SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 JUNE 30, 1999
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 1-11998
KONOVER PROPERTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 56-1819372
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11000 Regency Parkway
Suite 300
Cary, North Carolina
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
27511
(ZIP CODE)
(919) 462-8787
(Registrant's telephone
number, including area
code)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
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: 30,838,711 shares of Common
Stock, $0.01 par value, as of August 10, 1999.
<PAGE>
KONOVER PROPERTY TRUST, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
ITEM 1. Financial Statements (Unaudited)................................. 3
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
ITEM 3. Quantitative and Qualitative Disclosures of Market Risk.......... 27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 28
ITEM 2. Changes in Securities and Use of Proceeds........................ 28
ITEM 3. Defaults Upon Senior Securities.................................. 28
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 28
ITEM 5. Other Information................................................ 28
ITEM 6. Exhibits and Reports on Form 8-K................................. 28
Signatures ............................................................. 29
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
INDEX TO UNAUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.................................. 4
Consolidated Statements of Operations for the three months ended June 30, 1999 and 1998................ 5
Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998.................. 6
Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1999................. 7
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998.................. 8
Notes to Consolidated Financial Statements............................................................. 9
</TABLE>
3
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
(UNAUDITED) (AUDITED)
---------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA))
ASSETS
<S> <C> <C>
INCOME PRODUCING PROPERTIES:
Land $ 115,431 $ 108,978
Buildings and improvements 473,128 437,932
Deferred leasing and other charges 31,691 28,561
---------------------------------------------
620,250 575,471
Accumulated depreciation and amortization (76,027) (66,108)
---------------------------------------------
544,223 509,363
Properties under development 20,352 7,414
Properties held for sale 5,837 5,946
Investment in joint ventures 38,496 32,138
---------------------------------------------
608,908 554,861
OTHER ASSETS:
Cash and cash equivalents 17,887 72,302
Restricted cash 5,662 6,052
Tenant and other receivables 14,139 12,076
Deferred charges and other assets 17,178 12,622
Notes receivable 16,706 24,536
---------------------------------------------
$ 680,480 $ 682,449
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt on income properties $ 307,084 $ 304,783
Capital lease obligations 755 774
Accounts payable and other liabilities 17,181 15,305
---------------------------------------------
325,020 320,862
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN OPERATING PARTNERSHIP 12,796 12,246
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 792,000
issued and outstanding at June 30, 1999 and December 31, 1998 18,962 18,962
Stock purchase warrants 9 9
Commonstock, $0.01 par value, 100,000,000 shares authorized, 30,838,711 and
31,207,457 issued and outstanding at June 30, 1999 and December 31,
1998, respectively 308 313
Additional paid-in capital 323,867 328,705
Retained Earnings - 1,612
Deferred compensation - Restricted Stock Plan (482) (260)
---------------------------------------------
342,664 349,341
=============================================
$ 680,480 $ 682,449
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---------------------------------------------
<S> <C> <C>
RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Base rents $ 15,922 $ 14,048
Percentage rents 408 151
Property operating cost recoveries 4,232 3,962
Other income 524 504
---------------------------------------------
21,086 18,665
---------------------------------------------
Property operating costs:
Common area maintenance 2,399 2,044
Utilities 624 627
Real estate taxes 2,002 1,882
Insurance 238 243
Marketing 162 156
Other 996 582
---------------------------------------------
6,421 5,534
Depreciation and amortization 5,896 5,585
---------------------------------------------
12,317 11,119
---------------------------------------------
8,769 7,546
---------------------------------------------
OTHER EXPENSES:
General and administrative 2,115 1,870
Interest 3,862 6,101
---------------------------------------------
INCOME (LOSS) FROM OPERATIONS 2,792 (425)
Loss on sale of real estate 158 353
Equity in earnings of unconsolidated ventures 3 -
Minority interest in operating partnership 79 -
---------------------------------------------
NET INCOME (LOSS) 2,552 (778)
Preferred dividends 275 -
---------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 2,277 $ (778)
=============================================
BASIC INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.07 $ (0.05)
=============================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,756 14,186
=============================================
DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ (0.05)
=============================================
WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,341 14,186
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---------------------------------------------
<S> <C> <C>
RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Base rents $ 30,482 $ 23,776
Percentage rents 569 302
Property operating cost recoveries 7,991 7,062
Other income 1,207 1,731
---------------------------------------------
40,249 32,871
---------------------------------------------
Property operating costs:
Common area maintenance 4,487 3,653
Utilities 1,246 1,209
Real estate taxes 3,930 3,273
Insurance 479 405
Marketing 316 315
Other 1,875 1,105
---------------------------------------------
12,333 9,960
Depreciation and amortization 11,066 9,558
---------------------------------------------
23,399 19,518
---------------------------------------------
16,850 13,353
---------------------------------------------
OTHER EXPENSES:
General and administrative 4,050 3,397
Interest 7,170 10,482
---------------------------------------------
INCOME (LOSS) FROM OPERATIONS 5,630 (526)
Loss on sale of real estate 350 353
Equity in earnings of unconsolidated ventures 6 -
Minority interest in operating partnership 166 -
---------------------------------------------
NET INCOME (LOSS) 5,108 (879)
Preferred dividends 550 -
---------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 4,558 $ (879)
=============================================
BASIC INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.15 $ (0.07)
=============================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,936 13,076
=============================================
DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.15 $ (0.07)
=============================================
WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,492 13,076
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE STOCK PURCHASE ADDITIONAL PAID
PREFERRED STOCK WARRANTS COMMON STOCK IN CAPITAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 18,962 $ 9 $ 313 $ 328,705
Expenses related to sale of common stock - - - (213)
Issuance of 10,830 employee stock purchase plan
shares - - - 58
Issuance of 55,871 restricted shares - - - 325
Repurchase of 493,200 shares of common stock - - (5) (2,962)
Compensation under stock plans - - - -
Preferred stock dividends ($0.25 per share) - - - -
Common stock dividends ($0.25 per share) - - - (2,046)
Net income - - - -
====================================================================
BALANCE AT JUNE 30, 1999 $ 18,962 $ 9 $ 308 $ 323,867
====================================================================
</TABLE>
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
RETAINED RESTRICTED STOCK
EARNINGS PLAN TOTAL
------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 1,612 $ (260) $ 349,341
Expenses related to sale of common stock - - (213)
Issuance of 10,830 employee stock purchase plan
shares - - 58
Issuance of 55,871 restricted shares - (325) -
Repurchase of 493,200 shares of common stock - - (2,967)
Compensation under stock plans - 103 103
Preferred stock dividends ($0.25 per share) (550) - (550)
Common stock dividends ($0.25 per share) (6,170) - (8,216)
Net income 5,108 - 5,108
=====================================================
BALANCE AT JUNE 30, 1999 $ - $ (482) $ 342,664
=====================================================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
-----------------------------
<S> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,108 $ (879)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,066 9,558
Loss on sale of real estate 350 353
Minority interest in operating partnership 166 -
Amortization of deferred financing costs 848 173
Compensation under stock plans 948 664
Amortization of debt premium (652) -
Net changes in:
Tenant and other receivables (2,063) (1,223)
Deferred charges and other assets (5,211) (1,882)
Accounts payable and other liabilities 1,683 3,464
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,243 10,228
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (17,879) (7,098)
Proceeds from sale of real estate - 5,717
Acquisition of income-producing properties, net (36,382) (5,528)
Payments received (advances) on notes receivable, net 7,830 (6,973)
Investment in joint ventures (6,358) (9,464)
Change in restricted cash 390 975
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (52,399) (22,371)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt on income properties 646 82,721
Repayment of debt on income properties (1,786) (86,288)
Expenses related to sale of common stock (213) 20,210
Deferred financing charges (842) (1,221)
Repayments of capital lease obligation (123) (258)
Repurchase of restricted stock - (30)
Exercise of stock options - 39
Issuance of shares under employee stock purchase plan 58 -
Distribution to operating partnership unit holders (266) -
Distribution to common and preferred stockholders (8,766) -
Repurchase of common stock (2,967) -
-----------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (14,259) 15,173
-----------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (54,415) 3,030
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,302 4,872
=============================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,887 $ 7,902
=============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
(net of interest capitalized of $360 and $546) $ 8,823 $ 9,427
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
1. INTERIM FINANCIAL STATEMENTS
ORGANIZATION
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty
Trust, Inc., was incorporated on March 31, 1993 as a self-advised and
self-managed real estate investment trust (REIT). The Company is principally
engaged in the acquisition, development, ownership, and operation of retail
shopping centers. The Company's revenues are primarily derived under real estate
leases with national, regional and local retailing companies.
