SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number: 1-12216
CROWN AMERICAN REALTY TRUST
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
25-1713733
(IRS Employer Identification No.)
Pasquerilla Plaza, Johnstown, Pennsylvania 15901
(Address of principal executive offices)
(814) 536-4441
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares of Beneficial Interest, par value $.01 per share
11.00% Senior Preferred Shares, par value $.01 per share ($50.00 Liquidation
Preference)
(Title of Class)
As of October 24, 1997, 27,727,212 Common Shares of Beneficial Interest and
2,500,000 11.00% Senior Preferred Shares of the registrant were issued.
New York Stock Exchange
(Name of Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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 and (2) has been subject to such filing requirements for
at least the past 90 days.
Yes X No ____
Crown American Realty Trust
Form 10-Q
For the Quarterly Period ended September 30, 1997
INDEX
Part I - Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the nine
months ended September 30, 1997
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other Information
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
Signatures
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
(in thousands)
<S> <C> <C>
Income-producing properties:
Land $ 120,198 $ 120,999
Buildings and improvements 823,765 798,470
Deferred leasing and other charges 39,666 41,223
Net 983,629 960,692
Accumulated depreciation and amortization (305,639) (281,478)
Net 677,990 679,214
Other assets:
Investment in joint venture 5,755 5,799
Cash and cash equivalents 44,028 6,746
Tenant and other receivables 13,435 16,516
Deferred charges and other assets 37,418 32,363
Net $ 778,626 $ 740,638
Liabilities:
Debt on income-producing properties $ 531,900 $ 568,785
Accounts payable and other liabilities 24,532 32,201
Net 556,432 600,986
Minority interest in Operating Partnership 30,781 35,576
Commitments and contingencies
Shareholders' equity:
Non-redeemable senior preferred shares, 11%
cumulative, $.01 par value, 2,500,000 shares
issued and outstanding 25
Common shares, par value $.01 per share,
120,000,000 shares
authorized, 27,727,212 and 27,612,756 shares
issued at September 30, 1997 and December 31,
1996, respectively 277 276
Additional paid-in capital 304,024 184,205
Accumulated deficit (101,676) (80,405)
Net 202,650 104,076
Less common shares held in treasury at cost,
1,169,998 and 0 shares at September 30, 1997
and December 31, 1996, respectively (11,237)
Net 191,413 104,076
Net $ 778,626 $ 740,638
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(in thousands, except per share data)
<S>
Rental operations: <C> <C> <C> <C>
Revenues:
Minimum rent $ 20,025 $ 20,778 $ 59,845 $ 62,320
Percentage rent 1,290 1,263 3,898 3,880
Property operating cost 7,047 7,241 21,484 21,877
recoveries
Temporary and promotional leasing 1,613 1,592 4,875 4,372
Net utility income 601 562 2,014 1,834
Business interruption insurance 830
Miscellaneous income 165 348 484 1,027
Net 30,741 31,784 92,600 96,140
Property operating costs:
Recoverable operating costs 9,681 9,443 28,536 29,720
Property administrative costs 502 520 1,526 1,512
Other operating costs 457 731 1,381 2,058
Depreciation and amortization 9,396 9,399 28,530 26,299
Net 20,036 20,093 59,973 59,589
Net 10,705 11,691 32,627 36,551
Other expenses:
General and administrative 1,003 1,039 3,052 3,023
Interest 9,644 11,181 32,464 33,499
Net 10,647 12,220 35,516 36,522
Net 58 (529) (2,889) 29
Property sales, disposals and
adjustments:
Gain on sale of office building 2,351 2,351
Gain on sale of outparcel land 399 371 968 2,955
Net 399 2,722 968 5,306
Income (loss) before
extraordinary item
and minority interest 457 2,193 (1,921) 5,335
Extraordinary loss on early
extinguishment of debt (631) (598) (1,363) (718)
Income (loss) before minority (174) 1,595 (3,284) 4,617
interest
Minority interest in Operating 862 (406) 1,655 (1,173)
Partnership
Net income (loss) 688 1,189 (1,629) 3,444
Income allocated to preferred 3,208 3,208
shares
Net income (loss) applicable to $ (2,520) $ 1,189 $(4,837) $ 3,444
common shares
Per common share data:
Income (loss) before $ (.08) $ .06 $ (.14) $ .14
extraordinary
item
Extraordinary item (net of (.02) (.02) (.04) (.02)
minority interest)
Net income (loss) $ (.10) $ .04 $ (.18) $ .12
Weighted average shares 27,092 27,533 27,467 27,495
outstanding
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statement of Shareholder's Equity
(Unaudited)
Common
Shares Senior
Issued and Preferred Common
Outstanding Shares Shares
(in thousands)
<S> <C> <C> <C> <C>
Balance, January 1, 1997 27,613 $ $ 276
Common shares issued under dividend
reinvestment plan 114 1
Common shares purchased and held in (1,170)
treasury
Transfer in (out) of limited
partner's interest in the Operating
Partnership
Capital contributions from Crown
Investments Trust:
Cash flow support
Issuance of Preferred shares 25
Net income (loss)
Dividends paid and accrued
Balance, September 30, 1997 26,557 $ 25 $ 277
Common
Additional Shares
Paid in Accumulated Held in
Capital Deficit Treasury Total
(in thousands)
Balance, January 1, 1997 $ 184,205 $ (80,405) $ $104,076
Shares issued under dividend
reinvestment plan 920 921
Buyback of Common Shares (11,237) (11,237)
Transfer in (out) of limited
partner's interest in the Operating (1,840) (1,840)
Partnership
Capital contributions from Crown
Investments Trust:
Cash flow support 2,041 2,041
Issuance of Preferred Shares 118,698 118,723
Net income (1,629) (1,629)
Dividend paid and accrued (19,642) (19,642)
Balance, September 30, 1997 $ 304,024 $ (101,676) $ (11,237) $191,413
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1997 1996
(in thousands)
<S>
Cash flows from operating activities: <C> <C>
Net income (loss) $ (1,629) $ 3,444
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest in Operating Partnership (1,655) 1,173
Gain on sale of office building (2,351)
Equity earnings in joint venture (383) (450)
Depreciation and amortization 34,200 32,597
Extraordinary loss on early extinguishment of debt 1,363 718
Net changes in:
Tenant and other receivables 3,081 3,345
Deferred charges and other assets (9,388) (434)
Accounts payable and other liabilities (5,653) (4,841)
Net cash provided by operating activities 19,936 33,201
Cash flows from investing activities:
Investment in income properties (27,082) (41,511)
Distributions from joint venture 150 300
Cash from sale of office building (net of closing 9,452
costs)
Net cash (used in) investing activities (26,932) (31,759)
Cash flows from financing activities:
Net proceeds from issuance of senior preferred 118,723
shares
Net proceeds from issuance of common shares under
dividend reinvestment plan 921 856
Purchase of common shares held in treasury (11,237)
Proceeds from issuance of debt, net of issuance 81,282 82,630
cost
Debt repayments (120,832) (61,633)
Dividends and distributions paid on common shares
and partnership units (22,096) (22,161)
Dividends paid on senior preferred shares (2,483)
Net cash provided by (used in) financing 44,278 (308)
activities
Net increase in cash and cash equivalents 37,282 1,134
Cash and cash equivalents, beginning of period 6,746 6,036
Cash and cash equivalents, end of period $ 44,028 $ 7,170
Interest paid (net of capitalized amounts) $ 30,965 $ 30,416
Interest capitalized $ 1,982 $ 2,272
Non-cash financing activities:
Cash flow support credited to minority interest
and paid in capital that was prefunded in 1995. $ 2,742 $ 2,209
Preferred dividends accrued, but unpaid as of $ 725 $
period end
The accompanying notes are an integral part of these statements.
</TABLE>
CROWN AMERICAN REALTY TRUST
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Crown American Realty Trust (the "Company") was formed on May 14, 1993 as a
Maryland real estate investment trust (a "REIT") to acquire and operate
substantially all of the enclosed shopping mall properties and two office
buildings (the "Properties") owned by Crown American Associates ("Crown
Associates"), formerly Crown American Corporation. Crown Associates is a
wholly-owned subsidiary of Crown Holding Company ("Crown Holding"). Crown
Associates, which was founded in 1950, was engaged principally in the
development, acquisition, ownership and management of enclosed shopping malls
and, to a lesser extent, strip shopping centers, hotels and office buildings.
