<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission file number 1-11690
------------------------------------------------
DEVELOPERS DIVERSIFIED REALTY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1723097
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34555 Chagrin Boulevard Moreland Hills, Ohio 44022
- -------------------------------------------------------------------------------
(Address of principal executive offices - zip code)
(216) 247-4700
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO CORPORATE ISSUERS:
------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
21,631,953 shares outstanding as of November 11, 1996
---------- -----------------
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 1996 and December 31,
1995.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended September 30, 1996 and 1995.
Condensed Consolidated Statements of Operations for the Nine Month Periods ended
September 30, 1996 and 1995.
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods ended
September 30, 1996 and 1995.
Notes to Condensed Consolidated Financial Statements.
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Real estate rental property:
Land $ 121,277,639 $ 109,325,006
Land under development 22,970,077 18,440,812
Buildings 765,726,507 688,122,876
Fixtures and tenant improvements 14,304,760 13,677,643
Construction in progress 36,057,948 18,806,999
------------- -------------
960,336,931 848,373,336
Less accumulated depreciation (135,685,969) (120,040,503)
------------- -------------
Real estate, net 824,650,962 728,332,833
Cash and cash equivalents 543,327 12,100
Advances to and investments in joint ventures 98,122,558 83,190,388
Other assets 22,448,912 18,524,208
------------- -------------
$ 945,765,759 $ 830,059,529
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 4
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 195,477,406 $ 103,731,362
Revolving credit facilities 86,000,000 65,000,000
Subordinated convertible debentures 60,000,000 60,000,000
------------- -------------
341,477,406 228,731,362
------------- -------------
Mortgage indebtedness:
Revolving credit facilities -- 22,500,000
Banks and other financial institutions 107,929,162 139,643,352
Construction loans -- 14,851,074
------------- -------------
107,929,162 176,994,426
------------- -------------
Total indebtedness 449,406,568 405,725,788
Accounts payable and accrued expenses 18,891,015 17,530,130
Other liabilities 5,190,410 2,642,148
------------- -------------
473,487,993 425,898,066
------------- -------------
Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 421,500 shares
issued and outstanding at September 30, 1996
and December 31, 1995 105,375,000 105,375,000
Class B - 9.44% cumulative redeemable preferred shares, without
par value, $250 liquidation value; 1,500,000 shares authorized;
177,500 and 160,000 shares issued and outstanding at September
30, 1996 and December 31, 1995, respectively 44,375,000 40,000,000
Class C - Cumulative redeemable preferred shares, without par
value; 1,500,000 shares authorized; none issued -- --
Class D - Cumulative redeemable preferred shares without par
value; 1,500,000 shares authorized; none issued -- --
Class E - Cumulative redeemable preferred shares, without par
value; 1,500,000 shares authorized; none issued -- --
Non-cumulative redeemable preferred shares, without par
value; 1,500,000 shares authorized; none issued -- --
Common shares, without par value, $.10 stated value; 50,000,000 shares
authorized; 21,627,677 and 18,968,943 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively 2,162,768 1,896,894
Paid-in-capital 368,089,317 291,843,152
Accumulated dividends in excess of net income (47,109,319) (34,953,583)
------------- -------------
472,892,766 404,161,463
Less: Unearned compensation - restricted stock (615,000) --
------------- -------------
472,277,766 404,161,463
------------- -------------
$ 945,765,759 $ 830,059,529
============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 5
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Revenues from operations:
Minimum rents $25,281,060 $ 21,077,731
Percentage and overage rents 317,296 351,218
Recoveries from tenants 6,365,724 4,990,046
Management fee income 599,381 118,362
Other 1,971,122 702,063
----------- ------------
34,534,583 27,239,420
----------- ------------
Rental operation expenses:
Operating and maintenance 3,024,784 2,409,937
Real estate taxes and rent 3,929,348 3,219,265
General and administrative 2,275,623 1,584,468
Depreciation and amortization 6,574,424 5,394,074
----------- ------------
15,804,179 12,607,744
----------- ------------
Interest expense 7,942,508 7,409,945
----------- ------------
Income before equity in net income (loss)
of joint ventures 10,787,896 7,221,731
Equity in net income (loss) of joint ventures 2,138,678 (95,914)
----------- ------------
Net income $12,926,574 $ 7,125,817
=========== ============
Net income applicable to common shareholders $ 9,376,667 $ 7,125,817
=========== ============
Per share data:
Earnings per common share - primary
Income before extraordinary item $ .43 $ .38
Extraordinary item -- --
----------- ------------
Net income $ .43 $ .38
=========== ============
Earnings per common share - fully diluted
Income before extraordinary item $ .43 $ .37
Extraordinary item -- --
----------- ------------
Net income $ .43 $ .37
=========== ============
Dividends declared $ .60 $ .54
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 6
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Revenues from operations:
Minimum rents $71,000,683 $ 60,892,595
Percentage and overage rents 1,502,002 1,339,991
Recoveries from tenants 17,684,581 13,882,009
Management fee income 1,744,397 338,433
Other 5,141,920 2,364,380
----------- ------------
97,073,583 78,817,408
----------- ------------
Rental operation expenses:
Operating and maintenance 8,748,758 6,704,389
Real estate taxes and rent 10,705,083 8,893,019
General and administrative 6,011,829 4,859,761
Depreciation and amortization 18,452,926 16,278,004
----------- ------------
43,918,596 36,735,173
----------- ------------
Interest expense 21,921,738 21,512,736
----------- ------------
Income before equity in net income (loss)
of joint ventures, gain on sales of land
and developments and extraordinary item 31,233,249 20,569,499
Equity in net income (loss) of joint ventures 6,012,851 (194,559)
Gain on sale of land, net -- 299,666
----------- ------------
Income before extraordinary item 37,246,100 20,674,606
Extraordinary item - extinguishment of debt -- (3,556,875)
----------- ------------
Net income $37,246,100 $ 17,117,731
=========== ============
Net income applicable to common shareholders $26,596,381 $ 17,117,731
=========== ============
Per share data:
Earnings per common share - primary
Income before extraordinary item $ 1.27 $ 1.10
Extraordinary item -- (.19)
----------- ------------
Net income $ 1.27 $ 0.91
=========== ============
Earnings per common share - fully diluted
Income before extraordinary item $ 1.25 $ 1.09
Extraordinary item -- (.18)
----------- ------------
Net income $ 1.25 $ 0.91
=========== ============
Dividends declared $ 1.80 $ 1.62
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 7
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Net cash flow provided by operating activities $ 53,082,020 $ 40,182,290
------------- ------------
Cash flow provided by (used for) investing activities:
Real estate developed or acquired (156,317,856) (99,746,035)
(Advances to) repayments from joint ventures, net (7,543,262) 230,933
Proceeds from sale of land 1,246,843 1,797,088
------------- ------------
Net cash flow used for investing activities (162,614,275) (97,718,014)
------------- ------------
Cash flow provided by (used for) financing activities:
Proceeds from (Repayment of) revolving credit facilities, net 16,915,000 (64,388,586)
Repayment of Floating Rate Senior Notes -- (10,000,000)
Proceeds from (repayment of) construction loans, net 2,923,926 464,361
Proceeds from issuance of Medium Term Notes, net of
underwriting commissions and $630,000 of offering
expenses paid 91,068,543 --
Payment of deferred finance costs -- (2,225,443)
Principal payments on rental property debt (31,714,190) (11,823,742)
Proceeds from issuance of Fixed Rate Senior Notes, net of
underwriting commissions and discounts and $400,000 of
offering expenses paid -- 98,543,000
Proceeds from issuance of common shares, net of
underwriting commissions and $300,000 and $400,000
of offering expenses paid in 1996 and 1995, respectively 75,389,307 76,506,250
Proceeds from issuance of Class B preferred shares, net of
underwriting commissions and $200,000 of offering
expenses paid 4,182,050 --
Proceeds from issuance of common shares in conjunction
with exercise of stock options, the Company's 401(k)
plan, dividend reinvestment plan and restricted stock plan 700,682 270,372
Dividends paid (49,401,836) (30,717,428)
------------- ------------
Net cash flow provided by financing activities 110,063,482 56,628,784
------------- ------------
Increase (decrease) in cash and cash equivalents 531,227 (906,940)
Cash and cash equivalents, beginning of period 12,100 919,040
------------- ------------
Cash and cash equivalents, end of period $ 543,327 $ 12,100
============= ============
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisitions of certain shopping centers, the Company
assumed other liabilities of approximately $1.1 million for the nine month
period ended September 30, 1996. In addition, in conjunction with the formation
of a joint venture, the Company transferred land and buildings with a net book
value of $41.6 million and related mortgage debt of $36.4 million creating an
equity investment in joint ventures of $5.2 million. The foregoing transactions
did not require the use of cash.