Over the past five years, the Company has grown from an owner of retail
shopping centers with an aggregate square footage of 4.2 million to an owner of
approximately 8.9 million square feet. On June 30, 1999, the Company-owned
properties consisted of:
1. 54 community shopping centers in 17 states aggregating approximately
6,580,000 square feet;
2. 10 outlet centers in nine states aggregating approximately 2,110,000 square
feet;
3. 2 centers aggregating approximately 167,000 square feet that are held for
sale; and
4. approximately 124 acres of outparcel land located near or adjacent to certain
of the Company's centers, which are being marketed for lease or sale.
In addition, square footage of properties managed by the Company
increased to 8.9 million at June 30, 1999 from 1.8 million at June 30, 1998.
On December 17, 1997, following shareholder approval, the Company
changed its domicile from the State of Delaware to the State of Maryland. The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland subsidiary, Konover Property Trust, Inc. (formerly FAC Realty Trust,
Inc.). Following the reincorporation on December 18, 1997, the Company
reorganized as an umbrella partnership real estate investment trust (an
"UPREIT"). The Company then contributed to KPT Properties, L.P. (formerly FAC
Properties, L.P.), a Delaware limited partnership (the "Operating Partnership")
all of its assets and liabilities. In exchange for the Company's assets, the
Company received limited partnership interests ("Units") in the Operating
Partnership in an amount and designation that corresponded to the number and
designation of outstanding shares of capital stock of the Company at the time.
The Company is the sole general partner of the Operating Partnership and owns a
97% interest as of June 30, 1999. As additional limited partners are admitted to
the Operating Partnership in exchange for the contribution of properties, the
Company's percentage ownership in the Operating Partnership will decline. As the
Company issues additional shares of capital stock, it will contribute the
proceeds for that capital stock to the Operating Partnership in exchange for a
number of Units equal to the number of shares that the Company issues. The
Company conducts all of its business and owns all of its assets through the
Operating Partnership (either directly or through subsidiaries) such that a Unit
is economically equivalent to a share of the Company's common stock.
An UPREIT may allow the Company to offer Units in the Operating
Partnership in exchange for ownership interests from tax-motivated sellers.
Under certain circumstances, the exchange of Units for a seller's ownership
interest will enable the Operating Partnership to acquire assets while allowing
the seller to defer the tax liability associated with the sale of such assets.
Effectively, this allows the Company to use Units instead of stock to acquire
properties, which provides an advantage over non-UPREIT entities.
9
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and the Operating Partnership and all of its subsidiaries. All
significant inter-company balances have been eliminated in consolidation.
Properties owned (at least in part) and controlled by the Operating
Partnership have been consolidated. Control is demonstrated by the ability of
the Operating Partnership to manage, directly or indirectly, day-to-day
operations, refinance debt and sell the assets of the entity that owns the
property without the consent of the other owners and the inability of the other
owners to replace the general partner or manager. Investments in ventures which
represent noncontrolling ownership interests or where control is deemed
temporary are accounted for using the equity method of accounting. These
investments are recorded initially at cost and subsequently adjusted for net
equity in income (loss) and cash contributions and distributions.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (primarily consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six-month periods ended June
30, 1999 are not necessarily indicative of results that may be expected for the
year ended December 31, 1999. For further information, refer to the audited
financial statements and accompanying footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
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 at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain amounts from prior years were reclassified to conform with
current-year presentation. These reclassifications had no effect on net income
(loss) or stockholders' equity as previously reported.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
BASIC AND DILUTED INCOME PER SHARE
For the three months and six months ended June 30, 1999, the
denominator for diluted earnings per share is calculated as follows (in
thousands):
10
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
THREE SIX MONTHS
MONTHS ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
---------------- ----------------
DENOMINATOR:
Denominator- weighted average shares 30,756 30,936
Effect of dilutive securities:
Preferred stock 2,200 2,200
Employee stock options 33 33
Restricted stock 301 272
Operating Partnership Units 1,051 1,051
---------------- ----------------
Dilutive potential common shares 3,585 3,556
---------------- ----------------
Denominator- adjusted weighted average
shares and assumed conversions 34,341 34,492
================ ================
All potential common shares have been excluded from dilutive potential shares
for the three and six months ended June 30, 1998 because the effect would be
antidilutive.
DIVIDENDS
In June, 1999, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of June 15, 1999. The dividend of $4.5
million was paid on June 30, 1999. As of June 30, 1999, the Company has paid
dividends totaling $9.0 million to its shareholders including $0.3 million to
operating partnership unit holders.
COMPREHENSIVE INCOME
The Company had no items of other comprehensive income for three and
six months ended June 30, 1999 and 1998.
