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, 2000
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)
<TABLE>
<CAPTION>
<S> <C> <C>
Maryland 56-1819372
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11000 Regency Parkway 27511
Suite 300 (Zip Code)
Cary, North Carolina (919) 462-8787
(Address of Principal Executive Offices) (Registrant's telephone
number, including area code)
</TABLE>
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: 31,282,572 shares of Common
Stock, $0.01 par value, as of November 8, 2000.
<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......... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 26
Item 2. Changes in Securities and Use of Proceeds....................... 26
Item 3. Defaults Upon Senior Securities................................. 26
Item 4. Submission of Matters to a Vote of Security Holders............. 26
Item 5. Other Information............................................... 26
Item 6. Exhibits and Reports on Form 8-K................................ 26
Signatures ............................................................ 27
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, 2000 and December 31, 1999............................. 4
Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999........... 5
Consolidated Statements of Operations for the nine months ended September 30, 2000 and 1999............ 6
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2000............ 7
Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999............ 8
Notes to Consolidated Financial Statements............................................................. 9
</TABLE>
3
<PAGE>
KONOVER PROPERTY TRUST, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
(Unaudited) (Audited)
---------------------------------------------
(in thousands, except per share data)
<S> <C> <C>
Assets
Income producing properties:
Land $ 129,492 $ 119,360
Buildings and improvements 536,215 516,579
Deferred leasing and other charges 44,226 35,605
---------------------------------------------
709,933 671,544
Accumulated depreciation and amortization (97,727) (89,019)
---------------------------------------------
612,206 582,525
Properties under development 17,110 65,924
Properties held for sale 19,738 611
Other assets:
Cash and cash equivalents 16,571 8,164
Restricted cash 6,614 8,634
Tenant and other receivables, net of allowance of $1,707 and $1,588 at September
30, 2000 and December 31, 1999, respectively 6,378 9,974
Deferred charges and other assets 13,847 12,197
Investment in and advances to unconsolidated entities 26,097 26,143
Notes receivable 646 5,285
---------------------------------------------
$ 719,207 $ 719,457
=============================================
Liabilities and Stockholders' Equity
Liabilities:
Debt on income properties $ 382,549 $ 362,041
Capital lease obligations 489 698
Accounts payable and other liabilities 25,532 22,661
---------------------------------------------
408,570 385,400
Commitments and contingencies
Minority interest in Operating Partnership 9,180 12,999
---------------------------------------------
Stockholders' equity:
Convertible preferred stock, Series A, 5,000,000 shares authorized, 780,680
issued and outstanding at September 30, 2000 and December 31, 1999,
respectively 18,679 18,679
Stock purchase warrants 9 9
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,232,424 and
30,868,630 issued and outstanding at September 30, 2000 and December 31,
1999, respectively 312 309
Additional paid-in capital 297,438 307,871
Accumulated deficit (14,526) (5,432)
Deferred compensation - Restricted Stock Plan (455) (378)
---------------------------------------------
301,457 321,058
---------------------------------------------
$ 719,207 $ 719,457
=============================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
4
<PAGE>
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended September 30,
2000 1999
---------------------------------------------
Rental operations: (in thousands, except per share data)
<S> <C> <C>
Revenues:
Base rents $ 16,849 $ 15,834
Percentage rents 327 250
Property operating cost recoveries 4,248 3,804
Other income 260 891
---------------------------------------------
21,684 20,779
---------------------------------------------
Property operating costs:
Common area maintenance 2,646 2,425
Utilities 829 786
Real estate taxes 2,192 2,100
Insurance 313 284
Marketing 148 147
Other 1,409 1,400
---------------------------------------------
7,537 7,142
Depreciation and amortization 6,939 6,574
---------------------------------------------
14,476 13,716
---------------------------------------------
7,208 7,063
---------------------------------------------
Other expenses:
General and administrative 1,467 1,778
Interest, net 7,353 3,955
---------------------------------------------
(Loss) income from operations (1,612) 1,330
Loss on sale of real estate 1,069 18
Abandoned transaction costs 88 26
Equity in losses (earnings) of unconsolidated ventures:
Technology venture 1,226 -
Real estate operations 566 (1,455)
---------------------------------------------
(Loss) income before minority interest (4,561) 2,741
---------------------------------------------
Minority interest 121 (233)
---------------------------------------------
Net (loss) income (4,440) 2,508
Preferred dividends (271) (268)
---------------------------------------------
Net (loss) income applicable to common stockholders $ (4,711) $ 2,240
=============================================
Basic (loss) income applicable to common stockholders per share $ (0.15) $ 0.07
=============================================
Weighted-average number of common shares outstanding 31,109 30,751
=============================================
Diluted (loss) income applicable to common stockholders per share $ (0.15) $ 0.07
=============================================
Weighted-average number of diluted shares outstanding 31,109 34,394
=============================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30,
2000 1999
---------------------------------------------
Rental operations: (in thousands, except per share data)
Revenues:
<S> <C> <C>
Base rents $ 51,770 $ 46,382
Percentage rents 558 819
Property operating cost recoveries 13,048 11,799
Other income 1,536 2,095
---------------------------------------------
66,912 61,095
---------------------------------------------
Property operating costs:
Common area maintenance 7,707 6,928
Utilities 2,189 2,032
Real estate taxes 6,552 6,037
Insurance 831 764
Marketing 229 464
Other 4,063 3,705
---------------------------------------------
21,571 19,930
Depreciation and amortization 21,326 18,588
---------------------------------------------
42,897 38,518
---------------------------------------------
24,015 22,577
---------------------------------------------
Other expenses:
General and administrative 4,792 4,450
Interest, net 20,475 11,125
---------------------------------------------
(Loss) income from operations (1,252) 7,002
Loss on sale of real estate 1,943 231
Abandoned transaction costs 106 163
Equity in losses (earnings) of unconsolidated ventures:
Technology venture 4,865 -
Real estate operations 1,384 (1,428)
---------------------------------------------
(Loss) income before minority interest (9,550) 8,036
---------------------------------------------
Minority interest 456 (420)
---------------------------------------------
Net (loss) income (9,094) 7,616
Preferred dividends (813) (818)
---------------------------------------------
Net (loss) income applicable to common stockholders $ (9,907) $ 6,798
=============================================
Basic (loss) income applicable to common stockholders per share $ (0.32) $ 0.22
=============================================
Weighted-average number of common shares outstanding 30,884 30,873
=============================================
Diluted (loss) income applicable to common stockholders per share $ (0.32) $ 0.22
=============================================
Weighted-average number of diluted shares outstanding 30,884 34,459
=============================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
KONOVER PROPERTY TRUST, INC.
