UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file Number 1-12286
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Mid-Atlantic Realty Trust
-------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1832411
- - -------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
170 West Ridgely Road, Suite 300 - Lutherville, Maryland 21093
- - -------------------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 684-2000
---------------------
Securities registered pursuant to Section 12 (b) of the Act:
NONE
----
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares of Beneficial Interest, $.01 par value
----------------------------------------------------
(Title of Class)
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.
X Yes No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant=s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
As of March 12, 1999, 14,330,817 common shares of beneficial interest of
Mid-Atlantic Realty Trust were outstanding and the aggregate value of common
stock (based upon the $10.25 closing price on that date) held by non-affiliates
was approximately $146,891,000.
Documents Incorporated by Reference
The definitive proxy statement with respect to the 1999 annual meeting of
Mid-Atlantic Realty Trust shareholders (to be filed).
<PAGE>
PART I
ITEM 1 - BUSINESS
Mid-Atlantic Realty Trust was incorporated June 29, 1993, and commenced
operations effective with the completion of its initial public share offering on
September 11, 1993. Mid-Atlantic Realty Trust qualifies as a real estate
investment trust, "REIT", for Federal income tax purposes. As used herein, the
term "MART" or the "Company" refers to Mid-Atlantic Realty Trust and entities
owned or controlled by MART, including MART Limited Partnership (the "Operating
Partnership").
The Company is a fully integrated, self-administered real estate investment
trust which owns, acquires, develops, redevelops, leases and manages primarily
neighborhood or community shopping centers in the Middle Atlantic region of the
United States. The Company's primary objectives are to enhance funds from
operations ("FFO") per share and maximize shareholder value. To achieve its
objectives, the Company seeks to operate its properties for long-term FFO
growth. The Company also acquires neighborhood or community shopping centers
that either have dominant anchor tenants or contain a mix of tenants which
reflects the shopping needs of the communities they serve. The Company also
develops and redevelops shopping centers on a tenant-driven basis, leveraging
either existing tenant relationships or geographic and demographic knowledge
while seeking to minimize exposure to risk associated with long-term land
development.
The Company's financial strategy is to execute its operation and growth
strategies by utilizing a blend of internally generated funds, issuance of
Operating Partnership Units, defined below, proceeds from divestitures,
institutional borrowings and issuance of corporate equity or debt, as
appropriate. The Company currently intends to maintain a ratio of secured debt
to total estimated property value at or below 50%.
The Company has an equity interest in 32 operating shopping centers, 27 of
which are wholly owned by the Company and five in which the Company has
interests ranging from 50% to 93%, as well as other commercial properties,
collectively the AProperties@. The Properties have a gross leasable area of
approximately 4,558,000 square feet, of which approximately 95% was leased at
December 31, 1998. Of these Properties, approximately 99% of the gross leasable
area is in the states of Maryland, Virginia, New York, Pennsylvania,
Massachusetts and Delaware. The Company also owns seven undeveloped parcels of
land totaling approximately 147 acres and varying in size from three to 64
acres.
All of MART's interests in the Properties are held directly or indirectly
by, and substantially all of its operations relating to the Properties are
conducted through the Operating Partnership. Units of partnership interest in
the Operating Partnership (AUnits@) may be exchanged by the limited partners for
cash or common shares of beneficial interest in MART on a one-for-one basis.
MART controls the Operating Partnership as the sole general partner, and owns
approximately 82% of the Units at December 31, 1998.
The business of the Company is not materially affected by seasonal factors.
Although construction may be affected to some extent by inclement weather
conditions, usually during winter months, revenues from income producing
properties held for investment are usually not so affected.
The commercial real estate development and investment industry is subject
to widespread competition for desirable sites, tenants and financing. The
industry is extremely fragmented and there are no principal methods of
competition. However, the ability to compete is dependent in part upon the
ability to find and complete appropriate real estate investments in a timely
manner. While many competitors have fewer assets and financial resources than
the Company, there are many competitors with greater financial resources
competing for similar business opportunities. Accordingly, it is not possible to
estimate the Company's position in the industry. In addition, certain of the
Company=s real estate projects are near unimproved sites that could be developed
commercially and would provide further competition to the Company. The
management of the Company believes, however, that the Company competes favorably
in the industry due to the quality of its developments, its ability to take
advantage of opportunities as they arise, its access to capital and its
reputation.
