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 March 31, 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 May 9, 1997, there were 10,334,796 Common Shares of Beneficial Interest,
par value $0.01 per share, outstanding.
<PAGE>
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
MARCH 31, 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 Mortgages and Notes Payable 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>
March 31, December 31,
1997 1996
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS:
Shopping center properties owned, at cost
Buildings and improvements $ 337,077,000 $ 294,293,000
Land 101,377,000 76,198,000
------------- -------------
438,454,000 370,491,000
Less-accumulated depreciation 37,947,000 35,287,000
------------- -------------
400,507,000 335,204,000
Cash and cash equivalents 5,495,000 5,301,000
Restricted cash 725,000 329,000
Rents and other receivables, net of allowance of
$1,227,000 and $1,245,000, March 31, 1997 and December 31,1996 9,234,000 9,661,000
Prepaid expenses 1,810,000 1,729,000
Deferred financing costs, net of accumulated amortization of $325,000
and $203,000, March 31, 1997 and December 31,1996 2,324,000 1,893,000
Deferred costs, net of accumulated amortization of $718,000
and $888,000, March 31, 1997 and December 31,1996 1,892,000 1,793,000
Other assets 1,130,000 3,247,000
------------- -------------
Total assets $ 423,117,000 $ 359,157,000
============= =============
LIABILITIES:
Mortgages and notes payable $ 246,034,000 $ 212,590,000
Tenant security deposits 1,195,000 1,136,000
Accounts payable and accrued expenses 2,805,000 2,785,000
Other liabilities 621,000 527,000
Distributions payable 5,397,000 5,106,000
------------- -------------
Total liabilities 256,052,000 222,144,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED SHARES, SERIES C, $0.01 PAR VALUE; 356,400 SHARES,
MARCH 31, 1997, NONE AT DECEMBER 31, 1996 3,564,000 0
BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest, Series A-1, $0.01 par value; 11,155 shares,
March 31, 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, March 31, 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, 10,333,914 and 103,000 103,000
10,332,784 as of March 31, 1997 and December 31, 1996, respectively
Capital in excess of par value 216,593,000 187,177,000
Cumulative net income available for common shareholders 28,755,000 26,754,000
Cumulative distributions on common shares of beneficial interest (81,851,000) (76,891,000)
------------- -------------
163,613,000 137,144,000
Unearned compensation on restricted shares of beneficial interest (112,000) (131,000)
------------- -------------
Total beneficiaries' equity 163,501,000 137,013,000
Total liabilities and beneficiaries' equity $ 423,117,000 $ 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
months ended months ended
March 31, 1997 March 31, 1996
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
REVENUES:
Minimum rent $ 10,929,000 $ 10,577,000
Percentage rent 268,000 247,000
Expense reimbursements 2,697,000 3,510,000
Interest income 54,000 225,000
Other 31,000 19,000
------------- -------------
Total revenues 13,979,000 14,578,000
------------- -------------
EXPENSES:
Interest 4,486,000 4,281,000
Depreciation and amortization 2,859,000 2,872,000
Real estate taxes 1,596,000 1,445,000
Operations and maintenance 1,971,000 3,189,000
General and administrative 601,000 699,000
------------- -------------
Total expenses 11,513,000 12,486,000
------------- -------------
INCOME BEFORE LOSS ON SALE OF REAL ESTATE 2,466,000 2,092,000
Loss on sale of real estate 0 63,000
------------- -------------
NET INCOME 2,466,000 2,029,000
Preferred Share Distribution 465,000 173,000
------------- -------------
NET INCOME FOR COMMON SHAREHOLDERS $ 2,001,000 $ 1,856,000
============= =============
NET INCOME PER COMMON SHARE OF BENEFICIAL INTEREST $0.19 $0.18
============= =============
<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 three For the three
months ended months ended
March 31, 1997 March 31, 1996
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 2,466,000 2,029,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,859,000 2,872,000
Amortization of deferred interest costs 0 447,000
Amortization of unearned compensation on restricted shares of
beneficial interest 19,000 14,000
Loss on sale of real estate 0 63,000
Changes in assets and liabilities:
(Increase) decrease in-
Rents and other receivables 427,000 (1,309,000)
Prepaid expenses (81,000) (13,000)
Other assets 47,000 (29,000)
Increase (decrease) in-
Accounts payable and accrued expenses 20,000 209,000
Tenant security deposits 59,000 (19,000)
Other liabilities 94,000 117,000
------------- -------------
Net cash provided by operating activities 5,910,000 4,381,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (67,963,000) (204,000)
Decrease in other assets 2,070,000 0
Proceeds from sale of real estate 0 524,000
Increase in restricted cash (396,000) (3,000)
Increase in deferred costs (176,000) (165,000)
------------- -------------
Net cash (used in) provided by investing activities (66,465,000) 152,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of beneficial interest (4,960,000) (4,955,000)
Distributions paid on preferred shares of beneficial interest (146,000) (139,000)
Issuance of common shares of beneficial interest, net 19,000 16,000
Issuance of preferred shares of beneficial interest, net 32,945,000 0
Proceeds of mortgages and notes payable 33,629,000 0
Repayments of mortgages and notes payable (185,000) (436,000)
Increase in deferred financing costs (553,000) (85,000)
------------- -------------
Net cash provided by (used in) financing activities 60,749,000 (5,599,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 194,000 (1,066,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,301,000 6,129,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 5,495,000 5,063,000
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate preferred shares 28,000 33,000
------------- -------------
<FN>
The Company declared a distribution of $0.48 per share, payable to shareholders of record as of March 31, 1997.