The Company raised approximately $405 million in equity through an initial
public offering of approximately 25.5 million shares, which occurred on
August 17, 1993, and used the proceeds to purchase an initial 78% general
partnership interest in Crown American Properties, L.P. (the "Operating
Partnership"), a partnership which was formed just prior to consummation of
the offering to own and operate the Properties. The proceeds were used by the
Operating Partnership to retire debt related to the Properties.
Simultaneously with the public offering, Crown Associates and an affiliate
transferred the Properties and the management operations into either the
Company, the Operating Partnership, or Crown American Financing Partnership (the
"Financing Partnership"), a partnership which is 99.5% owned by the Operating
Partnership and 0.5% owned by the Company.
The limited partnership interest in the Operating Partnership and the 1.6
million shares in the Company received for two malls transferred in 1993 are
currently held by Crown Investments Trust ("Crown Investments"), by Crown
American Investment Company (a subsidiary of Crown Investments), and by members
of the Pasquerilla family. Two additional malls were acquired by the Company
in 1995.
Simultaneously with the above transactions, the Financing Partnership borrowed
approximately $300 million of mortgage debt (the "Mortgage Loans") secured by
its 15 enclosed shopping malls (see Note 3). The $300 million of mortgage debt
together with the proceeds of the equity offering were used to retire existing
debt contributed with the Properties.
The Properties currently consist of: (1) 24 enclosed shopping malls (together
with adjoining outparcels and undeveloped land) located in Pennsylvania, New
Jersey, Maryland, Tennessee, West Virginia, Virginia and Georgia, (2) a 50%
general partnership interest in Palmer Park Mall Venture, which owns Palmer Park
Mall located in Easton, Pennsylvania, (3) Pasquerilla Plaza, an office building
in Johnstown, Pennsylvania, which serves as the headquarters of the Company and
is partially leased to other parties, and (4) a parcel of land improved with a
building leased to an anchor store tenant.
As the owner of real estate, the Company is subject to risks arising in
connection with the underlying real estate, including defaults under or non-
renewal of tenant leases, tenant bankruptcies, competition, inability to rent
unleased space, failure to generate sufficient income to meet operating
expenses, as well as debt service, capital expenditures and tenant improvements,
environmental matters, financing availability and changes in real estate and
zoning laws. The success of the Company also depends upon certain key
personnel, the Company's ability to maintain its qualification as a REIT,
compliance with the terms and conditions of the Mortgage Loans and other debt
instruments, and trends in the national and local economy, including income tax
laws, governmental regulations and legislation and population trends.
Basis of Presentation
The accompanying consolidated financial statements of the Company include all
accounts of the Company and its majority-owned subsidiary, the Operating
Partnership (74.6% owned by the Company), which in turn includes the Financing
Partnership (99.5% owned by the Operating Partnership and 0.5% by the Company).
All significant intercompany amounts have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements include all adjustments of a normal recurring nature necessary for a
fair presentation of the financial position and results of operations of the
Company. These consolidated financial statements and the accompanying notes
should be read in conjunction with the audited consolidated financial statements
of the Company for the year ended December 31, 1996, which are included in its
Annual Report on Form 10-K. The results of operations for interim periods are
not necessarily indicative of results to be expected for the year.
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.
NOTE 2 - PREFERRED SHARE OFFERING
The Company completed an offering of 2,500,000 11.00% non-convertible senior
preferred shares on July 3, 1997. The initial offering price was $50.00 per
share. The preferred shares are non-callable by the Company for a ten-year
period (until July 31, 2007). On or after July 31, 2007, the Company, at its
option, may redeem the preferred shares for cash at the redemption price per
share set forth below:
Redemption Price
Redemption Period Per Share
July 31, 2007 through July 30, 2009 $52.50
July 31, 2009 through July 20, 2010 $51.50
On or after July 31, 2010 $50.00
The net proceeds from the offering were $118.7 million after underwriter's
commission and other offering expenses. The proceeds have been used to repay
$58.3 million of debt in early July and to repurchase $11.2 million of common
shares to be held in treasury under a common share repurchase program approved
by the Board of Trustees. The remaining proceeds may be used to finance future
property acquisitions and development projects, to continue funding the common
share repurchase program, and for working capital. The repayment of debt fully
unencumbered three of the Company's mall properties.
As stipulated in the Prospectus Supplement, additional dividends shall be paid
quarterly to the holders of the preferred shares if the Company's total debt (as
defined) exceeds the product of 6.5 times EDITDA (as defined) (the "Leverage
Ratio") without the consent of the holders of at least 50% of the preferred
shares outstanding at the time. The leverage ratio computed as of September 30,
1997, is 6.08 to 1. If required to be paid, additional dividends will be for an
amount per preferred share equal to 0.25% of the Preferred Liquidation
Preference Amount (as defined) on an annualized basis for the first quarter with
respect to which an additional dividend is due. For each quarter thereafter
that the Company continues to exceed the permitted Leverage Ratio, the
additional dividend will increase by an amount per preferred share equal to an
additional 0.25% of the Preferred Liquidation Preference Amount on an annualized
basis. However, the maximum total dividend on the preferred shares, including
any additional dividends, will not at any time exceed 13.00% of the Preferred
Liquidation Preference Amount per annum.
NOTE 3 - DEBT ON INCOME-PRODUCING PROPERTIES
Debt on income-producing properties consisted of the following (in thousands):
<TABLE>
September 30, 1997 December 31, 1996
<S> <C> <C>
Mortgage loans $ 280,637 $ 280,637
Permanent loans 169,901 165,134
Construction loans 51,362 87,389
Secured term loans 30,000 35,625
Net $ 531,900 $ 568,785
Mortgage Loans
Concurrently with the offering of shares of the Company in 1993, the Financing
Partnership borrowed an aggregate principal amount of $300 million
(collectively, the "Mortgage Loans") through Kidder Peabody Mortgage Capital
Corporation (the "Lender").
In connection with obtaining a construction loan for rebuilding and expanding
Logan Valley Mall, in December 1995 the Company repaid $19.4 million of the
Mortgage Loans in order to release the Logan Valley Mall from the Mortgage Loans
and Financing Partnership. No prepayment penalty was incurred.
The Mortgage Loans are non-recourse to the Financing Partnership and are
evidenced by 14 separate notes requiring aggregate principal payments of $80.6
million in August 1998 and $100 million each in August of 2000 and 2003, subject
to optional prepayment. The notes bear fixed interest, payable monthly, at
rates of 6.55%, 7.20% and 7.85% for the loans due in 1998, 2000, and 2003,
respectively, for an average rate of 7.24% in 1997 and 1996. The average rate
as of September 30, 1997 is 7.24%. Repayment of the Mortgage Loans is secured
by separate first mortgage liens and second mortgage liens (each a "Mortgage")
on the 14 malls owned by the Financing Partnership and by assignments of all of
the Financing Partnership's interest in the rents and the leases at each of such
mortgaged properties. In order to maintain certain tax bases, Crown Investments
guaranteed approximately $250 million of such indebtedness. Each Mortgage
contains a cross-default provision allowing the Lender to declare a default
under any or all of the Mortgages if the Financing Partnership fails to make any
payment of principal, interest, premium or any other sum due under any Mortgage
Loan or another event of default occurs under the mortgage documents. The
Mortgage Loans allow the Financing Partnership to borrow up to $10 million from
other parties, either unsecured or secured by a qualifying subordinate lien,
provided the proceeds are used solely to finance tenant improvements or leasing
costs. No such amounts are borrowed as of September 30, 1997.
The $80.6 million mandatory principal payment due in August 1998 may be prepaid
at any time after August 1997, subject to the payment of a yield maintenance
charge; after February 1998 such prepayment would not be subject to the yield
maintenance charge. After August 1998 voluntary prepayments of the remaining
two tranches can be made in whole or in part on any monthly interest payment
date, subject to the payment of a yield maintenance charge; however, six months
prior to the due dates of the remaining two tranches, prepayment of that tranche
may be made without penalty. Principal of the Mortgage Loans is subject to
mandatory prepayment as a result of certain events of casualty or condemnation
at the Mortgaged Properties as provided in the respective Mortgages.
The Company is currently required to deposit $450,000 each quarter to a
restricted cash account for capital plan reserves and renovation reserves.
Amounts may be withdrawn from this account to reimburse the Company for incurred
qualifying expenditures. As of September 30, 1997, $1.4 million of restricted
cash was held for this purpose and is included in deferred charges and other
assets.