In conjunction with the acquisitions of certain shopping centers, the Company
assumed mortgage debt of approximately $15.7 million and other liabilities of
approximately $0.4 million for the nine month period ended September 30, 1995.
In addition, included in accounts payable was approximately $0.2 million
relating to construction in progress which did not require the use of cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-7-
<PAGE> 8
DEVELOPERS DIVERSIFIED REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Company is a self-administered and self-managed real estate
investment trust and is engaged in the business of acquiring, expanding, owning,
developing, managing and operating neighborhood and community shopping centers,
enclosed malls and business centers.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The
information furnished reflects all adjustments which are, in the opinion of
management, necessary to reflect a fair statement of the results for the interim
periods presented, and all such adjustments are of a normal recurring nature.
2. FORMATION OF THE COMPANY, PUBLIC OFFERINGS AND BASIS OF
PRESENTATION
Developers Diversified Realty Corporation (the "Company" or "DDRC") was
incorporated in the State of Ohio on November 20, 1992 by issuance of 1,000
common shares (for cash proceeds of $1,000) to the principal partners/
shareholders of Developers Diversified Group ("DDG-Predecessor") for the
purpose of continuing the shopping center, business center and management
company operations then being conducted by DDG - Predecessor.
On February 9, 1993, the Company sold 9,200,000 common shares in an
Initial Public Offering ("IPO"), and received net proceeds of $188.7 million.
The net proceeds from the IPO were primarily used to repay mortgage indebtedness
and acquire the partnership interests associated with certain shopping center
and business center properties, held by unrelated third parties.
The acquisition of the properties acquired by the Company prior to the
IPO and merger of Developers Diversified Management, Inc. were recorded by the
Company at the historical cost reflected in the DDG - Predecessor financial
statements, since these transactions were conducted with entities deemed to be
related parties.
Since the completion of the Company's IPO in February 1993, the Company
has accessed the capital markets several times, primarily to finance growth
through acquisitions, developments and expansions. The following is a summary of
the common share, debt and preferred share offerings following the IPO:
Common Share Offerings:
In October 1993, the Company sold 3,950,000 shares of common stock, in an
underwritten offering at $29-7/8 per share. In July 1994, the Company sold
500,000 shares of common stock, in an underwritten offering, to a group of
Institutional Investors at $31-5/8 per share. In January 1995, the Company sold
2,875,000 shares of common stock, in an underwritten offering at $28-1/4 per
share. In March 1996, the Company sold 2,611,500 shares of common stock in an
underwritten offering at $28.95 per share. The aggregate net proceeds of
approximately $278 million from the above four offerings were primarily used to
retire variable rate indebtedness.
-8-
<PAGE> 9
Debt Offerings:
In August 1994, the Company issued $60 million of 7% coupon subordinated
convertible debentures ("Debentures") which mature in August 1999. The
Debentures are non-callable and convertible into common shares any time prior to
maturity at a conversion price of $33-3/8 per share. In December 1994, the
Company issued $100 million of Floating Rate Senior Notes which were repaid at
their stated maturity, in December 1995. In May 1995, the Company issued $100
million of Fixed Rate Senior Notes at a discount to 99.963% with a coupon
interest rate of 7-5/8% due in May 2000. In November and December 1995, the
Company issued, through its Medium Term Note ("MTN") program, an aggregate of $4
million of Senior Fixed Rate Notes at interest rates of 7.15% and 7.28% and
maturities of seven and ten years, respectively. In the first quarter of 1996,
the Company issued $53 million of MTN's and in the third quarter of 1996, the
Company issued $38.7 million of MTN's. These MTN's have terms ranging from five
to seven years with interest at rates ranging from 6.58% to 7.42%. The aggregate
net proceeds of approximately $351 million from the above debt offerings were
primarily used to retire variable rate indebtedness.
Preferred Share Offerings:
In November and December 1995, the Company sold 4,215,000 depositary shares
representing 9.5% Class A Cumulative Redeemable Preferred Shares at $25 per
depositary share. In December 1995, the Company sold 1,600,000 depositary shares
representing 9.44% Class B Cumulative Redeemable Preferred Shares at $25 per
depositary share. An additional 175,000 of Class B depositary shares were sold
in January 1996, in conjunction with the exercise of the underwriters'
over-allotment option. Both the Class A and Class B depositary shares represent
1/10 of an underlying share of the respective class of preferred stock. The
Class A and Class B depositary shares are not redeemable by the Company, except
in certain circumstances relating to the preservation of the Company's status as
a Real Estate Investment Trust (REIT), prior to November 15, 2000 and December
26, 2000, respectively. The aggregate net proceeds of approximately $144 million
were used in part to fund the Company's equity investment relating to the
acquisition of the Community Center Properties (Note 3) and to retire variable
rate indebtedness, primarily the Floating Rate Senior Notes.
New Accounting Standards:
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", in the first quarter of
1996. This statement requires, when events or changes in circumstances suggest
that the carrying value of an asset or group of assets is not recoverable, that
the Company measure its long lived assets for impairment utilizing undiscounted
cash flows. This statement also sets forth the measurement criteria for assets
to be sold or disposed of and requires the resultant assets to be carried at the
lower of cost or fair market value. The effect of the adoption is not
significant.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". This statement establishes a fair
value based method of accounting for employee stock based compensation plans,
and also permits companies to continue to apply the intrinsic value based
methodology, providing certain pro-forma disclosures are made. The Company is
adopting the standard in 1996 through disclosure only.