The distribution of $4,960,000 was paid on April 22, 1997.
The Company declared a distribution of $0.48 per share, payable to shareholders of record as of March 29, 1996.
The distribution of $4,955,000 was paid on April 17, 1996.
The Company recorded the quarterly distribution on the preferred shares, Series A, as of March 31, 1997. The
distribution of $146,000 was paid on April 1, 1997.
The Company recorded the quarterly distribution on the preferred shares, Series A, as of March 31, 1996. The
distribution of $139,000 was paid on April 1, 1996.
The Company recorded $265,000 of the distribution on the preferred shares, Series B-1 and B-2, as of March 31, 1997. The
entire distribution of $417,000 was paid on April 20, 1997.
The Company recorded $26,000 of the distribution on the preferred shares, Series C, as of March 31, 1997. The
entire distribution of $26,000 was paid on April 30, 1997.
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 three months ended March 31, 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, 1994 10,315,497 $103,000 - $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 1,184 - - - 20,000 - - -
Forfeiture of common shares (54) - - - (1,000) - - -
Issuance of preferred
shares-Series B-1, B-2 - - 1,183,331 12,000 29,369,000 - - -
Issuance of preferred
shares-Series C - - 356,400 4,000 3,560,000 - - -
Accretion of discount
on preferred shares
of beneficial interest - - - - 28,000 (28,000) - -
Accretion of unearned
compensation on
restricted shares of
beneficial interest - - - - - - - 19,000
Net income - - - - - 2,466,000 - -
Distributions on preferred
shares - - - - - (437,000) - -
Distributions on common
shares of beneficial
interest ($0.48 per share) - - - - - - (4,960,000) -
----------- --------- ----------- --------- ------------ ----------- ------------ ----------
BALANCE, March 31, 1997 10,333,914 $103,000 1,550,886 $17,000 $220,153,000 $28,755,000 ($81,851,000) ($112,000)
<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
March 31, 1997
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 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 March 31, 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 net realizable 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 to Be Disposed Of" ("SFAS No. 121").
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 10,333,925 and 10,322,858 as of March 31, 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 $4,449,000 and
$3,806,000 for the three months ended March 31, 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 March 31, 1997 and December 31, 1996, the Company had mortgages and notes
payable outstanding of $246,034,000 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 three months ending March 31, 1997 and
1996 in the accompanying statements of operations is shown net of reimbursements
of $0 and $206,000, respectively, relating to the interest rate protection
agreements and capitalized interest of $108,000 and $60,000, 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 March 31, 1997 was $100,000. 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 $245,000 as of March 31, 1997.
In addition, the Company has eight fixed rate mortgages outstanding as of
March 31, 1997 totalling $38,334,000. 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 $622,000 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 March 31, 1997 total $13,000,000.
These mortgages have maturity dates ranging from 1999 through 2004 and have
interest rates ranging from 7.50% to 8.75%. The Company is required to make
principal payments of $271,000 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 7.125% at March 31, 1997. There was $13,000,000
outstanding under this facility as of March 31, 1997, and an additional
$9,000,000 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 $380,000 as of March 31, 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 will
bear interest at 50 basis points above that bank's reference rate. There were
no outstanding borrowings under this facility as of March 31, 1997.
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 March
31, 1997 and the facility was extended through December 31, 1997.
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 loss of $63,000 on the sale of real estate
recorded in the first quarter of 1996 by the Company has been excluded from the
pro forma presentation.
For the three months ended March 31, 1997
Pro forma total revenues $15,328,000
Pro forma net income for common shareholders $1,918,000
Pro forma net income per common share $0.19
For the three months ended March 31, 1996
Pro forma total revenues $16,634,000
Pro forma net income for common shareholders $1,610,000
Pro forma net income per common share $0.16
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 March 31, 1997, the distribution rate on
the Preferred Shares was 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 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 acquisition, through a merger, of sixteen properties in
February 1997, 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 $29,381,000. 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 $3,564,000. 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 dividends, if any, allocable to
the Series C Preferred Shares.
5. 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 March 31, 1997 the Company had $5,495,000 of cash on hand. In addition to
its cash reserve, unused capacity under credit facilities totaled $13,000,000 at
March 31, 1997.
