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, 1999
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, 1999, there were 10,560,143 Common Shares of Beneficial
Interest, par value $0.01 per share, outstanding.
<PAGE>
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
JUNE 30, 1999
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 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Shopping center properties owned, at cost
Buildings and improvements $437,293,000 $437,242,000
Land 143,388,000 147,641,000
------------ ------------
580,681,000 584,883,000
Less-accumulated depreciation 66,285,000 59,793,000
------------ ------------
514,396,000 525,090,000
Properties held for sale, net 8,687,000 0
------------ ------------
Total shopping center properties owned, at cost 523,083,000 525,090,000
Cash and cash equivalents 5,948,000 2,913,000
Restricted cash 1,769,000 1,465,000
Rents and other receivables, net of allowance of
$2,472,000 and $2,160,000, June 30, 1999 and December 31,1998 7,025,000 7,573,000
Prepaid expenses 1,968,000 2,237,000
Deferred financing costs, net of accumulated amortization of $1,528,000
and $1,237,000, June 30, 1999 and December 31,1998 1,821,000 2,066,000
Deferred costs, net of accumulated amortization of $1,144,000
and $1,040,000, June 30, 1999 and December 31,1998 2,953,000 2,753,000
Other assets 2,064,000 2,419,000
------------ ------------
Total assets $546,631,000 $546,516,000
============ ============
LIABILITIES:
Mortgages and notes payable $358,229,000 $350,141,000
Tenant security deposits 1,519,000 1,453,000
Accounts payable and accrued expenses 3,409,000 3,234,000
Other liabilities 213,000 559,000
Distributions payable 6,637,000 6,650,000
------------ ------------
Total liabilities 370,007,000 362,037,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED SHARES, SERIES C, $0.01 PAR VALUE; 0 AND 44,550 SHARES,
JUNE 30, 1999 AND DECEMBER 31, 1998, RESPECTIVELY 0 445,000
BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest, Series A-1, $0.01 par value; 11,155 shares,
June 30, 1999 and December 31, 1998 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, 1999 and December 31, 1998 12,000 12,000
Preferred shares of beneficial interest, Series D, $0.01 par value; 1,800,000 shares,
June 30, 1999 and December 31, 1998 18,000 18,000
Common shares of beneficial interest, $0.01 par value; authorized 100,000,000
shares; issued and outstanding, 10,540,748 and 10,537,103 as of June 30, 1999
and December 31, 1998, respectively 105,000 105,000
Capital in excess of par value 263,445,000 263,370,000
Cumulative net income available for common shareholders 40,232,000 37,685,000
Cumulative distributions on common shares of beneficial interest (127,032,000) (116,914,000)
------------ ------------
176,781,000 184,277,000
Unearned compensation on restricted shares of beneficial interest (157,000) (243,000)
------------ ------------
Total beneficiaries' equity 176,624,000 184,034,000
Total liabilities and beneficiaries' equity $546,631,000 $546,516,000
============ ============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Operations
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Minimum rent $15,644,000 $13,705,000 $31,618,000 $27,112,000
Percentage rent 379,000 249,000 773,000 559,000
Expense reimbursements 3,338,000 2,928,000 6,951,000 5,767,000
Interest income 80,000 84,000 166,000 207,000
Other 51,000 16,000 120,000 44,000
----------- ----------- ----------- -----------
Total revenue 19,492,000 16,982,000 39,628,000 33,689,000
----------- ----------- ----------- -----------
EXPENSES:
Interest $6,781,000 $5,033,000 $13,373,000 $9,904,000
Depreciation and amortization 4,194,000 3,473,000 8,359,000 6,923,000
Real estate taxes 2,009,000 1,556,000 3,962,000 3,360,000
Operations and maintenance 2,458,000 2,200,000 5,382,000 4,343,000
General and administrative 950,000 909,000 2,010,000 1,676,000
----------- ----------- ----------- -----------
Total expenses 16,392,000 13,171,000 33,086,000 26,206,000
----------- ----------- ----------- -----------
INCOME BEFORE LOSS ON SALE OF REAL ESTATE 3,100,000 3,811,000 6,542,000 7,483,000
Loss on Sale of Real Estate, net (68,000) 0 (68,000) 0
----------- ----------- ----------- -----------
NET INCOME 3,032,000 3,811,000 6,474,000 7,483,000
Preferred Share Distributions 1,988,000 2,016,000 3,927,000 4,029,000
----------- ----------- ----------- -----------
NET INCOME FOR COMMON SHAREHOLDERS $1,044,000 $1,795,000 $2,547,000 $3,454,000
=========== =========== =========== ===========
Income before loss on sale of real estate per
Common Share of Beneficial Interest $0.11 $0.17 $0.25 $0.33
Loss on sale of real estate per Common Share
of Beneficial Interest ($0.01) $0.00 ($0.01) $0.00
----------- ----------- ----------- -----------
Basic and Diluted Earnings per Common Share
of Beneficial Interest $0.10 $0.17 $0.24 $0.33
=========== =========== =========== ===========
<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 six For the six
months ended months ended
June 30, 1999 June 30, 1998