Permanent Loans
At September 30, 1997, permanent loans consisted of nine loans secured by seven
properties held by the Operating Partnership with various maturities from
January 1998 through December 2008. Included in permanent loans are (1) a $3.1
million interest free Urban Development Action Grant loan with the City of
Johnstown, Pennsylvania, secured by an office building and due October 2006, and
(2) a 4.5% Industrial Development Bond secured with a $1.3 million letter of
credit. This letter of credit expires on April 30, 1999. Crown Holding has
guaranteed one loan with a balance of $11.4 million as of September 30, 1997
Construction Loans
At September 30, 1997, the Company had a construction loan on one mall. The
loan bears interest at a variable interest rate indexed to the LIBOR rate. The
loan has certain restrictive covenants including minimum coverage ratios and
limitations on investments and borrowings without the prior consent of the
lenders.
Secured Term Loans and Lines of Credit
At September 30, 1997, the Company had three secured term loan arrangements
totaling $45.6 million, of which $5.6 million is a revolving bank line of credit
($0 and $5.6 million outstanding at September 30, 1997 and December 31, 1996,
respectively) used for general corporate purposes and is renewable annually on
April 30. The loans have certain restrictive covenants including the
maintenance of certain coverage ratios and limitations on investments and
borrowings without the prior consent of the lenders. In January 1997, the
Company entered into a $10 million unsecured line of credit with a related
party, of which $0 was outstanding at September 30, 1997.
Interest Rates
The Mortgage Loans on the Financing Partnership properties and eight of the
permanent loans related to six of the Operating Partnership properties
(aggregate principal outstanding of $400.5 million at September 30, 1997) have
fixed interest rates ranging from 0% to 9.79%. The weighted average interest
rate on this fixed-rate debt at September 30, 1997 and 1996 was 7.66% and 7.82%,
respectively. The weighted average interest rate during the nine months ended
September 30, 1997 and 1996 was 7.71% and 7.88%, respectively.
All of the remaining loans (aggregate principal outstanding of $131.4 million at
September 30, 1997) have variable rated debt based on spreads ranging from 1.75%
to 3.50% above 30 day LIBOR, except for the two lines of credit which are based
on spreads of .63% and 1.63% above the prime rate. The weighted average
interest rate on the variable rated debt at September 30, 1997, and 1996 was
7.77%, and 7.83%, respectively. The weighted average interest rate during the
nine months ended September 30, 1997 and 1996 was 7.95% and 8.02%, respectively.
Refinancing or Extension of Three Mortgage Loans Completed in Late June
On June 27 and 30, 1997 the Company refinanced or extended mortgage loans on
three existing shopping mall properties: Capital City Mall, Harrisburg, PA;
Oak Ridge Mall, Oak Ridge, TN; and Schuylkill Mall, Frackville, PA.
Capital City Mall was refinanced with a new $41.0 million mortgage, placed with
a major life insurance company, that has a seven-year maturity, a fixed interest
rate of 8.27% and 25 year amortization. It replaced a $38.3 million 9.79% fixed
interest rate mortgage loan that has been scheduled to mature on December 1,
1997. Approximately $1.5 million of the proceeds of the new mortgage are being
used for an interior renovation of Capital City Mall.
On Oak Ridge Mall the Company replaced the existing $25.2 million mortgage with
a new mortgage loan from a bank lender totaling $26.0 million, of which $20.0
million was funded and $6.0 million will be drawn in the future to fund planned
redevelopment costs at the property. The previous lender also funded a $3.0
million temporary loan that was repaid with the preferred share proceeds in
early July. The $20.0 million loan has a five-year maturity and a fixed
interest rate of 8.12%; the $6.0 million loan for future redevelopment costs
will also have a five-year maturity with a floating interest rate during the
first year and a fixed rate for the last four years. The repaid $25.2 million
mortgage had a floating interest rate of 9.2% and principal amortization of $1.2
million per year.
The Company also extended its existing $36.9 million mortgage loan on Schuylkill
Mall for seven years to December 1, 2004; this loan has been scheduled to mature
on December 1, 1997. The extended loan will have a fixed interest rate of
8.375% beginning December 1, 1997, with 23 year amortization and will be
recourse. The loan currently has a fixed interest rate of 9.79% and is non-
amortizing.
In connection with the repayment of indebtedness under existing loans as
described above and in Note 2, the Company has recorded approximately $1.4
million extraordinary loss on early extinguishment of debt. This loss results
from writing off unamortized deferred financing costs and from prepayment
penalties associated with certain loans that were prepaid.
Debt Maturities
As of September 30, 1997, the scheduled principal payments on all debt,
including extensions available at the Company's option provided the debt is not
in default at the extension dates, are as follows (in thousands):
Period/Year Ending
December 31,
1997 (three months) $ 521
1998 (year) 120,353
1999 (year) 3,543
2000 (year) 202,523
2001 (year) 3,783
Thereafter 201,177
$ 531,900
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt FAS No. 128, "Earnings per Share" and FAS No. 129
"Disclosure of Information about Capital Structure" in the fourth quarter of
1997. Neither of these new standards is expected to have a material effect on
the Company's consolidated financial statements.
NOTE 5 - PROPERTY SALES, DISPOSALS, AND ADJUSTMENTS
In September 1996, the Company sold its Patrick Henry Corporate Center, an
office building located in Newport News, Virginia, to an insurance company. The
gross sales price was $9.9 million, and the net gain was $2.35 million.
Existing debt on the property was repaid from the sales proceeds, resulting in
$364 thousand extraordinary loss on early extinguishment of debt arising from a
prepayment penalty and the write off of unamortized deferred financing costs.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain of the following comments contain forward looking statements that
involve risk and uncertainties. Factors that could cause actual results to
differ materially include: overall economic conditions, local economic
conditions in the market areas surrounding each property, consumer buying
trends, expansion and development plans of retailers and other current and
potential tenants, the impact of competition, weather patterns and related
impact on consumer spending, changing interest rates and financing conditions,
and other risk factors listed from time to time in the Company's SEC reports,
including this report on Form 10Q for the quarter ended September 30, 1997.
Selected Financial Data
The table on the following page sets forth selected financial data for the
Company for the three and nine months ended September 30, 1997 and 1996.
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with this table and the interim
financial statements on pages 3 to 11.
Performance Measurement
Management believes that there are several important factors that contribute to
the ability of the Company to increase rent and improve profitability of its
enclosed shopping malls and other income properties, including aggregate anchor
tenant and mall shop tenant sales volume, mall shop retail tenant sales per
square foot and occupancy levels. Each of these factors has a significant
effect on Funds from Operations and EBITDA.
Funds from Operations (FFO) is a recognized industry performance measure for
real estate investment trusts (REIT's) and as defined by the National
Association of Real Estate Investment Trusts (NAREIT) generally represents net
income or loss (computed in accordance with generally accepted accounting
principles) before real estate depreciation and amortization (as defined) and
extraordinary items, and additionally includes amounts under the Company's cash
flow support agreement (see Note 7 to the financial statements included in the
Company's 1996 Form 10K). Funds from Operations is used in the real estate
industry as a measure of operating performance because reductions for real
estate depreciation and amortization charges are not meaningful in evaluating
the operating results of real estate, which have historically been appreciating
assets. Gain on sales of outparcel land have been included in this supplemental
measure of performance. Gain on sales of properties and anchor store locations,
adjustments to carrying values of assets to be disposed of, and extraordinary
items are excluded from FFO because such transactions are uncommon and not a
part of ongoing operations.
EBITDA is defined as revenues and gain on sale of outparcel land, less operating
costs, including general and administrative expenses, before interest, and all
depreciation and amortization; EBITDA also excludes gain on sales of properties
and anchor store locations, adjustments to carrying values of assets to be
disposed of, and extraordinary items because such items are uncommon not a part
of ongoing operations. Management believes EBITDA, as defined, provides the
clearest 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 (or 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.
Funds from Operations 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.
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the Selected Financial Data and
the accompanying consolidated financial statements and notes thereto.