In February 1997, the Company acquired, in a merger, Union Property
Investors, Inc. ("UPI") for approximately $65 million. UPI owned sixteen
properties located in eleven states that have a total of approximately 1.3
million square feet of gross leasable area. The UPI portfolio was approximately
99% leased as of December 31, 1996. 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 March 31, 1997 the Company had total mortgages and notes payable of
$246,034,000 of which $220,034,000 bears interest at fixed rates ranging from
7.50% to 10.5%. As of March 31, 1997, the Company is required to make principal
payments of $893,000 in 1997, $1,290,000 in 1998, $22,352,000 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 $100,000 as of March
31, 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 $245,000 as
of March 31, 1997.
As of March 31, 1997, the Company had eight fixed rate mortgages outstanding
totalling $38,334,000. 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 $622,000 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 March
31, 1997 totalling $13,000,000. These mortgages have maturity dates ranging
from 1999 through 2004 and have interest rates ranging from 7.50% to 8.75%. The
Company is required to make principal payments of $271,000 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 7.125%
at March 31, 1997. There was $13,000,000 outstanding under this facility as
of March 31, 1997, with $9,000,000 available for future borrowings. 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. 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
$380,000 as of March 31, 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 will
bear interest at 50 basis points above that bank's reference rate. There were
no outstanding borrowings under this facility as of March 31, 1997.
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 8.75% at March 31, 1997. The facility was extended
through December 31, 1997, and there were no borrowings outstanding under this
facility as of March 31, 1997.
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 $238,000 or 5% from $4,485,000 for
the first quarter of 1996 to $4,723,000 for the first quarter of 1997.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. Among the tenants are Bradlee's (three stores
representing approximately $2.2 million or 4.0% of the Company's annual
revenues) and Caldor (three stores representing approximately $2.5 million or
4.5% of the Company's annual 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 the approximately 60,000 square foot store to
Ames Department store, which is also leasing an additional 4,000 square feet at
that location. Other tenants in the Company's portfolio that continue 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. The Company believes that it is adequately reserved
for these tenants.
Best Products, a tenant in bankruptcy at one of the Company's centers, has
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
fourth quarter of 1997.
During the three months ended March 31, 1997, the Company invested
approximately $294,000 in the expansion and improvement of existing shopping
center properties, exclusive of the acquisition of the sixteen properties. 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 for common shareholders increased $145,000 from $1,856,000 or $0.18
per common share in the first quarter of 1996 to $2,001,000 or $0.19 per common
share in the first quarter of 1997. This increase 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 $352,000 or 3% from $10,577,000 in the first quarter of
1996 to $10,929,000 in the first quarter of 1997. The increase was primarily
due to the additional rents from the sixteen centers acquired in February 1997
of approximately $597,000, which was offset by a netdecrease in the minimum
rents of approximately $245,000 from the other thirty-eight shopping centers.
The decrease was due to the lower occupancy rate at those centers.
Expense reimbursements decreased $813,000 or 23% from $3,510,000 in the first
quarter of 1996 to $2,697,000 in the first quarter of 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 $171,000 or 76% from $225,000 in the first quarter of
1996 to $54,000 in the first quarter of 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 $205,000 or 5% from $4,281,000 in the first quarter
of 1996 to $4,486,000 in the first quarter of 1997. The increase is primarily
due to the interest expense incurred in connection with the additional sixteen
centers acquired in February 1997. In addition, interest expense was reduced by
capitalized interest on projects under construction and land under development
in the amount of $60,000 and $108,000 for the first quarter of 1996 and 1997,
respectively.
Depreciation and amortization decreased $13,000 or less than 1% from $2,872,000
in the first quarter of 1996 to $2,859,000 in the first quarter of 1997. While
depreciation expense on buildings and improvements increased approximately
$141,000 in the first quarter of 1997 versus the first quarter of 1996 due to
the sixteen additional centers acquired in February 1997 as well as a full
quarter of depreciation taken on improvements made prior to 1997, amortization
of deferred financing costs decreased approximately $169,000 in the first
quarter 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 $151,000 or 10% from $1,445,000 in the first quarter
of 1996 to $1,596,000 in the first quarter of 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 of $32,000
and $24,000 for the first quarter of 1996 and 1997, respectively.
Operations and maintenance expenses decreased $1,218,000 or 38% from $3,189,000
in the first quarter of 1995 to $1,971,000 in the first quarter of 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 $98,000 or 14% from $699,000 in
the first quarter of 1996 to $601,000 in the first quarter of 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
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
The Company filed a report on Form 8-K dated February 27, 1997
during the quarter for which this report is filed. Such Form 8-K (which
contained Items 2 and 7) reported acquisition, through a merger, of assets by
the Company as well as a description of a new debt facility.
The Company filed a report on Form 8-K/A dated May 6, 1997 during
the quarter for which this report is filed. Such Form 8-K/A (which contained
Item 7) amended the Form 8-K dated February 27, 1997.
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: May 13, 1997 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: May 13, 1997 /S/Robert H. Dennis
Chief Financial Officer and Treasurer
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