The Company has 58 full time employees and believes that its relationship
with its employees is good.
<PAGE>
ITEM 2 - PROPERTIES
The following schedule describes the Company's commercial and other properties
as of December 31, 1998.
<TABLE>
<CAPTION>
Gross
Year (s) Leasable Area
Percent Year Built/ Percent
Ownership Acquired Redeveloped ( Sq. Ft. ) Leased Major Tenants
--------- -------- ----------- ----------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
SHOPPING CENTER PROPERTIES (1)
MARYLAND
Baltimore Metropolitan Area:
Harford Mall and Business Center (2) 100% 1972 1972/1984-96 615,000 98% Hecht's, Montgomery Ward
Best Buy
Arundel Plaza Shopping Center 67% 1997 1967/1998 240,000 92% Giant Food, Lowe's Home
Center
Lutherville Station Shopping Center (3) 100% 1993 1969/1997 285,000 100% Metro Food Market,
Caldor, Circuit City
North East Station Shopping Center 100% 1989 1998/- 79,000 93% Food Lion, Sears
Timonium Shopping Center 100% 1997 1962/- 207,000 98% Ames, Loews Theaters,
Blockbuster
Perry Hall Shopping Center 100% 1997 1965/1996 195,000 87% Metro Food Market
(on own pad), Rite Aid,
Frank's Nursery & Crafts
Enchanted Forest Shopping Center 100% 1997 1992/- 140,000 100% Safeway, Petco
Wilkens Beltway Plaza Shopping Center 93% 1981* 1985-87/ 132,000 97% Giant Food, Provident
1991/1995 Bank, Radio Shack
New Town Village Shopping Center 100% 1995* 1995/- 122,000 99% Giant Food, Blockbuster,
Starbucks
Ingleside Shopping Center 100% 1997 1963/1996 115,000 100% Safeway, Rite Aid, First
National Bank,
Blockbuster
Shawan Plaza Shopping Center 100% 1997 1991/- 95,000 99% Giant Food, Nationsbank,
Provident Bank
Glen Burnie Village Shopping Center 100% 1997 1972/- 94,000 83% Rite Aid, Firestone,
First National Bank,
West Marine
York Road Plaza Shopping Center 100% 1967* 1967/1996 91,000 97% Giant Food, Firestone,
Starbucks, Boston Market
Radcliffe Shopping Center at Towson 100% 1997 1988/1993 86,000 100% CVS Drug, CompUSA,
Linens N' Things
Rosedale Plaza Shopping Center 100% 1989 1972/- 73,000 80% Exxon, Rite Aid
Patriots Plaza Shopping Center (3) 50% 1984* 1984/- 67,000 49% Denny's, Dunkin Donuts
Rolling Road Plaza Shopping Center 100% 1973* 1973/1994 63,000 97% AMF, Firestone
Timonium Crossing Shopping Center 100% 1997 1986/1996 60,000 98% Bibelot, Cosmetic Center
Club Centre at Pikesville Shopping Center 100% 1997 1990/- 44,000 93% Blockbuster
Easton:
Shoppes at Easton Shopping Center 100% 1994 1994/- 113,000 100% Giant Food, Wal-Mart
(on own pad)
DELAWARE
Wilmington:
Brandywine Commons Shopping Center (3) 100% 1995 1992/- 166,000 100% Shop Rite, Office Depot,
Sports Authority
Milford:
Milford Commons Shopping Center 100% 1997 1994 61,000 100% Food Lion, Remco
Wal-Mart (on own pad)
</TABLE>
2
<PAGE>
ITEM 2 - PROPERTIES CONTINUED
<TABLE>
<CAPTION>
Gross
Year (s) Leasable Area
Percent Year Built / Percent
Ownership Acquired Redeveloped ( Sq. Ft. ) Leased Major Tenants
--------- -------- ----------- ----------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA
Chambersburg:
Wayne Avenue Plaza Shopping Center 100% 1998 1990/1993 121,000 97% Giant Food (of Carlisle),
CVS Drug, Blockbuster
Waynesboro:
Wayne Heights Plaza Shopping Center 100% 1998 1975/- 109,000 95% Martins (Giant of
Carlisle), Ames, Eckerd
Drug
MASSACHUSETTS
Pittsfield:
Del Alba Plaza Shopping Center 100% 1998 1995/- 70,000 100% Stop & Shop, First National
Bank
NEW YORK
Colonie:
Colonie Plaza Shopping Center 100% 1987* 1987/- 140,000 93% Price Chopper,
Consolidated Stores
East Greenbush:
Columbia Plaza Shopping Center 100% 1988* 1988/1997 133,000 93% Price Chopper, Ben
Franklin
VIRGINIA
Burke:
Burke Town Plaza Shopping Center (3) 100% 1979* 1979-1982/1997 116,000 95% Safeway, CVS Drug
Fredericksburg:
Spotsylvania Crossing Shopping Center 93% 1987* 1987/1991 142,000 99% Giant Food (on own pad),
Kmart, Fashion Bug
Harrisonburg:
Skyline Village Shopping Center 100% 1988* 1988/1992 127,000 100% Richfood, Toys "R" Us
Manassas:
Sudley Towne Plaza Shopping Center 100% 1984* 1984/- 108,000 100% Burlington Coat Factory
Prince William County:
Smoketown Plaza Shopping Center 93% 1987* 1987/1994 176,000 99% Hub Furniture, Frank's
Nursery & Crafts
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Gross
Year (s) Leasable Area
Percent Year Built / Percent
Ownership Acquired Redeveloped ( Sq. Ft. ) Leased Major Tenants
--------- -------- ----------- ----------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
OTHER RETAIL AND COMMERCIAL PROPERTIES (4)
MARYLAND
Baltimore Metropolitan Area:
Orchard Square Medical Office 100% 1997 1988/- 28,000 94% N/A
Southwest Mixed Use Property 100% 1968* 1968/1984 25,000 100% Shell Oil, Otis, Potomac
Air Gas
Other:
Waldorf Property 100% 1979* 1979/- 31,000 100% AMF, Firestone
Clinton Property (3) 100% 1971* 1971/- 29,000 100% AMF, Suburban Bank
ILLINOIS
Chicago Property 100% 1978 1963/- 37,000 100% AMF
</TABLE>
<TABLE>
<CAPTION>
Area
Percent in
Ownership Acres Zoning
<S> <C> <C> <C> <C> <C> <C>
UNDEVELOPED LAND
MARYLAND
Baltimore Metropolitan Area:
Dorsey Property 100% 19.4 Commercial
Harford Property (Adjacent to Harford Mall) 100% 3.0 Light Industrial
Northeast Station Property 100% 63.7 Commercial
Pulaski Property 100% 3.0 Industrial
Salisbury:
Northwood Industrial Park 67% 16.1 Industrial
NORTH CAROLINA
Burlington:
Burlington Commerce Park 100% 34.3 Commercial
Hillsborough:
Hillsborough Crossing 100% 8.0 Commercial
- - ------------------------------------------
<FN>
(1) Shopping centers in operation are subject to mortgage financing aggregating $123,144,893 at December 31, 1998.
(2) The Harford Mall property is subject to mortgage financing aggregating $19,193,787 at December 31, 1998.
The Harford Mall mortgage has an interest rate of 9.78%, a 30 year amortization, with a 10 year balloon payment of
$18,148,848 due at the maturity date of July 2003. The mortgage allows prepayment with a penalty of the greater of 1% of
the outstanding principal balance or yield maintenance.