Consolidated Statement of Stockholders' Equity
Nine Months ended September 30, 2000
(Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
Convertible Stock Purchase Additional Paid
Preferred Stock Warrants Common Stock in Capital
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999 $ 18,679 $ 9 $ 309 $ 307,871
Issuance of 22,512 employee stock purchase plan
shares - - - 98
Issuance of 104,900 restricted shares - - 1 569
Repurchase of 8,999 restricted shares - - - (48)
Cancellation of 15,495 restricted stock - - - (98)
OP units converted into 260,876 common shares - - 2 2,476
Expenses related to sale of common stock to Lazard - - - (479)
Compensation under stock plans - - - -
Stock options issued for services - - - 61
Adjustment to value of minority interest in
Operating Partnership - - - 510
Preferred stock dividends ($0.375 per share) - - - (813)
Common stock dividends ($0.375 per share) - - - (12,709)
Net loss - - - -
---------------------------------------------------------------------
Balance at September 30, 2000 $ 18,679 $ 9 $ 312 $ 297,438
=====================================================================
<CAPTION>
Deferred
Compensation
Accumulated Restricted Stock
Deficit Plan Total
------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1999 $ (5,432) $ (378) $ 321,058
Issuance of 22,512 employee stock purchase plan
shares - - 98
Issuance of 104,900 restricted shares - (407) 163
Repurchase of 8,999 restricted shares - - (48)
Cancellation of 15,495 restricted stock - 98 -
OP units converted into 260,876 common shares - - 2,478
Expenses related to sale of common stock to Lazard - - (479)
Compensation under stock plans - 232 232
Stock options issued for services - - 61
Adjustment to value of minority interest in
Operating Partnership - - 510
Preferred stock dividends ($0.375 per share) - - (813)
Common stock dividends ($0.375 per share) - - (12,709)
Net loss (9,094) - (9,094)
------------------------------------------------------
Balance at September 30, 2000 $ (14,526) $ (455) $ 301,457
======================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
7
<PAGE>
KONOVER PROPERTY TRUST, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
--------------------------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (9,094) $ 7,616
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Minority interest (456) 420
Depreciation and amortization 21,326 18,588
Loss on sale of real estate 1,943 231
Abandoned transaction costs 106 163
Amortization of deferred financing costs 1,772 1,496
Technology venture operations 4,865 -
Amortization of debt premium (391) (783)
Net changes in:
Tenant and other receivables 2,830 149
Deferred charges and other assets (1,471) (7,097)
Accounts payable and other liabilities (1,729) 4,731
--------------------------------
Net cash provided by operating activities 19,701 25,514
--------------------------------
Cash flows from investing activities:
Investment in income-producing properties (24,550) (57,580)
Net proceeds from sale of real estate 3,553 -
Acquisitions of income-producing properties, net - (54,782)
Payments received on notes receivable, net 4,639 7,042
Investment in and advances to unconsolidated entities (4,819) 3,370
Change in restricted cash 2,020 434
--------------------------------
Net cash used in investing activities (19,157) (101,516)
--------------------------------
Cash flows from financing activities:
Proceeds from debt on income properties 24,950 33,580
Repayment of debt on income properties (4,052) (3,060)
Expenses related to sale of common stock (479) (259)
Deferred financing charges (3,129) (875)
Other debt repayments (210) (176)
Issuance of shares under employee stock purchase plan 98 88
Dividends paid (9,267) (13,533)
Repurchase of common stock (48) (2,967)
--------------------------------
Net cash provided by financing activities 7,863 12,798
--------------------------------
Net increase (decrease) in cash and cash equivalents 8,407 (63,204)
Cash and cash equivalents at beginning of period 8,164 72,302
--------------------------------
Cash and cash equivalents at end of period $ 16,571 $ 9,098
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 22,681 $ 18,703
================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
8
<PAGE>
KONOVER PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Continued)
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.
On September 30, 2000 the Company-owned and consolidated properties
consisted of:
1. 38 community shopping centers in nine states aggregating approximately
5,302,000 square feet;
2. 9 outlet centers in nine states aggregating approximately 1,977,000 square
feet;
3. 16 Vanity Fair (VF) anchored centers in 12 states aggregating approximately
1,424,000 square feet;
4. 2 centers under redevelopment and one center being held for sale with all
three centers aggregating approximately 697,000 square feet; and
5. approximately 150 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 for owned and
consolidated properties was 9.5 million square feet for the nine months ended
September 30, 2000 and 8.8 million square feet for the same period in 1999.
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, 2000. 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 substantially 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.