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C>
Selected Financial Data:
EBITDA (1 & 3) $ 20,579 $ 21,644 $ 62,371 $ 66,261
Funds from Operations (FFO)
(2 & 3):
Net Income (loss) $ 688 $ 1,189 $ (1,629) $ 3,444
Adjustments:
Minority interest in Operating (862) 406 (1,655) 1,173
Partnership
Depreciation and amortization - 9,704 9,738 29,519 27,258
real estate
Operating covenant amortization 658 680 1,973 1,973
Cash flow support 1,066 761 2,742 2,209
Gain on asset sales (2,351) (2,351)
Extraordinary loss on early
extinguishment of debt 631 598 1,363 718
Funds from Operations, before
allocations to minority interests
and preferred shares 11,885 11,021 32,313 34,424
Less:
Amount allocable to preferred 3,208 3,208
shares
Amount allocable to minority 2,246 2,781 7,444 8,699
interest
Funds from Operations applicable
to common shares $ 6,431 $ 8,240 $ 21,661 $ 25,725
Average common shares outstanding 27,092 27,533 27,467 27,495
(000)
Cash Flows:
Net cash provided by operating $ 7,679 $ 8,884 $ 19,936 $ 33,201
activities
Net cash used in investing $ (9,248) $ (2,423) $(26,932) $ (31,759)
activities
Net cash (used in) provided by
financing activities $ 42,873 $ (5,670) $ 44,278 $ (308)
1. EBITDA represents revenues and gain on sale of outparcel land, less operating
costs, including general and administrative expenses, before interest, and
all depreciation and amortization; EBITDA also exlcudes gain on sales of
properties and anchor store locations, adjustments to carrying values of
assets to be disposed of, and extraordinary items because such items are
uncommon not a part of ongoing operations.
2. Funds from Operations represents net income before minority interest and
before depreciation and amortization plus earned cash flow support and
adjustment for certain unusual items.
3. EBITDA and Funds from Operations (i) do not represent cash flow from
operations as defined by generally needs and (iii) should not be con-
sidered as an alternative to net income for purposes of evaluating the
Company's operating performance.
</TABLE>
Comparison of Nine and Three Months Ended September 30, 1997 to the
corresponding periods in 1996
Revenues
For the first nine months of 1997, revenues totaled $92.6 million compared to
$96.1 million in the first nine months of 1996, a decrease of $3.5 million.
Positive factors affecting revenues for the nine months were temporary and
promotional leasing, which increased $0.5 million over 1996, and straight-line
rents (up $0.4 million); negative factors affecting revenues for the first nine
months were: lower minimum and percentage rents of $1.5 million due to fewer
mall shops open in the first quarter and due to delayed tenant openings; lower
business interruption income of $0.8 million from the Logan Valley Fire; lower
recovery income of $0.4 million, due mainly to lower recoverable costs; lower
lease buyout income of $1.3 million; and lower miscellaneous income of $0.5
million. The reduction in lease buyout income of $1.3 million was primarily
due to the buyout of an anchor tenant lease at one mall location.
Total revenues for the third quarter of 1997 were $30.7 million compared with
$31.8 million for the same period in 1996. Positive factors affecting revenues
for the third quarter were: base and percentage rents from mall shops increased
$0.5 million, and straight-line rents were up $0.1 million. Negative factors
affecting revenues for the quarter were: base and percentage rents from anchor
tenants decreased by $0.4 million due to several vacancies; lease buyout income
decreased by $1.0 million due to the buyout of an anchor tenant lease at one
location; and lower miscellaneous income of $0.2 million.
Property Operating Costs:
Total recoverable and non-recoverable mall operating costs for the first nine
months of 1997 were $31.4 million, down $1.8 million from the corresponding
period in 1996. Factors contributing to this decrease were lower snow removal
costs in the first quarter of 1997, lower insurance costs and real estate tax
expense, and lower consulting fees and non-recoverable mall repairs.
Depreciation and amortization expense increased by $2.2 million in the first
nine months of 1997 compared to 1996 due to a cessation of depreciation in the
first quarter of 1996 on certain assets that had been held for possible sale in
1996. These assets were withdrawn from held for sale status during the second
quarter of 1996.
Recoverable and non-recoverable mall operating costs for the three months ended
September 30, 1997 were $10.6 million compared to $10.7 million in 1996.
Depreciation and amortization for the third quarter of 1997 was even with that
of the third quarter of 1996 at $9.4 million.
General, Administrative and Interest Expenses:
For the first nine months of 1997, general and administrative expenses were
approximately $3.1 million, up less than $0.1 million from 1996. Interest
expense decreased by $1.0 million in the first nine months of 1997 compared to
1996. This decrease in interest expense of $1.0 million was primarily
attributable to the proceeds received from the Preferred Share Offering (see
Note 2) which resulted in higher interest income and lower interest expense due
to the paydown of approximately $58.3 million of debt.
In the third quarter of 1997, general and administrative expenses were $1.0
million, or even with the third quarter of 1996. Interest expense for the three
months ended September 30, 1997 was $9.6 million, a decrease of $1.5 million
from what was reported in the third quarter of 1996. This decrease was also
attributable to the Preferred Share Offering mentioned above.
Gain on Property Sales and Disposals:
The gain on the sale of outparcel land was $1.0 million for the first nine
months of 1997, a decrease of $2.0 million from the corresponding period of
1996. For the third quarter of 1997, gain on outparcel sales was $0.4 million,
or the same as the third quarter of 1996.
In September 1996, the Company sold the Patrick Henry Corporate Center, an
office building located in Newport News, Virginia to an insurance company. The
net gain from this transaction was $2.35 million.
Net Income (loss):
The net loss for the first nine months of 1997 was $1.6 million, or $0.18 per
common share, compared with net income of $3.4 million, or $0.12 per share, for
the first nine months of 1996. The first nine months of 1997 include an
extraordinary loss on the early extinguishment of debt of $1.4 million, or
$0.04 per share, compared to $0.7 million in the same period of 1996, or $0.02
per share.
The net income for the third quarter of 1997 was $0.7 million; after deducting
preferred dividends there was a net loss applicable to common shares of $2.5
million, or $0.10 per common share, this compares to net income of $1.2 million,
or $0.04 per share, in 1996. The third quarters of 1997 and 1996 each include
an extraordinary loss on the early extinguishment of debt of $0.6 million, or
$0.02 per share.
Funds from Operations:
For the nine months ended September 30, 1997, total Funds from Operations
("FFO") before allocations to minority interests and preferred shares was $32.3
million, down from $34.4 million for the same period of 1996. After deductions
for minority interests and preferred share dividends, FFO applicable to common
shares was $21.7 million, compared with $25.7 million, for the corresponding
period in 1996. FFO from core mall operations during the nine months was up by
$0.8 million. Core mall operations includes minimum, percentage and straight-
line rents, net mall operating costs (after tenant recoveries), temporary and
promotional leasing, and miscellaneous mall and net utility income. However,
this was offset by $2.0 million in lower gain on land sales, $1.3 million in
lower lease buyouts, $0.8 million in lower business interruption insurance
income related to the December 1994 fire at Logan Valley Mall, and by $1.5
million net impact of the preferred offering completed in July 1997.
For the quarter ended September 30, 1997, FFO before allocations to minority
interests and preferred shares was $11.9 million, up from $11.0 million for the
same period of 1996. After deductions for minority interests and preferred
shares, FFO applicable to common shares was $6.4 million, compared to $8.2
million, in the same quarter of 1996. This decline in FFO was mainly due to
$1.0 million in lower lease buyout income this year compared with the third
quarter of 1996 when Kmart bought out its lease in one location, and the $1.5
million from the net temporary dilutive impact of the $125 million preferred
share offering.
EBITDA
For the nine months ended September 30, 1997, EBITDA was $62.4 million compared
to $66.3 million in 1996. For the third quarter of 1997, EBITDA was $20.6
million compared to $21.6 million in 1996. EBITDA was largely impacted by the
same factors as FFO above, except for interest costs and preferred stock
dividends, which are not included in EBITDA.
Liquidity and Capital Resources
The Company believes that its cash generated from property operations and funds
obtained from property financings will provide the necessary funds on a short-
term and long-term basis for its operating expenses, interest expense on
outstanding indebtedness and recurring capital expenditures and tenant
allowances, and dividends to shareholders in amounts that would be necessary to
satisfy the REIT requirements under the Internal Revenue Code. The Company
intends to pay regular quarterly dividends to its shareholders. However, the
Company's ability to pay dividends is affected by several factors, including
cash flow from operations and capital expenditures and its ability to refinance
its maturing debt as described below. Dividends by the Company will be at the
discretion of the Board of Trustees and will depend on the cash available to the
Company, its financial condition, investment needs and opportunities, capital
and other requirements, and such other factors as the Trustees may consider.