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,474,000 $7,483,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,359,000 6,923,000
Amortization of unearned compensation on restricted shares
of beneficial interest 86,000 64,000
Loss on sale of real estate, net (68,000) 0
Changes in assets and liabilities:
(Increase) decrease in-
Rents and other receivables 548,000 (326,000)
Prepaid expenses 269,000 233,000
Other assets 13,000 (42,000)
Increase (decrease) in-
Accounts payable and accrued expenses 442,000 (5,000)
Tenant security deposits 66,000 85,000
Other liabilities (346,000) (448,000)
---------- ----------
Net cash provided by operating activities 15,843,000 13,967,000
---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (6,517,000) (4,129,000)
Proceeds from sale of real estate 864,000 0
(Increase) decrease in other assets 342,000 72,000
(Increase) decrease in accrued acquisition costs (267,000) 75,000
Increase in restricted cash (304,000) (622,000)
Increase in deferred costs (500,000) (594,000)
---------- ----------
Net cash used in investing activities (6,382,000) (5,198,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of beneficial interest (10,118,000) (10,012,000)
Distributions paid on preferred shares of beneficial interest (3,911,000) (3,379,000)
Issuance of common shares of beneficial interest, net 46,000 285,000
Redemption of redeemable preferred shares (445,000) (891,000)
Proceeds of mortgages and notes payable 9,500,000 2,000,000
Repayments of mortgages and notes payable (1,412,000) (1,549,000)
Decrease in accrued expenses for preferred share offering 0 (391,000)
Increase in deferred financing costs (86,000) 0
---------- ----------
Net cash used in financing activities (6,426,000) (13,937,000)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,035,000 (5,168,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,913,000 11,423,000
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,948,000 $6,255,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate preferred shares $29,000 $40,000
========== ==========
Preferred and common shares issued as part of the purchase price for
the acquisition of real estate:
Fair value of assets acquired $0 $3,665,000
Liabilities assumed 0 3,345,000
---------- ----------
Preferred shares issued $0 $0
Common shares issued $0 $320,000
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Beneficiaries' Equity
For the years ended December 31, 1997 and 1998
For the six months ended June 30, 1999
<CAPTION>
Unearned
Cumulative Compensation
Preferred Cumulative Distributions on
Common Preferred Shares of Net Income on Common Restricted
Shares of Shares of Beneficial Capital In Available Shares of Shares of
Beneficial Par Beneficial Interest Excess 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, 1997 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 122,748 1,000 - - 2,218,000 - - (241,000)
Forfeiture of common
shares (1,072) - - - (18,000) - - -
Conversion of Series B-1
to common shares - - (54) - (1,000) - - -
Accretion of discount on
preferred shares of
beneficial interest - - - - 74,000 (74,000) - -
Accretion of unearned
compensation on
restricted shares of
beneficial interest - - - - - - - 153,000
Net income - - - - - 11,863,000 - -
Distributions on preferred
shares - - - - - (7,910,000) - -
Distributions on common
shares of
beneficial interest
($1.92 per share) - - - - - - (20,143,000) -
---------- -------- ---------- ---------- ------------ ------------ ------------- ------------
BALANCE, DECEMBER 31, 1998 10,537,103 $105,000 2,994,432 $31,000 $263,370,000 $37,685,000 ($116,914,000) ($243,000)
Issuance of common shares 3,940 - - - 52,000 - - -
Forfeiture of common
shares (295) - - - (6,000) - - -
Accretion of discount on
preferred shares of
beneficial interest - - - - 29,000 (29,000) - -
Accretion of unearned
compensation on
restricted shares of
beneficial interest - - - - - - - 86,000
Net income - - - - - 6,474,000 - -
Distributions on preferred
shares - - - - - (3,898,000) - -
Distributions on common
shares of
beneficial interest
($0.96 per share) - - - - - - (10,118,000) -
---------- -------- ---------- ---------- ------------ ------------ ------------- ------------
BALANCE,
JUNE 30, 1999 (Unaudited) 10,540,748 $105,000 2,994,432 $31,000 $263,445,000 $40,232,000 ($127,032,000) ($157,000)
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
KRANZCO REALTY TRUST AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
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, 1998. 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, 1999, the Company owned
66 properties in eighteen Northeastern, Southern and Mid-Atlantic 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 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 10,539,777 and 10,434,621 as
of June 30, 1999 and 1998, 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 10,539,923 and 10,441,256 as of June 30, 1999
and 1998, 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 $13,774,000 and
$10,388,000 for the six months ended June 30, 1999 and 1998, respectively.
RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") is effective for fiscal years beginning after December 15, 1999.
SFAS 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that
an entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The Company does not
currently have any derivative instruments or participate in any hedging
activities, and accordingly, believes that SFAS 133 will not have a material
affect on the financial statements.
3. INDEBTEDNESS:
At June 30, 1999 and December 31, 1998, the Company had mortgages and notes
payable outstanding of $358,229,000 and $350,141,000, respectively.
In 1996, 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 annual 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, 1999 and 1998 in the accompanying statements of
operations is shown net of capitalized interest of $363,000 and $469,000,
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, 1999 was $422,000. 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
$174,000 as of June 30, 1999.
In September 1998, the Company obtained a $65,900,000 million fixed rate
mortgage from Salomon Brothers Realty Corp. This mortgage is secured by nine
properties acquired in September, 1998. The mortgage bears a fixed interest
rate of 7% per annum and requires monthly payments of interest and principal
based on a 30-year amortization. The mortgage matures on October 1, 2008. The
outstanding principal balance on the mortgage was approximately $65,498,000 as
of June 30, 1999. Pursuant to the mortgage, the Company is required to make
monthly escrow payments for the payment of real estate taxes, insurance, tenant
improvements and repair reserves. The balance of the tenant improvement and
repair reserve account as of June 30, 1999 was $480,000.
In addition, the Company has eleven mortgages outstanding as of June 30, 1999
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 annual interest rates ranging
from 7.50% to 10.50%. The outstanding principal balance on these mortgages at
June 30, 1999 was approximately $53,041,000. One of the mortgages currently has
a balloon payment of approximately $5,000,000 which is due in the fourth
quarter of 1999. The Company is in the process of refinancing the debt. 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, 1999
was approximately $6,990,000.
In 1998, the Company increased its secured line of credit from Salomon Brothers
Realty Corp. to $100 million from $50 million (the "Salomon Facility"). Amounts
borrowed under the line bear interest at the one month London Interbank
Offering Rate ("LIBOR") plus 175 basis points, which interest rate was 6.68% at
June 30, 1999. As of June 30, 1999, there was $48,000,000 outstanding under
this facility and an additional $5,000,000 available for future borrowing. The
facility is secured by seventeen of the Company's shopping centers or portions
thereof and the due date is July 2000. 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 $432,000 as of June 30, 1999.
The Company has a $3.0 million line of credit from Bank Leumi Trust Company of
New York which is secured by one property located in Orange, CT. Amounts
borrowed under the line bear interest at that bank's reference rate plus 50
basis points, which was 8.25% at June 30, 1999. There was $3,000,000 of
outstanding borrowings under this facility as of June 30, 1999 which was repaid
in August 1999. The line expires August 31, 1999.
The Company has a $1.0 million unsecured line of credit from First Union
National Bank. Amounts borrowed under the line will bear interest at that
bank's prime rate. There were no outstanding borrowings under this facility as
of June 30, 1999. The facility's expiration date is April 30, 2000.
