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, 1998
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 8, 1998, there were 10,444,942 Common Shares of Beneficial
Interest, par value $0.01 per share, outstanding.
<PAGE>
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
MARCH 31, 1998
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 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS:
Shopping center properties owned, at cost
Buildings and improvements $375,047,000 $369,969,000
Land 116,044,000 114,772,000
------------- -------------
491,091,000 484,741,000
Less-accumulated depreciation 50,028,000 46,811,000
------------- -------------
441,063,000 437,930,000
Cash and cash equivalents 6,448,000 11,423,000
Restricted cash 1,185,000 883,000
Rents and other receivables, net of allowance of
$1,239,000 and $1,152,000, March 31, 1998 and December 31,1997 9,732,000 9,210,000
Prepaid expenses 2,067,000 1,870,000
Deferred financing costs, net of accumulated amortization of $918,000
and $778,000, March 31, 1998 and December 31, 1997 1,828,000 1,975,000
Deferred costs, net of accumulated amortization of $672,000
and $1,043,000, March 31, 1998 and December 31, 1997 2,155,000 2,119,000
Other assets 1,172,000 810,000
------------- -------------
Total assets $465,650,000 $466,220,000
============= =============
LIABILITIES:
Mortgages and notes payable $257,201,000 $255,124,000
Tenant security deposits 1,364,000 1,318,000
Accounts payable and accrued expenses 2,772,000 2,831,000
Other liabilities 574,000 597,000
Distributions payable 6,617,000 6,010,000
------------- -------------
Total liabilities 268,528,000 265,880,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED SHARES, SERIES C, $0.01 PAR VALUE; 178,200
AND 222,750 SHARES, MARCH 31, 1998 AND DECEMBER 31, 1997 1,782,000 2,228,000
BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest, Series A-1,
$0.01 par value; 11,155 shares,
March 31, 1998 and December 31, 1997 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, 1998 and December 31, 1997 12,000 12,000
Preferred shares of beneficial interest, Series D,
$0.01 par value; 1,800,000 shares,
March 31, 1998 and December 31, 1997 18,000 18,000
Common shares of beneficial interest, $0.01 par value;
authorized 100,000,000 shares; issued and
outstanding, 10,444,054 and 10,415,427 as of
March 31, 1998 and December 31, 1997, respectively 104,000 104,000
Capital in excess of par value 261,647,000 261,097,000
Cumulative net income available for common shareholders 35,465,000 33,806,000
Cumulative distributions on common shares of beneficial interest (101,784,000) (96,771,000)
------------- -------------
195,463,000 198,267,000
Unearned compensation on restricted shares of beneficial interest (123,000) (155,000)
------------- -------------
Total beneficiaries' equity 195,340,000 198,112,000
Total liabilities and beneficiaries' equity $465,650,000 $466,220,000
============= =============
<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 ending months ending
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
REVENUE:
Minimum rent $13,407,000 $10,929,000
Percentage rent 310,000 268,000
Expense reimbursements 2,839,000 2,697,000
Interest income 123,000 54,000
Other 28,000 31,000
------------- -------------
Total revenue 16,707,000 13,979,000
------------- -------------
EXPENSES:
Interest 4,871,000 4,486,000
Depreciation and amortization 3,450,000 2,859,000
Real estate taxes 1,804,000 1,596,000
Operations and maintenance 2,101,000 1,971,000
General and administrative 809,000 601,000
------------- -------------
Total expenses 13,035,000 11,513,000
------------- -------------
NET INCOME 3,672,000 2,466,000
PREFERRED SHARE DISTRIBUTIONS 2,013,000 465,000
------------- -------------
NET INCOME FOR COMMON SHAREHOLDERS $1,659,000 $2,001,000
============= =============
BASIC AND DILUTED EARNINGS PER COMMON SHARE
OF BENEFICIAL INTEREST $0.16 $0.19
============= =============
<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 ending months ending
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,672,000 $2,466,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,450,000 2,859,000
Amortization of unearned compensation on restricted
shares of beneficial interest 32,000 19,000
Changes in assets and liabilities:
(Increase) decrease in-
Rents and other receivables (522,000) 427,000
Prepaid expenses (197,000) (81,000)
Other assets (10,000) 47,000