3. SIGNIFICANT TRANSACTIONS
LAZARD FRERES TRANSACTION
On August 5, 1998, the stockholders approved a Stock Purchase Agreement
between Prometheus Southeast Retail, LLC (including its assignee, "PSR"), a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC,
("Lazard") and the Company pursuant to which PSR made a $200 million purchase of
shares of Common Stock of the Company at a purchase price of $9.50 per share
(the "Transaction"). Upon completion of funding, PSR owned an equity interest in
the Company of approximately 58%, on a diluted basis. As a result of subsequent
stock repurchases by the Company, PSR's ownership interest in the Company is
62%, assuming conversion of outstanding preferred stock and units into shares.
Under the terms of the Transaction agreements, for as long as PSR's investment
in the Company is $50 million or more, PSR has the right to participate in
future equity issuances to preserve its ownership interest.
Pursuant to the Contingent Value Rights Agreement, if PSR has not
doubled its investment (through stock appreciation and dividends) by January 1,
2004, the Company may be required to pay PSR, in cash or stock, an amount
necessary to achieve such a return, subject to a maximum payment of 4,500,000
shares or the cash value thereof.
11
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of the Company's acquisition activity since 1996 follows (in
thousands):
<TABLE>
<CAPTION>
OP UNITS
STATE SQUARE PURCHASE DEBT ($9.50
LOCATION DATE FEET PRICE ASSUMED CASH PER SHARE)
----------------- ----------- ----------- -------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 TO DATE
Grove Park SC 5/13/99 95 $ 5,700 - $ 5,700 -
Crossroads at Mandarin FL 4/14/99 72 4,500 - 4,500 -
Dare Center NC 3/31/99 113 5,000 - 5,000 -
Braves Village SC 3/31/99 60 4,500 - 4,500 -
Eastgate Plaza FL 3/30/99 182 10,400 - 10,400 -
Dukes Plaza VA 3/1/99 140 6,500 4,100 2,400 -
Robertson Corners SC 1/6/99 48 3,900 - 3,900 -
----------- ----------- -------------- ------------- ------------- ----------
TOTAL 710 40,500 4,100 36,400 -
1998
Waverly Place NC 12/14/98 181 12,800 10,700 2,100 -
University Shoppes SC 8/31/98 54 4,700 3,200 1,500 -
Konover (portfolio) FL, NC, VA, AL 4/1/98 1,519 85,400 55,200 26,700 369
Rodwell/Kane (portfolio) NC, VA 3/31/98 955 57,100 44,300 3,500 974 (1)
Market Square VA 1/7/98 56 3,100 2,300 800 -
----------------- ----------- ----------- -------------- ------------- ------------- ----------
TOTAL 2,765 163,100 115,700 34,600 1,343
1997
North Hills (portfolio) NC 3/31/97 606 32,300 - 32,300 -
1996
N/A - - - - -
=========== ============== ============= ============= ==========
TOTAL 4,081 $ 235,900 $ 119,800 $ 103,300 1,343
=========== ============== ============= ============= ==========
</TABLE>
(1) Includes 292 units to be issued upon the completion of certain contingencies
contained in the agreement.
JOINT VENTURES
A summary of the Company's investments in venture companies at June 30,
1999 and December 31, 1998, is as follows (all investments are accounted for
under the equity method, in thousands):
<TABLE>
<CAPTION>
Amounts invested
---------------- --------------
June 30, December 31,
Location Ownership 1999 1998
-------- --------- ---------------- --------------
<S> <C> <C> <C> <C>
Atlantic Realty North Carolina 50% $ 7,780 $ 7,442
Mount Pleasant KPT Mount Pleasant, SC 50% 24,429 18,759
Wakefield Investment Wake Forest, NC 95% 570 570
Falls KPT Raleigh, NC 50% 5,717 5,367
---------------- --------------
$ 38,496 $ 32,138
================ ==============
</TABLE>
12
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The majority of the properties owned by the venture companies are under
development and have no material operations with the exception of two projects
with Atlantic Realty as of June 30, 1999. The development project at Mount
Pleasant was 38% occupied at June 30, 1999. Its grand opening will be on August
13, 1999 at which time 50% of the center will be open and a total of 64% of the
center's gross leasable area under executed leases. The acquisition and
development of the above properties are subject to, among other things,
completion of due diligence and various contingencies, including those inherent
in development projects, such as zoning, leasing and financing. There can be no
assurance that all of the above transactions will be consummated. All debt
incurred by the ventures is non-recourse to the Company and is secured by their
respective properties and guaranteed by the Company's respective venture
partners.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This discussion should be read with the selected financial data in this
section and the consolidated financial statements and notes in this report.
Certain comparisons between the periods have been made on a percentage basis and
on a weighted-average square-foot basis. Comparisons on a weighted-average
square-foot basis adjust for square-footage added at different times during the
year.
GENERAL OVERVIEW
Konover Property Trust, Inc. (the "Company"), formerly FAC Realty
Trust, Inc., was incorporated on March 31, 1993 as a self-advised and
self-managed real estate investment trust (REIT). The Company is principally
engaged in the acquisition, development, operation, and ownership of retail
shopping centers. The Company's revenues are primarily derived under real estate
leases with national, regional and local retailing companies.
On June 30, 1999, the Company-owned properties consisted of:
(1) 54 community shopping centers in 17 states aggregating approximately
6,580,000 square feet;
(2) 10 outlet centers in nine states aggregating approximately 2,110,000
square feet;
(3) 2 centers aggregating approximately 167,000 square feet that are held
for sale; and
(4) approximately 124 acres of outparcel land located near or adjacent to
certain of the Company's centers, which are being marketed for lease or
sale.
The weighted-average square feet of gross leasable area is as follows (in
millions):
Three months ended Six months ended
June 30, June 30,
--------------------- -------------------
1999 1998 1999 1998
---------- ---------- --------- ---------
Weighted average gross leasable area 8.8 8.1 8.5 6.8
SELECTED FINANCIAL DATA
The following information should be read in conjunction with the
consolidated financial statements and notes thereto included in this report.
Industry analysts generally consider Funds from Operations ("FFO") an
appropriate measure of performance for an equity REIT. FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt restructuring and sales of property plus depreciation
and amortization and adjustments for unusual items. Management believes that
FFO, as defined herein, is an appropriate measure of the Company's operating
performance because reductions for depreciation and amortization charges are not
meaningful in evaluating the operating results of its properties, which have
historically been appreciating assets.
Beginning in 1996 the Company adopted a change in the definition of FFO
as promulgated by the National Association of Real Estate Investment Trusts
(NAREIT). Under the new definition, amortization of deferred financing costs and
depreciation of non-real estate assets, as defined, are not included in the
calculation of FFO.
"EBITDA" is defined as revenues less operating costs, including general
and administrative expenses, before interest, depreciation and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal income
taxes. Management believes that EBITDA provides a meaningful indicator of
operating performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"), which is generally equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.
