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 SEPTEMBER 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: 30,869,112 shares of Common
Stock, $0.01 par value, as of November 5, 1999.
<PAGE>
KONOVER PROPERTY TRUST, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NO.
<S> <C> <C>
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
</TABLE>
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 September 30, 1999 and December 31, 1998............................. 4
Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998........... 5
Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998............ 6
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1999............ 7
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............ 8
Notes to Consolidated Financial Statements............................................................. 9
</TABLE>
3
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
(UNAUDITED) (AUDITED)
---------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA))
ASSETS
INCOME PRODUCING PROPERTIES:
<S> <C> <C>
Land $ 117,770 $ 108,978
Buildings and improvements 492,471 437,932
Deferred leasing and other charges 32,753 28,561
---------------------------------------------
642,994 575,471
Accumulated depreciation and amortization (81,139) (66,108)
---------------------------------------------
561,855 509,363
Properties under development 20,620 7,414
Properties held for sale 5,785 5,946
Investment in joint ventures 39,479 32,138
---------------------------------------------
627,739 554,861
OTHER ASSETS:
Cash and cash equivalents 9,031 72,302
Restricted cash 5,618 6,052
Tenant and other receivables 14,735 12,076
Deferred charges and other assets 19,557 12,622
Notes receivable 11,588 24,536
---------------------------------------------
$ 688,268 $ 682,449
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Debt on income properties $ 315,888 $ 304,783
Capital lease obligations 701 774
Accounts payable and other liabilities 18,098 15,305
---------------------------------------------
334,687 320,862
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST IN OPERATING PARTNERSHIP 12,729 12,246
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 786,340
and 792,000 issued and outstanding at September 30, 1999 and December 31,
1998, respectively 18,820 18,962
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized, 30,860,153 and
31,207,457 issued and outstanding at September 30, 1999 and December
31, 1998, respectively 309 313
Additional paid-in capital 322,140 328,705
Retained Earnings - 1,612
Deferred compensation - Restricted Stock Plan (426) (260)
---------------------------------------------
340,852 349,341
---------------------------------------------
$ 688,268 $ 682,449
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
---------------------------------------------
RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
<S> <C> <C>
Base rents $ 15,312 $ 14,137
Percentage rents 250 151
Property operating cost recoveries 3,665 3,861
Other income 927 493
---------------------------------------------
20,154 18,642
---------------------------------------------
Property operating costs:
Common area maintenance 2,330 2,198
Utilities 784 716
Real estate taxes 2,076 1,873
Insurance 276 247
Marketing 147 153
Other 985 635
---------------------------------------------
6,598 5,822
Depreciation and amortization 6,574 5,382
---------------------------------------------
13,172 11,204
---------------------------------------------
6,982 7,438
---------------------------------------------
OTHER EXPENSES:
General and administrative 2,298 1,463
Interest 3,686 5,778
---------------------------------------------
INCOME FROM OPERATIONS 998 197
Loss on sale of real estate 44 -
Equity in earnings of unconsolidated ventures (1,621) -
Minority interest in operating partnership 67 -
---------------------------------------------
NET INCOME 2,508 197
Preferred dividends 268 -
---------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 2,240 $ 197
=============================================
BASIC INCOME AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.07 $ 0.01
=============================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,750 17,229
=============================================
DILUTED INCOME AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.07 $ 0.01
=============================================
WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,394 20,621
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---------------------------------------------
RENTAL OPERATIONS: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
<S> <C> <C>
Base rents $ 45,794 $ 37,913
Percentage rents 819 453
Property operating cost recoveries 11,656 10,923
Other income 2,134 2,224
---------------------------------------------
60,403 51,513
---------------------------------------------
Property operating costs:
Common area maintenance 6,817 5,851
Utilities 2,030 1,925
Real estate taxes 6,006 5,146
Insurance 755 652
Marketing 463 468
Other 2,860 1,740
---------------------------------------------
18,931 15,782
Depreciation and amortization 18,588 15,604
---------------------------------------------
37,519 31,386
---------------------------------------------
22,884 20,127
---------------------------------------------
OTHER EXPENSES:
General and administrative 5,400 4,196
Interest 10,856 16,260
---------------------------------------------
INCOME (LOSS) FROM OPERATIONS 6,628 (329)
Loss on sale of real estate 394 353
Equity in earnings of unconsolidated ventures (1,615) -
Minority interest in operating partnership 233 -
---------------------------------------------
NET INCOME (LOSS) 7,616 (682)
Preferred dividends 818 -
---------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 6,798 $ (682)
=============================================
BASIC INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS PER SHARE $ 0.22 $ (0.05)