As of June 30, 1999, aggregate principal payments on all outstanding
indebtedness are due, as follows:
December 31,
------------
1999 $10,335,000
2000 56,082,000
2001 5,279,000
2002 4,354,000
2003 193,970,000
Thereafter 88,209,000
------------
$358,229,000
------------
4. ACQUISITIONS AND DISPOSITIONS:
The Company acquired ten shopping centers during the year ended December 31,
1998 for approximately $93,000,000 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, 1998.
For the six months ended June 30, 1998
--------------------------------------
Pro forma total revenues $38,210,000
Pro forma net income for common shareholders $3,206,000
Pro forma net income per common share $0.31
In June 1999, the Company sold one of its free-standing properties located in
Tucson, AZ for approximately $864,000 and recorded a net loss on the sale of
approximately $68,000.
In July and August 1999, the Company completed the sale of three additional
free-standing properties located in Raynham, MA, Roseville, MN, and Minnetonka,
MN as well as a 61,000 square foot shopping center in Orange, CT. Total
proceeds on the sales were approximately $9,800,000 and the net gain was
approximately $350,000. The proceeds of the sales were used to pay down debt
obligations and for general corporate purposes, including the continuing
program of upgrading and expanding existing properties.
5. DISTRIBUTIONS ON COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST:
On June 2, 1999, the Trustees declared a cash distribution of $0.48 per common
share, payable to shareholders of record on June 25, 1999. The distribution of
$5,059,000 was paid on July 21, 1999. 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.
The Company accrued the quarterly distribution on the Series A-1 Preferred
Shares of $166,000 and $159,000 as of June 30, 1999 and 1998, respectively.
These distributions were paid on July 1, 1999 and 1998, respectively.
The Company accrued $569,000 and $577,000 of the distribution on the Series B
Preferred Shares as of June 30, 1999 and 1998, respectively. The entire
distribution of $721,000 was paid on July 20, 1999 and 1998, respectively.
The Company accrued $30,000 of the distribution on the Series C Preferred
Shares as of June 30, 1998. The entire distribution of $30,000 was paid on July
31, 1998.
The Company accrued $843,000 and $855,000 of the distribution on the Series D
Preferred Shares as of June 30, 1999 and 1998, respectively. The entire
distribution of $1,069,000 was paid on July 20, 1999 and 1998, respectively.
ITEM 2. 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; lease-up delays; 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, 1998 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, 1999 the Company had $5,948,000 of cash on hand. In addition to its
cash reserve, unused capacity under credit facilities totaled $1,000,000 at
June 30, 1999.
As of June 30, 1999, the Company had total mortgages and notes payable of
$358,229,000 of which $300,239,000 bears interest at fixed rates ranging from
7.50% to 10.50% per annum. The weighted average annual interest rate of all of
the Company's mortgages and notes payable as of June 30, 1999 was 7.74%. As of
June 30, 1999, the Company is required to make aggregate principal payments on
all of its outstanding borrowings of $10,335,000 in 1999, $56,082,000 in 2000,
$5,279,000 in 2001, $4,354,000 in 2002, $193,970,000 in 2003 and $88,209,000 in
2004 and thereafter. One of the mortgages has a balloon payment of
approximately $5,000,000 which is due in the fourth quarter of 1999. The
Company is in the process of refinancing this mortgage.
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 annual 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 $422,000 as of June 30, 1999. The
balance in the Capital and TI Reserve Account was $174,000 as of June 30, 1999.
As of June 30, 1999, the Company has two floating rate mortgages with principal
outstanding of $6,990,000. 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, 1999, the rates of the two mortgages were 6.875% and
7.125% per annum, respectively.
In 1998, the Company doubled its secured first mortgage loan facility from $50
million to up to $100 million from Salomon Brothers Realty Corp. (the "Salomon
Facility"). The maturity of the Salomon Facility was extended two years to July
2000, with the Company's option for a one-year extension. As of June 30, 1999,
seventeen of the Company's shopping centers or portions thereof secure the
mortgage loan facility. Amounts borrowed under the Salomon Facility bear
interest at the one-month London Interbank Offering Rate ("LIBOR") plus 175
basis points, which was 6.68% as of June 30, 1999. The Salomon Facility
requires that the following covenants be met: consolidated equity will not fall
below $150 million; consolidated income available for debt service will not be
less than 1.75 to 1.0; and debt to market cap will not be above 70%. The
Company is in compliance with these covenants. There was $48,000,000 of
outstanding borrowings under this facility as of June 30, 1999. The proceeds of
the Salomon Facility were used by the Company for funding property
acquisitions, general corporate purposes and capital needs.