-9-
<PAGE> 10
3. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at September 30, 1996 were
comprised of (i) a 50% joint venture interest in several Community Center Joint
Ventures, formed in November 1995 in conjunction with the acquisition of the
Homart Community Center Division of Sears, Roebuck and Co. ("Sears"), as
described in the following paragraph, (ii) a 50% joint venture interest, formed
in September 1996, with The Ohio State Teachers Retirement Systems (OSTRS), as
described below, and (iii) a 50% joint venture interest in a limited partnership
that owns a 411,977 square foot shopping center located in Martinsville,
Virginia.
On November 17, 1995, the Company, through the Community Center Joint Ventures,
acquired the Homart Community Center Division of Sears, from an affiliate of
General Growth Properties, Inc. General Growth Properties, Inc. had contracted
to purchase the Homart Community Center Division as part of its acquisition of
Homart Development Co., a subsidiary of Sears. The Homart Community Center
Division includes ten power centers, aggregating in excess of four million
square feet of Gross Leasable Area ("GLA"), located in major metropolitan areas
throughout the United States as well as several outlots and pad sites adjacent
to the ten power centers and certain other power centers previously sold by
Sears (the "Community Center Properties"). In addition, in connection with the
primary transaction previously described, the Company acquired certain rights to
acquire several future development sites (in which its joint venture partners
may have certain rights to participate). Construction of eight of the ten power
centers is complete or substantially complete and two of the power centers are
currently under construction. The total purchase price for the Community Center
Properties aggregated approximately $448.7 million and was funded through
approximately $300 million of secured indebtedness at the joint venture level,
$6.7 million of assumed net liabilities and $142 million of cash of which
one-half each was provided by the Company and its joint venture partners. In
addition, the Company paid cash of approximately $1.3 million relating to the
purchase of certain rights to potential future development sites. The Company's
initial cash contribution was made available through proceeds from the issuance
of the 9.5% Class A depositary shares (Note 2). Construction of the two centers
under development is expected to be substantially complete by the spring of
1997. Certain tenants at each of these two centers are currently open for
business (or are expected to open prior to the completion of construction). In
addition to owning a 50% interest in each Community Center Joint Venture, the
Company manages the Community Center Properties and related developments
pursuant to management and development agreements with each of the Community
Center Joint Ventures.
In September 1996, the Company entered into a joint venture with OSTRS. In
conjunction with the formation of the joint venture the Company transferred to
the joint venture two shopping centers with a net book value of $41.6 million
and non recourse mortgage debt aggregating $36.4 million. OSTRS funded an
initial cash contribution of $11.4 million which was used to repay a portion of
the non- recourse mortgage debt. In addition to owning a 50% interest in the
Joint Venture, the Company continues to manage the two properties pursuant to a
management agreement.
Included in 1996 management fee income for the nine month period ended September
30, 1996, is approximately $1.5 million of fees earned from the Company's Joint
Venture interests. Other income for the nine month period ended September 30,
1996 includes $0.5 million of development fee income from the Community Center
Joint Ventures.
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<PAGE> 11
Summarized combined financial information of the Company's joint venture
investments is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
Combined Balance Sheets 1996 1995
------------- -------------
<S> <C> <C>
Real estate, net $ 545,268,719 $ 473,913,981
Other assets 16,211,549 18,606,231
------------- -------------
$ 561,480,268 $ 492,520,212
============= =============
Mortgage debt $ 354,234,731 $ 317,142,199
Amounts payable to DDRC 10,057,158 9,173,195
Other liabilities 10,398,673 16,927,381
------------- -------------
374,690,562 343,242,775
Accumulated equity 186,789,706 149,277,437
------------- -------------
$ 561,480,268 $ 492,520,212
============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
Combined Statements of Operations 1996 1995 1996 1995
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues from operations $ 16,114,687 $ 754,964 $ 45,635,928 $ 2,409,386
------------ ----------- ------------ -------------
Rental operation expenses 4,240,174 212,318 12,158,146 601,730
Depreciation and amortization
expense 2,164,178 206,670 6,370,694 609,989
Interest expense 5,432,979 527,804 15,081,386 1,586,786
------------ ----------- ------------ -------------
11,837,331 946,792 33,610,226 2,798,505
------------ ----------- ------------ -------------
Net income (loss) $ 4,277,356 $ (191,828) $ 12,025,702 $ (389,119)
============ =========== ============ =============
</TABLE>
The Company has guaranteed $25 million of joint venture indebtedness
and related interest associated with certain mortgage debt.
4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
During the nine month period ended September 30, 1996, the Company
completed the acquisition of five shopping centers with an aggregate of
approximately 1.1 million Company owned gross leasable square feet (GLA) at an
initial aggregate purchase price of approximately $99 million. These properties
are summarized as follows:
<TABLE>
<CAPTION>
Year Date Acquired Company
Location Built By the Company GLA
--------------------------- ----- -------------- -------
<S> <C> <C> <C>
Phoenix, AZ 1995 July 2, 1996 329,036
Minneapolis, MN 1995 July 2, 1996 250,269
Highland, IN 1995 July 2, 1996 174,477
Fort Worth, TX 1996 July 2, 1996 175,154
Portland, OR 1995 August 23, 1996 136,626
---------
1,065,562
=========
</TABLE>
The operating results of the acquired shopping centers are included in the
results of operations of the Company from the date of purchase.
-11-
<PAGE> 12
The following unaudited supplemental pro forma operating data is
presented for the nine months ended September 30, 1996 as if each of the
following transactions had occurred on January 1, 1996 (i) the acquisition by
the Company of all properties acquired by the Company in 1996; (ii) the sale by
the Company of 175,000 depositary shares representing 9.44% Class B Cumulative
Redeemable Preferred Shares in January 1996, (iii) the completion of the sale by
the Company of $91.7 million of Medium Term Notes during the first and third
quarters of 1996 and (iv) the sale by the Company of 2,611,500 Common Shares in
March 1996. Pro forma operating data is presented for the nine months ended
September 30, 1995, as if each of the following transactions had occurred on
January 1, 1995: (i) the acquisition by the Company of all properties acquired
by the Company in 1995 and 1996, (ii) the formation of the Community Center
Joint Ventures and the related acquisition of the Community Center Properties,
(iii) the completion of the sale by the Company of 2,875,000 Common Shares in
January 1995, (iv) the completion of the sale by the Company of the $100 million
7-5/8% Fixed Rate Senior Notes in May 1995, (v) the sale by the Company of
4,215,000 depositary shares representing 9.5% Class A Cumulative Redeemable
Preferred Shares in November and December 1995 and 1,775,000 depositary shares
representing 9.44% Class B Cumulative Redeemable Preferred Shares in December
1995 and January 1996 (vi) the completion of the sale by the Company of $95.7
million of Medium Term Notes during the fourth quarter of 1995 and the first and
third quarters of 1996 and (vii) the completion of the sale by the Company of
2,611,500 common shares in March 1996.