Increase (decrease) in-
Accounts payable and accrued expenses 427,000 20,000
Tenant security deposits 46,000 59,000
Other liabilities (23,000) 94,000
------------- -------------
Net cash provided by operating activities 6,875,000 5,910,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (2,685,000) (4,616,000)
Increase (decrease) in other assets (352,000) 2,070,000
Decrease in accrued acquisition costs (96,000) 0
Increase in restricted cash (302,000) (396,000)
Increase in deferred costs (122,000) (176,000)
------------- -------------
Net cash used in investing activities (3,557,000) (3,118,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of beneficial interest (4,999,000) (4,960,000)
Distributions paid on preferred shares of beneficial interest (1,398,000) (146,000)
Issuance of common shares of beneficial interest, net 208,000 19,000
Issuance of preferred shares of beneficial interest, net 0 (202,000)
Redemption of redeemable preferred shares (446,000) 0
Proceeds of mortgages and notes payable 0 3,429,000
Repayments of mortgages and notes payable (1,268,000) (185,000)
Decrease in accrued expenses for preferred share offering (390,000) 0
Increase in deferred financing costs 0 (553,000)
------------- -------------
Net cash used in financing activities (8,293,000) (2,598,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,975,000) 194,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,423,000 5,301,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,448,000 $5,495,000
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate preferred shares $22,000 $28,000
============= =============
Preferred and common shares issued as part of the purchase price for the acquisition of real estate:
Fair value of assets acquired $3,665,000 $63,347,000
Liabilities assumed 3,345,000 30,200,000
------------- -------------
Preferred shares issued $0 $33,147,000
Common shares issued $320,000 $0
============= =============
<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, 1996 and 1997
For the three months ended March 31, 1998
<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, 1996 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 82,697 1,000 - - 1,545,000 - - (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 D - - 1,800,000 18,000 42,927,000 - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 95,000 (95,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 101,000
Net income - - - - - 10,617,000 - -
Distributions
on preferred shares - - - - - (3,470,000) - -
Distributions
on common shares
of
beneficial
interest($1.92 per share) - - - - - - (19,880,000) -
------------ -------- ---------- ---------- ------------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 1997 10,415,427 $104,000 2,994,486 $31,000 $261,097,000 $33,806,000 ($96,771,000) ($155,000)
Issuance of common shares 28,627 - - - 528,000 - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 22,000 (22,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 32,000
Net income - - - - - 3,672,000 - -
Distributions
on preferred shares - - - - - (1,991,000) - -
Distributions
on common shares
of
beneficial
interest($0.48 per share) - - - - - - (5,013,000) -
------------ -------- ---------- ---------- ------------- ------------- -------------- -------------
BALANCE,
MARCH 31, 1998 (Unaudited) 10,444,054 $104,000 2,994,486 $31,000 $261,647,000 $35,465,000 ($101,784,000) ($123,000)
<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, 1998
1. BASIS OF PRESENTATION:
The financial statements are unaudited but reflect all adjustments which are
necessary, in the opinion of management, 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 Kranzco
Realty Trust and its subsidiaries' Annual Report on Form 10-K for the year
ended December 31, 1997. 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. In
addition to its own properties, the Company may provide management services
for shopping centers owned by third parties. As of March 31, 1998, the Company
owned 59 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 depreciated
cost. 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 Long-Lived
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. 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 placement of debt and the costs of leasing the
shopping centers. 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.
Earnings Per Share Data
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock.