14
<PAGE>
FFO and EBITDA (i) do not represent cash flow from operations as
defined by generally accepted accounting principles, (ii) are not necessarily
indicative of cash available to fund all cash flow needs and (iii) should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity.
Other data that management believes is important in understanding
trends in its business and properties are also included in the following table
(in thousands, except per share data).
The income per share amounts comply with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share".
15
<PAGE>
<TABLE>
<CAPTION>
KONOVER PROPERTY TRUST, INC.
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Rental revenues $ 21,086 $ 18,665 $ 40,249 $ 32,871
Property operating costs 6,421 5,534 12,333 9,960
----------------- ---------------- ---------------- ----------------
14,665 13,131 27,916 22,911
Depreciation and amortization 5,896 5,585 11,066 9,558
General and administrative 2,115 1,870 4,050 3,397
Interest 3,862 6,101 7,170 10,482
Loss on sale of real estate 158 353 350 353
Equity in earnings of unconsolidated ventures 3 - 6 -
Minority interest in Operating Partnership 79 - 166 -
----------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 2,552 $ (778) $ 5,108 $ (879)
Preferred stock dividends 275 - 550 -
================= ================ ================ ================
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 2,277 $ (778) $ 4,558 $ (879)
================= ================ ================ ================
BASIC INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
PER SHARE $ 0.07 $ (0.05) $ 0.15 $ (0.07)
================= ================ ================ ================
Weighted-average common shares outstanding 30,756 14,186 30,936 13,076
================= ================ ================ ================
DILUTED INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE $ 0.07 $ (0.05) $ 0.15 $ (0.07)
================= ================ ================ ================
Weighted-average shares outstanding - diluted (a) 34,341 14,186 34,492 13,076
================= ================ ================ ================
OTHER DATA:
EBITDA
Net income (loss) $ 2,552 $ (778) $ 5,108 $ (879)
Adjustments:
Interest 3,862 6,101 7,170 10,482
Depreciation and amortization 5,896 5,585 11,066 9,558
Compensation under stock awards 548 367 948 664
Loss on sale of real estate 158 353 350 353
Minority interest 79 - 166 -
Share of depreciation in unconsolidated
ventures 24 - 48 -
------------------ ----------------- --------------- ----------------
$ 13,119 $ 11,628 $ 24,856 $ 20,178
================== ================= =============== ================
Weighted-average shares outstanding - diluted (a) 34,341 17,472 34,492 15,983
================== ================= =============== ================
FUNDS FROM OPERATIONS:
Net income (loss) $ 2,552 $ (778) $ 5,108 $ (879)
Adjustments:
Straight line rent 142 (12) 285 448
Real estate depreciation and amortization 5,822 5,427 10,953 9,260
Compensation under stock awards 548 367 948 664
Loss on sale of real estate 158 353 350 353
Minority interest 79 - 166 -
Share of depreciation in unconsolidated
ventures 24 - 48 -
================== ================= =============== ================
$ 9,325 $ 5,357 $ 17,858 $ 9,846
================== ================= =============== ================
Weighted-average shares outstanding - diluted (a) 34,341 17,472 34,492 15,983
================== ================= =============== ================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
KONOVER PROPERTY TRUST, INC.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
FUNDS AVAILABLE FOR DISTRIBUTION / REINVESTMENT:
Funds from Operations $ 9,325 $ 5,357 $ 17,858 $ 9,846
Adjustments:
Capitalized tenant allowances (747) (1,405) (1,049) (1,653)
Capitalized leasing costs (282) (580) (563) (1,092)
Recurring capital expenditures (67) (154) (131) (217)
=============== ================= =============== ================
$ 8,229 $ 3,218 $ 16,115 $ 6,884
=============== ================= =============== ================
DIVIDENDS DECLARED ON QUARTERLY EARNINGS $ 4,517 $ - $ 9,032 $ -
=============== ================= =============== ================
DIVIDENDS DECLARED ON QUARTERLY EARNINGS PER SHARE $ 0.125 $ - $ 0.250 $ -
=============== ================= =============== ================
CASH FLOWS:
Cash flows from operating activities $ 6,156 $ 3,163 $ 12,243 $ 10,228
Cash flows from investing activities (11,591) (14,861) (52,399) (22,371)
Cash flows from financing activities (6,186) 7,676 (14,259) 15,173
=============== ================= =============== ================
Net (decrease) increase in cash and cash equivalents $ (11,621) $ (4,022) $ (54,415) $ 3,030
=============== ================= =============== ================
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
--------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Income-producing properties (before depreciation and
amortization) $ 620,250 $ 546,509
Total assets 680,480 564,472
Debt on income properties 307,084 339,081
Total liabilities 325,020 371,827
Minority interest 12,796 9,304
Total stockholders' equity 342,664 183,341
PORTFOLIO PROPERTY DATA:
Total GLA (at end of period) 8,857 8,084
Weighted-average GLA 8,527 6,829
Number of properties (at end of period) 66 59
Occupancy (at end of period):
Operating 92.8% 93.6%
Held for sale/redevelopment 46.6% 57.5%
</TABLE>
(a) The following table sets forth the computation of the denominator to be
used in calculating the weighted-average shares outstanding based on
Statement of Financial Accounting Standard No. 128, "Earnings Per Share":
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
DENOMINATOR:
Denominator- weighted average shares 30,756 14,186 30,936 13,076
Effect of dilutive securities:
Preferred stock 2,200 2,222 2,200 2,222
Employee stock options 33 33 33 33
Restricted stock 301 368 272 321
Operating Partnership Units 1,051 663 1,051 331
------------- ------------- -------------- -------------
Dilutive potential common shares 3,585 3,286 3,556 2,907
------------- ------------- -------------- -------------
Denominator- adjusted weighted average
shares and assumed conversions 34,341 17,472 34,492 15,983
============= ============= ============== =============
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998.
NET INCOME
The Company reported a net income available to common shareholders of
$2.3 million, or $0.07 per common share, for the three months ended June 30,
1999. The same period in 1998 reported a net loss available to common
shareholders of ($0.8) million, or ($0.05) per common share. The elements having
a material impact on the change are discussed below:
>> The Company's NOI, exclusive of straight-line rent, increased by $1.7
million, or 13%, to $14.8 million from $13.1 million for the same period in
1998. Including the effect of straight-line rent adjustment, ($0.2 million)
NOI increased by $1.5 million. This increase was partly attributable to the
following:
Acquisition impact on NOI for the three months ended June 30, 1999 (in
thousands).
