30, 1997.
In November 1996, the Company obtained a $3.0 million secured line of credit
from Bank Leumi Trust Company of New York. Amounts borrowed under the line
bear interest at 50 basis points above that bank's reference rate, which was
8.5% as of September 30, 1997. The outstanding borrowings under this facility
totalled $1,000,000 as of September 30, 1997. The term of the line has been
renewed through June 30, 1998.
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 8.50% at September 30, 1997. There were no
borrowings outstanding under this facility as of September 30, 1997. The
facility expires on December 31, 1997 and the Company is involved in
discussions with the lender to extend the terms of the line.
Effective January 1, 1996, The National Association of Real Estate Investment
Trusts (NAREIT) revised the definition of funds from operations to income
before depreciation and amortization of real estate assets and significant
non-recurring events, less gains on sale of real estate. 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 for common shareholders increased $376,000 or 8% from $4,516,000
for the third quarter of 1996 to $4,892,000 for the third quarter of 1997, and
increased $874,000 or 6% from $13,586,000 for the first nine months of 1996 to
$14,460,000 for the first nine months of 1997.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. Among these tenants are Bradlee's (three stores
representing approximately $2.2 million or 3.7% of the Company's annualized
revenues) and Caldor (three stores representing approximately $2.5 million or
4.2% of the Company's annualized revenues). To date Bradlee's and Caldor
continue to pay current rent and operate their stores located in the Company's
centers and have not taken any action to reject these leases. Effective
November 1, 1996, the Company entered into an agreement to reduce common area
maintenance and real estate tax reimbursements at one of the Caldor locations
for a five year period. Rickel's disaffirmed the lease for the store located
at the Hillcrest Mall in Phillipsburg, NJ on November 30, 1996. The rental for
this store amounted to approximately $300,000 per year including
reimbursements for operating expenses. Rickel's has affirmed the lease for
The Mall at Cross County. The rental for this store amounts to approximately
$1.1 million per year including reimbursements for operating expenses.
Effective February 29, 1996, Jamesway disaffirmed its leases at the two
locations in which they had operated. The Jamesway stores were approximately
60,000 and 76,000 square feet, respectively, and the average rent paid by
Jamesway for these locations was approximately $2.60 per square foot, which
represented less than 1% of revenues in 1996. The Company has leased both of
the locations to Ames Department store. One of the leases commenced in April
of 1997 and the projected commencement date of the other lease is April, 1998.
Other tenants in the Company's portfolio that continue to pay current rent and
operate their stores under Chapter 11 are individually and in the aggregate
less than 1% of annual revenues. The Company believes that it is adequately
reserved for these tenants.
Best Products, a tenant in bankruptcy at one of the Company's centers,
discontinued operations of all of its stores and closed the store in the
Company's portfolio in February 1997. In May 1997, the Company purchased the
lease from Best Products for approximately $650,000. The Company has several
prospective tenants for this space and expects the space to be leased before
the end of the fourth quarter of 1997.
On July 31, 1997, the Company filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission to offer $100,000,000 of debt
securities, preferred shares, common shares, warrants and rights, separately
or together, in separate series, in amounts, at prices and on terms to be set
forth at a later date. The Company intends to use the net proceeds from the
sale of the offered securities for general corporate purposes, which may
include the acquisition of shopping centers, the expansion and improvement of
existing properties, the repayment of certain indebtedness and working
capital.
During the nine months ended September 30, 1997, the Company invested
approximately $4,848,000 in the expansion and improvement of existing shopping
center properties, exclusive of the acquisition of the sixteen properties
acquired from UPI. 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 Mortgage Loan. 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 (loss) for common shareholders decreased $59,000, or 3%, from
$1,877,000 or $0.18 per common share in the third quarter of 1996 to
$1,818,000 or $0.18 per common share in the third quarter of 1997. Net
income (loss) for common shareholders increased $11,043,000 from ($5,339,000),
or ($0.52) per common share, for the first nine months of 1996 to $5,704,000,
or $0.55 per common share, for the corresponding period in 1997. Excluding
the extraordinary loss on refinancing, the net income for common shareholders
decreased $9,000 or less than 1% from $5,713,000, or $0.55 per common share,
for the first nine months of 1996 to $5,704,000, or $0.55 per common share,
for the corresponding period in 1997. This was due to a combination of factors
as described in further detail below. 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 increased $1,840,000, or 18%, from $10,302,000 in the third
quarter of 1996 to $12,142,000 in the third quarter of 1997 and increased
$3,915,000 or 13% from $31,270,000 for the first nine months of 1996 to
$35,185,000 for the corresponding period in 1997. The increase was primarily
due to the additional rents from the sixteen centers acquired in February 1997
of approximately $4,227,000, which was offset by a net decrease in the minimum
rents of approximately $312,000 from the other thirty-eight shopping centers.