(3) These properties are subject to ground leases; all of the land relating to the other properties listed above is owned in fee
simple. The ground leases are subject to the following terms:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Property Annual Rent Remaining Lease Term
-------- ----------- --------------------
<S> <C> <C>
Lutherville Station Shopping Center $60,000 18 years plus six 10 year options
Lutherville Station Shopping Center $26,000 48 years
Patriots Plaza Shopping Center $59,700 9 years plus two 10 year options
Brandywine Commons Shopping Center $392,600 54 years plus two 10 year options
Burke Towne Plaza Shopping Center $80,000 33 years plus three 15 year renewal options
Clinton Property $33,000 28 years plus one 45 year renewal option
<FN>
(4) Other retail and commercial properties in operation are subject to mortgage financing aggregating $2,256,957 at
December 31, 1998.
</FN>
</TABLE>
* Developed by MART or its predecessor.
4
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in legal
proceedings. However, there are no material legal proceedings presently pending
against the Company.
- - --------------------------------------------------------------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
- - -------------------------------------------------------------------------------
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MART's common shares of beneficial interest, par value $.01 per share,
("shares"), began trading on the New York Stock Exchange on September 18, 1997,
under the symbol "MRR". The shares were formerly traded on the American Stock
Exchange under the symbol "MRR". The following table sets forth, for the
quarters indicated, the high and low closing sale prices of MART shares on the
AMEX or NYSE, and the cash distributions paid per share for the indicated
period.
<TABLE>
<CAPTION>
Closing Prices Per Share
1998 High Low Distributions
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 14.750 13.062 0.25
Second Quarter 14.187 12.250 0.25
Third Quarter 13.500 11.312 0.25
Fourth Quarter 13.062 11.250 0.26
1997 High Low Distributions
- - ------------------------------------------------------------------------------------------------------
First Quarter 11.750 10.500 0.24
Second Quarter 11.875 11.000 0.24
Third Quarter 13.375 11.500 0.24
Fourth Quarter 14.688 12.813 0.25
1996 High Low Distributions
- - ------------------------------------------------------------------------------------------------------
First Quarter 10.375 8.750 0.23
Second Quarter 10.000 9.250 0.23
Third Quarter 10.125 9.500 0.23
Fourth Quarter 11.750 9.625 0.24
</TABLE>
For the record shareholders of MART during the entire year, for each
respective year, per share dividends indicated are taxable as follows:
<TABLE>
<CAPTION>
Per Share
--------------------------------------------
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Ordinary Dividends - taxable as ordinary income 0.85 0.97 0.58
Capital gain distribution - taxable as capital gain 0.01 - -
Non-taxable distribution - return of capital or
taxable gain - (depending on a shareholder's
basis in MART shares) 0.15 - 0.35
--------------------------------------------
--------------------------------------------
Total annual gross dividends per share 1.01 0.97 0.93
--------------------------------------------
Percent of total annual gross dividends per share
nontaxable distribution-return of capital or taxable 15% - 38%
gain --------------------------------------------
</TABLE>
5
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
Company and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 49,537,130 39,152,220 32,406,300 29,593,158 27,212,796
--------------------------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle and extraordinary loss $ 12,385,861 6,819,211 3,508,709 3,165,082 2,916,286
Cumulative effect of change in accounting
for percentage rents - - - 612,383 -
--------------------------------------------------------------------------------
Earnings before extraordinary loss 12,385,861 6,819,211 3,508,709 3,777,465 2,916,286
Extraordinary loss (32,984) (226,873) - - -
--------------------------------------------------------------------------------
Net earnings $ 12,352,877 6,592,338 3,508,709 3,777,465 2,916,286
--------------------------------------------------------------------------------
Net earnings per share - basic $ 0.85 0.70 0.56 0.61 0.46
Net earnings per share - diluted 0.84 0.70 0.56 0.61 0.46
--------------------------------------------------------------------------------
Total assets $ 319,740,765 300,886,703 173,278,241 182,521,299 162,842,567
--------------------------------------------------------------------------------
Indebtedness -
total mortgages, convertible debentures,