Basic EPS is based on the weighted average number of common shares of
beneficial interest outstanding. The weighted average number of shares
outstanding used in the Basic EPS computations was 10,423,836 and 10,333,925 as
of March 31, 1998 and 1997, respectively. The Diluted EPS computations have
been adjusted to give effect to common share equivalents; specifically, common
share options outstanding. The weighted average number of shares outstanding
used in the Diluted EPS computations was 10,427,342 and 10,334,399 as of March
31, 1998 and 1997, respectively. The Company's Series A-1 and B Preferred
Shares and the majority of the Company's stock options were not included in the
Diluted EPS calculation because their impact would be anti-dilutive based on
current market prices.
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 $5,157,000 and
$4,449,000 for the three months ended March 31, 1998 and 1997, 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, 1998 and December 31, 1997, the Company had mortgages and notes
payable outstanding of $257,201,000 and $255,124,000, respectively.
In 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 entire outstanding
principal balance of the Mortgage Loan is due in June 2003. Interest expense
for the three months ending March 31, 1998 and 1997 in the accompanying
statements of operations is shown net of capitalized interest of $293,000 and
$108,000, 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. The balance in the
Sinking Fund Account as of March 31, 1998 was $239,000. 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 $428,000 as of March 31, 1998.
In addition, the Company has eleven mortgages outstanding as of March 31, 1998
which were assumed in connection with the acquisition of certain shopping
centers. These mortgages have maturity dates ranging from 1999 through 2009.
Nine of the eleven mortgages assumed have fixed interest rates ranging from
7.50% to 10.50%. The outstanding principal balance on these mortgages at March
31, 1998 was approximately $54,221,000. The Company is required to make
principal payments of $692,000 in 1998, $21,419,000 in 1999, $7,209,000 in 2000,
$4,329,000 in 2001, $3,338,000 in 2002, and $5,311,000 in 2003, respectively,
related to these mortgages. The other two mortgages have interest rates payable
at a rate adjusted each year to equal the sum of Moody's A Corporate Bond Index
Daily Rate minus 0.125% per annum. The outstanding principal balance on these
mortgages at March 31, 1998 was approximately $7,280,000. The Company is
required to make principal payments of $154,000 in 1998, $218,000 in 1999,
$231,000 in 2000, $247,000 in 2001, $262,000 in 2002, and $6,168,000 in 2003,
respectively, related to these two mortgages.
In 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 7.44% at March 31, 1998. As of March 31, 1998, there
was $14,000,000 outstanding under this facility and an additional $10,000,000
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 $398,000 as of March 31, 1998.
The Company has 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 8.50% as of March 31, 1998.
There were no outstanding borrowings under this facility as of March 31, 1998.
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 March 31,
1998 and the facility's expiration date was extended to December 31, 1998.
4. ACQUISITIONS:
The Company acquired one shopping center in March 1998 for approximately
$4,000,000 which was accounted for by the purchase method. This shopping center
was under contract at December 31, 1997. This center was part of a package of
five centers located in Georgia (the "Georgia Properties"), of which four of the
centers were acquired prior to December 31, 1997.
The Company acquired twenty shopping centers during the year ended December 31,
1997 for approximately $104,000,000 which were accounted for by the purchase
method. The results of operations of each center were 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
acquisitions had occurred on January 1, 1997.
For the three months ended March 31, 1997
Pro forma total revenues $16,680,000
Pro forma net income for common shareholders $1,672,000
Pro forma net income per common share $0.16
In March 1998, the Company executed a letter of intent to enter into a strategic
alliance with New America International ("NAI"), the nation's largest privately
held affiliation of commercial real estate brokerage and related services firms.
Pursuant to the terms of the proposed transactions, NAI would become a public
company which would be 9.8% owned by the Company and would provide for a
long-term cooperative agreement under which the two companies will collaborate
in developing new opportunities and revenue streams for each other from real
estate brokerage and related services, but will otherwise remain independent.