The decrease was due to the lower occupancy rate at those centers.
Expense reimbursements increased $169,000, or 6%, from $2,629,000 in the third
quarter of 1996 to $2,798,000 in the third quarter of 1997 and decreased
$599,000 or 7% from $8,852,000 for the first nine months of 1996 to $8,253,000
for the corresponding period in 1997. The decrease was primarily due to the
common area maintenance expenses which were significantly lower in 1997 due to
the severe winter weather in the Northeast portion of the United States in
1996.
Interest income decreased $18,000, or 28%, from $82,000 in the third quarter
of 1996 to $64,000 in the third quarter of 1997 and decreased $343,000 from
$523,000 for the first nine months of 1996 to $180,000 for the corresponding
period in 1997. The decrease was primarily due to the sale of the Series A-2
Commercial Mortgage Modified Pass - Through Interest Only Certificates (the
"Series A-2 Certificates"). The Series A-2 Certificates provided for payment
of interest only at 65 basis points calculated on a notional amount of
$100,000,000. The Series A-2 Certificates were sold in connection with the
debt refinancing in June 1996.
Interest expense increased $574,000, or 14%, from $4,242,000 in the third
quarter of 1996 to $4,816,000 in the third quarter of 1997 and $1,317,000 or
10% from $12,753,000 for the first nine months of 1996 to $14,070,000 for the
corresponding period in 1997. The increase is primarily due to the interest
expense incurred in connection with the additional sixteen centers acquired in
February 1997 of approximately $1,628,000. In addition, interest expense was
reduced by capitalized interest on projects under construction and land under
development in the amount of $63,000 and $300,000 for the third quarter of
1996 and 1997, respectively, and $185,000 and $632,000 for the first nine
months of 1996 and 1997, respectively.
Depreciation and amortization increased $537,000, or 20%, from $2,720,000 in
the third quarter of 1996 to $3,257,000 in the third quarter of 1997 and
increased $813,000 or 10% from $8,434,000 for the first nine months of 1996 to
$9,247,000 for the corresponding period in 1997. Depreciation expense on
buildings and improvements increased approximately $832,000 in the first nine
months of 1997 versus the first nine months of 1996 due to the sixteen
additional centers acquired in February 1997 as well as two full quarters of
depreciation taken on improvements made prior to 1997. This increase is
offset by a decrease in amortization of deferred financing costs of
approximately $133,000 in the first nine months of 1997 versus 1996. This
decrease was due to the change in deferred financing fees associated with the
Company's debt refinancing in June 1996.
Real estate taxes increased $113,000, or 7%, from $1,555,000 in the third
quarter of 1996 to $1,668,000 in the third quarter of 1997, and increased
$377,000 or 8% from $4,514,000 for the first nine months of 1996 to $4,891,000
for the corresponding period in 1997. The increase was primarily due to the
increase in expense from the additional sixteen centers acquired in 1997, as
well as the effect of a real estate tax refund of approximately $40,000
recorded in the first quarter of 1996. The increase was offset by the
capitalization of real estate taxes on projects under construction and land
under development in the amount of $29,000 and $55,000 for the third quarter
of 1996 and 1997, respectively, and $93,000 and $132,000 for the first nine
months of 1996 and 1997, respectively.
Operations and maintenance expenses increased $108,000, or 6%, from $1,915,000
in the third quarter of 1996 to $2,023,000 in the third quarter of 1997 and
decreased $1,037,000 or 17% from $7,099,000 for the first nine months of 1996
to $6,062,000 for the corresponding period in 1997. The decrease 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).
General and administrative expenses decreased $66,000, or 9%, from $834,000 in
the third quarter of 1996 to $768,000 in the third quarter of 1997 and
decreased $167,000 or 8% from $2,357,000 for the first nine months of 1996 to
$2,190,000 for the corresponding period in 1997. The decrease is primarily
due to capitalization of certain direct labor costs in 1997 related to
identifiable projects such as the merger of the Company with UPI and certain
leasing projects.
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.
Part II
OTHER INFORMATION
Item 1.Legal Proceedings
None.
Item 2.Changes in Securities and Use of Proceeds
None.
Item 3.Defaults upon Senior Securities
None.
Item 4.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 10, 1997 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: November 10, 1997 /S/Robert H. Dennis
Chief Financial Officer and Treasurer
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