construction loans, notes and loans payable $ 166,732,850 145,660,657 133,805,495 154,020,757 133,390,553
--------------------------------------------------------------------------------
Funds from operations (FFO) (1) - diluted $ 25,117,146 17,513,062 13,177,955 12,307,381 11,173,205
--------------------------------------------------------------------------------
Net cash flow:
Provided by operating activities $ 24,255,137 16,005,958 9,898,948 11,193,068 7,766,044
(Used in) provided by investing activities $ (21,668,918) (5,995,155) 4,231,471 (23,584,229) (19,629,727)
(Used in) provided by financing activities $ (10,402,329) (2,597,424) (13,631,237) 12,561,025 11,521,097
--------------------------------------------------------------------------------
Cash dividends paid per share $ 1.01 0.97 0.93 0.89 0.85
--------------------------------------------------------------------------------
Weighted average number of shares outstanding: EPS
Basic 14,240,533 9,308,682 6,211,092 6,176,991 6,291,407
Diluted 15,778,727 9,360,566 6,211,092 6,176,991 6,291,407
Weighted average number of shares outstanding: FFO
Basic 14,240,533 9,308,682 6,211,092 6,176,991 6,291,407
Diluted 18,954,498 14,209,757 11,721,436 11,889,372 12,005,693
</TABLE>
6
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA (Continued)
Reconciliation of Net Earnings to FFO - Diluted
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earnings $ 12,352,877 6,592,338 3,508,709 3,777,465 2,916,286
Depreciation and amortization of real estate assets 8,813,251 6,954,803 5,413,737 4,983,617 4,549,781
Gain on life insurance proceeds - - - (1,001,787) -
(Gain) loss on properties 4,223 (16,836) (300,599) 280,362 (1,203,087)
Cumulative effect of change in accounting
for percentage rents - - - (612,383) -
Extraordinary loss from early extinguishment of debt 32,984 226,873 - - -
Operating Partnership minority interest expense 2,707,051 1,139,840 - - -
Subordinated debenture interest expense 1,206,760 2,616,044 4,556,108 4,880,107 4,910,225
-------------------------------------------------------------------------------
FFO - diluted $ 25,117,146 17,513,062 13,177,955 12,307,381 11,173,205
-------------------------------------------------------------------------------
<FN>
(1) Funds from operations is defined by the National Association of Real Estate
Investment Trusts, Inc. (NAREIT) as net income (computed in accordance with
generally accepted accounting principles), excluding cumulative effects of
changes in accounting principles, extraordinary or unusual items, and gains or
losses from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not represent cash flows from operations as defined by
generally accepted accounting principles (GAAP). FFO is not indicative that cash
flows are adequate to fund all cash needs and is not to be considered as an
alternative to net income as defined by GAAP.
</FN>
</TABLE>
Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for MART for 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended
1998 March 31, June 30, September 30, December 31,
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 11,824,395 12,267,335 12,322,456 13,122,944
-------------------------------------------------------------------
Earnings before extraordinary loss $ 3,102,987 3,002,283 2,979,240 3,301,351
Extraordinary loss
from early extinguishment of debt (32,984) - - -
-------------------------------------------------------------------
Net earnings $ 3,070,003 3,002,283 2,979,240 3,301,351
-------------------------------------------------------------------
Net earnings per share - basic $ 0.21 0.20 0.21 0.23
Net earnings per share - diluted $ 0.21 0.20 0.21 0.22
-------------------------------------------------------------------
Quarter Ended
1997 March 31, June 30, September 30, December 31,
- - --------------------------------------------------------------------------------------------------------------
Revenues $ 8,204,768 8,192,329 11,427,185 11,327,938
-------------------------------------------------------------------
Earnings before extraordinary loss $ 1,351,793 1,528,925 1,267,281 2,671,212
Extraordinary loss
from early extinguishment of debt - - - (226,873)
-------------------------------------------------------------------
Net earnings $ 1,351,793 1,528,925 1,267,281 2,444,339
-------------------------------------------------------------------
Net earnings per share - basic and diluted $ 0.18 0.19 0.15 0.18
-------------------------------------------------------------------
</TABLE>
Quarterly results are influenced by a number of factors including timing of
settlements of property sales, completion of operating projects, write-offs of
unrecoverable development costs, extraordinary items and allowances for loss on
properties.