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
-------------------------------------
(in thousands, except per share)
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Revenues from rental property $ 90,188 $ 80,496
Management fees and other 6,886 3,619
-------- --------
97,074 84,115
-------- --------
Expenses:
Rental operation expenses 19,454 17,127
General and administrative 6,012 5,210
Depreciation and amortization 18,453 16,094
Interest 20,890 14,545
-------- --------
64,809 52,976
-------- --------
32,265 31,139
Equity in net income of joint ventures 6,013 2,544
Gain on sale of land - 300
-------- --------
Income before extraordinary item 38,278 33,983
Less preferred dividends (10,650) (10,650)
-------- --------
Income before extraordinary item applicable to
common shareholders $ 27,628 $ 23,333
======== ========
Per share data:
Income before extraordinary item - primary $ 1.28 $ 1.23
======== ========
Pro forma weighted average shares
outstanding (in thousands) 21,597 18,960
======== ========
</TABLE>
The 1996 and 1995 pro forma information above does not include revenues
and expenses for the properties acquired by the Company in 1996 prior to their
respective acquisition dates because these shopping centers were either under
development or in the lease-up phase and, accordingly, the related operating
information for such centers either does not exist or would not be meaningful.
-12-
<PAGE> 13
The 1995 pro forma information above does not include revenues and
expenses for the following properties acquired by the Company in 1995 located in
Orangeburg, South Carolina; Anderson, South Carolina; Columbia, South Carolina;
and Huntsville, Alabama and with regard to the acquisition of the Community
Center Properties, the shopping centers located in Durham, North Carolina;
Marietta, Georgia; Independence, Missouri; Atlanta, Georgia; and Phase II of
Framingham, Massachusetts are not reflected in the 1995 pro forma information
prior to their respective acquisition dates because these shopping centers were
either under development or in the lease-up phase and, accordingly, the related
operating information for such centers either does not exist or would not be
meaningful.
5. SHAREHOLDERS' EQUITY:
The following table summarizes the changes in shareholders' equity
since December 31, 1995:
<TABLE>
<CAPTION>
Class A 9.5% Class B 9.44%
Cumulative Cumulative
Redeemable Redeemable
Preferred Preferred Accumulated
Shares ($250 Shares ($250 Dividends in
Liquidation Liquidation Common Paid-in Excess of Restricted
Value) Value) Shares Capital Net Income Stock Total
------------ ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 $105,375,000 $40,000,000 $1,896,894 $291,843,152 $(34,953,583) $ - $404,161,463
Net income 37,246,100 37,246,100
Dividends declared -
Preferred Shares (10,533,280) (10,533,280)
Dividends declared -
Common Shares (38,868,556) (38,868,556)
Issuance of Common Shares 261,150 75,128,157 75,389,307
Issuance of Preferred Shares 4,375,000 (192,950) 4,182,050
Stock options exercised 1,773 410,240 412,013
Shares issued through employee
401(k) plan 130 39,451 39,581
Shares issued through Dividend
Reinvestment Plan 321 95,017 95,338
Shares issued through restricted
stock plan 2,500 766,250 (615,000) 153,750
------------ ----------- ---------- ------------ ------------ ------------ ------------
Balance September 30, 1996 $105,375,000 $44,375,000 $2,162,768 $368,089,317 $(47,109,319) $ (615,000) $472,277,766
============ =========== ========== ============ ============ ============ ============
</TABLE>
6. REVOLVING CREDIT FACILITIES:
In May 1995, the Company obtained a three year $150 million unsecured
revolving credit facility from a syndicate of financial institutions for which
the First National Bank of Chicago and the First National Bank of Boston serve
as agents (the "Unsecured Credit Facility"). Borrowings under this facility bear
interest at variable rates based on the prime rate or LIBOR plus a specified
spread, currently at 1.25%, depending on the Company's long term senior
unsecured debt rating from Standard and Poor's and Moody's Investors Service. In
June 1996, the Company renegotiated the terms of this facility to extend the
agreement one year, to May 1999, reduce the specified spread over LIBOR by 25
basis points and reduce the unused commitment fees. The Unsecured Credit
Facility is used to finance the acquisition of shopping centers, to provide
working capital and general corporate purposes. The Unsecured Credit Facility
replaced a $150 million secured facility. At September 30, 1996, $86 million was
outstanding under this facility.
In July 1995, the Company entered into a three year $25 million secured
revolving credit facility with National City Bank. In September 1996, the
Company restructured its $25 million secured revolving credit facility with
National City Bank. This restructuring resulted in an $18.6 million ten year non
recourse mortgage loan, which was transferred into the OSTRS Joint Venture as
discussed in
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<PAGE> 14
Note 3, and a $10 million unsecured revolving credit facility which
matures in November, 1999 and bears interest at variable rates based on the
prime rate or LIBOR plus a specified spread, currently at 1.25%, depending on
the Company's long term senior unsecured debt rating from Standard and Poor's
and Moody's Investors Service. This restructuring resulted in the mortgage
release of two of the three shopping centers which served as collateral for the
$25 million secured revolving credit facility. At September 30, 1996, there was
nothing outstanding under this facility.
7. EXTRAORDINARY CHARGES:
In January 1995, the Company terminated a $25 million secured revolving
credit facility in conjunction with the successful completion of a 2,875,000
common share offering and recognized an extraordinary charge of $0.3 million in
the first quarter of 1995 primarily relating to the write-off of unamortized
deferred finance costs.
In the second quarter of 1995, the Company terminated a $150 million
secured revolving credit facility with Nomura Asset Capital Corporation. As a
result, the Company recognized a non-cash extraordinary charge of $3.3 million
relating to the unamortized deferred finance costs written off.
8. RELATED PARTY TRANSACTIONS
In April 1995, the Company acquired from a partnership owned by the
chairman of the board of directors and an officer of the Company two out parcels
and approximately eight acres of land adjacent to the Company's shopping center
in Macedonia, Ohio at a purchase price of approximately $3 million. The two out
parcels are leased to a restaurant and a video store, and an 81,000 square foot
Kohl's Department store was constructed on the eight acres of land. Management
believes that the acquisition of this property was completed on terms at least
as favorable to the Company as could have been obtained from an unrelated third
party.
The Company has agreed to acquire, from the affiliates previously
referred to, additional land parcels and expansions under development which are
located adjacent to properties previously acquired. The Company's purchase price
for the remaining parcels and expansion areas has not yet been determined since
it is subject to the leasing and/or construction of vacant space and resolution
of various other contingencies. The Company believes the ultimate payment for
such additional land will approximate $2 million.
9. STOCK OPTION PLAN AND EQUITY-BASED AWARD PLAN
Effective January 31, 1993, the Company established an incentive and
non-qualified stock option plan under which 1,556,903 of the Company's common
shares have been reserved for issuance to eligible key employees. Options may be
granted at per share prices not less than fair market value at the date of
grant, and in the case of incentive options, must be exercisable within ten
years thereof (or, with respect to options granted to certain shareholders,
within five years thereof). As of September 30, 1996, options to purchase shares
aggregating 1,342,050 have been granted to certain eligible employees at the
market price per share on the date of grant. Options granted under the plan
generally become exercisable one year after the date of grant as to one third of
the optioned shares, with the remaining options being exercisable over the
following two year period. As of September 30, 1996 options aggregating 527,556
had become exercisable, of which 33,351 shares were exercised as of that date.