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 non-voting Series A-1 Increasing Rate
Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value
per share, of Kranzco Realty Trust (the "Series A-1 Preferred Shares") at a face
amount of $11,155,000. 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, 1998, the distribution rate on the Preferred Shares
is 5.50%. 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. The Series B Preferred Shares have a
distribution rate of 9.75% per annum and distributions are paid quarterly on the
20th of January, April, July and October of each year. The Series B-1 Preferred
Shares are convertible into Common Shares after February 1998 with the following
conversion prices: $19.175 in the first year, $18.69 in the second year, $18.20
in the third year, $17.71 in the fourth year and thereafter. The Series B-2
Preferred Shares automatically convert into Series B-1 Preferred Shares after
the third anniversary date and follow the conversion rates of the Series B-1
Preferred Shares thereafter. 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. 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 was 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.
In December 1997, the Company issued 1,800,000 shares of 9 1/2% Series D
Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series D
Preferred Shares"), par value $0.01 per share, each with a $25.00 per share
liquidation preference. The proceeds of the issuance were used in connection
with the acquisition of four shopping centers in December 1997 and one shopping
center in 1998 (approximately $15,774,000 and $225,000, respectively), to repay
approximately $19,810,000 of indebtedness and for general corporate purposes.
The distributions are paid quarterly on the 20th of each January, April, July
and October of each year. The Series D Preferred Shares are not redeemable
prior to December 11, 2002. On or after December 11, 2002, the Series D
Preferred Shares may be redeemed for cash at the option of the Company at a
redemption price of $25.00 per share, plus accrued and unpaid distributions, if
any, thereon to the redemption date.
There was no conversion of preferred shares into common shares of beneficial
interest during 1997 or during the three months ending March 31, 1998.
6. DISTRIBUTIONS ON COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST:
On March 17, 1998, the Trustees declared a cash distribution of $0.48 per common
share, payable to shareholders of record on March 30, 1998. The distribution of
$5,013,000 was paid on April 22, 1998. On March 19, 1997, the Trustees declared
a cash distribution of $0.48 per common 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 accrued the quarterly distribution on the Series A-1 Preferred
Shares of $153,000 and $146,000 as of March 31, 1998 and 1997, respectively.
These distributions were paid on April 1, 1998 and 1997, respectively.
The Company accrued $569,000 and $265,000 of the distribution on the Series B
Preferred Shares as of March 31, 1998 and 1997, respectively. The entire
distribution of $721,000 and $417,000 was paid on April 20, 1998 and 1997,
respectively.
The Company accrued $39,000 and $26,000 of the distribution on the Series C
Preferred Shares as of March 31, 1998 and 1997, respectively. The entire
distribution of $39,000 and $26,000 was paid on April 30, 1998 and 1997,
respectively.
The Company accrued $843,000 of the distribution on the Series D Preferred
Shares as of March 31, 1998. The entire distribution of $1,069,000 was paid on
April 20, 1998.
7. NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The impact of adopting SFAS
130 is not material to the Company's financial statements.
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 statements that may be deemed to
be "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Form 10-Q that address
activities, events or developments that the Company expects, believes or
anticipates will or may occur in the future, including such matters as future
capital expenditures, distributions and acquisitions (including the amount and
nature thereof), the use of proceeds of offerings, expansion and other
development trends of the real estate industry, business strategies, expansion
and growth of the Company's operations and other such matters are
forward-looking statements. 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. Prospective investors are cautioned that any
such statements are not guarantees of future performance and that actual results
or developments may differ materially from those anticipated in the
forward-looking statements. Risks and other factors that might cause such
differences, some of which could be material, include, but are not limited to:
the burden of the Company's substantial debt obligations; the necessity of
future financings to repay the "balloon" payments required at the maturity of
certain of the Company's debt obligations; the highly competitive nature of the
real estate leasing market; adverse changes in the real estate markets
including, among other things, competition with other companies; general
economic and business conditions, which will, among other things, affect demand
for retail space or retail goods, availability and creditworthiness of
prospective tenants and lease rents; financial condition and bankruptcy of
tenants, including disaffirmance of leases by bankrupt tenants; the availability
and terms of debt and equity financing; risks of real estate acquisition,
expansion and renovation; governmental actions and initiatives;
environmental/safety requirements; and other changes and factors listed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 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, 1998 the Company had $6,448,000 of cash on hand. In addition to its
cash reserve, unused capacity under credit facilities totaled $14,000,000 at
March 31, 1998.