1999 Acquisitions $ 1,100
University Shoppes 100
Waverly Place 340
----------------
$ 1,540
================
>> The Company's acquisition activity was funded primarily with the use of
proceeds generated from the 1998 sale of common stock. These proceeds also
enabled the Company to reduce interest expense by $0.3 million to $6.5
million in 1999 from $6.8 million in 1998 and resulted in increased
interest income of $1.9 million over 1998.
>> Through acquisitions, the Company had increased depreciation and
amortization of $0.3 million and increased general and administrative
expenses of $0.2 million.
>> The disposition of certain development projects resulted in a loss of
approximately $0.2 million compared to $0.4 million for the same period in
1998.
>> The Company paid a $0.3 million dividend in 1999 to its preferred
shareholders.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM
OPERATIONS
EBITDA was $13.1 million for the three months ended June 30, 1999, an
increase of $1.5 million or 13%, from $11.6 million for the same period in 1998.
The increase was primarily due to increased NOI of $1.5 million over 1998,
including adjustment for straight-line rent, as described above, offset by an
increase in general and administrative expenses of $0.1 million exclusive of
compensation under stock plan awards.
Funds from Operations ("FFO") for the three months ended June 30, 1999
increased $3.9 million or 72% to $9.3 million. The Company's FFO for the same
period in 1998 was $5.4 million. FFO increased primarily as a result of the $1.7
million increase in NOI, exclusive of straight-line rent, as described above.
This increase in NOI is combined with:
>> an increase in general and administrative expenses, exclusive of
compensation under stock awards, of $0.1 million and
>> the decrease in net interest expense of $2.2 million.
TENANT INCOME
Base rent, including straight-line rent, increased 14% to $15.9 million
for the three months ended June 30, 1999 from $14.0 million for the same period
in 1998. Base rent before the adjustment for straight-line rent increased $2.1
million, or 15%, to $16.1 million for the three months ended June 30, 1999 when
compared to
18
<PAGE>
$14.0 million in 1998. The increase in base rent for the three months ended June
30, 1999, is attributable primarily to the following acquisitions:
Base Rent **
Three Months ended
June 30, 1999
(IN THOUSANDS)
-----------------------
1999 Acquisitions $ 1,130
University Shoppes 125
Waverly Place 410
-----------------------
$ 1,665
=======================
** BASE RENT EXCLUDES STRAIGHT-LINE RENT
During this same period, the Company's weighted-average square feet of
gross leasable area in operation increased 9%. Gross leasable area in operation
increased by 0.7 million square feet, primarily because of the acquisition of
the seven properties in 1999.
Recoveries from tenants increased 5% for the three months ended June
30, 1999 to $4.2 million compared to $4.0 million in the same period of 1998.
These recoveries represent contractual reimbursements from tenants of certain
common area maintenance, real estate taxes, and insurance costs. On a
weighted-average square-foot basis, recoveries decreased 2% to $0.48 for the
three months ended June 30, 1999 when compared to $0.49 for the same period in
1998. The average recovery of property operating expenses, exclusive of
marketing and other non-recoverable operating costs, decreased to 80% in 1999 as
compared to 83% in 1998.
PROPERTY OPERATING EXPENSES
Property operating costs increased $0.9 million, or 16%, to $6.4
million in 1999 from $5.5 million in the same period of 1998. The increase in
operating costs was principally due to the increase in the weighted-average
square feet in operation in 1999, which rose 9% to 8.8 million square feet in
1999 from 8.1 million square feet in 1998. On a weighted-average square-foot
basis, operating expenses increased 7% to $0.73 from $0.68 per weighted average
square foot.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended June 30,
1999 increased $0.2 million, or 11%, to $2.1 million in 1999 from $1.9 million
in 1998. General and administrative expenses in 1999 include $0.5 million in
compensation under stock plan awards. General and administrative expenses in
1998 include compensation under stock awards of $0.4 million. Exclusive of these
charges in 1999 and 1998, general and administrative expenses increased $0.1
million, but decreased as a percentage of revenues to 7.6% in 1999 from 8.0% in
1998.
DEPRECIATION
Depreciation decreased to $4.5 million for the three months ended June
30, 1999 compared to $4.6 million in the same period of 1998. The decrease is
due primarily to the 1999 acquisitions. Absent the impact of these acquisitions,
depreciation decreased $0.5 million which represents the impact on depreciation
of the change in estimate of the useful life of buildings from 31 to 39 years
recorded in fourth quarter of 1998. Amortization of deferred leasing and other
charges increased $0.4 million to $1.4 million. On a weighted-average
square-foot basis, depreciation and amortization decreased to $0.67 in 1999 from
$0.69 in 1998.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1999, net of
interest income of $2.7 million,
19
<PAGE>
decreased by $2.2 million, or 36%, to $3.9 million compared to $6.1 million, net
of interest income of $0.7 million, for the three months ended June 30, 1998.
This decrease resulted primarily from the increase in interest income generated
from the proceeds from the sale of common stock in 1998. On a weighted-average
basis, the three months ended June 30, 1999, debt outstanding was $305.8
million, and the average interest rate was 7.92%. This compares to $342.1
million of outstanding debt and a 7.93% average interest rate in 1998. The
Company capitalized $0.2 million of interest costs associated with its
development projects for the three months ended June 30, 1999 and 1998.
PROPERTIES HELD FOR SALE
For the three months ended June 30, 1999, the properties held for sale
contributed approximately $0.1 million of revenue. After deducting related
interest expense on the debt associated with those properties, the properties
held for sale incurred a loss of $0.1 million. For the three months ended June
30, 1998, the properties held for sale contributed approximately $0.2 million of
revenue and incurred a loss of $0.8 million after deducting related interest
expense. The decrease in revenue and decrease in net loss is principally due to
the sale of one property in April 1998 which resulted in a loss of $0.4 million.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998.
NET INCOME
The Company reported a net income available to common shareholders of
$4.6 million, or $0.15 per common share, for the six months ended June 30, 1999.
The same period in 1998 reported a net loss available to common shareholders of
$0.9 million, or ($0.07) per common share. The elements having a material impact
on the change are discussed below:
>> The Company's NOI, exclusive of straight-line rent, increased by $4.9
million, or 21%, to $28.2 million from $23.3 million for the same period in
1998. Including the effect of straight-line rent adjustment, ($0.2 million)
NOI increased by $5.0 million. This increase was partly attributable to the
following:
Acquisition impact on NOI for the six months ended June 30, 1999 (in
thousands).
1999 Acquisitions $ 1,220
University Shoppes 230
Waverly Place 700
Konover (portfolio) 2,100
--------------------
$ 4,250
====================
>> The Company's acquisition activity required higher borrowing levels
resulting in increased interest expense by $0.9 million. Investments made
with funds from the proceeds from the sale of common stock in 1998 resulted
in increased interest income of $4.2 million.