The Company has two taxable subsidiaries, Sunset KPT Investment, Inc.
formed under the laws of Delaware, and truefinds.com, Inc. (doing business as
Image Twin) formed under the laws of Maryland. These taxable subsidiaries
develop properties, buy and sell properties, provide equity to developers,
perform third party management, leasing and brokerage services and had pursued
certain technology ventures which at September 30, 2000 consists of a body
scanning measurement technology. Sunset KPT Investment Inc. currently owns
RMC/Konover Property Trust, LLC, a third party property management business
operating mainly in Florida, and holds a 60% ownership interest in approximately
9
<PAGE>
KONOVER PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Continued)
2,700 acres of undeveloped land in Brunswick County, North Carolina. The Company
holds substantially all of the non-voting common stock of these taxable
subsidiaries. Substantially, all of the voting common stock is held by certain
officers of the Company. Accordingly, these entities are accounted for under the
equity method for investments. Additionally, these taxable subsidiaries are
taxed as regular corporations.
Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of the Company, its subsidiaries and the Operating Partnership. All
significant inter-company balances have been eliminated in consolidation.
Properties owned or owned less than 100% 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, 2000 are not necessarily indicative of results that may be
expected for the year ended December 31, 2000. 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, 1999.
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 (loss)
income 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
Basic earnings per share is calculated by dividing the income
applicable to common stockholders by the weighted-average number of shares
outstanding. Diluted earnings per share reflects the potential dilution that
could occur if options or warrants to purchase common shares were exercised and
preferred stock was converted into common shares ("potential common share").
10
<PAGE>
KONOVER PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Continued)
For the three and nine months ended September 30, 2000, basic and
dilutive earnings per share are computed based on a weighted average number of
shares of 31,108,904 and 30,884,019, respectively. Potential dilutive common
shares have been excluded from diluted earnings per share for the three and nine
months ended September 30, 2000 because their inclusion would be antidilutive.
For the three months and nine months ended September 30, 1999, the
denominator for diluted earnings per share is calculated as follows (in
thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1999
--------------------------------
Denominator:
Denominator- weighted average shares 30,751 30,873
Effect of dilutive securities:
Preferred stock 2,211 2,213
Employee stock options 33 33
Restricted stock 334 274
Operating Partnership Units 1,065 1,066
--------------------------------
Dilutive potential common shares 3,643 3,586
--------------------------------
Denominator- adjusted weighted average
shares and assumed conversions 34,394 34,459
================================
Dividends
In September, 2000, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of September 25, 2000. A dividend on
outstanding shares and dividend equivalent related to stock-based compensation
totaling $4.6 million was paid on October 10, 2000.
Comprehensive Income
Comprehensive income equals net income for all periods presented.
Properties Held for Sale and Redevelopment
As part of the Company's ongoing strategic evaluation of its portfolio
of assets, the Company intends to sell a non-strategic outlet center located in
Las Vegas, Nevada. The net carrying value of this center at September 30, 2000
is $19.7 million which approximates its fair value less selling costs. The
center generated a net operating loss of $0.1 million for the nine months ended
September 30, 2000 and net operating income of $0.3 million for the same period
in 1999.
The Company's Nashville center, which is currently classified as a held
for sale/redevelopment property, is a 286,000 square foot retail outlet shopping
center on 33 acres in Nashville, Tennessee. The net operating income of the
Nashville center has declined as a result of competition from the new Opry
Mills. The Company is in the process of evaluating redevelopment opportunities
including re-tenanting, determining alternative uses and/or disposal. Based on
the outcome of this evaluation, the Company will determine whether the
approximate $19 million of book value for this property is ultimately
realizable.
11
<PAGE>
KONOVER PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Continued)
3. Acquisitions and Dispositions
A summary of the Company's acquisition activity since 1997 follows (in
thousands):
<TABLE>
<CAPTION>
OP Units
State Square Purchase Debt ($9.50
Location Date Feet Price Assumed Cash per share)
----------------- ----------- ----------- -------------- ------------- ------------- ----------
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Merchant's Festival GA 11/30/99 152 $ 16,750 - $ 16,750 -
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 1,095 75,650 4,100 71,550 -
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 2,761 163,100 115,700 34,600 1,343
1997
North Hills (portfolio) NC 3/31/97 606 32,300 - 32,300 -
----------- -------------- ------------- ------------- ----------
TOTAL 4,462 $ 271,050 $ 119,800 $ 138,450 1,343
=========== ============== ============= ============= ==========
</TABLE>
(1) Includes 250 units to be issued upon the completion of certain contingencies
contained in the agreement. To date, certain of the contingencies were met,
which resulted in the issuance of 177 of the 250 OP units. The remaining 73 OP
units continue to be subject to various contingencies at September 30, 2000.
In May 2000, the Company sold a center that was held for sale for its
approximate net book value of $0.6 million. In September 2000, the Company sold
a retail shopping center in Georgia for approximately $3 million resulting in a
loss of $1.1 million. The centers did not conform to the Company's long-term
strategic plan.
12
<PAGE>
KONOVER PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Continued)
4. Investment in and Advances to Unconsolidated Entities
A summary of the Company's investments in and advances to
unconsolidated entities at September 30, 2000 and December 31, 1999 is as
follows (all investments in unconsolidated entities are accounted for under the
equity method):
<TABLE>
<CAPTION>
September 30, December 31,
Entity Location Ownership 2000 1999
------------------------------------------------- ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Community Center Ventures:
Atlantic Realty LLC (2 community centers) Apex and
Pembroke, NC 50% $ 2,574 $ 2,440
Park Place KPT LLC Morrisville, NC 50% 6,527 6,245
Falls Pointe KPT LLC Raleigh, NC 50% 5,352 7,059
Taxable Subsidiaries (See Note 1):
Sunset KPT Investment, Inc. 85% 13,012 9,888
truefinds.com, Inc. 95% (1,368)(1) 511
--------------- ----------------
$ 26,097 $ 26,143
=============== ================
</TABLE>
(1) Net balance in truefinds.com, Inc. represents the pro-rata share of
accumulated losses in excess of investments in and advances to
truefinds.com, Inc.