Sources of capital for non-recurring capital expenditures, such as major
building renovations and expansions, as well as for scheduled principal
payments, including balloon payments on the outstanding indebtedness, are
expected to be obtained from additional Company or property financings and
refinancings, sale of non-strategic assets, additional common or preferred
equity raised in the public or private markets, and from retained internally
generated cash flows, or from combinations thereof.
As further described in Note 2 to the interim financial statements included
herein, on July 3, 1997 the Company completed an offering of 11.00% senior
preferred shares for an aggregate of $118.7 million after underwriter's
commission and other offering expenses. The proceeds have been used to repay
$58.3 million of debt in early July and to repurchase $11.2 million of common
shares to be held in treasury under a common share repurchase program approved
by the Board of Trustees. The remaining proceeds may be used to finance future
property acquisitions and development projects, to continue funding the common
share repurchase program, and for working capital. The repayment of debt fully
unencumbered three of the Company's mall properties.
During 1995 the Company started the reconstruction and expansion of the fire-
damaged Logan Valley Mall; the construction project was substantially completed
in the third quarter of 1997 at a total cost of approximately $68.0 million,
including tenant allowances for new tenants. A bank construction loan, with a
current balance of $51.4 million, was used to fund most of the project costs
with the remainder funded from the Company's internal cash flows.
As of September 30, 1997 the scheduled principal payments on all debt are as
follows: $0.5 million for the three months ending December 31, 1997, and $120.4
million; $3.5 million; $202.5 million; and $3.8 million in the years ending
December 31, 1998 through 2001, respectively, and $201.2 million thereafter.
The Company expects to refinance or extend the majority of the maturities over
the next five years through additional Company financings and mortgage loans on
those properties having the maturing loans. The Company's ability to refinance
or extend these loans on or before their due dates depends on the level of
income generated by the properties, prevailing interest rates, credit market
trends, and other factors that may be in affect at the time of such refinancings
or extensions and there is no assurance that such refinancings or extensions
will be executed. The ratios of the Company's EBITDA to cash interest costs for
the years ended December 31, 1996, 1995, and 1994 were 2.08 to 1, 2.13 to 1, and
2.34 to 1, respectively.
Part II - Other Information
Item 1: Legal Proceedings
The Company from time to time is involved in litigation incidental to its
business. Except as described below, neither the Company, the Operating
Partnership nor the Financing Partnership are currently involved in any material
litigation and, to the best of the Company's knowledge, there is no material
litigation currently threatened against the Company, the Operating Partnership,
the Financing Partnership or the Properties, other than routine litigation
arising in the ordinary course of business, most of which is expected to be
covered by liability insurance or established reserves.
On August 10, 1995, August 17, 1995, and September 8, 1995, complaints were
filed by various individuals on behalf of themselves and also purportedly on
behalf of other similarly situated persons against the Company and certain of
its executive officers in United States District Court for the Western District
of Pennsylvania to recover unspecified damages under the federal securities laws
resulting from a recent decline in the market price for the Company's common
shares of beneficial interest which are listed and traded on the New York Stock
Exchange. The decline in the Company's share price followed the announcement on
August 8, 1995, of various operational and capital resource initiatives by the
Company, including the reduction of the Company's quarterly dividend to increase
its levels of retained internal cash flow and the sale of certain assets that do
not currently fit the Company's growth strategy. The complaints in these three
cases were consolidated by the Court and a consolidated amended complaint was
filed on February 23, 1996. The consolidated amended complaint asserts a class
period extending from March 1, 1995 to August 8, 1995, inclusive.
A fourth Complaint was filed the week of December 15, 1995, by an individual on
behalf of himself and also purportedly on behalf of other similarly situated
persons against the Company and certain of its current and former executive
officers in the United States District Court for the Eastern District of
Pennsylvania (the Warden action). This action was subsequently transferred to
the Western District of Pennsylvania. While this Complaint is substantially
similar to the previous Complaints, it alleges a class period extending from
August 17, 1993 (the IPO Date) to August 8, 1995. Pursuant to an amended
complaint, the Plaintiffs changed the end of this class period to February 29,
1995.
The Company filed a motion seeking to dismiss the consolidated action and
negotiated a stay of the Warden action pending resolution of the motion to
dismiss the consolidated action. On September 15, 1997, the Court issued an
opinion dismissing the consolidated amended complaint. In its ruling, the Court
dismissed certain allegations with prejudice and others with an opportunity to
amend. On October 10, 1997, the Plaintiffs filed a second amended complaint in
the consolidated action. Although the Company and its counsel are currently
evaluating the second amended complaint, the Company anticipates the filing of a
motion to dismiss the second amended complaint. Furthermore, as a result of the
Court's September 15, 1997 decision, the Company anticipates the filing of a
second amended complaint in the Warden action.
The consolidated legal action and the Warden action are in a very preliminary
stage. However, the Company believes, based on the advice of legal counsel,
that it and the named officers have substantial defenses to the Plaintiffs'
claims, and the Company intends to vigorously defend the actions. The Company's
current and former officers that are named in this litigation are covered under
a liability insurance policy paid for by the Company. The Company's officers
also have indemnification agreements with the Company. While the final
resolution of this litigation cannot be presently determined, management does
not believe that it will have a material adverse affect on the Company's results
of operations or financial condition.
As a result of the fire which damaged the Logan Valley Mall in Altoona,
Pennsylvania on December 16, 1994 a number of tenants or their insurers have
filed lawsuits against the Company for damages to property and for interruption
of business. In summary, nine lawsuits have been filed in the Court of Common
Pleas of Blair County, Pennsylvania. The Company has insurance policies in
place with coverage limits sufficient to indemnify the Company for any
anticipated losses arising from these lawsuits. In August 1997, all of the
above-referenced lawsuits were settled within the coverage limits of the
applicable insurance policies. The settlements had no material adverse effect
on the Company's results of operations or financial condition.
Dillard's Virginia, Inc. has filed suit alleging that the Company and The May
Department Stores Company ("May") have conspired and agreed in restraint of
trade in violation of the antitrust laws of the United States and Commonwealth
of Virginia. This action arises out of the Company's termination of a lease at
Patrick Henry Mall that had been held by Proffitt's department stores.
In December 1996, Proffitt's advised the Company that it was selling its stores
in the Tidewater region of Virginia to Dillard Department Stores, Inc. and would
therefore be assigning its interest in the Lease to Dillard. Pursuant to the
Lease between the Company and Proffitt's, the Company had the right to terminate
its Lease with Proffitt's in the event of assignment to a third party. The
Company exercised its right of termination. In conjunction with its termination
of the Lease, the Company filed a declaratory judgment action in the state court
of Virginia seeking a judicial affirmation of the lease termination. In
response to the Company's Complaint, Dillard filed a Motion to Dismiss which was
summarily denied by the state court.
In August of 1997, Dillard filed the instant case in the United States District
Court for the Eastern District of Virginia. This Complaint initially asserted
one count against the Company for breach of contract claim against the Company
and two counts against May for violation of federal and state antitrust laws.
On September 18, 1997, Dillard moved to amend its Complaint to include the
Company as a defendant with respect to the antitrust claims previously asserted
against May.
In conjunction with its Complaint, Dillard sought a preliminary injunction to
enjoin the Company from leasing or otherwise conveying certain premises at the
Patrick Henry Mall to May. During a hearing on October 8, 1997, Dillard's
request for a preliminary injunction was denied. In addition, the court
declined to exercise supplementary jurisdiction over Dillard's breach of
contract claim against the Company. That claim was dismissed by the court
without prejudice to be pursued by Dillard in the state courts. To date, no
action has been taken by Dillard to pursue that action in the state court.
While the final resolution of this litigation cannot be presently determined,
management does not believe that it will have a material adverse affect on the
Company's results of operations or financial condition.
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
On October 30, 1997, the Company issued its regular quarterly earnings
release and its Third Quarter 1997 Supplemental Financial and Operational
Information Package for analysts and investors. Copies of these documents are
hereby filed as Exhibits to the Form 10-Q.
Exhibit 99 (a) - Press release dated October 30, 1997
Exhibit 99 (b) - Third Quarter 1997 Supplemental Financial and
Operational Information Package
Item 6: Exhibits and Reports on Form 8-K
On July 14, 1997, the Company filed with the Securities and Exchange
Commission a report on Form 8-K relating to the offering of 11.00% senior
preferred shares that was completed on July 3, 1997.
