UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 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 August 12, 1998, there were 10,535,906 Common Shares of Beneficial
Interest, par value $0.01 per share, outstanding.
<PAGE>
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
JUNE 30, 1998
INDEX
PART I. PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Diclosures About Market Risks 13
PART II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
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>
June 30, December 31,
1998 1997
(Unaudited)
------------ ------------
<S> <C> <C>
ASSETS:
Shopping center properties owned, at cost
Buildings and improvements $376,427,000 $369,969,000
Land 116,108,000 114,772,000
------------ ------------
492,535,000 484,741,000
Less-accumulated depreciation 53,285,000 46,811,000
------------ ------------
439,250,000 437,930,000
Cash and cash equivalents 6,255,000 11,423,000
Restricted cash 1,505,000 883,000
Rents and other receivables, net of allowance of
$1,259,000 and $1,152,000, June 30, 1998 and December 31,1997 9,536,000 9,210,000
Prepaid expenses 1,637,000 1,870,000
Deferred financing costs, net of accumulated amortization of $1,029,000
and $778,000, June 30, 1998 and December 31,1997 1,717,000 1,975,000
Deferred costs, net of accumulated amortization of $768,000
and $1,043,000, June 30, 1998 and December 31,1997 2,522,000 2,119,000
Other assets 780,000 810,000
------------ ------------
Total assets $463,202,000 $466,220,000
============ ============
LIABILITIES:
Mortgages and notes payable $258,920,000 $255,124,000
Tenant security deposits 1,403,000 1,318,000
Accounts payable and accrued expenses 2,510,000 2,831,000
Other liabilities 149,000 597,000
Distributions payable 6,636,000 6,010,000
------------ ------------
Total liabilities 269,618,000 265,880,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED SHARES, SERIES C, $0.01 PAR VALUE; 133,700 SHARES,
AND 222,750 SHARES, JUNE 30, 1998 AND DECEMBER 31, 1997 1,337,000 2,228,000
BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest, Series A-1,
$0.01 par value; 11,155 shares,
June 30, 1998 and December 31, 1997 1,000 1,000
Preferred shares of beneficial interest, Series B-1 and B-2,
$0.01 par value; 1,183,277 shares,
June 30, 1998 and December 31, 1997 12,000 12,000
Preferred shares of beneficial interest, Series D,
$0.01 par value; 1,800,000 shares,
June 30, 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, 10,448,762 and 10,415,427 as of June 30, 1998 and
December 31,1997, respectively 104,000 104,000
Capital in excess of par value 261,742,000 261,097,000
Cumulative net income available for common shareholders 37,260,000 33,806,000
Cumulative distributions on common shares of beneficial interest (106,799,000) (96,771,000)
------------ ------------
192,338,000 198,267,000
Unearned compensation on restricted shares of beneficial interest (91,000) (155,000)
------------ ------------
Total beneficiaries' equity 192,247,000 198,112,000
Total liabilities and beneficiaries' equity $463,202,000 $466,220,000
============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Operations
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Minimum rent $13,705,000 $12,114,000 $27,112,000 $23,043,000
Percentage rent 249,000 281,000 559,000 549,000
Expense reimbursements 2,928,000 2,758,000 5,767,000 5,455,000
Interest income 84,000 62,000 207,000 116,000
Other 16,000 44,000 44,000 75,000
----------- ----------- ----------- -----------
Total revenues 16,982,000 15,259,000 33,689,000 29,238,000
----------- ----------- ----------- -----------
EXPENSES:
Interest 5,033,000 4,768,000 9,904,000 9,254,000
Depreciation and amortization 3,473,000 3,131,000 6,923,000 5,990,000
Real estate taxes 1,556,000 1,627,000 3,360,000 3,223,000
Operations and maintenance 2,158,000 2,068,000 4,259,000 4,039,000
General and administrative 951,000 821,000 1,760,000 1,422,000
----------- ----------- ----------- -----------
Total expenses 13,171,000 12,415,000 26,206,000 23,928,000
----------- ----------- ----------- -----------
NET INCOME 3,811,000 2,844,000 7,483,000 5,310,000
PREFERRED SHARE DISTRIBUTIONS 2,016,000 959,000 4,029,000 1,424,000
NET INCOME FOR COMMON SHAREHOLDERS $1,795,000 $1,885,000 $3,454,000 $3,886,000
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE
SHARE OF BENEFICIAL INTEREST $0.17 $0.18 $0.33 $0.38
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
For the six For the six
months ended months ended
June 30,1998 June 30,1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,483,000 $5,310,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,923,000 5,990,000
Amortization of unearned compensation
on restricted shares of beneficial interest 64,000 37,000
Changes in assets and liabilities:
(Increase) decrease in-
Rents and other receivables (326,000) 607,000
Prepaid expenses 233,000 322,000
Other assets (42,000) (61,000)
Increase (decrease) in-
Accounts payable and accrued expenses (5,000) 786,000
Tenant security deposits 85,000 74,000
Other liabilities (448,000) (198,000)
------------ ------------
Net cash provided by operating activities 13,967,000 12,867,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (4,129,000) (71,339,000)