7
<PAGE>
ITEM 7 - MANAGEMENT=S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of operating results covers each of the
Company's two business segments for the years ended December 31, 1998, 1997, and
1996.
Management believes that a segment analysis provides the most effective
means of understanding the business. As discussed in Note O to the consolidated
financial statements, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in 1998. As required by the Statement, segment data are reported
using the accounting policies followed by the Company for internal reporting to
management. These policies are the same as those used for external reporting.
Operating results of the segments are reconciled to earnings from operations in
the financial statements in Note O.
Operating Results - Shopping Centers
Operating results of shopping center properties are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Revenues $ 47,402 34,938 27,388
Operating and interest expenses, exclusive of depreciation and amortization 24,509 22,281 21,276
Depreciation and amortization 8,362 6,011 4,288
Minority interest 3,080 1,410 494
--------------------------------------------
Earnings from operations $ 11,451 5,236 1,330
--------------------------------------------
</TABLE>
Revenues from shopping centers increased by $12,464,000 in 1998 and by
$7,550,000 in 1997. The increase in 1998 was due primarily to a full year of
operations from the portfolio of properties acquired from partnerships
associated with Jack H. Pechter ("JHP Acquisition") in July 1997, the operations
of five additional operating properties acquired in 1998 and 1997, the
completion of two redevelopment projects which were in operation for the last
three quarters of the year, and other occupancy and net rental increases. These
increases were partly offset by the disposition of three properties during 1997.
The increase in 1997 was due primarily to the JHP Acquisition , the completion
of three redevelopment projects, and other occupancy and net rental increases.
These increases were partly offset by the dispositions of properties referred to
above.
Operating and interest expenses (exclusive of depreciation and amortization)
for shopping center properties increased by $2,228,000 in 1998 and by $1,005,000
in 1997. The increase in 1998 was due primarily to the acquisitions referred to
above, partly offset by a decrease in interest expense due to the conversion of
debentures, paydowns of mortgages and notes payable, and dispositions of
properties. The increase in 1997 was due primarily to the acquisitions referred
to above, partly offset by dispositions of properties and the conversion of
debentures. Depreciation and amortization expense increased by $2,351,000 in
1998 and by $1,723,000 in 1997 due primarily to the acquisitions referred to
above. Minority interest expense increased by $1,670,000 in 1998 and by $916,000
in 1997. The increases were due primarily to the addition of minority limited
partnership interests in connection with the JHP Acquisition.
Operating Results - All Other Properties
Operating results of all other properties are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Revenues $ 2,135 4,214 5,018
Operating and interest expenses, exclusive of depreciation and amortization 731 1,696 1,995
Depreciation and amortization 451 943 1,125
Minority interest 14 9 20
----------------------------------------------
Earnings from operations $ 939 1,566 1,878
----------------------------------------------
</TABLE>
Revenues from all other properties decreased by $2,079,000 in 1998 and by
$804,000 in 1997. The decreases in 1998 and 1997 were due primarily to the
disposition of the Gateway International Office project ("Gateway") in September
1997, partly offset by revenues from a medical office building acquired in the
JHP Acquisition.
Operating and interest expenses (exclusive of depreciation and
amortization) for all other properties decreased $965,000 in 1998 and $299,000
in 1997. Depreciation and amortization decreased by $492,000 in 1998 and by
$182,000 in 1997. The decreases were due primarily to the portfolio changes
referred to above.
Gain (Loss) on Dispositions
The gain on properties for 1997 includes gains on sales of various properties of
approximately $1,165,000, including approximately $959,000 relating to the
Gateway International Office project. These gains were substantially offset by a
provision for loss of $1,148,000 on a shopping center the Company decided to
sell. The gain on properties for 1996 includes gains on various properties of
$1,015,000, including approximately $450,000 relating to shopping center
properties. These gains were partly offset by a provision for loss of $714,000
on a shopping center the Company decided to sell.
Liquidity and Capital Resources
The Company had cash and cash equivalents of $611,000 at December 31, 1998.