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.
Date: November 12, 1997 CROWN AMERICAN REALTY TRUST
/s/ Frank J. Pasquerilla
Frank J. Pasquerilla
Chairman of the Board
of Trustees and Chief Executive Officer
(Authorized Officer of the Registrant
and Principal Executive Officer)
Date: November 12, 1997 CROWN AMERICAN REALTY TRUST
/s/ Mark E. Pasquerilla
Mark E. Pasquerilla
President
(Authorized Officer of the Registrant
and Principal Operating Officer)
Date: November 12, 1997 CROWN AMERICAN REALTY TRUST
/s/ John M. Kriak
John M. Kriak
Executive Vice-President and
Chief Financial Officer
(Authorized Officer of the Registrant
and Principal Financial Officer)
Date: November 12, 1997 CROWN AMERICAN REALTY TRUST
/s/ Terry L. Stevens
Terry L. Stevens
Senior Vice President and
Chief Accounting Officer
(Authorized Officer of the Registrant
and Principal Accounting Officer)
EXHIBIT 99 (a)
NEWS FROM:
C R O W N A M E R I C A N R E A L T Y T R U S T
CONTACT: Media: Christine Menna 814-536-9520
Investors: Frank Pasquerilla 814-535-9347
Mark Pasquerilla 814-535-9364
Internet: http://www.crownam.com
IMMEDIATE RELEASE: Thursday, October 30, 1997
CROWN AMERICAN REALTY TRUST REPORTS
CORE MALL RESULTS IMPROVE
FOR THE THIRD QUARTER AND NINE MONTHS
CROWN AMERICAN REALTY TRUST ANNOUNCES
THIRD QUARTER RESULTS AND DECLARES DIVIDENDS
Johnstown, Pa. - Crown American Realty Trust (NYSE:CWN), a real estate
investment trust, today announced financial results and operating information
for the third quarter and for the nine months ended September 30, 1997. The
Board of Trustees also declared regular quarterly dividends on its common and
senior preferred shares.
"Third quarter results are generally in line with our expectations and are
continuing to reflect the impact of the positive leasing trends we have
experienced during 1997," stated Crown American Realty Trust President, Mark E.
Pasquerilla. "FFO (Funds From Operations) contributed from our `core' mall
operations was up in both the third quarter and for the nine months ended
September 30, 1997 compared to the corresponding periods of 1996. Core mall
operations includes minimum, percentage and straight-line rents, net mall
operating costs (after tenant recoveries), temporary and promotional leasing,
and miscellaneous mall and net utility income. However, due to other factors,
such as high lease buyouts in 1996, and the temporary dilutive impact of the
July 1997 preferred share offering, net FFO allocable to common shares for the
third quarter was lower than 1996 by $1.8 million ($0.06 per share). While FFO
from the core mall operations in the fourth quarter of 1997 is expected to
outperform 1996, total FFO allocable to common shares will slightly trail last
year's fourth quarter due to $1.0 million in lease buyout income in the fourth
quarter of 1996 and $.02 to $.03 per share net dilutive impact from the
preferred offering (expected to be between $.06 and $.07 per share for all of
1997).
"The fundamental operating trends in the portfolio continue to be positive,"
Pasquerilla continued. "For the first nine months of 1997, comparable small
shop sales increased by 4.6 percent. Annualized revenues from new and renewal
signed small shop leases during the nine months were $11.6 million, 74 percent
higher than the same period in 1996. In addition to the small shop leasing, we
have signed theater and freestanding leases having annual revenues of $2.2
million so far this year. Based on these trends, we expect 1998 to show a
modest improvement in FFO per share compared to 1997, thus reversing the decline
in FFO we have had during the last three years."
Dividend Information
The Board of Trustees declared a regular quarterly dividend of $.20 per common
share and $1.375 per senior preferred share. Both dividends are payable
December 12, 1997 to shareholders of record on November 28, 1997.
Financial Information - Third Quarter
For the quarter ended September 30, 1997, the Company reports that Funds from
Operations (FFO) allocable to common shares was $6.4 million, or $0.24 per
common share, compared with $8.2 million, or $0.30 per common share, for the
third quarter of 1996. The difference is due primarily to $1.0 million ($0.03
per share) in lower lease buyout income this year compared with the third
quarter of 1996 when Kmart bought out its lease in one location, and $1.5
million ($0.04 per share) from the net temporary dilutive impact of the $125
million preferred share offering completed in early July 1997. The net dilutive
impact of the preferred reflects the $3.2 million in preferred dividends, offset
by $1.7 million interest savings on the $58.3 million in debt paid-down from
the preferred share proceeds and interest income on temporary short term
investments. The per share impact from the preferred offering was also
mitigated by the lower average common shares outstanding due to the common share
buyback program which has been funded from the preferred share proceeds.
Through September 30, 1997, the Company had acquired nearly 1.2 million common
shares under the previously announced buyback program; the Board of Trustees has
authorized the repurchase of up to 2.5 million common shares.
Total revenues for the third quarter were $30.7 million, as compared to $31.8
for the third quarter of 1996. The $1.1 million decrease is due to $1.0 million
in lower lease buyout income (included in minimum rent) compared to 1996, $0.1
million in lower fees and commissions from sales of non-Company properties
(included in miscellaneous income), $0.2 million in lower cost recovery income
due to lower recovery costs, offset by $0.2 million higher small shop and anchor
rents.
For the third quarter of 1997, the Company achieved net income of $0.7 million.
After deducting preferred dividends, there was a net loss applicable to common
shares of $2.5 million, or $0.10 per common share. This compares to $1.2
million net income, or $0.04 per share, in the third quarter of 1996. Net
income in the three and nine months ended September 30, 1996 was positively
impacted by a $2.4 million gain from the sale of Patrick Henry Corporate Center,
an office building located in Newport News, Virginia.
Financial Information - Nine Months
For the first nine months of 1997, FFO allocable to common shares was $21.7
million or $0.79 per share, compared to $25.7 million, or $0.94 per share, in
1996. FFO from core mall operations during the nine months was up by $0.02 per
share; however, this was offset by $2.0 million ($0.05 per share) in lower gain
on land sales, $1.3 million in lower lease buyouts ($.04 per share), $0.8
million in lower business interruption insurance income related to the December
1994 fire at Logan Valley Mall ($.02 per share), and by the net impact of the
preferred offering ($.04 per share).
For the first nine months of 1997, revenues were $92.6 million compared to $96.1
million in 1996. The difference is mainly due to the $0.8 million lower
business interruption insurance, $0.4 in lower cost recovery income due mainly
to lower recoverable costs at the properties, $1.3 million in lower lease buyout
income, $1.1 million in lower small shop base rents due to lower average
occupancy partially offset by higher average base rent per foot, $0.4 million in
lower anchor base rents, $0.3 million in lower fees and commissions from sales
of non-Company properties (included in miscellaneous income), and $0.7 million
in higher temporary and promotional income and net utility income.
For the nine months ended September 30, 1997, there was a net loss of $1.6
million, or $0.18 per common share after preferred dividends, compared to $3.4
million net income, or $0.12 per share, in the corresponding period of 1996.
Net income for the nine months ended September 30, 1996 was positively impacted
by the $2.4 million gain from the sale of Patrick Henry Corporate Center, as
noted above.
Operating Information
During the third quarter of 1997, leases for 213,000 square feet of mall shops
were signed resulting in $3.6 million in annual base rental income. This
compares to 100,000 square feet for $2.3 million during the same period in 1996,
a 56 percent increase based on annual rental income. A total of 88 leases were
signed, which included 42 renewals and 46 new leases. Annualized revenues from
new and renewal signed small shop leases during the nine months were $11.6
million, 74 percent higher than the same period in 1996.
For the nine months ended September 30, 1997, the average rent for mall shop
leases signed was $19.23 per square foot compared with $20.13 for the same
period in 1996. The average rents per square foot were $21.55 for new leases
and $17.20 for renewals in the first nine months of 1997, compared with $20.40
and $19.58, respectively, in 1996.
Also during the third quarter of 1997, leases for 4,000 square feet in non-mall
shop and/or freestanding locations were signed resulting in $35,000 in annual
base rental income. For the nine months ended September 30, 1997, the Company
has signed leases on 220,000 square feet resulting in $2.2 million in annual
base rental income.