Decrease in other assets 72,000 2,165,000
Decrease in accrued acquisition costs 75,000 0
Increase in restricted cash (622,000) (436,000)
Increase in deferred costs (594,000) (359,000)
------------ ------------
Net cash used in investing activities (5,198,000) (69,969,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of beneficial interest (10,012,000) (9,920,000)
Distributions paid on preferred shares of beneficial interest (3,379,000) (735,000)
Issuance of common shares of beneficial interest, net 285,000 33,000
Issuance of preferred shares of beneficial interest, net 0 32,940,000
Redemption of redeemable preferred shares (891,000) (445,000)
Proceeds of mortgages and notes payable 2,000,000 35,629,000
Repayments of mortgages and notes payable (1,549,000) (488,000)
Decrease in accrued expenses for preferred share offering (391,000) 0
Increase in deferred financing costs 0 (696,000)
------------ ------------
Net cash used in financing activities (13,937,000) 56,318,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,168,000) (784,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,423,000 5,301,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,255,000 $4,517,000
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate preferred shares $40,000 $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>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Beneficiaries' Equity
For the years ended December 31, 1996 and 1997
For the six months ended June 30, 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 33,335 - - - 606,000 - - -
Conversion
of
Series B-1 to common shares - - (54) - (1,000) - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 40,000 (40,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 64,000
Net income - - - - - 7,483,000 - -
Distributions
on preferred shares - - - - - (3,989,000) - -
Distributions
on common shares
of
beneficial
interest($0.96 per share) - - - - - - (10,028,000) -
BALANCE,
JUNE 30, 1998 (Unaudited) 10,448,762 $104,000 2,994,432 $31,000 $261,742,000 $37,260,000 ($106,799,000) ($91,000)
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
ii.
KRANZCO REALTY TRUST AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June
30, 1998, the Company owned 59 properties in sixteen states.
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.
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 10,434,621 and 10,334,363
as of June 30, 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 10,441,256 and
10,335,352 as of June 30, 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
$10,388,000 and $9,483,000 for the six months ended June 30, 1998 and 1997,
respectively.
3. INDEBTEDNESS:
At June 30, 1998 and December 31, 1997, the Company had mortgages and notes
payable outstanding of $258,920,000 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
six months ending June 30, 1998 and 1997 in the accompanying statements of
operations is shown net of capitalized interest of $469,000 and $331,000,
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 June 30, 1998 was $275,000. 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 $680,000 as of June 30, 1998.
In addition, the Company has eleven mortgages outstanding as of June 30,
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 June 30, 1998 was approximately $53,994,000. The Company is
required to make principal payments of $465,000 in 1998, $7,419,000 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 June 30, 1998 was
approximately $7,226,000. The Company is required to make principal
payments of $100,000 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 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 interest rate was 7.40% at June 30, 1998. As of June
30, 1998, there was $16,000,000 outstanding under this facility and an
additional $8,000,000 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 $405,000 as of June
30, 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 interest rate was
8.50% as of June 30, 1998. There was no outstanding borrowings under this
facility as of June 30, 1998. The line has been extended to June 30, 1999.
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 which was 8.5% as of June 30, 1998. There were no
outstanding borrowings under this facility as of June 30, 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 six months ended June 30, 1997
Pro forma total revenues $33,291,000
Pro forma net income for common shareholders $3,311,000
Pro forma net income per common share $0.32
On August 12, 1998, the Company commenced an Exchange Offer pursuant to
which the Company is offering to exchange an aggregate of $8,000,000 of
Callable Convertible Subordinated Notes Due 2008, for an aggregate of
10,379,531 shares of common stock, par value $.01 per share (the "NAI
Shares") of New America Network, Inc., a Delaware corporation which conducts
business under the name New America International ("NAI"), or approximately
80% of the outstanding NAI Shares. NAI is 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 approximately 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.