In March 1998, the Company acquired one shopping center in Georgia for
approximately $4,000,000. This shopping center was under contract as of
December 31, 1997 and was the last of a package of five Georgia properties to be
acquired. The other four properties were acquired prior to December 31, 1997.
The Company funded the purchase of the property through the assumption of
approximately $3.3 million of debt, the issuance of approximately $320,000 of
Kranzco Common Shares of Beneficial Interest and the payment of approximately
$225,000 of cash.
In March 1998, the Company announced its intent to enter into a strategic
alliance with New America International ("NAI"), the nation's largest privately
held affiliation of commercial real estate brokerage and related services firms.
Upon closing, NAI will become a publicly-traded company which will be 9.8%
owned by the Company, 70.2% owned by KRT's shareholders and 20% owned by the
current shareholders of NAI. The alliance will also provide for a long-term
cooperative agreement under which the two companies will collaborate in
developing new opportunities and revenue streams for each other from real estate
brokerage and related services, but will otherwise remain independent.
As of March 31, 1998, the Company had total mortgages and notes payable of
$257,201,000 of which $235,921,000 bears interest at fixed rates ranging from
7.50% to 10.5%. The weighted average interest rate of all of the Company's
mortgages and notes payable as of March 31, 1998 was 8.12%. As of March 31,
1998, the Company is required to make aggregate principal payments on all of its
outstanding borrowings of $846,000 in 1998, $21,637,000 in 1999, $7,440,000 in
2000, $4,576,000 in 2001, $3,600,000 in 2002 and $193,179,000 in 2003.
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. The
balance in the Sinking Fund Account was $239,000 as of March 31, 1998. The
balance in the Capital and TI Reserve Account was $428,000 as of March 31, 1998.
As of March 31, 1998, the Company has two floating rate mortgages with principal
outstanding of $7,280,000. The interest rate on both of the mortgages is equal
to the sum of Moody's A Corporate Bond Index Daily Rate minus 0.125% per annum,
rounded up the the next highest 1/8 percentage rate. The rates are reset once a
year. As of March 31, 1998, the rates of the two mortgages were 6.875% and
7.75%.
In 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 Salomon Facility bear interest at the one-month
London Interbank Offering Rate ("LIBOR") plus 175 basis points, which was 7.44%
as of March 31, 1998. As of March 31, 1998, there was $14,000,000 outstanding
under this facility with $10,000,000 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 $398,000 as of March
31, 1998.
In 1996, the Company obtained a $3.0 million secured line of credit from Bank
Leumi Trust Company of New York which expires in June 1998. This line is
secured by a property in Orange, Connecticut. Amounts borrowed under the line
bear interest at 50 basis points above that bank's reference rate, which was
8.5% as of March 31, 1998. There were no outstanding borrowings under this
facility as of March 31, 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. The facility was extended through December 31, 1998 and there
were no borrowings outstanding under this facility as of March 31, 1998.
The National Association of Real Estate Investment Trusts ("NAREIT") defines
funds from operations as 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. 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 $239,000 or
5% from $4,723,000 for the first quarter of 1997 to $4,962,000 for the first
quarter of 1998.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. Among these tenants are Bradlees (three stores
representing approximately $2.2 million or 3.6% of the Company's annualized
revenues) and Caldor (three stores representing approximately $2.5 million or
4.1% of the Company's annualized revenues). In March 1998, Bradlees rejected
its leases for its stores in Groton, Connecticut and Whitehall, Pennsylvania and
is seeking potential assignees for the stores. The Stop & Shop Companies, Inc.
shall remain primarily liable for all payments and other obligations set forth
under the leases and has commenced making rental and other payments under the
leases for both locations. To date Caldor has not taken any action to reject
their leases and continues to pay current rent and operate their stores located
in the Company's centers. 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
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. 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.