The option prices range from $22 to $32.875 per share.
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<PAGE> 15
In addition to the stock option plan described above, the Company has
granted options for 445,000 shares to its directors and certain officers who are
not employees of the Company. Such options were granted at fair market value on
the date of grant and are exercisable one year from the date of grant with
respect to 45,000 shares and the remaining 400,000 shares become exercisable one
year after the date of grant as to one third of the 400,000 shares with the
remaining options being exercisable over the following two year period. As of
September 30, 1996, options aggregating 158,333 shares had become exercisable,
of which 5,000 shares were exercised as of that date. The option prices range
from $22 to $30.75 per share.
In April 1996, the shareholders approved an equity-based award Plan
which provides for the grant to key employees of the Company of options to
purchase Common Shares of the Company, rights to receive the appreciation in
value of Common Shares, awards of Common Shares subject to restrictions on
transfer, awards of Common Shares issuable in the future upon satisfaction of
certain conditions, rights to purchase Common Shares and other awards based on
Common Shares. Under the terms of the Award Plan, Awards may be granted with
respect to an aggregate of not more than 600,000 Common Shares.
In 1996, the Board of Directors approved, in conjunction with an
executive compensation review performed by an outside consulting firm, a grant
of 25,000 restricted shares of common stock and 15,000 Participation Units to
the Company's Chief Executive Officer. The 25,000 shares of restricted stock
will vest in equal annual amounts of 5,000 shares per year through the year
2000. The 15,000 Participation Units will be converted into common shares,
ranging from 15,000 common shares to 100,000 common shares, at the end of five
years. The actual number of shares issued will be based upon the average total
shareholder return during the five year period.
10. EARNINGS PER SHARE
Primary earnings per share for income before extraordinary item
applicable to common shareholders and net income applicable to common
shareholders was computed by dividing common share dividends paid or declared
for the period by the weighted average number of common shares outstanding plus
the undistributed income (loss) before extraordinary item or undistributed net
income (loss) applicable to common shareholders, as appropriate, divided by the
weighted average number of common shares and common share equivalents
outstanding. Common share equivalents are excluded from the earnings per share
calculation where they would be antidilutive. The weighted average number of
shares outstanding utilized in the calculations is 20,973,816 and 18,717,652 for
the nine month periods ended September 30, 1996 and 1995, respectively and
21,619,082 and 18,963,600 for the three month periods ended September 30, 1996
and 1995, respectively.
Fully diluted earnings per common share were calculated by dividing net
income (loss) applicable to common shareholders by the weighted average number
of common shares and common share equivalents during the period. Common share
equivalents included stock options outstanding. The assumed conversion of the
Debentures was antidilutive, and was therefore excluded from the calculation.
Common share equivalents for purposes of the fully diluted earnings per share
were 232,006 and 168,426 for the nine month periods ended September 30, 1996 and
1995, respectively and 244,427 and 171,172 for the three month periods ended
September 30, 1996 and 1995, respectively. As required by APB Opinion No.
15, supplementary pro forma income per share data has been presented in Note 4.
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<PAGE> 16
11. SUBSEQUENT EVENTS
In October 1996, the Company issued a $20 million five year Medium Term
Note with a coupon interest rate of 7.3%. The proceeds were used to repay
variable rate indebtedness.
In October 1996, the Company formed a joint venture with DD Merriam,
L.P., which is advised by DRA Advisors, Inc., relating to the development of a
shopping center in Merriam, Kansas. This shopping center development project was
one of the development sites acquired in conjunction with the acquisition of the
Homart Community Center Division from General Growth Properties, Inc. The joint
venture is 50% owned by the Company and 50% owned by DD Merriam, L.P. In
addition, to owning a 50% interest in the joint venture, the Company will manage
the shopping center and related development pursuant to management and
development agreements.
As discussed in Note 6, the Company entered into a $10 million unsecured
revolving credit facility with National City Bank which replaced a $25 million
secured revolving credit facility.
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and the notes
thereto.
CAPITAL RESOURCES
In February 1993, the Company completed its initial public offering
("IPO"), pursuant to which the Company issued 9,200,000 common shares at a
public offering price of $22 per share and realized net proceeds of
approximately $187 million. Completion of the IPO permitted the Company to
significantly deleverage its real estate portfolio and facilitated the Company's
ability to obtain funds to acquire and develop new shopping centers and expand
or improve existing centers.
From the IPO through December 31, 1995, the Company completed several
offerings of its equity (common shares and preferred shares) and unsecured debt
aggregating approximately $734 million of net proceeds. The proceeds from the
offerings were used (i) to repay indebtedness, (ii) for the acquisition of
shopping centers and (iii) for the development of new shopping centers and
expansion of existing shopping centers.
During the first nine months of 1996, the Company completed the sale of
an additional 175,000 Depositary Shares representing Class B preferred shares,
in conjunction with the exercise of the underwriters' over-allotment option. The
Company also issued $91.7 million of five to seven year senior unsecured fixed
rate notes with interest rates ranging from 6.58% to 7.42% through its MTN
program. In March 1996, the Company completed an underwritten equity offering in
which 2,611,500 common shares were sold at an offering price, net of
underwriting commissions, of $28.95 per share. The aggregate net proceeds from
the above transactions were approximately $171 million and were primarily used
to retire revolving credit and mortgage debt of $140.9 million and $30.1
million, respectively. In addition, in June 1996, the Company extended its $150
million unsecured revolving credit facility for an additional year to May 1999
and reduced the stated interest rate by 25 basis points. During the third
quarter of 1996, the Company acquired five shopping centers aggregating 1.1
million square feet of Company owned GLA (gross leasable area owned by the
Company) at an aggregate purchase price of approximately $99 million. In
September 1996 the Company restructured its $25 million secured revolving credit
facility into an $18.6 million non-recourse ten year variable rate mortgage loan
secured by one property and also agreed to enter into a $10 million unsecured
revolving credit facility. This resulted in the mortgage release of two shopping
centers which served as collateral for the secured revolving credit facility.
The $18.6 million non-recourse mortgage loan was subsequently transferred to the
OSTRS joint venture discussed below.
In September 1996, the Company entered into a joint venture with OSTRS.
In conjunction with the formation of the joint venture the Company transferred
to the joint venture two shopping centers with a net book value of $41.6 million
and non recourse mortgage debt aggregating $36.4 million. OSTRS funded an
initial cash contribution of $11.4 million, which was used to repay a portion of
the non-recourse mortgage debt. In addition to owning a 50% interest in the
joint venture, the Company continues to manage the two properties pursuant to a
management agreement.
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<PAGE> 18
On November 17, 1995, the Company, in conjunction with certain joint
venture partners acquired the Homart Community Center Division of Sears, Roebuck
and Co. ("Sears") from an affiliate of General Growth Properties, Inc. The
Homart Community Center Division includes ten power centers which will aggregate
in excess of four million square feet of Gross Leasable Area ("GLA") located in
major metropolitan areas throughout the United States and several outlots and
pad sites adjacent to the ten power centers and certain other power centers
previously sold by Sears (the "Community Center Properties"). In addition, in
connection with the primary transaction, the Company acquired certain rights to
acquire several future development sites. Construction of eight of the ten power
centers is complete or substantially complete and two of the power centers are
currently under construction. Construction of the two centers is expected to be
substantially completed by the spring of 1997. Certain tenants at each of these
two centers are currently open for business or will open prior to the completion
of construction.