In June 1998, the Company entered into an agreement to acquire nine
community shopping centers in five midwestern and southern states for
approximately $85 million. The centers have a total of 1.4 million square
feet of gross leasable area and an overall leased rate of approximately 99%.
The purchase is subject to customary due diligence and is expected to close
in the third quarter.
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 June 30, 1998, the distribution
rate on the Preferred Shares is 5.75%. 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. In the
second quarter of 1998, 54 shares of the Series B Preferred Shares were
converted into 70 Common Shares. 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.
Other than the 54 Series B Preferred Shares discussed above, there was no
conversion of preferred shares into common shares of beneficial interest
during 1997 or during the six months ending June 30, 1998.
6. DISTRIBUTIONS ON COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST:
On June 3, 1998, the Trustees declared a cash distribution of $0.48 per
common share, payable to shareholders of record on June 26, 1998. The
distribution of $5,015,000 was paid on July 22, 1998. On June 4, 1997, the
Trustees declared a cash distribution of $0.48 per common share, payable to
shareholders of record as of June 27, 1997. The distribution of $4,961,000
was paid on July 23, 1997.
The Company recorded the quarterly distribution on the Series A-1 Preferred
Shares of $159,000 and $152,000 as of June 30, 1998 and 1997, respectively.
These distributions were paid on July 1, 1998 and 1997, respectively.
The Company recorded $577,000 and $569,000 of the distribution on the
Series B Preferred Shares as of June 30, 1998 and 1997, respectively. The
entire distribution of $721,000 and $722,000 was paid on July 20, 1998 and
1997, respectively.
The Company recorded $30,000 and $62,000 of the distribution on the Series
C Preferred Shares as of June 30, 1998 and 1997, respectively. The entire
distribution of $30,000 and $62,000 was paid on July 31, 1998 and 1997,
respectively.
The Company recorded $855,000 of the distribution on the Series D Preferred
Shares as of June 30, 1998. The entire distribution of $1,069,000 was paid
on July 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 June 30, 1998 the Company had $6,255,000 of cash on hand. In addition to
its cash reserve, unused capacity under credit facilities totaled
$12,000,000 at June 30, 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.
On June 26, 1998 the Company entered into an agreement to acquire nine
community shopping centers in five midwestern and southern states for
approximately $85 million. The purchase price initially will be financed
through a first mortgage financing and borrowings under Kranzco's $50
million secured first mortgage loan facility with Salomon Brothers Realty
Corp. The centers have a total of 1.4 million square feet of GLA and an
overall leased rate of approximately 99%. Wal-Mart is a tenant in nine of
the centers and has vacated its space at two of the centers but continues to
pay rent in accordance with its leases. Wal-Mart has subleased space at one
of these two centers to a third party. Besides Wal-Mart, other well-known
anchor retailers are Eckerd Drug, Food Lion, Radio Shack and CVS. After the
purchase, Kranzco will own 68 properties in 19 states with a total of nine
million square feet of GLA, an approximate 15 percent increase in GLA. The
purchase is subject to customary due diligence and is expected to close by
the end of September.
On August 12, 1998, the Company commenced an Exchange Offer pursuant to
which the Company is offering to exchange (the "Exchange Offer") an
aggregate of $8,000,000 of Callable Convertible Subordinated Notes Due 2008,
for an aggregate of 10,379,531 shares of common stock, par value $.01 per
share (the "NAI Shares") of New America Network, Inc., a Delaware
corporation which conducts business under the name New America International
("NAI"), or approximately 80% of the outstanding NAI Shares. Immediately
following the consummation of the Exchange Offer, NAI and Kranzco will,
among other things, enter into an Intercompany Agreement which will provide
for the companies to grant each other certain rights of first opportunity
and first notification with respect to certain business opportunities and
will also provide for the provision of certain consulting services by
Kranzco to NAI.