>> Through acquisitions, the Company had increased depreciation and
amortization of $1.5 million and increased general and administrative
expenses of $0.7 million.
>> The Company paid a $0.6 million dividend in 1999 to its preferred
shareholders.
20
<PAGE>
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM
OPERATIONS
EBITDA was $24.9 million for the six months ended June 30, 1999, an
increase of $4.7 million or 23%, from $20.2 million for the same period in 1998.
The increase was due to increased NOI of $5.0 million over 1998, including
adjustment for straight-line rent (as described above) offset by an increase in
general and administrative expenses of $0.5 million exclusive of compensation
under stock plan awards.
Funds from Operations ("FFO") for the six months ended June 30, 1999
increased $8.1 million or 81% to $17.9 million. The Company's FFO for the same
period in 1998 was $9.8 million. FFO increased primarily as a result of the $4.9
million increase in NOI, exclusive of straight-line rent, as described above
combined with:
>> an increase in general and administrative expenses (exclusive of
compensation under stock awards) of $0.5 million and
>> the decrease in net interest expense of $3.3 million.
TENANT INCOME
Base rent, including straight-line rent, increased 28% to $30.5 million
for the six months ended June 30, 1999 from $23.8 million for the same period in
1998. Base rent before the adjustment for straight-line rent increased $6.6
million, or 27%, to $30.8 million for the six months ended June 30, 1999 when
compared to $24.2 million in 1998. The increase in base rent for the six months
ended June 30, 1999, is attributable primarily to the following acquisitions (in
millions):
Base Rent (*)
Six Months ended
June 30, 1999
(IN THOUSANDS)
------------------
1999 Acquisitions $1,300
University Shoppes 245
Waverly Place 800
Konover (portfolio) 2,300
------------------
$4,645
==================
(*) Base rent excludes straight-line rent
During this same period, the Company's weighted-average square feet of
gross leasable area in operation increased 25%. In addition, gross leasable area
in operation at period end increased by 0.8 million square feet, primarily
because of the seven properties acquired in 1999 totaling 0.7 million in gross
leasable area and two properties acquired in the second half of 1998 totaling
0.2 million in gross leasable area. These described increases were partially
offset by the sales of properties in California and Kentucky totaling 0.2
million in gross leasable area.
Recoveries from tenants increased 13% for the six months ended June 30,
1999 to $8.0 million compared to $7.1 million in the same period of 1998. These
recoveries represent contractual reimbursements from tenants of certain common
area maintenance, real estate taxes, and insurance costs. On a weighted-average
square-foot basis, recoveries decreased 10% to $0.94 for the six months ended
June 30, 1999 when compared to $1.04 for the same period in 1998. The average
recovery of property operating expenses, exclusive of marketing and other
non-recoverable operating costs, decreased to 79% in 1999 as compared to 83% in
1998.
OTHER INCOME
Other income decreased $0.5 million to $1.2 million in 1999 compared to
$1.7 million in 1998 primarily as a result of decreased third-party management
fee income of $0.7 million offset by increased leasing fee income of $0.2
million primarily from development projects. The decrease is directly
attributable to the fact that prior
21
<PAGE>
to the closing on the eight Rodwell/Kane properties, the Company managed these
community centers, which generated $0.6 million in management fees. The Company
will continue to manage the one remaining Rodwell/Kane community center.
PROPERTY OPERATING EXPENSES
Property operating costs increased $2.3 million, or 23%, to $12.3
million in 1999 from $10.0 million in the same period of 1998. The increase in
operating costs was principally due to the increase in the weighted-average
square feet in operation in 1999, which rose 25% to 8.5 million square feet in
1999 from 6.8 million square feet in 1998. On a weighted-average square-foot
basis, operating expenses decreased 1% to $1.45 from $1.47 per weighted average
square foot.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the six months ended June 30,
1999 increased $0.7 million, or 21%, to $4.1 million in 1999 from $3.4 million
in 1998. General and administrative expenses in 1999 include $0.9 million in
compensation under stock plan awards. General and administrative expenses in
1998 include compensation under stock awards of $0.7 million. Exclusive of these
charges in 1999 and 1998, general and administrative expenses increased $0.5
million, but decreased as a percentage of revenues to 8.0% from 8.2% in 1998.
DEPRECIATION
Depreciation increased to $8.7 million for the six months ended June
30, 1999 compared to $7.6 million in the same period of 1998. The increase is
due primarily to the 1999 and 1998 acquisitions including the Rodwell/Kane and
Konover portfolio acquisitions. Absent the impact of these acquisitions,
depreciation decreased $0.5 million for the six months ended June 30, 1999,
which represents the impact on depreciation of the change in estimate of the
useful life of buildings from 31 to 39 recorded in the fourth quarter of 1998.
Amortization of deferred leasing and other charges increased $0.4 million to
$2.4 million. On a weighted-average square-foot basis, depreciation and
amortization decreased to $1.31 in 1999 from $1.41 in 1998.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 1999, net of
interest income of $5.3 million, decreased by $3.3 million, or 31%, to $7.2
million compared to $10.5 million, net of interest income of $1.1 million, in
the first six months of 1998. This decrease resulted primarily from higher
borrowing levels in 1999 due to the investment in and acquisition of
income-producing properties offset by the interest income generated from the
proceeds from the sale of common stock in 1998. On a weighted-average basis, in
the first six months of 1999, debt outstanding was $306.5 million, and the
average interest rate was 7.92%. This compares to $273.2 million of outstanding
debt and a 7.94% average interest rate in 1998. The Company capitalized $0.4
million of interest costs associated with its development projects in the first
six months of 1999 compared to $0.5 million in the same period of 1998.
PROPERTIES HELD FOR SALE
For the six months ended June 30, 1999, the properties held for sale
contributed approximately $0.1 million of revenue. After deducting related
interest expense on the debt associated with those properties, the properties
held for sale incurred a loss of $0.2 million. For the six months ended June 30,
1998, the properties held for sale contributed approximately $0.5 million of
revenue and incurred a loss of $1.2 million after deducting related interest
expense. The decrease in revenue and decrease in net loss is principally due to
the sale of one property in April 1998 which resulted in a loss of $0.4 million.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company's cash and cash equivalents balance at June 30, 1999 was
$17.9 million. Restricted cash, as reported in the financial statements, as of
such date, was $5.7 million. The restricted cash is an amount the Company was
required to escrow in connection with various loans. The escrows are required to
fund taxes, environmental and engineering work, recurring replacement costs and
insurance.
Net cash provided by operating activities was $12.2 million for the six
months ended June 30, 1999. Net cash used in investing activities was $52.4
million in that same period. The primary use of these funds included:
>> $36.4 million of cash to acquire seven centers aggregating 0.7 million
square feet located in Florida, North Carolina, South Carolina and Virginia
>> $6.4 million invested in ventures.