The Company, or a wholly owned subsidiary of the Company, and its joint
venture partners each own a 50% interest in each Community Center Joint Venture.
The total purchase price of the Community Center Properties aggregated $448.7
million and was funded through $300 million of secured indebtedness at the joint
venture level, $6.7 million of assumed net liabilities and $142 million of cash
of which approximately $71 million was provided by the Company and approximately
$71 million was provided by its joint venture partners. In addition, the Company
paid cash of approximately $1.3 million relating to the purchase of certain
rights to several development sites. The Company's cash contribution was
financed through proceeds from the issuance of Depositary Shares representing
Class A Preferred Shares.
Since the IPO in 1993, in addition to the 10 properties acquired
through joint ventures, the Company has acquired 46 shopping centers aggregating
approximately 8.1 million square feet of Company-owned GLA for an aggregate
purchase price of approximately $512.2 million. These acquisitions were financed
through cash and borrowings from revolving credit facilities of approximately
$416.7 million, debt and liabilities assumed of approximately $87.4 million and
equity of $8.1 million. As of September 30, 1996 the Company owned 111 shopping
centers, including 13 which are owned through joint ventures, seven business
centers and 91 parcels of undeveloped land aggregating approximately 266 acres.
At September 30, 1996, the Company's capitalization consisted of $449.4
million of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $177.1 million), $149.8 million of preferred stock and
$694.8 million of market equity (market equity is defined as common shares
outstanding multiplied by the closing price of the common shares on the New York
Stock Exchange at September 30, 1996, of $32.125) resulting in a debt to total
market capitalization ratio of 0.35 to 1.0. At September 30, 1996, the Company's
debt consisted of $360.2 million of fixed-rate debt, and $89.2 million of
variable rate debt.
It is management's intention that the Company have access to the
capital resources necessary to expand and develop its business. Accordingly, the
Company may seek to obtain funds through additional equity offerings or debt
financing in a manner consistent with its intention to operate with a
conservative debt capitalization policy. In June 1996, the Company filed a shelf
registration statement with the Securities and Exchange Commission under which
$400 million of debt securities, preferred shares or common shares may be
issued. At September 30, 1996, $361.3 million was available under its shelf
registration statement.
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<PAGE> 19
LIQUIDITY
The Company anticipates that cash flow from operating activities will
continue to provide adequate capital for all principal payments, recurring
tenant improvements, as well as dividend payments in accordance with REIT
requirements and that cash on hand, borrowings under its existing revolving
credit facilities, and the use of project financing as well as other debt and
equity alternatives will provide the necessary capital to achieve continued
growth. Cash flow from operating activities for the first nine months of 1996
increased to $53.1 million, as compared to $40.2 million in 1995. The increase
is attributable to increased cash flow from the Company's acquisitions,
developments and new leasing, re-tenanting and expansion of the properties owned
since January 1, 1995 ("Core Portfolio Properties").
An increase in the quarterly dividend per common share from $.54 to
$.60 was approved in December 1995 by the Company's Board of Directors. The
Company's common share dividend payout ratio for the first three quarters of
1996 approximated 80.8% of the actual Funds From Operations.
Industry analysts generally consider Funds From Operations to be an
appropriate measure of the operating performance of an equity REIT. Funds From
Operations is defined generally as net income applicable to common shareholders
plus depreciation and amortization of real property, nonrecurring and
extraordinary charges, less gain on sales of land. Adjustments are also made to
reflect the Company's proportionate share of Funds From Operations relating to
its joint venture equity interests. Funds From Operations does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to cash
flow as a measure of liquidity.
As of September 30, 1996 the Company had cash balances aggregating $0.5
million and $64 million available under its $150 million unsecured revolving
credit facility. On September 30, 1996, the Company also had 89 operating
properties with $70.5 million or 68.5% of the total revenue for the nine month
period ended September 30, 1996 which were unencumbered thereby providing a
potential collateral base for future borrowings.
RESULTS OF OPERATIONS
Revenues from Operations
Revenues from operations increased $7.3 million, or 26.8% to $34.5
million for the three month period ended September 30, 1996 from $27.2 million
for the same period in 1995. Similarly, revenues from operations increased $18.3
million, or 23.2% to $97.1 million for the nine month period ended September 30,
1996 as compared to $78.8 million for the nine month period ended September 30,
1995. Approximately $1.8 million of the increase in base and percentage and
overage revenues is the result of new leasing, re-tenanting and expansion of the
Core Portfolio Properties. The 15 shopping centers acquired in 1995 and 1996 and
two new shopping center developments contributed $8.5 million of the increase in
base and percentage and overage revenues. Included in the rental revenues for
the nine month period ended September 30, 1996 is approximately $0.4 million of
revenue resulting from the recognition of straight line rents primarily
associated with the recent acquisitions and developments. The increase in
recoveries from tenants of $3.8 million is directly related to the increase in
operating and maintenance expenses and real estate taxes and is primarily
related to the 1995 and 1996 shopping center acquisitions and developments.
Management fee income and other income increased by approximately $4.2 million
which generally relates to an increase in fee income (primarily management and
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<PAGE> 20
development fees) of approximately $1.9 million primarily associated with the
formation of the Community Center Joint Ventures and an increase in lease
termination income of approximately $2.3 million.
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended September 30, 1996 increased $0.6 million, or 25.5% to $3.0 million as
compared to $2.4 million for the same period in 1995. Rental operating and
maintenance expenses for the nine month period ended September 30, 1996
increased $2.0 million, or 30.5% to $8.7 million as compared to $6.7 million for
the same period in 1995. An increase of $1.5 million is attributable to the 17
shopping centers acquired and developed in 1995 and 1996 and $0.5 million in the
Core Portfolio Properties primarily attributed to higher snow removal costs in
1996 as compared to 1995.
Real estate taxes increased $0.7 million, or 23.3%, to $3.9 million for
the three month period ended September 30, 1996 as compared to $3.2 million for
the same period in 1995. Real estate taxes increased $1.8 million, or 20.6% to
$10.6 million for the nine month period ended September 30, 1996 as compared to
$8.8 million for the same period in 1995. An increase of $1.1 million is related
to the 17 shopping centers acquired and developed in 1995 and 1996 and an
increase of $0.7 million is related to the Core Portfolio Properties.
General and administrative expenses increased $0.7 million, or 43.6%,
to $2.3 million for the three month period ended September 30, 1996 as compared
to $1.6 million in 1995. General and administrative expenses increased $1.1
million, or 23.7% to $6.0 million for the nine month period ended September 30,
1996, as compared to $4.9 million for the same period in 1995. The increase is
attributable to the growth of the Company primarily related to the 1995 and 1996
acquisitions, expansions and developments.