Immediately following the consummation of the Exchange Offer, pursuant to a
Registration Statement, Kranzco intends to distribute (the "Distribution")
approximately 70.2% of the outstanding NAI Shares to holders of Common
Shares and holders of the outstanding Series B-1 Preferred Shares and Series
B-2 Preferred Shares of Beneficial Interest, each par value $.01 per share,
(together, the "Series B Preferred Shares") of Kranzco, on the basis of one
NAI Share for each Common Share and one NAI share for each Common Share into
which the Series B Preferred Shares are convertible. Upon the consummation
of the Distribution, Kranzco will own approximately 9.8% of the outstanding
NAI Shares, Kranzco shareholders will own approximately 70.2% of the
outstanding NAI shares, and the persons who owned NAI Shares prior to the
Exchange Offer will own an aggregate of approximately 20% of the NAI Shares.
As of June 30, 1998, the Company had total mortgages and notes payable of
$258,920,000 of which $235,694,000 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 June 30, 1998 was 8.10%. As of
June 30, 1998, the Company is required to make aggregate principal payments
on all of its outstanding borrowings of $565,000 in 1998, $23,637,000 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 $275,000 as of
June 30, 1998. The balance in the Capital and TI Reserve Account was
$680,000 as of June 30, 1998.
As of June 30, 1998, the Company had two floating rate mortgages with
principal outstanding of $7,226,000. 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 June 30, 1998, the rates of the two
mortgages were 6.875% and 7.00%.
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
interest rate was 7.40% as of June 30, 1998. As of June 30, 1998, there was
$16,000,000 outstanding under this facility with $8,000,000 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 $405,000 as of June 30, 1998.
In 1996, the Company obtained a $3.0 million secured line of credit from
Bank Leumi Trust Company of New York. 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 interest rate was 8.5%
as of June 30, 1998. There were no outstanding borrowings under this
facility as of June 30, 1998. The line has been extended until June 30,
1999.
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 8.5% as of June 30, 1998. The facility was
extended through December 31, 1998 and there were no borrowings outstanding
under this facility as of June 30, 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 $311,000 or 6% from
$4,845,000 for the second quarter of 1997 to $5,156,000 for the second
quarter of 1998, and increased $550,000 or 6% from $9,568,000 for the first
six months of 1997 to $10,118,000 for the first six months 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 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. In May
1998, this lease was assigned to National Wholesale Liquidators, Inc.
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 six months ended June 30, 1998, the Company invested
approximately $4,129,000 in the expansion and improvement of existing
shopping center properties, exclusive of the acquisition of the fifth
Georgia property in the first quarter of 1998. 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 $90,000 from $1,885,000 or
$0.18 per common share in the second quarter of 1997 to $1,795,000 or $0.17
per common share in the second quarter of 1998. Net income for common
shareholders decreased $432,000 from $3,886,000, or $0.38 per common share,
for the first six months of 1997 to $3,454,000, or $0.33 per common share,
for the corresponding period in 1998. This decrease was due to a combination
of factors as described in further detail below.
Minimum rent increased $1,591,000 or 13% from $12,114,000 in the second
quarter of 1997 to $13,705,000 in the second quarter of 1998 and increased
$4,069,000 or 18% from $23,043,000 for the first six months of 1997 to
$27,112,000 for the corresponding period in 1998. The increase was
primarily due to the additional rents from the twenty shopping centers
acquired in 1997 of approximately $3,551,000, as well as an increase in the
minimum rents of approximately $517,000 from the other thirty-eight shopping
centers.
Expense reimbursements increased $170,000 or 6% from $2,758,000 in the
second quarter of 1997 to $2,928,000 in the second quarter of 1998 and
increased $312,000 or 6% from $5,455,000 for the first six months of
1997 to $5,767,000 for the corresponding period in 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 the prior
year as well as the high recovery percentage at the centers acquired in
1997.
Interest income increased $22,000 or 35% from $62,000 in the second quarter
of 1997 to $84,000 in the second quarter of 1998 and increased $91,000 or
78% from $116,000 for the first six months of 1997 to $207,000 for the
corresponding period in 1998. The increase was primarily due to the
additional cash available for investment during the first quarter of 1998.
The additional cash primarily consisted of the remaining proceeds of the
issuance of the Company's 9 1/2% Series D Cumulative Redeemable Preferred
Shares.
Interest expense increased $265,000 or 6% from $4,768,000 in the second
quarter of 1997 to $5,033,000 in the second quarter of 1998 and $650,000 or
7% from $9,254,000 for the first six months of 1997 to $9,904,000 for the
corresponding period in 1998. The increase is primarily due to the interest
expense incurred in connection with the additional twenty shopping centers
acquired in 1997. In addition, interest expense was reduced by capitalized
interest on projects under construction and land under development in the
amount of $224,000 and $176,000 for the second quarter of 1997 and 1998,
respectively, and $331,000 and $469,000 for the first six months of 1997 and
1998, respectively.