The development of the venture 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 such developments will be completed. All debt incurred
by unconsolidated ventures is secured by their respective properties as well as
various guarantees of the Company and by the Company's respective venture
partners. At September 30, 2000, the Company is a guarantor on approximately $5
million of debt secured by undeveloped land in Brunswick County, North Carolina.
5. Reportable Segments
Management has determined under Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information", that it has four reportable segments: community centers,
outlet centers, VF anchored centers, and centers held for
sale/redevelopment/development (HRD). The outlet segment includes properties
which generate a majority of their revenue from traditional outlet manufacturers
and are destination oriented. The VF anchored segment includes properties that
have less than $1.5 million in total revenue, generate at least 20% of their
revenue from VF and have less than 150,000 square feet. The Company evaluates
performance and allocates resources based on the net operating income (NOI) of
the Company's investment portfolio. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. The Company's reportable segments are business units that
offer retail space to varied tenants and in varied geographical areas.
(All data in thousands and excludes straight line rent)
<TABLE>
<CAPTION>
Community Outlet VF
Centers (1) Centers (2) Centers HRD (1)(2) All others Total
<S> <C> <C> <C> <C> <C> <C>
Nine months ended September 30, 2000:
NOI $ 26,610 $ 14,450 $ 3,024 $ 1,559 $ (302) $ 45,341
Total Assets $ 352,946 $ 187,300 $ 43,841 $ 53,332 $ 81,788 $ 719,207
Nine months ended September 30, 1999:
NOI $ 19,205 $ 16,563 $ 3,929 $ 1,764 $ 155 $ 41,616
Total Assets $ 284,512 $ 210,887 $ 49,660 $ 95,020 $ 73,692 $ 713,771
</TABLE>
(1) Mount Pleasant was under development during 1999 and was stabilized in
2000. Accordingly, the NOI and total assets for Mount Pleasant are included
in the HRD segment in 1999 and the community center segment in 2000.
(2) The Company's Nashville outlet center was included under the outlet segment
for 1999. Due to current market conditions, the center is under
redevelopment and therefore included in the HRD segment in 2000.
13
<PAGE>
KONOVER PROPERTY TRUST, INC.
Notes to Consolidated Financial Statements
(Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
Selected Financial Data
Industry analysts generally consider Funds From Operations ("FFO") an
appropriate measure of performance for an equity REIT. Beginning in 2000 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
FFO means net income before extraordinary items (computed in accordance with
accounting principles generally accepted in the United States) excluding gains
or losses on the sale of real estate plus real estate depreciation and
amortization. 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. All prior periods have been restated.
"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.
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).
14
<PAGE>
<TABLE>
<CAPTION>
Konover Property Trust, Inc.
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Operating Data:
Rental revenues $ 21,684 $ 20,779 $ 66,912 $ 61,095
Property operating costs 7,537 7,142 21,571 19,930
----------------- ---------------- ---------------- ----------------
Net operating income 14,147 13,637 45,341 41,165
Depreciation and amortization 6,939 6,574 21,326 18,588
General and administrative 1,467 1,778 4,792 4,450
Interest, net 7,353 3,955 20,475 11,125
Loss on sale of real estate 1,069 18 1,943 231
Abandoned transaction costs 88 26 106 163
Equity in losses (earnings) of unconsolidated
entities:
Technology venture 1,226 - 4,865 -
Real estate operations 566 (1,455) 1,384 (1,428)
----------------- ---------------- ---------------- ----------------
(Loss) income before minority interest $ (4,561) $ 2,741 $ (9,550) $ 8,036
Minority interest 121 (233) 456 (420)
----------------- ---------------- ---------------- ----------------
Net (loss) income $ (4,440) 2,508 $ (9,094) $ 7,616
Preferred stock dividends (271) (268) (813) (818)
----------------- ---------------- ---------------- ----------------
(Loss) income applicable to common stockholders $ (4,711) $ 2,240 $ (9,907) $ 6,798
================= ================ ================ ================
Basic (loss) income per common share:
Basic (loss) income applicable to common stockholders
per share $ (0.15) $ 0.07 $ (0.32) $ 0.22
================= ================ ================ ================
Weighted-average common shares outstanding 31,109 30,751 30,884 30,873
================= ================ ================ ================
Diluted (loss) income per common share:
Diluted (loss) income applicable to common
stockholders per share $ (0.15) $ 0.07 $ (0.32) $ 0.22
================= ================ ================ ================
Weighted average common shares outstanding diluted 31,109 34,394 30,884 34,459
================= ================ ================ ================
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Data:
EBITDA:
Net (loss) income $ (4,440) $ 2,508 $ (9,094) $ 7,616
Adjustments:
Interest, net 7,353 3,955 20,475 11,125
Depreciation and amortization 6,939 6,574 21,326 18,588
Loss on sale of real estate 1,069 18 1,943 231
Abandoned transaction costs 88 26 106 163
Equity in losses (earnings) of
unconsolidated entities 1,792 (1,455) 6,249 (1,428)
Minority interest (121) 233 (456) 420
=================================================================
$ 12,680 $ 11,859 $ 40,549 $ 36,715
=================================================================
Funds from Operations:
Net (loss) income $ (4,440) $ 2,508 $ (9,094) $ 7,616
Adjustments:
Real estate depreciation and amortization 5,971 5,647 18,161 15,729
Stock based compensation amortization 602 512 2,252 1,460
Loss on sale of real estate 1,069 18 1,943 231
Technology venture operations 1,226 - 4,865 -
Share of depreciation in unconsolidated
ventures 197 24 588 72
Minority interest in Operating Partnership (121) 67 (252) 233