=============================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,873 14,475
=============================================
DILUTED INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS PER SHARE $ 0.22 $ (0.05)
=============================================
WEIGHTED-AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING 34,459 14,475
=============================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE STOCK PURCHASE ADDITIONAL PAID
PREFERRED STOCK WARRANTS COMMON STOCK IN CAPITAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 18,962 $ 9 $ 313 $ 328,705
Expenses related to sale of common stock - - - (259)
Issuance of 15,968 employee stock purchase plan
shares - - - 88
Issuance of 61,989 restricted shares - - - 370
Conversion of 5,660 shares of preferred stock into
15,722 shares of common stock (142) - 1 141
Cancellation of restricted stock (38)
Repurchase of 493,200 shares of common stock - - (5) (2,962)
Compensation under stock plans - - - -
Preferred stock dividends ($0.375 per share) - - - -
Common stock dividends ($0.375 per share) - - - (3,905)
Net income - - - -
---------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $ 18,820 $ 9 $ 309 $ 322,140
=====================================================================
<CAPTION>
DEFERRED
COMPENSATION
RETAINED RESTRICTED STOCK
EARNINGS PLAN TOTAL
------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 1,612 $ (260) $ 349,341
Expenses related to sale of common stock - - (259)
Issuance of 15,968 employee stock purchase plan
shares - - 88
Issuance of 61,989 restricted shares - (370) -
Conversion of 5,660 shares of preferred stock into
15,722 shares of common stock - - -
Cancellation of restricted stock - 38 -
Repurchase of 493,200 shares of common stock - - (2,967)
Compensation under stock plans - 166 166
Preferred stock dividends ($0.375 per share) (818) - (818)
Common stock dividends ($0.375 per share) (8,410) - (12,315)
Net income 7,616 - 7,616
------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $ - $ (426) $ 340,852
======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
KONOVER PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 7,616 $ (682)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 17,121 14,470
Loss on sale of real estate 394 353
Minority interest in operating partnership 233 -
Amortization of deferred financing costs 1,496 488
Compensation under stock plans 1,467 1,020
Amortization of debt premium (783) -
Net changes in:
Tenant and other receivables (2,659) (2,006)
Deferred charges and other assets (7,061) (6,540)
Accounts payable and other liabilities 2,142 4,328
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,966 11,431
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in income-producing properties (23,509) (12,232)
Proceeds from sale of real estate - 5,717
Acquisition of income-producing properties, net (54,782) (17,826)
Payments received (advances) on notes receivable, net 11,887 (7,961)
Investment in joint ventures (7,341) (22,903)
Change in restricted cash 434 2,231
--------------------------------
NET CASH USED IN INVESTING ACTIVITIES (73,311) (52,974)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt on income properties 10,856 82,721
Repayment of debt on income properties (3,060) (133,256)
(Expenses) proceeds related to sale of common stock (259) 197,563
Deferred financing charges (875) (1,221)
Repayments of capital lease obligation (176) (374)
Repurchase of restricted stock - (43)
Exercise of stock options - 39
Issuance of shares under employee stock purchase plan 88 34
Distribution to operating partnership unit holders (400) -
Distribution to common and preferred stockholders (13,133) -
Repurchase of common stock (2,967) (10,608)
--------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (9,926) 134,855
--------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (63,271) 93,312
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 72,302 4,872
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,031 $ 98,184
================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
(net of interest capitalized of $895 and $912) $ 18,469 $ 16,006
================================
SEE ACCOMPANYING NOTES.
</TABLE>
8
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 9.1 million square feet. On September 30, 1999, the Company-owned
properties consisted of:
1. 56 community shopping centers in 17 states aggregating approximately
6,830,000 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 5.6 million at September 30, 1999 from 1.9 million at September 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 September 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.
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.
9
<PAGE>
KONOVER PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 nine-month periods ended
September 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 nine months ended September 30, 1999 and the
three months ended September 30, 1998, 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)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1999 1998
---------------- -------------------- ----------------
DENOMINATOR:
<S> <C> <C> <C>
Denominator- weighted average shares 30,751 30,873 17,229
Effect of dilutive securities:
Preferred stock 2,211 2,213 2,222
Employee stock options 33 33 147
Restricted stock 334 274 228
Operating Partnership Units 1,065 1,066 795
---------------- -------------------- ----------------
Dilutive potential common shares 3,643 3,586 3,392
---------------- -------------------- ----------------
Denominator- adjusted weighted average
shares and assumed conversions 34,394 34,459 20,621
================ ==================== ================
</TABLE>
All potential common shares have been excluded from dilutive potential shares
for the nine months ended September 30, 1998 because the effect would be
antidilutive.