During the three months ended March 31, 1998, the Company invested approximately
$2,274,000 in the expansion and improvement of existing shopping center
properties, exclusive of the acquisition of the fifth Georgia property. 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.
The Company has established a Year 2000 compliance review process to assess the
impact on the Company's business, operations and financial condition. The
process encompasses internal information technology systems, property mechanical
operation systems and the potential impact from tenants and vendors. Management
does not believe that the Company has material exposure to Year 2000 issues.
Results of Operations
Net income for common shareholders decreased $342,000, or 17%, from $2,001,000
or $0.19 per common share in the first quarter of 1997 to $1,659,000 or $0.16
per common share in the first quarter of 1998. This decrease was due to a
combination of factors as described in further detail below.
Minimum rent increased $2,478,000, or 23%, from $10,929,000 in the first quarter
of 1997 to $13,407,000 in the first quarter of 1998. The increase was primarily
due to the additional rents from the acquisition of the additional twenty
centers in 1997 of approximately $2,315,000, combined with an increase in the
minimum rents of approximately $163,000 from the other thirty-eight shopping
centers. The increase was due to the higher occupancy rate at those centers.
Expense reimbursements increased $142,000, or 5%, from $2,697,000 in the first
quarter of 1997 to $2,839,000 in the first quarter of 1998. The increase was
primarily due to an increase in the recovery percentage of reimbursable expenses
due to an increase in the overall occupancy rate from prior year as well as the
high recovery percentage at the centers acquired in 1997.
Interest income increased $69,000, or 128%, from $54,000 in the first quarter of
1997 to $123,000 in the first quarter of 1998. The increase was primarily due
to the additional cash available for investment during the first quarter of
1998. This cash was the remaining proceeds of the issuance of the Company's 9
1/2% Series D Cumulative Redeemable Preferred Shares.
Interest expense increased $385,000, or 9%, from $4,486,000 in the first quarter
of 1997 to $4,871,000 in the first quarter of 1998. The increase is primarily
due to the interest expense incurred in connection with the additional twenty
centers acquired in 1997 of approximately $658,000. In addition, interest
expense was reduced by capitalized interest on projects under construction and
land under development in the amount of $108,000 and $293,000 for the first
quarter of 1997 and 1998, respectively.
Depreciation and amortization increased $591,000, or 21%, from $2,859,000 in the
first quarter of 1997 to $3,450,000 in the first quarter of 1998. Depreciation
expense on buildings and improvements increased approximately $558,000 in the
first three months of 1998 versus the first three months of 1997 due to the
twenty additional centers acquired in 1997.
Real estate taxes increased $208,000, or 13%, from $1,596,000 in the first
quarter of 1997 to $1,804,000 in the first quarter of 1998. The increase was
primarily due to the increase in expense from the additional twenty centers
acquired in 1997. The increase was offset by the capitalization of real estate
taxes on projects under construction and land under development in the amount of
$24,000 and $49,000 for the first quarter of 1997 and 1998, respectively.
Operations and maintenance expenses increased $130,000, or 7%, from $1,971,000
in the first quarter of 1997 to $2,101,000 in the first quarter of 1998. The
increase was primarily due to the additional costs incurred in operating and
maintaining twenty additional shopping centers acquired in 1997. This increase
was offset by a decrease in snow removal of approximately $86,000 as a result of
the mild winter experienced at the Company's centers in 1998.
General and administrative expenses increased $208,000, or 35%, from $601,000 in
the first quarter of 1997 to $809,000 in the first quarter of 1998. The
increase 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
1. Current Report on Form 8-K of Kranzco Realty Trust, dated March 23, 1998.
<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: May 11, 1998 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: May 11, 1998 /S/Robert H. Dennis
Chief Financial Officer and Treasurer
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