-----------------------------------------------------------------
$ 4,504 $ 8,776 $ 18,463 $ 25,341
=================================================================
Weighted average shares outstanding diluted(a) $ 34,708 $ 34,394 $ 34,575 $ 34,459
=================================================================
Funds Available for Distribution/Reinvestment:
Funds from Operations $ 4,504 $ 8,776 $ 18,463 $ 25,341
Adjustments:
Capitalized leasing costs (489) (435) (1,468) (1,484)
Capitalized tenant allowances (461) (533) (1,591) (1,096)
Recurring capital expenditures (500) (422) (549) (553)
-----------------------------------------------------------------
$ 3,054 $ 7,386 $ 14,855 $ 22,208
=================================================================
Dividends declared on quarterly earnings $ 4,630 $ 4,501 $ 13,897 $ 13,533
=================================================================
Dividends declared on quarterly earnings per
share $ 0.125 $ 0.125 $ 0.375 $ 0.375
=================================================================
Cash Flows:
Cash flows provided by operating activities $ 7,339 $ 6,728 $ 19,701 $ 25,514
Cash flows used in investing activities (994) (29,593) (19,157) (101,516)
Cash flows (used in) provided by financing
activities (4,329) 14,305 7,863 12,798
-----------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents $ 2,016 $ 8,560 $ 8,407 $ (63,204)
=================================================================
</TABLE>
(a) The computation of the denominator to be used in calculating the
weighted-average shares outstanding based on SFAS No. 128, "Earnings Per
Share" appears in the table on the following page.
16
<PAGE>
<TABLE>
<CAPTION>
Balance at September 30,
2000 1999
-------------- -------------
<S> <C> <C>
Balance Sheet Data:
Income-producing properties (before
depreciation and amortization) $ 709,933 $ 642,994
Total assets 719,207 713,771
Debt on income properties 382,549 338,613
Total liabilities 408,570 359,994
Minority interest 9,180 12,917
Total stockholders' equity 301,457 340,860
Portfolio Property Data:
Total GLA (at end of period) 9,400 9,419
Weighted average GLA 9,505 8,790
Number of properties (at end of period) 66 69
Occupancy (at end of period):
Operating 92.1% 92.6%
Held for sale/redevelopment/development 48.5% 59.5%
</TABLE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Denominator:
Denominator- weighted average common shares 31,109 30,751 30,884 30,873
Effect of dilutive securities:
Preferred stock 2,169 2,211 2,169 2,213
Employee stock options - 33 - 33
Restricted stock 450 334 464 274
Operating Partnership units 980 1,065 1,058 1,066
--------------------------------------------------------
Dilutive potential common shares 3,599 3,643 3,691 3,586
--------------------------------------------------------
Denominator- adjusted weighted average shares
and assumed conversions 34,708 34,394 34,575 34,459
========================================================
</TABLE>
17
<PAGE>
Results of Operations
Three Months Ended September 30, 2000 compared to the Three Months Ended
September 30, 1999.
Net Loss Applicable to Common Stockholders
The Company reported a net loss applicable to common stockholders of
($4.7) million, or ($0.15) per common share, for the three months ended
September 30, 2000. The same period in 1999 reported net income applicable to
common stockholders of $2.2 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 $0.4
million, or 2.9%, to $14.1 million from $13.7 million for the same period
in 1999. Including the effect of straight-line rent adjustment ($0.1
million) NOI increased by $0.5 million. This increase was partly
attributable to the $1.7 million in NOI growth generated from 1999
acquisitions and completed expansions and developments. The NOI growth
generated from the 1999 acquisitions and completed expansions and
developments was partially offset by decreasing NOI of $0.5 million from
two centers under redevelopment and one center being held for sale with the
remaining decreases related to the VF and outlet operating segments.
>> The Company recognized losses from unconsolidated ventures of $1.8 million
for the three months ended September 30, 2000, including a $1.2 million
loss related to the technology venture operations. The same period in 1999
reported earnings from unconsolidated ventures of $1.5 million. Losses from
unconsolidated real estate venture operations for 2000 include three
operating community centers and RMC/Konover Property Trust LLC, a third
party property management business. Earnings from unconsolidated real
estate venture operations for 1999 are primarily related to dividend income
of $1.4 million received from the sale of a joint venture interest.
>> Net interest expense increased by $3.4 million, or 85%, to $7.4 million
from $4.0 million for the same period in 1999.
>> Through acquisitions, depreciation and amortization increased by $0.4
million.
>> General and administrative expenses decreased by $0.3 million.
>> The Company incurred losses on the sale of real estate of $1.1 million for
the three months ended September 30, 2000.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $12.7 million for the three months ended September 30, 2000,
an increase of $0.8 million or 6.7%, from $11.9 million for the same period in
1999. The increase was primarily due to increased NOI of $0.5 million over 1999,
including adjustment for straight line rent (as described above) and by a $0.3
million decrease in general and administrative expenses.
Funds from Operations ("FFO") for the three months ended September 30,
2000 decreased $4.3 million, or 48.9%, to $4.5 million. The Company's FFO for
the same period in 1999 was $8.8 million. FFO decreased primarily as a result
of:
>> a $0.5 million increase in NOI and a decrease in general and administrative
expenses of $0.3 million, offset by
>> an increase in equity in losses in unconsolidated ventures of $1.9 million,
exclusive of losses from the technology venture operations and the
Company's share of depreciation from these unconsolidated ventures, and
>> an increase in net interest expense of $3.4 million.