DIVIDENDS
In September, 1999, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of September 15, 1999. The quarterly
dividend of $4.5 million was paid on September 30, 1999. As of September 30,
1999, the Company has paid dividends totaling $13.5 million to its shareholders
including $0.4 million to operating partnership unit holders.
COMPREHENSIVE INCOME
The Company had no items of other comprehensive income for three and
nine months ended September 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 operating
partnership 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)
ACQUISITIONS
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)
----------------- ----------- ----------- -------------- ------------- ------------- ----------
1999 TO DATE
<S> <C> <C> <C> <C> <C> <C> <C>
Lake Washington FL 9/17/99 119 $ 9,700 - $ 9,700 -
Patriots Plaza SC 9/1/99 115 8,700 - 8,700 -
Grove Park SC 5/13/99 107 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 956 58,900 4,100 54,800 -
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 4,327 $ 254,300 $ 119,800 $ 121,700 1,343
=========== ============== ============= ============= ==========
</TABLE>
(1) Includes 296 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
September 30, 1999 and December 31, 1998, is as follows (all investments are
accounted for under the equity method, in thousands):
<TABLE>
<CAPTION>
Amounts invested
September 30, December 31,
Location Ownership 1999 1998
-------- --------- ---- ----
<S> <C> <C> <C> <C>
Atlantic Realty North Carolina 50% $ 8,053 $ 7,442
Mount Pleasant KPT Mount Pleasant, SC 50% 24,914 18,759
Wakefield Investment Wake Forest, NC 95% 570 570
Falls KPT Raleigh, NC 50% 5,942 5,367
---------------- --------------
$ 39,479 $ 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 with the exception of two projects with Atlantic Realty as of
September 30, 1999. The development project at Mount Pleasant was 74% occupied
at September 30, 1999. 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 except for the debt
associated with the Mount Pleasant development.
During the third quarter of 1999, Wakefield Investments, Inc. sold its
interest in Wakefield Commercial LLC for approximately $9 million. The Company
has reported $1.4 million in equity in earnings of unconsolidated ventures for
the three months ended September 30, 1999 for its portion of the gain recognized
by Wakefield Investments, Inc.
TRUEFINDS.COM
The Company's online shopping site will be launched in the fourth
quarter of 1999. Web-based software and other capitalizable costs of $1.8
million are reported in deferred charges and other assets at September 30, 1999.
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 September 30, 1999, the Company-owned properties consisted of:
(1) 56 community shopping centers in 17 states aggregating approximately
6,830,000 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):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average gross leasable area 8.9 8.0 8.7 7.2
</TABLE>
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.
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.
14
<PAGE>
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
OPERATING DATA:
<S> <C> <C> <C> <C>
Rental revenues $ 20,154 $ 18,642 $ 60,403 $ 51,513
Property operating costs 6,598 5,822 18,931 15,782
----------------- ---------------- ---------------- ----------------
Net operating income 13,556 12,820 41,472 35,731
Depreciation and amortization 6,574 5,382 18,588 15,604
General and administrative 2,298 1,463 5,400 4,196
Interest 3,686 5,778 10,856 16,260
Loss on sale of real estate 44 - 394 353
Equity in earnings of unconsolidated ventures (1,621) - (1,615) -
Minority interest in Operating Partnership 67 - 233 -
----------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) 2,508 197 7,616 (682)
Preferred stock dividends 268 - 818 -
----------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 2,240 $ 197 $ 6,798 $ (682)
================= ================ ================ ================
BASIC INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
PER SHARE $ 0.07 $ 0.01 $ 0.22 $ (0.05)
================= ================ ================ ================
Weighted-average common shares outstanding 30,750 17,229 30,873 14,475
================= ================ ================ ================
DILUTED INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE $ 0.07 $ 0.01 $ 0.22 $ ( 0.05)
================= ================ ================ ================
Weighted-average shares outstanding - diluted (a) 34,394 20,621 34,459 14,475
================= ================ ================ ================
OTHER DATA:
EBITDA
Net income (loss) $ 2,508 $ 197 $ 7,616 $ (682)
Adjustments:
Interest 3,686 5,778 10,856 16,260
Depreciation and amortization 6,574 5,382 18,588 15,604
Loss on sale of real estate 44 - 394 353
Minority interest 67 - 233 -
Share of depreciation in unconsolidated
ventures 24 - 72 -
------------------ ----------------- --------------- ----------------