The Company obtained a $3.0 million secured line of credit from Bank Leumi
Trust Company of New York which expires August 31, 1999. This line is secured
by a property in Orange, Connecticut. Amounts borrowed under the line bear
interest at that bank's reference rate plus 50 basis points, which was 8.25% as
of June 30, 1999. There was $3,000,000 of outstanding borrowings under this
facility as of June 30, 1999 which was repaid in August 1999.
The Company obtained a $1.0 million unsecured line of credit from First Union
National Bank, N.A. Amounts borrowed under the line will bear interest at the
bank's prime rate. The facility expires April 30, 2000 and there were no
borrowings outstanding under this facility as of June 30, 1999.
The Company sold four of its free-standing properties located in three states
at an auction held in May 1999. The sale of one of the properties closed on
June 28, 1999 and the other three closings occurred in the third quarter of
1999. The properties were located in Tucson, AZ, Raynham, MA, Roseville, MN,
and Minnetonka, MN. In August 1999, the Company sold a 61,000 square foot
community shopping center located in Orange, CT. As a result of the sale of the
free-standing property located in Tucson, AZ in June, the Company recorded
gross proceeds of $864,000 and a net loss on the sale of approximately $68,000.
Total proceeds on the remaining sales in the third quarter were approximately
$9,800,000 and the net gain was approximately $350,000. The proceeds of the
sales were used to pay down debt obligations and for general corporate
purposes, including the continuing program of upgrading and expanding existing
properties.
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 decreased $14,000 or
less than 1/2% from $5,156,000 for the second quarter of 1998 to $5,142,000 for
the second quarter of 1999, and increased $525,000 or 5% from $10,118,000 for
the first six months of 1998 to $10,643,000 for the first six months of 1999.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. Among the tenants are Caldor (three stores
representing approximately $2.8 million or 3.9% of the Company's annual
revenues). Caldor announced in January 1999 that it was liquidating. Caldor
rejected the leases at the Company's Anneslie Shopping Center in Baltimore,
Maryland and Bristol Commerce Park in Bristol, Pennsylvania and ceased paying
rent. The lease at the Anneslie Shopping Center is guaranteed by The May
Department Stores Company. Management is seeking a potential replacement tenant
for the Bristol location. The rent lost at this location is approximately $1
million annually, including such reimbursements as real estate taxes and common
area maintenance charges. The lease for the store in Hamilton, New Jersey was
purchased by Bradlees in April 1999 in a bankruptcy court auction. Bradlees,
also a tenant at the Company's Bethlehem Square shopping center, emerged from
bankruptcy protection in January 1999 and continues to operate and pay its
obligations in accordance with its lease at these locations. Other tenants in
the Company's portfolio that continue to pay current rent and operate their
stores under Chapter 11 are individually less than 1% and in the aggregate
under 2% of the Company's annual revenues. The Company believes that it is
adequately reserved for these tenants.
During the six months ended June 30, 1999, the Company invested approximately
$6,517,000 in the expansion and improvement of existing shopping center
properties. The Company is reviewing its short-term and long-term liquidity
planning and requirements, and assessing the options available 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 completed a review of its Information Technology ("IT") Systems
and non-IT Systems regarding Year 2000 compliance. All phone systems, desktop
computer systems and network systems within the Company's offices are believed
to be Year 2000 compliant. The company has identified areas of its
minicomputer systems that are not Year 2000 compliant. Most affected programs
have been fixed and tested successfully or replaced with new programs that are
Year 2000 compliant. There are a few remaining programs in the accounting
system that will be fixed by the end of the third quarter of 1999. These
programs require the same fixes that have successfully applied to other
programs and no problems are foreseen with these repairs. There are also
programs that sort items by date incorrectly, but these may not be modified
because the problems are not harmful to business processes in a material way.
These programs will be replaced as a part of an ongoing systems upgrade within
the next year. In shopping centers where the Company is responsible for
computer controlled systems that are vulnerable to the Year 2000 problem such
as HVAC, elevators or alarms, all systems are believed to be compliant. The
Company has not performed an exhaustive audit of systems that are designated as
the tenant's responsibilty in leases, however all fire alarms were audited. One
tenant has been notified of a potential monitoring (not functional) problem
with its sprinkler system. All of the Company's tenants have been notified of
the issues regarding the Year 2000.