>> $17.9 million invested in the Company's income-producing properties.
>> These cash uses were offset by repayments received on certain notes
receivables of $7.8 million.
Net cash used in financing activities was $14.3 million for the six
months ended June 30, 1999. The primary use of these funds included:
>> $9.0 million for dividends paid,
>> $3.0 million for the repurchase of 493,200 shares of the Company's common
stock, and
>> $1.8 million for debt repayments.
CURRENT AND FUTURE CASH NEEDS
The Company's management anticipates that cash generated from
operations will provide the necessary funds for operating expenses, interest
expense on outstanding indebtedness, dividends and distributions in accordance
with REIT federal income tax requirements, re-tenanting and lease renewal tenant
improvement costs, as well as capital expenditures to maintain the quality of
its existing centers. The Company also believes that it has capital and access
to capital resources, including additional borrowings and issuances of debt or
equity securities, sufficient to pursue its strategic plans.
LAZARD TRANSACTION
On August 5, 1998, stockholders approved the Lazard transaction
involving PSR's $200 million purchase of the Company's Common Stock at $9.50 per
share. The investment was made in stages, as follows:
<TABLE>
<CAPTION>
SALE DATE SHARES SOLD PURCHASE PRICE
--------- ----------- --------------
<S> <C> <C> <C> <C>
March 23, 1998 2,350,000 $ 22,325,000
August 10, 1998 2,913,157 $ 27,675,000
August 28, 1998 5,263,158 $ 50,000,000
September 29, 1998 10,526,316 $ 100,000,000
---------- ----------------
21,052,631 $ 200,000,000
========== ================
</TABLE>
As of June 30, 1999, the majority of these funds have been used to fund
acquisitions, debt retirement, investments in ventures, common stock repurchases
and development.
As part of the Lazard transaction, the Company signed a Contingent
Value Rights Agreement with PSR. Under this the Contingent Value Rights
Agreement, if PSR has not essentially doubled its investment (through stock
appreciation and dividends) by January 1, 2004, the Company will be required to
pay PSR, in cash or stock, an amount necessary to achieve such a return, subject
to a maximum payment of 4,500,000 shares or the cash value thereof.
23
<PAGE>
FINANCING ACTIVITIES
In December 1998, the Company completed a substitution and
recollateralization of its REMIC facility. This $95 million facility was
originally issued in May 1995 and was secured by 18 properties. The substitution
was the first step in an effort by the Company to gain greater flexibility in
the purchase of assets and the sale of assets that may no longer meet the
Company's ongoing strategy. The REMIC balance as of June 30, 1999 was $89.1
million and is secured by 24 properties. The Company is currently seeking
bondholder approval for ongoing substitution rights based upon predetermined
criteria.
An acquisition line of credit was put in place in early 1997 for $150
million. The availability under this line is based upon a predetermined formula
on the Net Operating Income of the properties securing the facility. The line
originally was secured by 21 properties plus an assignment of the excess cash
flow of the REMIC facility referenced above. During 1998, the security on the
portfolio was reduced to only five properties plus the excess cash flow of the
REMIC in conjunction with both a permanent facility transaction, as described
below, and a paydown. The paydown of $31 million was funded from the issuance of
shares to PSR. The line was renewed for $150 million during the first quarter of
1999 through February 2000. The primary use of the line will be to fund future
acquisitions and developments. The addition of newly acquired properties to the
line would result in increased availability.
In 1998, the Company closed on a $75 million, 15-year permanent credit
facility. The loan has an effective rate of 7.73% and is amortized on a
360-month basis. Eleven properties previously securing the $150 million
revolving credit facility secure this new facility. The proceeds were used to
pay down borrowings outstanding on the $150 million credit facility. The credit
facility balance as of June 30, 1999 was $73.9 million, including a $7.2 million
unamortized interest rate premium.
DIVIDENDS
In June, 1999, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of June 15, 1999. The dividend of $4.5
million was paid on June 30, 1999. As of June 30, 1999, the Company has paid
dividends totaling $9.0 million to its shareholders including $0.3 million to
operating partnership unit holders.
SHARE REPURCHASE
For the six months ended June 30, 1999, the Company has repurchased
493,200 shares of its common stock at an average share price of $6.02 for a
total of approximately $3.0 million. As of June 30, 1999, the Company had
repurchased a total of 2,241,800 shares at an average price of $6.91 under its
stock repurchase program. The Company is currently authorized to purchase an
additional 1,758,200 shares.
IMPACT OF YEAR 2000 ISSUE
GENERAL
The Year 2000 compliance issue concerns the inability of computer
systems to calculate accurately, store or use a date after 1999. This could
result in a system failure or miscalculation causing disruptions of operations.
The Year 2000 issue affects virtually all companies and all organizations.
The Year 2000 issue, if not corrected, could result in the failure of
the information technology ("IT") systems that the Company uses in its business
operations, such as computer programs related to property management, leasing,
financial reporting and employee benefits. In addition, computerized systems and
microprocessors are embedded in a variety of products used in the Company's
operations and properties, such as HVAC controls, thermostats, lights,
elevators, alarms, smoke detectors, sprinklers and phones.
24
<PAGE>
STATE OF READINESS
The Company's remediation plan has three phases:
>> Assessment (inventory and testing of computer systems and inquiry of Y2K
readiness of material third parties)
>> Renovation (repairing or replacing non-compliant systems) and
>> Validation (testing of repaired or replaced systems).
The following chart shows our progress with respect to our remediation
plan:
<TABLE>
<CAPTION>
Assessment Phase Renovation Phase Validation Phase
---------------- ---------------- ----------------
Expected Expected
Completion Completion Completion
% Complete * Date % Complete * Date % Complete * Date
--------------- --------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
IT 100% 1Q 99 75% 3Q 99 75% 3Q 99
Non-IT 100% 1Q 99 90% 3Q 99 90% 3Q 99
</TABLE>
* BASED ON LABOR UNDERTAKEN
With respect to Year 2000 issues relating to third parties with whom we
have a material relationship, we have sought representations from all tenants
representing more than 2% of our annualized revenue. (No tenant is expected to
contribute more than 9% of our annualized revenue in 1999.) Such tenants do not
expect to be materially affected by Year 2000 issues. With respect to suppliers
and vendors, the Company's material purchases are generally from those in
competitive fields where others will be able to meet any Company needs unmet by
suppliers or vendors with Year 2000 difficulties. Although we have no reason to
expect a significant interruption of utility services for our properties, we
have not received written assurances from all utility providers that Y2K issues
will not cause an interruption in service.
COSTS
To date, the costs directly associated the Company's Year 2000 efforts
have not been material, and we estimate our future costs to be immaterial as
well.