$ 12,903 $ 11,357 $ 37,759 $ 31,535
================== ================= =============== ================
Weighted-average shares outstanding - diluted (a) 34,394 20,621 34,459 17,546
================== ================= =============== ================
FUNDS FROM OPERATIONS:
Net income (loss) $ 2,508 $ 197 $ 7,616 $ (682)
Adjustments:
Straight line rent 140 106 425 554
Real estate depreciation and amortization 6,359 5,198 18,260 15,122
Loss on sale of real estate 44 - 394 353
Minority interest 67 - 233 -
Share of depreciation in unconsolidated
ventures 24 - 72 -
----------------- ---------------- ---------------- ----------------
$ 9,142 $ 5,501 $ 27,000 $ 15,347
================== ================= =============== ================
Weighted-average shares outstanding - diluted (a) 34,394 20,621 34,459 17,546
================== ================= =============== ================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
KONOVER PROPERTY TRUST, INC.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------------- ----------------- --------------- ----------------
FUNDS AVAILABLE FOR DISTRIBUTION / REINVESTMENT:
<S> <C> <C> <C> <C>
Funds from Operations $ 9,142 $ 5,501 $ 27,000 $ 15,347
Adjustments:
Capitalized leasing costs (435) (1,244) (1,484) (2,897)
Capitalized tenant allowances (533) (550) (1,096) (1,642)
Recurring capital expenditures (422) (199) (553) (416)
--------------- ----------------- --------------- ----------------
$ 7,752 $ 3,508 $ 23,867 $ 10,392
=============== ================= =============== ================
DIVIDENDS DECLARED ON QUARTERLY EARNINGS $ 4,501 $ - $ 13,533 $ -
=============== ================= =============== ================
DIVIDENDS DECLARED ON QUARTERLY EARNINGS PER SHARE $ 0.125 $ - $ 0.375 $ -
=============== ================= =============== ================
CASH FLOWS:
Cash flows from operating activities $ 7,723 $ 1,203 $ 19,966 $ 11,431
Cash flows from investing activities (20,912) (30,603) (73,311) (52,974)
Cash flows from financing activities 4,333 119,682 (9,926) 134,855
--------------- ----------------- --------------- ----------------
Net (decrease) increase in cash and cash equivalents $ (8,856) $ 90,282 $ (63,271) $ 93,312
=============== ================= =============== ================
SEPTEMBER 30,
1999 1998
--------------- -----------------
BALANCE SHEET DATA:
Income-producing properties (before depreciation and
amortization) $ 642,994 $ 554,892
Total assets 688,268 676,816
Debt on income properties 315,888 295,348
Total liabilities 334,687 314,352
Minority interest 12,729 11,804
Total stockholders' equity 340,852 350,660
PORTFOLIO PROPERTY DATA:
Total GLA (at end of period) 9,107 8,138
Weighted-average GLA 8,662 7,170
Number of properties (at end of period) 68 60
Occupancy (at end of period):
Operating 92.6% 94.8%
Held for sale/redevelopment 44.6% 53.6%
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
DENOMINATOR:
<S> <C> <C> <C> <C>
Denominator- weighted average shares 30,751 17,229 30,873 14,475
Effect of dilutive securities:
Preferred stock 2,211 2,222 2,213 2,222
Employee stock options 33 147 33 145
Restricted stock 334 228 274 240
Operating Partnership Units 1,065 795 1,066 464
------------- ------------- -------------- -------------
Dilutive potential common shares 3,643 3,392 3,586 3,071
------------- ------------- -------------- -------------
Denominator- adjusted weighted average
shares and assumed conversions 34,394 20,621 34,459 17,546
============= ============= ============== =============
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998.
NET INCOME
The Company reported a net income available to common shareholders of
$2.2 million, or $0.07 per common share, for the three months ended September
30, 1999. The same period in 1998 reported net income available to common
shareholders of $0.2 million, or $0.01 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 $0.8
million, or 6%, to $13.7 million from $12.9 million for the same period in
1998. Including the effect of straight-line rent adjustment, NOI increased
by $0.7 million. This increase was partly attributable to property
acquisitions as follows:
NOI for the three
months ended
September 30, 1999
(IN THOUSANDS)
-------------------------
1999 Acquisitions $ 1,130
University Shoppes (8/98) 95
Waverly Place (12/98) 345
-------------------------
$ 1,570
=========================
The above acquisition impact on NOI is offset by a $0.5 million decrease in NOI
related to two properties under redevelopment.
>> The Company recognized earnings from unconsolidated ventures of $1.6
million. There were no earnings from unconsolidated ventures in 1998.
>> 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 $1 million to $6.3
million in 1999 from $7.3 million in 1998 and resulted in increased
interest income of $1.1 million over 1998.
>> Through acquisitions, the Company had increased depreciation and
amortization of $1.2 million and increased general and administrative
expenses of $0.8 million.