Depreciation and amortization expense increased $1.2 million, or 21.9%,
to $6.6 million for the three month period ended September 30, 1996 as compared
to $5.4 million for the same period in 1995. Depreciation and amortization
expense increased $2.2 million, or 13.4% to $18.5 million for the nine month
period ended September 30, 1996 as compared to $16.3 million for the same period
in 1995. The increase is primarily attributable to the growth related to the 17
shopping centers acquired and developed in 1995 and 1996.
Interest expense increased $0.5 million, or 7.2%, to $7.9 million for
the three month period ended September 30, 1996, as compared to $7.4 million for
the same period in 1995. Interest expense increased $0.4 million, or 1.9% to
$21.9 million for the nine month period ended September 30, 1996 as compared to
$21.5 million for the same period in 1995. The overall increase in interest
expense for the three and nine month periods ended September 30, 1996 as
compared to the same periods in 1995 are primarily related to the acquisition
and development of shopping centers during 1996. The increase in interest
expense relating to the acquisitions and development of shopping centers was
offset by the issuance of the Class A and Class B preferred shares in November
and December 1995 which resulted in net proceeds of $144.2 million of which
approximately $71 million was used to fund the Company's initial capital
contribution to the Community Center Joint Ventures. The balance was used to
repay variable rate indebtedness. In addition, in March 1996, the Company issued
an additional 2.6 million common shares which resulted in net proceeds of
approximately $75.4 million which were used to repay indebtedness. The weighted
average debt outstanding during the nine month period ended September 30, 1996
and related weighted average interest rate was $397.2 million and 8.3%,
respectively, compared to $371.3 million and 8.4%, respectively, for the same
period in 1995. Interest costs
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capitalized, in conjunction with development and expansion projects, were $0.8
million and $2.4 million for the three and nine month periods ended September
30, 1996, respectively, as compared to $0.9 million and $2.0 million for the
same periods in 1995.
Equity in net income of joint ventures increased $2.2 million to $2.1
million for the three month period ended September 30, 1996 as compared to a net
loss of $0.1 million in 1995. Equity in net income of joint ventures increased
$6.2 million to $6.0 million for the nine month period ended September 30, 1996
as compared to a net loss of $0.2 million for the same period in 1995. The
increase is attributable to the formation of the Community Center Joint Ventures
during the fourth quarter of 1995 which contributed $6.2 million of equity in
net income of joint ventures for the nine month period ended September 30, 1996.
The extraordinary item, which aggregated $3.6 million during the nine
month period ended September 30, 1995, is related to the write-off of deferred
finance costs, aggregating $3.3 million, associated with the termination of the
Company's $150 million secured revolving credit facility which was replaced with
a $150 million unsecured revolving credit facility. In addition, the Company
terminated a $25 million secured revolving credit facility in January 1995, in
conjunction with a 2,875,000 common share offering. The termination of this
facility also resulted in an extraordinary charge of $0.3 million primarily
related to the write-off of unamortized deferred finance costs.
Net Income
Net income increased $5.8 million to $12.9 million for the three month
period ended September 30, 1996, as compared to net income of $7.1 million for
the same period in 1995. Net income increased $20.1 million to $37.2 million for
the nine month period ended September 30, 1996 as compared to $17.1 million for
the same period in 1995. The increase in net income of $20.1 million is
primarily attributable to the increased net operating revenues (total revenues
less operating and maintenance, real estate taxes, rent and general and
administrative expense) aggregating $13.2 million, resulting from new leasing,
retenanting and expansion of Core Portfolio Properties, and the 17 shopping
centers acquired and developed in 1995 and 1996. An increase of $6.2 million
relates to the formation of the Community Center Joint Ventures and an increase
of $3.6 million relates to a decrease in extraordinary charges. The increase in
net operating revenues and equity income from joint ventures and reduction in
extraordinary charges was offset by increases in depreciation and interest
expense of $2.2 million and $0.4 million, respectively, and decreases in gain
on sales of land of $0.3 million.
INFLATION
Substantially all of the Company's long-term leases contain provisions
designed to mitigate the adverse impact of inflation. Such provisions include
clauses enabling the Company to receive percentage rentals based on tenants'
gross sales, which generally increase as prices rise, and/or escalation clauses,
which generally increase rental rates during the terms of the leases. Such
escalation clauses are often related to increases in the consumer price index or
similar inflation indices. In addition, many of the Company's leases are for
terms of less than ten years, which permits the Company to seek increased rents
upon re-rental at market rates. Most of the Company's leases require the tenants
to pay their share of operating expenses, including common area maintenance,
real estate taxes, insurance and utilities, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
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At September 30, 1996, approximately 80.2% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 5.1 years and a weighted average interest rate
of approximately 7.9%. The remainder of the Company's debt bears interest at
variable rates, with a weighted average maturity of approximately 2.9 years and
a weighted average interest rate of approximately 6.7%. As of September 30, 1996
the Company's Community Center Joint Ventures had variable rate debt aggregating
approximately $315.4 million in the form of bridge loans which may be converted
to long-term fixed rate debt through securitizations. Accordingly, the Company's
overall interest expense would be adversely impacted in an inflationary period
in the event that interest rates rise during such a period. Moreover, the
Company intends to utilize variable rate indebtedness available under its
revolving credit facilities to initially fund future acquisitions of shopping
centers. Thus, to the extent that the Company incurs additional variable rate
indebtedness, its exposure to increases in interest rates in an inflationary
period would increase. The Company believes, however, that in no event would
increases in interest expenses as a result of inflation significantly impact the
Company's distributable cash flow.
In December 1994, the Company entered into a one-year $39.0 million
swap agreement with a major financial institution as a hedge against increasing
interest rates associated with the Company's $100 million Floating Rate Senior
Notes, which terminated in conjunction with the repayment of the notes in
December 1995. The Community Center Joint Ventures have entered into swap
agreements with major financial institutions as a hedge against increasing
interest rates associated with the joint ventures' proposed upcoming
securitizations. The Company intends to continuously monitor and actively manage
interest costs on its variable rate debt portfolio and may increase or decrease
its swap position based on market fluctuations. In addition, the Company
believes that it has the ability to obtain funds through additional equity
and/or debt offerings, including the issuance of medium term notes. Accordingly,
the cost of obtaining such protection agreements in relation to the Company's
access to capital markets will continue to be evaluated.
ECONOMIC CONDITIONS
Many regions of the United States, including regions in which the
Company owns property, have experienced varying degrees of economic recession. A
continuation of the economic recession, or further adverse changes in general or
local economic conditions, could result in the inability of some existing
tenants of the Company to meet their lease obligations and could otherwise
adversely affect the Company's ability to attract or retain tenants. The
shopping centers are typically anchored by discount department stores (usually
Wal-Mart, Kmart or J.C. Penney), supermarkets, and drug stores which usually
offer day-to-day necessities, rather than high-priced luxury items.
Since these merchants typically perform better in an economic recession
than those who market high priced luxury items, the percentage rents received by
the Company have remained relatively stable. In addition, the Company seeks to
reduce its operating and leasing risks through ownership of a portfolio of
properties with a diverse geographic and tenant base.