Tenant Income
Base rent, including straight-line rent, increased to $16.8 million for
the three months ended September 30, 2000 from $15.8 million for the same period
in 1999. Base rent before the adjustment for straight-line rent increased $0.9
million, or 5.7%, to $16.8 million for the three months ended September 30, 2000
when compared to $15.9 million in 1999. The increase in base rent for the three
months ended September 30, 2000 is attributable primarily to the $1.9 million in
base rent, excluding straight-line rent, attributable to the 1999 acquisitions
and completed expansions and developments. These increases were offset by a
decrease of base rent of $0.5 million related to properties sold since September
1999 and other properties under redevelopment or held for sale. During this same
period, the Company's weighted-average square feet of gross leasable area in
operation increased 3.3%.
18
<PAGE>
Recoveries from tenants increased for the three months ended September
30, 2000 to $4.2 million compared to $3.8 million in the same period of 1999.
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 increased to $0.45 for the three
months ended September 30, 2000 when compared to $0.42 for the same period in
1999. The average recovery of property operating expenses, exclusive of
marketing and other non-recoverable operating costs, increased to 71% for the
three months ended September 30, 2000 as compared to 68% for the same period in
1999. With respect to approximately 13.2% of the leased gross leasable area, the
Company is obligated to pay all utilities and operating expenses.
Other Income
Other income decreased $0.6 million to $0.3 million for the three
months ended September 30, 2000 compared to $0.9 million in the same period of
1999 primarily as a result of decreased leasing fee income of $0.3 million.
Property Operating Expenses
Property operating costs increased $0.4 million, or 5.6%, to $7.5
million for the three months ended September 30, 2000 from $7.1 million in the
same period of 1999. The increase in operating costs was principally due to the
increase in the weighted-average square feet in operation in 2000, which rose
3.3% to 9.5 million square feet in 2000 from 9.2 million square feet in 1999. On
a weighted-average square-foot basis, operating expenses increased 1.3% to $0.79
from $0.78 per weighted average square foot.
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 2000 decreased $0.3 million, or 16.7%, to $1.5 million in 2000
from $1.8 million in the same period of 1999. General and administrative
expenses decreased as a percentage of revenues to 6.8% for the three months
ended September 30, 2000 from 8.6% in the same period of 1999. The decrease is
primarily related to a reduction in the number of employees and to the changes
in employee benefits compared to prior year. Also, 1999 reflects moving costs
related to the addition of corporate office space.
Depreciation and Amortization
Depreciation increased to $4.7 million for the three months ended
September 30, 2000 compared to $4.2 million in the same period of 1999. The
increase is due primarily to the 1999 acquisitions. Amortization of deferred
leasing and other charges and stock based compensation amortization decreased
$0.2 million to $2.2 million. On a weighted-average square-foot basis,
depreciation and amortization increased to $0.73 in 2000 from $0.72 in 1999.
Interest Expense
Interest expense for the three months ended September 30, 2000, net of
interest income of $1.4 million, increased by $3.4 million, or 85%, to $7.4
million compared to $4.0 million, net of interest income of $2.6 million, for
the same period in 1999. This increase resulted primarily from higher borrowing
levels in 2000 due to the investment in and acquisition of income-producing
properties. On a weighted-average basis, in the three months ended September 30,
2000, debt outstanding was $382.8 million, and the average interest rate was
8.3%. This compares to $328.5 million of outstanding debt and a 7.6% average
interest rate in 1999. The Company capitalized $0.4 million of interest costs
associated with its development projects in the three months ended September 30,
2000 compared to $0.5 million in the same period of 1999. Additional impacts to
net interest expense are related to the accounting for preferred return income
on real estate venture projects which were under development in 1999 and
currently operating. Interest income related to borrowings from unconsolidated
real estate ventures has also declined due to payment of certain borrowings.
19
<PAGE>
Results of Operations
Nine Months Ended September 30, 2000 compared to the Nine Months Ended September
30, 1999.
Net Loss Applicable to Common Stockholders
The Company reported a net loss applicable to common stockholders of
($9.9) million, or ($0.32) per common share, for the nine months ended September
30, 2000. The same period in 1999 reflected net income applicable to common
stockholders of $6.8 million, or $0.22 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 $3.7
million, or 8.9%, to $45.3 million from $41.6 million for the same period
in 1999. Including the effect of straight-line rent adjustment ($0.4
million) NOI increased by $4.1 million. This increase was partly
attributable to the $7.7 million in NOI growth generated from 1999
acquisitions and completed expansions and developments. The NOI growth
generated from the 1999 acquisitions and completed expansions and
developments was partially offset by decreasing NOI of $1.7 million from
two centers under redevelopment and one center held for sale with the
remaining decreases related to the VF and outlet operating segments.
>> The Company recognized losses from unconsolidated ventures of $6.2 million,
including a $4.9 million loss related to the technology venture operations
for the nine months ended September 30, 2000. The same period in 1999
reported earnings from unconsolidated ventures of $1.4 million. Losses from
unconsolidated real estate venture operations for 2000 include three
operating community centers and RMC/Konover Property Trust LLC. Earnings
from unconsolidated real estate venture operations for 1999 are primarily
related to dividend income of $1.4 million received from the sale of a
joint venture interest.
>> Net interest expense increased by $9.4 million, or 84.7%, to $20.5 million
from $11.1 million for the same period in 1999.