>> The Company paid a $0.3 million dividend in 1999 to its convertible
preferred shareholders, who receive dividends equal to that of common
shareholders on an as-converted basis.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM
OPERATIONS
EBITDA was $12.9 million for the three months ended September 30, 1999,
an increase of $1.5 million or 13%, from $11.4 million for the same period in
1998. The increase was primarily due to increased NOI of $0.7 million over 1998,
including adjustment for straight-line rent, as described above. The Company
recognized earnings from unconsolidated ventures of $1.6 million. These
increases were offset by an increase in general and administrative expenses of
$0.8 million.
Funds from Operations ("FFO") for the three months ended September 30,
1999 increased $3.6 million or 66% to $9.1 million. The Company's FFO for the
same period in 1998 was $5.5 million. FFO increased primarily as a result of:
>> the $0.8 million increase in NOI, exclusive of straight-line rent,
>> the Company's earnings from unconsolidated ventures of $1.6 million in
1999,
>> a decrease in net interest expense of $2.1 million, and
>> an increase in general and administrative expenses of $0.8 million.
TENANT INCOME
Base rent, including straight-line rent, increased 8.5% to $15.3
million for the three months ended September 30, 1999 from $14.1 million for the
same period in 1998. Base rent before the adjustment for straight-line rent
increased
18
<PAGE>
$1.3 million, or 9.2%, to $15.5 million for the three months ended September 30,
1999 when compared to $14.2 million in 1998. The increase in base rent for the
three months ended September 30, 1999, is attributable primarily to the
following acquisitions:
Base Rent **
Three Months ended
September 30, 1999
(IN THOUSANDS)
-------------------------
1999 Acquisitions $ 1,323
University Shoppes (8/98) 125
Waverly Place (12/98) 420
-------------------------
$ 1,868
=========================
** BASE RENT EXCLUDES STRAIGHT-LINE RENT
The above acquisition impact on base rent is offset by a $0.3 million decrease
in base rent related to two properties under redevelopment.
During this same period, the Company's weighted-average square feet of
gross leasable area in operation increased 9.9%. Gross leasable area in
operation increased by 1.0 million square feet, primarily because of the
acquisition of nine properties in 1999.
Recoveries from tenants decreased 1% for the three months ended
September 30, 1999 to $3.7 million compared to $3.9 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 1% to $0.42 for the
three months ended September 30, 1999 when compared to $0.48 for the same period
in 1998. The average recovery of property operating expenses, exclusive of
marketing and other non-recoverable operating costs, decreased to 67% in 1999 as
compared to 77% in 1998.
OTHER INCOME
Other income increased $0.4 million to $0.9 million for the three
months ended September 30, 1999 compared to $0.5 million in the same period of
1998 as a result of increased leasing fee income of $0.4 million from
development projects.
PROPERTY OPERATING EXPENSES
Property operating costs increased $0.8 million, or 14%, to $6.6
million in 1999 from $5.8 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 9.9% to 8.9 million square feet in
1999 from 8.1 million square feet in 1998. On a weighted-average square-foot
basis, operating expenses increased 2.8% to $0.74 from $0.72 per weighted
average square foot.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended
September 30, 1999 increased $0.8 million, or 53%, to $2.3 million in 1999 from
$1.5 million in 1998. General and administrative expenses increased as a
percentage of revenues to 11% in 1999 from 8% in 1998. The increase in general
and administrative expenses as a percentage of revenues is primarily related to
the Company's change in employee health benefit plan coverages from a
self-insured to a premium plan.
DEPRECIATION AND AMORTIZATION
Depreciation increased to $4.9 million for the three months ended
September 30, 1999 compared to $4.6 million in the same period of 1998. The
increase is due primarily to the 1999 acquisitions. Amortization of deferred
leasing and other charges increased $0.9 million to $1.7 million. On a
weighted-average square-foot basis, depreciation and amortization increased to
$0.74 in 1999 from $0.67 in 1998.
19
<PAGE>
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1999, net of
interest income of $2.6 million, decreased by $2.1 million, or 36%, to $3.7
million compared to $5.8 million, net of interest income of $1.5 million, for
the three months ended September 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
September 30, 1999, debt outstanding was $309.3 million, and the average
interest rate was 7.9%. This compares to $322.3 million of average outstanding
debt and a 7.9% average interest rate in 1998. The Company capitalized $0.5
million of interest costs associated with its development projects for the three
months ended September 30, 1999 compared to $0.4 million for the same period in
1998.