The average base rent of the portfolio as of September 30, 1997 was $16.69 per
square foot. This is a 6.2 percent increase from $15.71 per square foot as of
September 30, 1996, and the 16th consecutive quarter that average base rent has
increased.
Overall, mall shop occupancy was 77 percent as of September 30, 1997. This
compares to 77 percent as of September 30, 1996, and is higher than occupancy
reported at year-end 1996 and in early 1997.
Mall shop comparable sales for the nine months ended September 30, 1997 were
$143.67 per square foot. This is a 4.6 percent increase over the amount
reported for September 30, 1996.
Occupancy costs, that is, base rent, percentage rent and expense recoveries as a
percentage of mall shop sales at all properties, were 10.7 percent as of
September 30, 1997, as compared to 10.8 percent as of September 30, 1996.
Temporary and promotional leasing income for the first nine months of 1997
amounted to $4.9 million, an 11.4 percent increase over the same period in 1996.
Expansion/Renovation Projects
In October, the Company announced that at Patrick Henry Mall (Newport News, Va.)
agreements have been reached with Belk Stores for a major expansion of its
facility and with The May Department Stores Company to add a new Hecht's
department store to the ten-year old mall. Both department stores will be
responsible for their own construction. In addition, Crown American will be
adding 29,102 square feet of new mall shop space. Patrick Henry Mall is the
portfolio's highest performer with 1996 comparable mall shop sales at $343 per
square foot.
In August, the two and a half year expansion and reconstruction of Logan Valley
Mall (Altoona, Pa.) was completed. The mall had been damaged in a December
1994 fire. The project, whose total cost approximates $68 million, included
expanding a new Kaufmann's location, expanding and renovating Sears, relocating
JCPenney into a new location, building a new eight-screen theater complex,
building a new two-story mall shop area and completely renovating the existing
mall.
Construction is nearing completion on a $1.5 million interior renovation at
Capital City Mall (Harrisburg, Pa.). The project includes adding skylights and
new ceiling treatments.
At West Manchester Mall (York, Pa.) construction is continuing on the addition
of a 13 screen Regal Cinema. The 43,400 square foot theater is expected to open
in early 1998.
Wal-Mart is more than doubling its size at Martinsburg Mall (Martinsburg, WV).
The existing 90,000 square foot store will grow to a 204,000 square foot Wal-
Mart Supercenter. Wal-Mart is primarily responsible for the construction costs
of this project.
Construction is continuing at Oak Ridge Mall (Oak Ridge, Tenn.) where Goody's is
relocating from an adjacent strip center outside the mall to a 22,000 square
foot location inside the mall. Goody's is being relocated in order to build a
new 14 screen 50,000 square foot Cinemark theater.
Pasquerilla concluded, "The Company's primary internal growth objectives are to
increase mall shop occupancy while at the same time to continue to increase
average base rents in the portfolio. Our mall shop leasing momentum is
continuing. We continue to expect 1997 year-end occupancy to range from 78 to
79 percent. With the completion of the preferred share offering in July of this
year, the Company has reduced its debt leverage and also significantly enhanced
its ability to pursue external growth. We have been actively pursuing accretive
mall acquisitions. In addition, we are working on a possible early refinancing
of our $280 million REMIC debt in mid-1998 and other potential early
refinancings to take advantage of the favorable rate environment and to provide
further financial flexibility and funds for future acquisitions."
Certain preceding quotations contain forward looking statements that involve
risk and uncertainties, including overall economic conditions, the impact of
competition consumer buying trends, weather patterns and other factors.
Crown American Realty Trust is the managing general partner and majority owner
of Crown American Properties, L.P. (the "Operating Partnership") and Crown
American Properties, L.P. is general partner of Crown American Financing
Partnership, which entities own, acquire, operate and develop regional shopping
malls. Currently, Crown American owns and operates 25 regional shopping malls
in Pennsylvania, Maryland, Virginia, West Virginia, New Jersey, Tennessee and
Georgia.
Selected financial data follows for Crown American Realty Trust for the three
and nine months ended September 30, 1997. A copy of the Company's Supplemental
Financial and Operational Information Package is available by calling Investor
Relations at 1-800-860-2011.
<TABLE>
<CAPTION>
EXHIBIT 99 (b)
THIRD QUARTER 1997
OTHER FINANCIAL AND OPERATING DATA
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
FINANCIAL AND ANALYTICAL DATA: 1997 vs. 1996 1997 vs. 1996
(in thousands, except per share data) Total Per Total Per
Share Share
<S> <C> <C> <C> <C>
Base and percentage rents from anchors $ 118 $ 0.003 $ (1,514) $ (0.042)
and mall shops
Temporary and promotional leasing 21 503 0.014
income
Mall operating costs, net of tenant (159) (0.004) 1,467 0.040
recovery income
Utility income, miscellaneous mall (15) (12)
income, equity in joint venture
Straight line rental income 132 0.004 387 0.010
Core mall operations 97 0.003 831 0.022
Lease buyout income (998) (0.027) (1,330) (0.036)
Business interruption insurance from (830) (0.022)
Logan Valley Fire
Property admin. and general & admin. 23 0.001 (14)
expenses; other
Cash flow support earned 305 0.008 533 0.014
Interest expense, before impact from (183) (0.005) (684) (0.019)
preferred share
Gain on sale of outparcel land 28 0.001 (1,987) (0.054)
Fee income on sales of non-company (128) (0.003) (350) (0.009)
properties
Impact of preferred shares on net 1,720 0.047 1,720 0.047
interest expense
Net impact on per share amounts from
FFO allocation to preferred shareholders
and from common share buybacks (0.084) (0.084)
Rounding (0.001) (0.009)
Change in Total FFO for the period $ 864 $(0.060) $ (2,111) $ (0.150)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Funds from Operations ($000 except per
share data):
Net income (loss) $ 688 $ 1,189 $ (1,629) $ 3,444
Adjustments:
Minority Interest in Operating (862) 406 (1,655) 1,173
Partnership
Depreciation and amortization - real 9,704 9,738 29,519 27,258
estate
Operating covenant amortization 658 680 1,973 1,973
Cash flow support amounts 1,066 761 2,742 2,209
Gain on sale of office building (2,351) (2,351)
Extraordinary loss on early 631 598 1,363 718
extinguishment of debt
FFO before allocations to minority 11,885 11,021 32,313 34,424
interest and preferred shares
Less preferred share dividends (3,208) (3,208)
Less portion of FFO allocable to (2,246) (2,781) (7,444) (8,699)
minority interest
FFO allocable to common shares $ 6,431 $ 8,240 $ 21,661 $25,725
FFO per common share $ 0.24 $ 0.30 $ 0.79 $ 0.94
Average common shares outstanding 27,092 27,533 27,467 27,495
during the period
Common shares outstanding at period 26,557 27,560 26,557 27,560
end
Avg. partnership units and common
shares outstanding during the period 36,530 36,972 36,905 36,934
Partnership units and common shares 35,996 36,999 35,996 36,999
outstanding at period end
Components of Minimum Rents:
Anchor - contractual or base rents $ 5,403 $ 5,661 $ 16,638 $17,021
Mall shops - contractual or base rents 14,793 14,437 43,933 45,055
Straight line rental income 15 (117) (63) (450)
Ground lease - contractual or base 378 385 1,128 1,155
rents
Lease buyout income 94 1,092 182 1,512
Operating covenant amortization (658) (680) (1,973) (1,973)
Total minimum rents $ 20,025 $ 20,778 $ 59,845 $62,320
Components of Percentage Rents:
Anchors $ 612 $ 718 $ 2,017 $ 2,280
Mall shops and ground leases 678 545 1,881 1,600
$ 1,290 $ 1,263 $ 3,898 $ 3,880
</TABLE>
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
THIRD QUARTER 1997
OTHER FINANCIAL AND OPERATING DATA
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(in thousands, except as noted)
<S> <C> <C> <C> <C>
EBITDA: earnings (including gain on
sale of outparcel land)
before interest, taxes and all $ 20,579 $ 21,644 $ 62,371 $ 66,261
depreciation and amortization
Debt and Interest:
Fixed rate debt at period end $ 400,538 $ 396,031 $ 400,538 $396,031
Variable rate debt at period end 131,362 168,637 131,362 168,637
Total debt at period end $ 531,900 $ 564,668 $ 531,900 $564,668
Weighted avg. interest rate on fixed 7.7% 7.8% 7.7% 7.9%
rate debt for the period
Weighted avg. interest rate on variable 7.8% 8.0% 7.9% 8.0%
rate debt for the period
Total interest expense for period $ 9,644 $ 11,181 $ 32,464 $ 33,499
Amort. of deferred debt cost for period 813 953 2,498 3,083
(incl. in interest exp)
Capitalized interest costs during 716 833 1,982 2,272
period
Capital Expenditures Incurred:
Allowances for anchors tenants $ 100 $ 75 $ 2,973 $ 3,443
Allowances for mall shop tenants 2,059 2,030 4,714 6,006
Leasing costs and commissions 591 218 2,152 1,469
Expansions and major renovations 6,498 9,652 17,243 30,593
All other capital expenditures 975 675 1,245 1,135
(included in Other Assets)
Total Capital Expenditures during the $ 10,223 $ 12,650 $ 28,327 $ 42,646
period
OPERATING DATA:
Mall shop GLA at period end
(000 sq. ft.) 5,349 5,234
Occupancy percentage at period end 77% 77%
Comp. Store Mall shop sales - 9 months $ 143.67 $ 137.40
(per sq. ft.)