>> Through acquisitions, depreciation and amortization increased by $2.7
million and general and administrative expenses increased by $0.3 million.
>> The Company incurred losses on the sale of real estate of $1.9 million for
the nine months ended September 30, 2000 as compared to $0.2 million for
the same period in 1999.
Earnings Before Interest, Taxes, Depreciation, and Amortization and Funds from
Operations
EBITDA was $40.5 million for the nine months ended September 30, 2000,
an increase of $3.8 million or 10.4%, from $36.7 million for the same period in
1999. The increase was primarily due to increased NOI of $4.1 million over 1999,
including adjustment for straight line rent (as described above) offset by
increased general and administrative expenses of $0.3 million.
Funds from Operations ("FFO") for the nine months ended September 30,
2000 decreased $6.8 million, or 27.3%, to $18.5 million. The Company's FFO for
the same period in 1999 was $25.3 million. FFO increased primarily as a result
of:
>> $4.1 million increase in NOI and a $0.5 million decrease in non-real estate
depreciation and amortization offset by,
>> an increase in equity in losses in unconsolidated ventures of $2.3 million,
exclusive of losses from the e-commerce operations and the Company's share
of depreciation from these unconsolidated ventures.
>> an increase in net interest expense of $9.4 million.
>> an increase in general and administrative expenses of $0.3 million.
Tenant Income
Base rent, including straight-line rent, increased to $51.8 million for
the nine months ended September 30, 2000 from $46.4 million for the same period
in 1999. Base rent before the adjustment for straight-line rent increased $5.0
million, or 10.7%, to $51.8 million for the nine months ended September 30, 2000
when compared to $46.8 million in 1999. The increase in base rent for the nine
months ended September 30, 2000 is attributable primarily to the $7.9 million in
base rent, excluding straight-line rent, attributable to the 1999 acquisitions
and completed expansions and developments. These increases are offset by a
decrease in base rent of $2.9 million related to properties sold since September
1999 and other properties under redevelopment and held for sale. During this
same period, the Company's weighted-average square feet of gross leasable area
in operation increased 8.1%.
20
<PAGE>
Recoveries from tenants increased for the nine months ended September
30, 2000 to $13.0 million compared to $11.8 million in the same period of 1999.
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 increased to $1.37 for the nine
months ended September 30, 2000 compared to $1.34 for the same period in 1999.
The average recovery of property operating expenses, exclusive of marketing and
other non-recoverable operating costs, remained relatively stable at 75.5% for
the nine months ended September 30, 2000 as compared to 74.9% for the same
period in 1999. With respect to approximately 13.2% of the leased gross leasable
area, the Company is obligated to pay all utilities and operating expenses.
Other Income
Other income decreased $0.6 million to $1.5 million for the nine months
ended September 30, 2000 compared to $2.1 million in the same period of 1999
primarily as a result of decreased leasing fee income of $0.2 million, decreased
lease buy-out income of $0.1 million and decrease management fee income of $0.2
million.
Property Operating Expenses
Property operating costs increased $1.7 million, or 8.5%, to $21.6
million for the nine months ended September 30, 2000 from $19.9 million in the
same period of 1999. The increase in operating costs was principally due to the
increase in the weighted-average square feet in operation in 2000, which rose
8.0% to 9.5 million square feet in 2000 from 8.8 million square feet in 1999. On
a weighted-average square-foot basis, operating expenses remained stable at
$2.27.
General and Administrative Expenses
General and administrative expenses for the nine months ended September
30, 2000 increased $0.3 million, or 6.7%, to $4.8 million in 2000 from $4.5
million in the same period of 1999. General and administrative expenses
decreased as a percentage of revenues to 7.2% for the nine months ended
September 30, 2000 from 7.3% in the same period of 1999.
Depreciation and Amortization
Depreciation increased to $14.2 million for the nine months ended
September 30, 2000 compared to $12.4 million in the same period of 1999. The
increase is due primarily to the 1999 acquisitions. Amortization of deferred
leasing and other charges and stock based compensation amortization increased
$0.9 million to $7.1 million. On a weighted-average square-foot basis,
depreciation and amortization increased to $2.24 in 2000 from $2.11 in 1999.
Interest Expense
Interest expense for the nine months ended September 30, 2000, net of
interest income of $5.2 million, increased by $9.4 million, or 84.7%, to $20.5
million compared to $11.1 million, net of interest income of $7.8 million, in
the first nine months of 1999. This increase resulted primarily from higher
borrowing levels in 2000 due to the investment in and acquisition of
income-producing properties. On a weighted-average basis, in the first nine
months of 2000, debt outstanding was $374.5 million, and the average interest
rate was 8.2%. This compares to $315.8 million of outstanding debt and a 7.6%
average interest rate in 1999. The Company capitalized $1.6 million of interest
costs associated with its development projects in the first nine months of 2000
compared to $0.6 million in the same period of 1999. In addition, the Company
incurred costs related to short-term line of credit extensions in the nine
months ended September 30, 2000. Additional impacts to net interest expense are
related to the accounting for preferred return income associated with projects
which were under development in 1999 and currently operating. Interest income
related to borrowings from unconsolidated real estate ventures has also declined
due to payment of certain borrowings.
Liquidity and Capital Resources
Cash Flows
The Company's cash and cash equivalents balance at September 30, 2000
was $16.6 million. Restricted cash, as reported in the financial statements, as
of such date, was $6.6 million. The restricted cash is an amount the Company was
required to escrow in connection with various loans. The escrows are required to
provide additional loan collateral and to fund environmental and engineering
work and recurring replacement costs.