During 1995 and 1996, certain national and regional retailers
experienced financial difficulties and several have filed for protection under
bankruptcy laws. Although the Company has experienced an increase in the number
of tenants filing for protection under bankruptcy laws, no significant
bankruptcies have occurred through November 11, 1996 with regard to the
Company's portfolio of tenants.
Base rental revenues from Wal-Mart and Kmart represented 9.5% and 6.4%,
respectively, of the Company's aggregate base rental revenues, including
revenues from joint venture properties, for the nine month period ended
September 30, 1996. The Company could be adversely affected in the event of the
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<PAGE> 23
bankruptcy or insolvency of Wal-Mart or Kmart, or a significant downturn in the
business of Wal-Mart or Kmart. In addition, the Company would be adversely
affected in the event that either Wal-Mart or Kmart does not renew its leases
as they expire.
During 1995, Kmart closed three of its stores leased from the Company,
all in communities in which Kmart has constructed new larger stores. Kmart
closed its store in the Company's Chillicothe, Ohio shopping center effective
January 1, 1995, and the Company entered into a new lease with Lowe's. During
the first and second quarters of 1995, Kmart closed its stores in the Company's
Stone Mountain, Georgia and Melbourne, Florida shopping centers. In addition,
during the first quarter of 1995, Kmart closed two anchor stores it owns in the
Company's shopping centers (comprising 137,000 square feet of tenant-owned GLA).
The Company and Kmart are actively pursuing potential substitute tenants. Until
the Company consummates leases with other new tenants or the current leases with
Kmart expire or are terminated by the Company, Kmart will continue to be
responsible for their obligations under their leases.
Wal-Mart has constructed new, larger stores in the Martinsville and
Winchester, Virginia communities. As a result, Wal-Mart closed its existing
stores leased from the Company at its centers in each location. The Company
agreed to terminate the leases with Wal-Mart at each center as the Company has
entered into leases or letters of intent with a variety of tenants, relating to
the former Wal-Mart space, at higher rents which are scheduled to commence in
the fourth quarter of 1996 and first half of 1997.
The Company does not believe that the closing of the above mentioned
Kmart and Wal-Mart stores will have an adverse financial effect on the Company.
The Company could also be adversely affected in the event of a downturn in the
business of the other major tenants. However, as of September 30, 1996, the
Company received no more than 3.2% of its shopping center base rental revenues,
including revenues from joint venture properties, from any other single tenant.
-23-
<PAGE> 24
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation nor,
to its knowledge, is any material litigation threatened against the Company or
its properties, other than routine litigation arising in the ordinary course of
business and which is expected to be covered by the Company's liability
insurance.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
None
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER EVENTS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
11.1 Earnings per Share
27 (a) Financial Data Schedule
b) Reports on Form 8-K
Date of Report Items Reported
-------------- --------------
July 2, 1996 Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits
-24-
<PAGE> 25
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.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
November 13, 1996 /s/ Scott A. Wolstein
- --------------------- -----------------------------------
(Date) Scott A. Wolstein, President and
Chief Executive Officer
November 13, 1996 /s/ William H. Schafer
- --------------------- -----------------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
-25-
<PAGE> 1
EXHIBIT 11.1
DEVELOPERS DIVERSIFIED REALTY CORPORATION
Earnings per Share
<TABLE>
<CAPTION>
For the Three Month Periods Ended September 30,
1996 1995
----------- -------------------------------
Income Before
Extraordinary
Item Net Income
----------- -----------
<S> <C> <C> <C>
Primary - per APB - 15,
Interpretation 102
Dividends declared per weighted
average share outstanding
(21,619,082 shares) $0.60
Dividends declared per weighted
average share outstanding
(18,963,600 shares) $0.54 $0.54
Undistributed loss per share:
($3,584,412) divided by
21,619,082 shares (0.17)
-----------
($3,114,795) divided by
18,963,600 shares (0.16)
-----------
($3,114,795) divided by
18,963,600 shares (0.16)
-----------
Income per share $0.43 $0.38 $0.38
=========== =========== ===========
Undistributed loss:
Income available to common
shareholders per statement
of operations $9,376,667 $7,125,816 $7,125,816
Dividends declared (12,961,079) (10,240,611) (10,240,611)
----------- ----------- -----------
($3,584,412) ($3,114,795) ($3,114,795)
=========== =========== ===========
</TABLE>
NOTE: Common Stock Equivalents are antidilutive due to undistributed losses
during the period.
<TABLE>
<CAPTION>
Fully diluted:
--------------
<S> <C> <C> <C>
Net Income available to common
shareholders'/ $9,376,667 = $.43 $7,125,816 = $0.37 $7,125,816 = $0.37
---------- ---------- ----------
Weighted Average Number of 21,863,509 19,134,772 19,134,772
Shares and equivalents
</TABLE>
-26-
<PAGE> 2
EXHIBIT 11.1
DEVELOPERS DIVERSIFIED REALTY CORPORATION
Earnings per Share
<TABLE>
<CAPTION>
For the Nine Month Periods Ended September 30,
1996 1995
------------ -------------------------------
Income Before
Extraordinary
Item Net Income
----------- -----------
<S> <C> <C> <C>
Primary - per APB - 15,
Interpretation 102
Dividends declared per weighted
average share outstanding
(20,973,816 shares) $1.85
Dividends declared per weighted
average share outstanding
(18,717,652 shares) $1.64 $1,64
Undistributed loss per share:
($12,272,175) divided by
(20,973,816) shares (0.58)
------------
($10,042,823) divided by
18,717,652 shares (0.54)
------------
(13,599,698) divided by
18,717,652 shares (0.73)
------------
Income per share $1.27 $1.10 $0.91
============ ============ ============
Undistributed loss:
Income available to common
shareholders per statement
of operations $26,596,381 $20,674,605 $17,117,730
Dividends declared (38,868,556) (30,717,428) (30,717,428)
------------ ------------ ------------
($12,272,175) $(10,042,823) $(13,599,698)
============ ============ ============
</TABLE>
NOTE: Common Stock Equivalents are antidilutive due to undistributed losses
during the period.
<TABLE>
<CAPTION>
Fully diluted:
--------------
<S> <C> <C> <C>
Net Income available to common
shareholders'/ $26,596,381 = $1.25 $20,674,605 = $1.09 $17,117,730 = $0.91
----------- ----------- -----------
Weighted Average Number of 21,205,822 18,886,078 18,886,078
</TABLE>
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 543,327
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 960,336,931
<DEPRECIATION> (135,685,969)
<TOTAL-ASSETS> 945,765,759
<CURRENT-LIABILITIES> 0
<BONDS> 449,406,568
<COMMON> 2,162,768
0
149,750,000
<OTHER-SE> 320,364,998
<TOTAL-LIABILITY-AND-EQUITY> 945,765,759
<SALES> 0
<TOTAL-REVENUES> 97,073,583
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 43,918,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,921,738
<INCOME-PRETAX> 37,246,100
<INCOME-TAX> 0
<INCOME-CONTINUING> 37,246,100
<DISCONTINUED> 37,246,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,246,100
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.25
</TABLE>