PROPERTIES HELD FOR SALE
For the three months ended September 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
September 30, 1998, the properties held for sale contributed approximately $0.1
million of revenue and incurred a loss of $0.3 million after deducting related
interest expense.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1998.
NET INCOME
The Company reported a net income available to common shareholders of
$6.8 million, or $0.22 per common share, for the nine months ended September 30,
1999. The same period in 1998 reported a net loss available to common
shareholders of $0.7 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 $5.6
million, or 15.4%, to $41.9 million from $36.3 million for the same period
in 1998. Including the effect of straight-line rent adjustment, ($0.1
million) NOI increased by $5.7 million. This increase was partly
attributable to property acquisitions as follows:
NOI for the nine
months ended
September 30, 1999
(IN THOUSANDS)
----------------------
1999 Acquisitions $ 2,351
University Shoppes (8/98) 290
Waverly Place (12/98) 1,049
Konover (portfolio) (1998) 1,740
Rodwell/Kane (portfolio) (1998) 1,155
----------------------
$ 6,585
======================
The above acquisition impact on NOI is offset by a $1.2 million decrease in NOI
related to two properties under redevelopment.
>> The Company recognized earnings from unconsolidated ventures of $1.6
million. There were no earnings from unconsolidated ventures in 1998.
>> The Company's acquisition activity was funded primarily with the use of
proceeds generated from the 1998 sale of common stock. The proceeds
also enabled the Company to reduce interest expense $0.6 million to
$18.7 million in 1999 from $19.3 in 1998 and resulted in increased
interest income of $4.7 million over 1998.
>> Through acquisitions, the Company had increased depreciation and
amortization of $3.0 million and increased general and administrative
expenses of $1.2 million.
>> The Company paid a $0.8 million dividend in 1999 to its convertible
preferred shareholders, who receive dividends equal to that of common
shareholders on an as-converted basis.
20
<PAGE>
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION AND FUNDS FROM
OPERATIONS
EBITDA was $37.8 million for the nine months ended September 30, 1999,
an increase of $6.3 million or 20%, from $31.5 million for the same period in
1998. The increase was due primarily to increased NOI of $5.7 million over 1998,
including adjustment for straight-line rent (as described above), an increase in
earnings from unconsolidated ventures of $1.6 million over 1998, offset by an
increase in general and administrative expenses of $1.2 million.
Funds from Operations ("FFO") for the nine months ended September 30,
1999 increased $11.7 million or 76% to $27.0 million. The Company's FFO for the
same period in 1998 was $15.3 million. FFO increased primarily as a result of:
>> the $5.6 million increase in NOI, exclusive of straight-line rent,
>> an increase in earnings from unconsolidated ventures of $1.6 million,
>> a decrease in net interest expense of $5.4 million, and
>> an increase in general and administrative expenses of $1.2 million.
TENANT INCOME
Base rent, including straight-line rent, increased 21% to $45.8 million
for the nine months ended September 30, 1999 from $37.9 million for the same
period in 1998. Base rent before the adjustment for straight-line rent increased
$7.8 million, or 20%, to $46.2 million for the nine months ended September 30,
1999 when compared to $38.4 million in 1998. The increase in base rent for the
nine months ended September 30, 1999, is attributable primarily to the
following:
Base Rent (*)
Nine Months ended
September 30, 1999
(IN THOUSANDS)
-----------------------
1999 Acquisitions $ 2,636
University Shoppes (8/98) 374
Waverly Place (12/98) 1,231
Konover (portfolio) (1998) 2,094
Rodwell/Kane (portfolio) (1998) 2,026
-----------------------
$ 8,361
=======================
(*) Base rent excludes straight-line rent
The above acquisition impact on base rent is offset by a $0.7 million decrease
in base rent related to two properties under redevelopment.
During this same period, the Company's weighted-average square feet of
gross leasable area in operation increased 19%. In addition, gross leasable area
in operation at period end increased by 1 million square feet, primarily because
of the nine properties acquired in 1999 totaling 0.9 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 7.3% for the nine months ended
September 30, 1999 to $11.7 million compared to $10.9 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 11.1% to $1.35 for the
nine months ended September 30, 1999 when compared to $1.52 for the same period
in 1998. The average recovery of property operating expenses, exclusive of
marketing and other non-recoverable operating costs, decreased to 75% in 1999 as
compared to 80% in 1998.
OTHER INCOME
Other income decreased $0.1 million to $2.1 million in 1999 compared to
$2.2 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 $0.5
million primarily from development projects. The decrease is directly
attributable to the fact that prior 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.