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
We do not expect Year 2000 failures to have a material adverse effect
on our results of operations or liquidity because:
>> We do not rely on a small number of tenants for a significant portion of
our rental revenue and our largest tenants do not expect to be materially
affected by Year 2000 failures.
>> We stand ready to switch vendors or suppliers whose Year 2000 failures
adversely affect their products or services; and
>> Our remediation plan is expected to be complete prior to the Year 2000.
As a result, we do not expect to develop a contingency plan for Y2K failures.
Our assessment of the likely impact of Y2K issues on the Company, which
is a forward-looking statement, depends on numerous factors, such as the
continued provision of utility services and the accuracy of responses from
material third parties as to their Y2K readiness. The Company remains exposed to
the risk of Year 2000 failures. See "Disclosure Regarding Forward-Looking
Statements" below.
25
<PAGE>
This disclosure concerning our Year 2000 issues are intended to
constitute "Year 2000 Readiness Disclosures" as defined in the Year 2000
Information and Readiness Disclosure Act. The Act provides added protection from
liability for certain public and private statements concerning an entity's Year
2000 readiness and the Year 2000 readiness of its products and services. The Act
also potentially provides added protection from liability for certain types of
Year 2000 disclosures made after January 1, 1996, and before the date of
enactment of the Act.
ECONOMIC CONDITIONS
Inflation has remained relatively low during the past three years with
certain segments of the economy experiencing disinflation, such as apparel
sales. Disinflation in this market segment has slowed the growth of tenant
sales, which adversely affects the Company's revenue due to lower percentage and
overage rents on some properties. Additionally, weakness in the overall retail
environment as it relates to tenant sales volumes may have an impact on the
Company's ability to renew leases at current rental rates or to re-lease space
to other tenants. A decline in sales does not affect base rent, aside from
renewals; however, sales declines could result in reduced revenue from
percentage rent tenants, as well as overage rent paid to the Company. Both
revenue items are directly impacted by sales volumes and represented 4% of the
Company's total revenue for the six months ended June 30, 1999 compared to 6%
for the same period in 1998. Continuation of this economic trend may affect the
Company's operating centers' occupancy rate, rental rates, and concessions, if
any, granted on new leases or re-leases of space. This in turn may cause
fluctuations in the cash flow from the operation and performance of the
operating centers.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Some of the information in this Quarterly Report on Form 10-Q may
contain forward-looking statements. Such statements include, in particular,
statements about our plans, strategies and prospects under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can identify forward-looking statements by our use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue," or other similar words. Although we believe that our
plans, projections and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that our plans,
projections or expectations will be achieved. When considering such
forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statement:
>> our markets could suffer unexpected increases in development of retail
properties;
>> the financial condition of our tenants could deteriorate;
>> the costs of our development projects could exceed our original estimates;
>> we may not be able to complete development, acquisition or joint venture
projects as quickly or on as favorable terms as anticipated;
>> we may not be able to lease or release space quickly or on as favorable
terms as old leases;
>> we may have incorrectly assessed the environmental condition of our
properties;
>> an unexpected increase in interest rates would increase our debt service
costs;
>> we could lose key executive officers; and
>> our markets may suffer decline in economic growth or increase in
unemployment rates.
Given these uncertainties, we caution you not to place undue reliance
on forward-looking statements. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances or to reflect the occurrence
of unanticipated events.
26
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
THE EFFECTS OF POTENTIAL CHANGES IN INTEREST RATES ARE DISCUSSED BELOW.
OUR MARKET RISK DISCUSSION INCLUDES "FORWARD-LOOKING STATEMENTS" AND REPRESENTS
AN ESTIMATE OF POSSIBLE CHANGES IN FUTURE EARNINGS THAT WOULD OCCUR ASSUMING
HYPOTHETICAL FUTURE MOVEMENTS IN INTEREST RATES. THESE DISCLOSURES ARE NOT
PRECISE INDICATORS OF EXPECTED FUTURE RESULTS, BUT ONLY INDICATORS OF REASONABLY
POSSIBLE RESULTS. AS A RESULT, ACTUAL FUTURE MAY DIFFER MATERIALLY FROM THOSE
PRESENTED. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES," WHICH PROVIDES INFORMATION RELATED TO THESE
FINANCIAL INSTRUMENTS.
To meet in part our long-term liquidity requirements, we borrow funds
at a combination of fixed and variable rates. In addition, the Company has
assumed fixed rate debt in connection with acquiring properties. Our interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to lower our overall borrowing costs. Currently,
the Company is not party to any interest rate hedge contracts. As of June 30,
1999, we had approximately $32.1 million of variable rate debt outstanding. If
the weighted average interest rate on this variable rate debt is 100 basis
points higher or lower in 1999, our interest expense would be increased or
decreased approximately $0.3 million for the year ended December 31, 1999. The
Company has no fixed rate debt maturing in 1999.
27
<PAGE>
PART II
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
We held our annual meeting of shareholders on June 3, 1999. At that
meeting, our board of directors was elected. Information about the votes casts
for each nominee is set forth below:
Nominee Votes Cast For Withheld Abstentions
- ------------------------------------------------------------------------------
Simon Konover 30,635,637 11,257 -
Cammack Morton 30,625,529 21,365 -
Patrick M. Miniutti 30,624,916 21,978 -
William D. Eberle 30,628,037 18,857 -
Richard Futrell, Jr. 30,628,037 18,857 -
John W. Gildea 30,628,037 18,857 -
Klaus P. Kretschmann 30,635,327 11,567 -
Jonathan O'Herron 30,635,327 11,567 -
Mark S. Ticotin 30,635,327 11,567 -
- ------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 1999.
28
<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.
KONOVER PROPERTY TRUST, INC.
Date: August 13, 1999
By: /S/Patrick M. Miniutti
----------------------------------------------
Patrick M. Miniutti, Executive Vice President,
Chief Financial Officer and Director
By: /S/Sona A. Thorburn
----------------------------------------------
Sona A. Thorburn, Vice President,
Chief Accounting Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,549
<SECURITIES> 0
<RECEIVABLES> 14,139
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 71,572
<PP&E> 646,439
<DEPRECIATION> (76,027)
<TOTAL-ASSETS> 680,480
<CURRENT-LIABILITIES> 17,181
<BONDS> 307,084
0
18,962
<COMMON> 308
<OTHER-SE> 323,394
<TOTAL-LIABILITY-AND-EQUITY> 680,480
<SALES> 0
<TOTAL-REVENUES> 40,249
<CGS> 0
<TOTAL-COSTS> 23,399
<OTHER-EXPENSES> 4,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,170
<INCOME-PRETAX> 5,108
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,108
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.15
</TABLE>