Costs for the review and modifications of IT and non-IT systems have not been
separated from ongoing expenses due to their small amounts. No money has been
spent outside of normal salaries for both operations (non-IT) and IT personnel
and normal operations have not been interrupted. Similarly, no budget has been
allocated for future costs due to their minor contribution to ongoing
operations.
Tenants of the Company's properties may own or maintain IT and non-IT systems
which are not Year 2000 compliant. However, all leases will remain in full
effect and tenants will remain liable for all amounts due to the Company after
the change to the Year 2000. The Company has not received any notices from
tenants regarding systems that are out of compliance.
Vendors of the Company may own or maintain IT and non-IT systems which are not
Year 2000 compliant. To the extent that such vendors are unable to render
critical services, the Company's operating results and financial condition
could be adversely effected. The Company has not received any notices from
vendors regarding systems that are out of compliance.
There can be no guarantee that the Company will identify all IT and non-IT
systems that may be vulnerable to Year 2000 issues prior to January 1, 2000. To
the extent that systems are overlooked or remediation measures are themselves
subject to error, the Company may experience loss of normal operation which
could adversely effect the Company's operating results and financial condition.
In one reasonably likely worst case scenario after January 1, 2000, the
Company's internal systems repairs would not perform as planned and accounting
data could be rendered incorrect. In this case, we foresee no loss of income
but normal operations of the accounting department would be interrupted for up
to a month while repairs are performed. In another scenario, a large number of
tenants or even a small number of large tenants would be unable to send rent
payments to the Company. If the interruption is temporary, the Company believes
it has sufficient resources to make any required payments while the problems
are resolved. If the tenant's problems are not temporary and the stores are
closed permanently, there could be an impact on the Company's income while the
stores are re-leased if lease payments are not honored.
Based on current information, the Company does not consider it necessary to
develop a formal contingency plan. Ad-hoc contingency plans regarding some of
the Company's IT systems are being assembled, and a formal plan will be
considered as a part of our ongoing Year 2000 planning.
RESULTS OF OPERATIONS
Net income for common shareholders decreased $751,000, or 42%, from $1,795,000
or $0.17 per common share in the second quarter of 1998 to $1,044,000 or $0.10
per common share in the second quarter of 1999. Net income for common
shareholders decreased $907,000, or 26%, from $3,454,000 or $0.33 per common
share for the first six months of 1998 to $2,547,000 or $0.24 per common share
for the corresponding period in 1999.This decrease was due to a combination of
factors as described in further detail below.
Minimum rent increased $1,939,000, or 14%, from $13,705,000 in the second
quarter of 1998 to $15,644,000 in the second quarter of 1999 and increased
$4,506,000 or 17% from $27,112,000 for the first six months of 1998 to
$31,618,000 for the corresponding period in 1999. The increase was primarily
due to the additional rents from the acquisition of the additional ten centers
in 1998 of approximately $4,368,000, combined with an increase in the minimum
rents of approximately $138,000 from the other fifty-seven shopping centers
which is net of rents lost of approximately $150,000 for the Caldor store in
Bristol.
Percentage rent increased $130,000, or 52%, from $249,000 in the second quarter
of 1998 to $379,000 in the second quarter of 1999, and increased $214,000 or
38% from $559,000 for the first six months of 1998 to $773,000 for the
corresponding period in 1999. The increase was due to an additional $212,000 of
percentage rent being recognized at the nine properties purchased in the third
quarter of 1998.
Expense reimbursements increased $410,000, or 14%, from $2,928,000 in the
second quarter of 1998 to $3,338,000 in the second quarter of 1999 and
increased $1,184,000 or 21% from $5,767,000 for the first six months of 1998 to
$6,951,000 for the corresponding period in 1999. The increase was due to the
additional revenues recorded from the ten centers purchased in 1998 of
approximately $435,000, as well as an increase in the reimbursable expenses
incurred in 1999 versus 1998 of which the recovery is accrued by the Company.