21
<PAGE>
PROPERTY OPERATING EXPENSES
Property operating costs increased $3.1 million, or 20%, to $18.9
million in 1999 from $15.8 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 19% to 8.7 million square feet in
1999 from 7.3 million square feet in 1998. On a weighted-average square-foot
basis, operating expenses decreased 1% to $2.18 from $2.20 per weighted average
square foot.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September
30, 1999 increased $1.2 million, or 29%, to $5.4 million in 1999 from $4.2
million in 1998. General and administrative expenses increased as a percentage
of revenues to 9% in 1999 from 8% in 1998.
DEPRECIATION AND AMORTIZATION
Depreciation increased to $14.4 million for the nine months ended
September 30, 1999 compared to $12.9 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. Amortization of deferred
leasing and other charges increased $1.5 million to $4.2 million. On a
weighted-average square-foot basis, depreciation and amortization decreased to
$2.15 in 1999 from $2.18 in 1998.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 1999, net of
interest income of $7.8 million, decreased by $5.3 million, or 33%, to $10.9
million compared to $16.2 million, net of interest income of $3.1 million, in
the first nine months of 1998. This decrease resulted primarily from the
interest income generated from the proceeds from the sale of common stock in
1998. On a weighted-average basis, in the first nine months of 1999, debt
outstanding was $307.4 million, and the average interest rate was 7.9%. This
compares to $299.0 million of average outstanding debt and a 7.9% average
interest rate in 1998. The Company capitalized $0.9 million of interest costs
associated with its development projects in the first nine months of 1999 and
1998.
PROPERTIES HELD FOR SALE
For the nine months ended September 30, 1999, the properties held for
sale contributed approximately $0.2 million of revenue. After deducting related
interest expense on the debt associated with those properties, the properties
held for sale incurred a loss of $0.4 million. For the nine months ended
September 30, 1998, the properties held for sale contributed approximately $0.6
million of revenue and incurred a loss of $1.4 million after deducting related
interest expense and the $0.4 million loss on the sale of one property in April
1998.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company's cash and cash equivalents balance at September 30, 1999
was $9.0 million. Restricted cash, as reported in the financial statements, as
of such date, was $5.6 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 $20 million for the nine
months ended September 30, 1999. Net cash used in investing activities was $73.3
million in that same period. The primary use of these funds included:
>> $54.8 million of cash to acquire nine centers aggregating 0.9 million
square feet located in Florida, North Carolina, South Carolina and
Virginia,
>> $7.3 million invested in ventures and
>> $23.5 million invested in the Company's income-producing properties.
These cash uses were offset by repayments received on certain notes
receivables of $11.9 million.
Net cash used in financing activities was $9.9 million for the nine
months ended September 30, 1999. The primary use of these funds included:
>> $13.5 million for dividends paid,
>> $3.0 million for the repurchase of 493,200 shares of the Company's
common stock, and
>> $3.1 million for debt repayments.
These cash uses were offset by proceeds from debt borrowings of $10.9 million.
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>
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 September 30, 1999, 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 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 September 30, 1999 was $88.6
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 allowing
for the maximum available at up to $150 million. The availability under this
line is based upon a predetermined formula based 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 $31 million paydown.
The paydown 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 September 30, 1999 was $73.7 million, including a $7
million unamortized interest rate premium.
DIVIDENDS
In September, 1999, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of September 15, 1999. The quarterly
dividend of $4.5 million was paid on September 30, 1999. As of September 30,
1999, the Company has paid dividends totaling $13.5 million to its shareholders
including $0.4 million to operating partnership unit holders.
SHARE REPURCHASE
For the nine months ended September 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 September 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% 1Q99 95% 4Q99 95% 4Q99
Non-IT 100% 1Q99 90% 4Q99 90% 4Q99
</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.
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
25
<PAGE>
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 nine months ended September 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 re-lease 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 RESULTS MAY DIFFER MATERIALLY FROM
THOSE PRESENTED.
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 September
30, 1999, we had approximately $41.9 million of variable rate debt outstanding.
If the weighted average interest rate on this variable rate debt were 100 basis
points higher or lower in 1999, our interest expense would be increased or
decreased approximately $0.4 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter to Simon Konover, Chairman of the Board, dated June 7, 1999
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 September 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: November 10, 1999
By: /S/Patrick M. Miniutti
-------------------------------------------
Patrick M. Miniutti, Executive Vice President,
Chief Financial Officer and Director
29
Dated as of June 7, 1999
Mr. Simon Konover
Konover Investments Corporation
342 North Main Street, Suite 200
West Hartford, CT 06117
Dear Simon:
The purpose of this letter is to summarize the terms of the agreement
recently reached between us regarding the Boca office and related issues:
1. Effective June 7, 1999, Konover Management South Corporation
("KMSC") will operate the Boca office located at 7000 W. Palmetto Park Road,
Suite 409, Boca Raton, Florida ("Boca office"). Notwithstanding the foregoing,
Konover Property Trust, Inc. ("KPT") will continue to pay all staff, including
providing benefits, through September 30, 1999, except for Maria Ashenfelter,
who will be paid by KMSC commencing June 7, 1999, and Ted Konover, who will be
paid by KMSC commencing June 1, 1999, and KPT will pay all rent, utilities, and
other charges due under the Lease for the operation of the Boca office through
the end of its current lease term, April 30, 2000. Commencing October 1, 1999,
KMSC shall assume responsibility for paying all staff in the Boca office, except
Fred P. Steinmark.