21
<PAGE>
Net cash provided by operating activities was $19.7 million for the
nine months ended September 30, 2000. Net cash used in investing activities was
$19.2 million in that same period. The primary source and use of these funds
included:
>> $24.6 million invested in income-producing properties, primarily in
community centers in North and South Carolina, and
>> $4.8 million invested in or advanced to unconsolidated entities
offset by,
>> $4.6 million collected on the repayment of notes receivable,
>> $3.6 million of net proceeds from sale of real estate, and
>> $2.0 million reduction in restricted cash.
Net cash provided by financing activities was $7.9 million for the nine
months ended September 30, 2000. The primary transactions included:
>> $9.3 million for dividends paid,
>> $4.1 million for debt repayments,
>> $3.1 million in deferred financing charges offset by,
>> $25.0 million of net proceeds from debt on income producing
properties.
Financing Activities
The Company's policy is to finance its acquisitions, expansions and
developments with the source of capital believed by management to be most
appropriate and provide the proper balance of equity and fixed and floating rate
debt. Sources may include undistributed cash flow, borrowings from institutional
lenders, equity issuances, and the issuance of debt securities on a secured or
unsecured basis. The Company's philosophy is to use its Funds Available for
Distribution as a key source of financing.
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 sale of assets that may no longer meet the Company's ongoing
strategy. The REMIC balance as of September 30, 2000 was $86.9 million, which
was secured by 23 properties, and matures in June, 2002.
An acquisition line of credit was put in place in early 1997 for $150
million. The availability under this line was based upon a predetermined formula
on the Net Operating Income of the properties that secure the facility. The line
originally was secured by 21 properties plus an assignment of the excess
cashflow of the REMIC facility referenced above. The $150 million line was
converted into a $60 million term loan in June 2000. The loan, which expires the
latter of December 2002 or the termination of the REMIC facility, has an
interest rate of LIBOR plus 3.25%.
On March 11, 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 338-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, 2000, was $72.8 million including a
$6.5 million unamoritized interest premium.
On January 11, 2000, the Company closed on a $5 million line of credit
with a financial institution. In March, 2000, the available borrowings were
increased by $5 million to $10 million. The line of credit has an interest rate
of LIBOR plus 2.0%. The line of credit balance as of September 30, 2000 was $6.7
million and matures on May 31, 2001. The line of credit is secured by a
community shopping center in Georgia.
The Company has a $2.5 million line of credit with a financial
institution. The line of credit is secured by one of the Company's
income-producing properties in South Carolina and has an interest rate of prime
plus 1/2%. There were no outstanding borrowings on this line of credit at
September 30, 2000.
The Company may enter into additional mortgage indebtedness related to
certain joint venture development projects. The Company's policy is to extend
loans to unconsolidated entities only upon terms similar to those that would be
made by third parties.
22
<PAGE>
Any additional debt financing, including additional lines of credit,
may be secured by mortgages on the Properties. Such mortgages may be recourse or
non-recourse or cross-collateralized or may contain cross-default provisions.
Current mortgage financing instruments do limit the Company's ability to obtain
additional indebtedness.
On August 5, 1998, stockholders approved the Lazard transaction
involving the Prometheus Southeast Retail, LLC ("PSR") $200 million purchase of
the Company's Common Stock at $9.50 per share. 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 at its discretion, an amount necessary to
achieve such a return, subject to a maximum payment of 4,500,000 shares or the
cash value thereof.
Current and Future Cash Needs
The Company's management anticipates that cash generated from
operations as well as access to capital resources, including additional
borrowings and issuances of debt or equity securities, 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,
capital expenditures to maintain the quality of its existing centers as well as
development projects. The Company's policy is to evaluate dividend distributions
on a quarter to quarter basis. The Company is actively pursuing outside equity
and/or debt to fund the ventures of its taxable subsidiaries. The Company
anticipates future funding of truefinds.com, Inc. to be significantly less than
prior periods.
Operating Plan
Over the last three years, the Company's strategy has been to
transition from an outlet center company to a community center company focused
on the southeast. At September 30, 2000, the Company has 5.3 million square feet
of community shopping centers. The Company is in the process of selecting an
investment banking firm to assist the Company in developing and implementing a
strategy for the potential sale of the Outlet and VF segments. Upon finalization
of a plan of disposal, the resulting write-down of the book values of the assets
in the Outlet and VF segments may be material to the Company's results of
operations.
Dividends
In September, 2000, the Company declared a $0.125 per share quarterly
dividend to shareholders of record as of September 25, 2000. A dividend on
outstanding shares and dividend equivalent related to stock-based compensation
totaling $4.6 million was paid on October 10, 2000.
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. Any 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 3.3% of the Company's total
revenue for the nine months ended September 30, 2000 and 4.2% for the same
period in 1999. 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.
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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 obtain financing on as favorable terms as
current financing;
>> 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;
>> our markets may suffer decline in economic growth or increase in
unemployment rates; and
>> new technology ventures may not produce a profit.
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.
24
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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 long-term liquidity requirements, the Company borrows
funds at a combination of fixed and variable rates. In addition, the Company has
assumed fixed rate debt in connection with acquiring properties. The Company's
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 party to an interest rate cap related to the June 2000
$60 million term loan. The agreement, which required a $0.5 million payment out
of the loan proceeds, caps the variable rate term loan at 10.66% for the entire
term of the loan. As of September 30, 2000, the Company had approximately $112.8
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 2000, our
interest expense would be increased or decreased approximately $0.8 million for
the nine months ended September 30, 2000. The Company has no fixed rate debt
maturing in 2000.
25
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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
27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2000.
26
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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, 2000
By: /S/ Daniel J. Kelly
------------------------------------
Daniel J. Kelly, Sr. Vice President,
Chief Financial Officer
27