Mall shop occupancy cost percentage at 10.7% 10.8%
period end
Average mall shop base rent at period $ 16.69 $ 15.71
end (per sq. ft.)
Mall shop leasing for the period:
New leases - sq. feet (000) 108 70 220
282
New leases - $ per sq. ft. $ 18.95 $ 21.50 $ 21.55 $ 20.40
Number of new leases signed. 46 40 151 116
Renewal leases - sq. feet (000) 105 30 323 112
Renewal leases - $ per sq. ft. $ 14.65 $ 25.29 $ 17.20 $ 19.58
Number of renewal leases signed. 42 22 146 74
Tenant Allowances for leases signed
during the period:
First Generation Space - per sq. ft. $ 46.34 $ 16.47 $ 36.30 $ 32.38
Second Generation Space - per sq. ft. $ 7.83 $ 10.05 $ 6.58 $ 11.34
Leases Signed during the period by:
First Generation Space - sq. feet (000) 20 4 75 65
Second Generation Space - sq. feet 193 96 530 267
(000)
Strip center and theater leasing for
the period
New leases - sq. feet (000) 4 n/a 220 n/a
New leases - $ per sq. ft. $ 9.17 n/a $ 10.11 n/a
</TABLE>
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
Consolidated Statements Of Operations
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Rental operations:
Revenues:
Minimum rent $ 20,025 $ 20,778 $ 59,845 $ 62,320
Percentage rent 1,290 1,263 3,898 3,880
Property operating cost 7,047 7,241 21,484 21,877
recoveries
Temporary and promotional 1,613 1,592 4,875 4,372
leasing
Net utility income 601 562 2,014 1,834
Business interruption 830
insurance
Miscellaneous income 165 348 484 1,027
Net 30,741 31,784 92,600 96,140
Property operating costs:
Recoverable operating costs 9,681 9,443 28,536 29,720
Property administrative costs 502 520 1,526 1,512
Other operating costs 457 731 1,381 2,058
Depreciation and amortization 9,396 9,399 28,530 26,299
Net 20,036 20,093 59,973 59,589
Net 10,705 11,691 32,627 36,551
Other expenses:
General and administrative 1,003 1,039 3,052 3,023
Interest 9,644 11,181 32,464 33,499
Net 10,647 12,220 35,516 36,522
Net 58 (529) (2,889) 29
Property sales, disposals and
adjustments:
Gain on sale of office building 2,351 2,351
Gain on sale of outparcel land 399 371 968 2,955
Net 399 2,722 968 5,306
Income (loss) before
extraordinary item
and minority interest 457 2,193 (1,921) 5,335
Extraordinary loss on early
extinguishment of debt (631) (598) (1,363) (718)
Income (loss) before minority (174) 1,595 (3,284) 4,617
interest
Minority interest in Operating 862 (406) 1,655 (1,173)
Partnership
Net income (loss) 688 1,189 (1,629) 3,444
Income allocable to preferred 3,208 3,208
shareholders
Net income (loss) applicable
to common shareholders $ (2,520) $ 1,189 $(4,837) $ 3,444
Per common share
Income (loss) before $ (0.08) $ 0.06 $ (0.14) $ 0.14
extraordinary item
Extraordinary item, net of (0.02) (0.02) (0.04) (0.02)
minority interest
Net income (loss) $ (0.10) $ 0.04 $ (0.18) $ 0.12
Weighted average shares 27,092 27,533 27,467 27,495
outstanding
</TABLE>
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Income properties:
Land $ 120,198 $ 120,999
Buildings and improvements 823,765 798,470
Deferred leasing and other charges 39,666 41,223
Net 983,629 960,692
Accumulated depreciation and amortization (305,639) (281,478)
Net 677,990 679,214
Investment in joint venture 5,755 5,799
Cash and cash equivalents 44,028 6,746
Tenant and other receivables 13,435 16,516
Deferred charges and other assets 37,418 32,363
Net $ 778,626 $ 740,638
Liabilities and Shareholders' Equity
Debt on income properties $ 531,900 $ 568,785
Accounts payable and other liabilities 24,532 32,201
Net 556,432 600,986
Minority interest in Operating Partnership 30,781 35,576
Commitments and contingencies
Shareholders' equity:
Non-redeemable senior preferred shares, 11%
cumulative, $.01 par value, 2,500,000 shares
issued and outstanding 25
Common shares, par value $.01 per share,
120,000,000 shares authorized, 27,727,212
and 27,612,756 shares issued and
outstanding, including shares held in treasury
at September 30, 1997 and December 31, 1996
respectively 277 276
Additional paid-in capital 304,024 184,205
Accumulated deficit (101,676) (80,405)
Net 202,650 104,076
Less common shares held in treasury at cost;
1,169,998 and 0 shares at September 30, 1997
and December 31, 1996, respectively (11,237)
Net 191,413 104,076
Net $ 778,626 $ 740,638
</TABLE>
<TABLE>
<CAPTION>
CROWN AMERICAN REALTY TRUST
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1997 1996
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,629) $ 3,444
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in Operating Partnership (1,655) 1,173
Gain on asset sales (2,351)
Equity earnings in joint venture (383) (450)
Depreciation and amortization 34,200 32,597
Extraordinary loss on early extinguishment of debt 1,363 718
Net changes in:
Tenant and other receivables 3,081 3,345
Deferred charges and other assets (9,388) (434)
Accounts payable and other liabilities (5,653) (4,841)
Net cash provided by operating activities 19,936 33,201
Cash flows from investing activities:
Investment in income properties (27,082) (41,511)
Distributions from joint venture 150 300
Cash from asset sales (net of closing costs) 9,452
Net cash (used in) investing activities (26,932) (31,759)
Cash flows from financing activities:
Net proceeds from issuance of senior preferred shares 118,723
Net proceeds from issuance of common shares under 921 856
dividend reinvestment plan
Purchase of common shares held in treasury (11,237)
Proceeds from issuance of debt, net of issuance cost 81,282 82,630
Debt repayments (120,832) (61,633)
Dividends and distributions paid on common shares and (22,096) (22,161)
partnership units
Dividends paid on senior preferred shares (2,483)
Net cash (used in) provided by financing activities 44,278 (308)
Net increase in cash and cash equivalents 37,282 1,134
Cash and cash equivalents, beginning of period 6,746 6,036
Cash and cash equivalents, end of period $ 44,028 $ 7,170
Interest paid (net of capitalized amounts) $ 30,965 30,416
$
Interest capitalized $ 1,982 $ 2,272
Non-cash financing activities:
Cash flow support credited to minority interest and
paid in capital that was prefunded in 1995. $ 2,742 $ 2,209
Preferred dividends accrued, but unpaid as of period $ 725 $
end
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Sep-30-1997
<CASH> 44,028
<SECURITIES> 0
<RECEIVABLES> 13,435
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 983,629
<DEPRECIATION> 305,639
<TOTAL-ASSETS> 778,626
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
25
<COMMON> 277
<OTHER-SE> 191,111
<TOTAL-LIABILITY-AND-EQUITY> 778,626
<SALES> 92,600
<TOTAL-REVENUES> 92,600
<CGS> 59,973
<TOTAL-COSTS> 59,973
<OTHER-EXPENSES> 3,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,464
<INCOME-PRETAX> (1,921)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,921)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,363)
<CHANGES> 0
<NET-INCOME> (1,629)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