2. From and after June 7, 1999, as to any properties owned or
controlled by Simon Konover, if Maria Ashenfelter registers a prospective
tenant, in writing, with Chuck Taylor of RMC/Konover Property Trust LLC, with a
copy to Chris Gavrelis of KPT, then any leasing commission due to KPT under the
Management and Leasing Agreements as to such tenant will be split equally
between KPT and KMSC.
3. Fred P. Steinmark, an employee of KPT, shall continue to work at the
Boca office after September 30, 1999, through the end of the lease term of the
Boca office, or any substitute therefor. From October 1, 1999 through June 30,
2001, he shall be provided, free of charge, with office space, receptionist
services, telephone services and secretarial services.
4. KPT shall pay KMSC on October 1, 1999, $150,000 (less any salary
paid by KPT to Ted Konover after June 1, 1999 and to Maria Ashenfelter after
June 7, 1999, prior to each of them going onto KMSC's payroll) in consideration
of the terms and conditions of this agreement.
5. The following existing Management and Leasing Agreements shall
remain in place after June 7, 1999: Ocala Factory Stores, Sunrise Center, Tampa
Festival Centre, and The Plaza (Davie, FL). In addition, and subject to the
terms of paragraph 8 below, a Management and Leasing Agreement, in form
identical to the foregoing Agreements, shall be executed, on or before September
10, 1999 by the owner of the Admiral's Crossing, Jupiter Palms Associates, Ltd.,
and KPT, effective April 1, 1999. The Management and Leasing Agreements, for
Liberty, NY, Tri-State Mall, NJ, Monticello, NY and Brunswick, GA are terminated
as of June 1, 1999.
6. With respect to the properties with ongoing Management and Leasing
Agreements as set forth in Paragraph 5 above, all accounting functions shall be
handled by the Boca office
<PAGE>
throughout the remaining term of such Agreements. The accounting staff in the
Boca office shall continue to reasonably cooperate with KPT in providing
information to KPT necessary for KPT to perform its management and leasing
obligations under the Management and Leasing Agreements. Specifically, KPT and
Boca will exercise due diligence in reaching the transition deadlines as set
forth on the June 18, 1999 Memorandum attached as Exhibit A with respect to
properties not owned or controlled by Simon Konover. Notwithstanding the
foregoing, under all circumstances the transition will be complete no later than
September 30, 1999. As soon as practical, after the KIC Internet mail server is
available to the Boca office, KPT will cooperate in transitioning the Boca
office (except Fred Steinmark) from the KPT to the KIC Internet mail server.
Until that time, KPT will permit the Boca office to remain on the KPT Internet
mail server.
7. All furniture, fixtures and equipment presently in the Boca office
shall be transferred to KMSC as of June 7, 1999, by Bill of Sale identical in
form to the one which KMSC provided to KPT, subject to Board approval of this
transaction, if necessary.
8. Please note that the terms contained herein are set forth as
approved by KPT's Board of Directors on August 12, 1999.
Should this letter accurately reflect your understanding of the
arrangement we discussed, please sign the enclosed copy of this letter and
return it to me for our records. Please retain the original for your files.
Sincerely,
C. Cammack Morton
President & Chief Executive Officer
Agreed to as of this 7th day of June 1999
Konover Management South Corporation
By:__________________________
Simon Konover
Its Chairman
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,649
<SECURITIES> 0
<RECEIVABLES> 14,735
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 669,399
<DEPRECIATION> 81,139
<TOTAL-ASSETS> 688,268
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 315,888
0
18,820
<COMMON> 309
<OTHER-SE> 321,723
<TOTAL-LIABILITY-AND-EQUITY> 688,268
<SALES> 0
<TOTAL-REVENUES> 60,403
<CGS> 0
<TOTAL-COSTS> 22,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,856
<INCOME-PRETAX> 7,616
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,616
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,616
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<FN>
<F1>The Company's balance sheet is unclassified.
</FN>
</TABLE>