Interest expense increased $1,748,000, or 35%, from $5,033,000 in the second
quarter of 1998 to $6,781,000 in the second quarter of 1999 and $3,469,000 or
35% from $9,904,000 for the first six months of 1998 to $13,373,000 for the
corresponding period in 1999. The increase is primarily due to the interest
expense incurred in connection with the additional ten centers acquired in 1998
of approximately $2,442,000 for the six month period. The Company also incurred
an additional $1,032,000 of interest expense in 1999 as compared to 1998 as a
result of additional borrowings made on the Salomon Facility. In addition,
interest expense was reduced by capitalized interest on projects under
construction and land under development in the amount of $176,000 and $98,000
for the second quarter of 1998 and 1999, respectively, and $469,000 and
$363,000 for the first six months of 1998 and 1999, respectively.
Depreciation and amortization increased $721,000, or 21%, from $3,473,000 in
the second quarter of 1998 to $4,194,000 in the second quarter of 1999 and
increased $1,436,000 or 21% from $6,923,000 for the first six months of 1998 to
$8,359,000 for the corresponding period in 1999. Depreciation expense on
buildings and improvements increased approximately $1,008,000 in the first six
months of 1999 versus the first six months of 1998 due to the ten additional
centers acquired in 1998. The remaining increase in depreciation and
amortization was primarily due to the depreciation expense recorded in 1999 for
improvements made to the centers subsequent to June 30, 1998.
Real estate taxes increased $453,000, or 29%, from $1,556,000 in the second
quarter of 1998 to $2,009,000 in the second quarter of 1999 and increased
$602,000 or 18% from $3,360,000 for the first six months of 1998 to $3,962,000
for the corresponding period in 1999. The increase was primarily due to the
increase in expense from the additional ten centers acquired in 1998 of
$258,000. The increase was offset by the capitalization of real estate taxes on
projects under construction and land under development in the amount of $29,000
and $15,000 for the second quarter of 1998 and 1999, respectively, and $77,000
and $45,000 for the first six months of 1998 and 1999, respectively.
Operations and maintenance expenses increased $258,000, or 12%, from $2,200,000
in the second quarter of 1998 to $2,458,000 in the second quarter of 1999 and
increased $1,039,000 or 24% from $4,343,000 for the first six months of 1998 to
$5,382,000 for the corresponding period in 1999. The Company increased its
provision for troubled tenants by approximately $300,000 over the year-end
provision. The Company regularly evaluates the allowance for troubled tenants
based on known facts and market conditions. The operations and maintenance
increase was also attributable to an increase in snow removal costs of
approximately $450,000 in 1999. In 1998, the Company experienced lower costs as
a result of the mild winter experienced at the Company's centers.
General and administrative expenses increased $41,000, or 5%, from $909,000 in
the second quarter of 1998 to $950,000 in the second quarter of 1999 and
increased $334,000 or 20% from $1,676,000 for the first six months of 1998 to
$2,010,000 for the corresponding period in 1999. The increase is primarily due
to an increase in professional fees as well as an increase in salary costs over
the prior year.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure to market risk is to changes in interest rates.
The Company has $358,229,000 of debt outstanding as of June 30, 1999 of which
84% has been borrowed at fixed rates ranging from 7.00% to 10.50% per annum. As
these debt instruments mature, the Company expects to refinance such debt at
then existing market interest rates which may be more or less than interest
rates on the maturing debt.
The Company has approximately $57,990,000 of variable rate debt as of June 30,
1999. These debt instruments are subject to the change of market interest rates
on a short term basis from anywhere from one month to one year.
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 2, 1999.
Proxies for the meeting were solicited by the registrant pursuant
to Regulation 14A 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 9,576,622 shares were cast for the election of Norman M.
Kranzdorf as a Trustee; votes of 31,803 shares were withheld.
Votes of 9,570,373 shares were cast for the election of Bernard J.
Korman as a Trustee; votes of 38,052 shares were withheld.
In connection with Proposal 2, 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, 1999 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 9,575,936 shares were cast for the ratification of the
appointment of Arthur Andersen LLP as the Company's independent
public accountants; votes of 17,606 shares were against; and votes
of 14,883 shares abstained.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRANZCO REALTY TRUST
Date: August 12, 1999 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: August 12, 1999 /S/Robert H. Dennis
Chief Financial Officer and Treasurer
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