Depreciation and amortization increased $342,000 or 11% from $3,131,000 in
the second quarter of 1997 to $3,473,000 in the second quarter of 1998 and
increased $933,000 or 16% from $5,990,000 for the first six months of 1997
to $6,923,000 for the corresponding period in 1998. The increase is due to
the additional depreciation expense on buildings and improvements due to the
twenty shopping centers acquired in 1997 as well as two full quarters of
depreciation taken on improvements made prior to 1998.
Real estate taxes decreased $71,000 or 4% from $1,627,000 in the second
quarter of 1997 to $1,556,000 in the second quarter of 1998, and increased
$137,000 or 4% from $3,223,000 for the first six months of 1997 to
$3,360,000 for the corresponding period in 1998. The decrease in the second
quarter and the relatively minor increase for the six months is due to real
estate tax refunds of approximately $235,000 received from tax appeals which
offset the increase in taxes from the additional 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
$53,000 and $29,000 for the second quarter of 1997 and 1998, respectively,
and $77,000 for the first six months of 1997 and 1998, respectively.
Operations and maintenance expenses increased $90,000 or 4% from $2,068,000
in the second quarter of 1997 to $2,158,000 in the second quarter of 1998
and increased $220,000 or 5% from $4,039,000 for the first six months of
1997 to $4,259,000 for the corresponding period in 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 $184,000 as a result
of the mild winter experienced at the Company's centers in 1998.
General and administrative expenses increased $130,000 or 16% from $821,000
in the second quarter of 1997 to $951,000 in the second quarter of 1998 and
increased $338,000 or 24% from $1,422,000 for the first six months of 1997
to $1,760,000 for the corresponding period in 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.
Quantitative and Qualitative Disclosures About Market Risks
Not applicable.
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
An annual meeting of shareholders was held on June 3, 1998. Proxies
for the meeting were solicited by the registrant pursuant to Regulation 14
under the Securities Exchange Act of 1934. In connection with Proposal 1
regarding the election of trustees, there was no solicitation in opposition
to the management's nominees as listed in the proxy statement and all of
such nominees were elected. There were no broker non-votes in connection
with such proposal.
Votes of 9,349,089 shares were cast for the election of Edmund
Barrett as a Trustee; votes of 99,318 shares were withheld.
Votes of 9,350,075 shares were cast for the election of Robert H.
Dennis as a Trustee; votes of 98,332 shares were withheld.
Votes of 9,350,235 shares were cast for the election of Gerald C.
Finn as a Trustee; votes of 98,172 shares were withheld.
In connection with Proposal 2, there was no solicitation in
opposition of the approval of amendment no. 2 to the Company's 1992 Employee
Share Option Plan and amendment no. 2 to the Company's 1992 Trustee Share
Option Plan as set forth in the Proxy Statement and such amendments were
approved. There were no broker non-votes in connection with such proposal.
Votes of 8,532,819 shares were cast for the amendment no. 2 to the
Company's 1992 Employee Share Option Plan and amendment no. 2 to the
Company's 1992 Trustee Share Option Plan; votes of 786,331 shares were
against; and votes of 129,256 shares abstained.
In connection with Proposal 3, there was no solicitation in
opposition of the ratification of the appointment of Arthur Andersen LLP as
independent public accountants for the fiscal year ending December 31, 1998
as set forth in the proxy statement and such appointment was ratified.
There were no broker non-votes in connection with such proposal.
Votes of 9,362,551 shares were cast for the ratification of the
appointment of Arthur Andersen LLP as the Company's independent public
accountants; votes of 44,560 shares were against; and votes of 41,295 shares
abstained.
Item 5. Other Information
On August 6, 1998, pursuant to the Company's Registration
Statement on Form S-3, the Company sold 73,455 Common Shares to
an institutional investor at a negotiated purchase price
equal to $18.1572, and net offering proceeds to the Company, after the
deduction of estimated offering expenses of $20,000,
were approximately $1,313,333.
Item 6. Exhibits and Reports on Form 8-K
None.
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: August 13, 1998 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: August 13, 1998 /S/Robert H. Dennis
Chief Financial Officer and Treasurer
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