Net cash flow provided by operating activities was $24,255,000,
$16,006,000, and $9,899,000 in 1998, 1997, and 1996, respectively. The changes
in cash provided by operating activities were due primarily to the factors
discussed above in the comparisons of operating results. The level of net cash
provided by operating activities is also affected by the timing of receipt of
revenues and the payment of operating and interest expenses.
Net cash flow used in investing activities increased by $15,674,000, to a
net cash flow used in investing activities of $21,669,000 in 1998 from a net
cash flow used in investing activities of $5,995,000 in 1997. The increase was
primarily a result of a lower level of sales of properties in 1998 partly offset
by a decrease in acquisitions of and additions to properties.
Net cash flow used in investing activities increased by $10,227,000, to a
net cash flow used in investing activities of $5,995,000 in 1997 from a net cash
flow provided by investing activities of $4,232,000 in 1996. The decrease was
primarily a result of more acquisitions of and additions to properties in 1997
than in 1996, partly offset by higher sales of properties in 1997. Milford
Commons and Arundel Plaza and development projects Lutherville Station and North
East Station were acquired and added to properties and Gateway was sold in 1997.
Net cash flow used in financing activities increased by $7,805,000 to
$10,402,000 in 1998 from $2,597,000 in 1997. The increase in cash used was
primarily a result of higher dividends paid in 1998, and share repurchases under
the Company's plan of $3,831,000.
Net cash flow used in financing activities decreased by $11,034,000 to
$2,597,000 in 1997 from $13,631,000 in 1996. The decrease in cash used was
primarily a result of $49,061,000 in proceeds from a common share offering in
October 1997, partly offset by higher levels of net principal paydowns in 1997
of $34,943,000 (primarily due to mortgage principal paydowns using offering
proceeds and to the line of credit paydown using proceeds of the Gateway sale),
as well as an increase in dividends paid of $3,467,000 in 1997.
The Company currently has a $40,000,000 secured line of credit available
for various purposes, including acquisition, development or redevelopment of
properties and liquidity, subject to various terms and conditions. The note
payable under the bank line of credit had an $18,400,000 balance outstanding at
December 31, 1998. The Company has received a commitment letter from its primary
bank to increase its line of credit from $40,000,000 to $75,000,000. The new
credit facility will be unsecured and is subject to agreement on final terms.
The Company has registered to sell up to an aggregate of approximately
$98,000,000 (based on the public offering price) of additional commons shares of
beneficial interest and/or debt securities. The shares and debt may be issued
from time to time at prices, in amounts and on terms to be determined at the
time of offering.
In order to qualify as a REIT for Federal income tax purposes, MART is
required to pay dividends to its shareholders of at least 95% of its REIT
taxable income. MART intends to pay these dividends from operating cash flows.
While MART intends to distribute to its shareholders a substantial portion of
its cash flows from operating activities, MART also intends to retain or reserve
such amounts as it considers necessary from time to time for the acquisition or
development of new properties as suitable opportunities arise and for the
expansion and renovation of its shopping centers. Also, MART currently has and
expects to continue to maintain a line of credit from its primary bank.
The Company anticipates material commitments for capital expenditures to
include, in the next two years, the ongoing redevelopment of five projects in
the planning stage at an estimated cost of $12,500,000 to $14,000,000. The
Company expects to fund the development projects and other capital expenditures
with available net cash flows from operating activities and if necessary with
construction loan financing, long-term mortgage financing on unencumbered
operating properties or the use of its line of credit.
It is management=s intention that MART continually have access to the
capital resources necessary to expand and develop its business. Management
cannot practically quantify MART=s 1999 cash requirements, but expects to meet
its short-term liquidity requirements generally through available net cash flow
provided by operations and short-term borrowings. To meet its long-term capital
requirements, MART intends to obtain funds through additional equity offerings
or long-term debt financing in a manner consistent with its financial strategy.
The Company anticipates that the cash flow available from operations, together
with cash from borrowings and equity offerings, will be sufficient to meet its
liquidity and capital needs in both the short- and long-term.
Market Risk Information
The market risk associated with financial instruments and derivative financial
and commodity instruments is the risk of loss from adverse changes in market
prices or rates. The Company's market risk arises primarily from interest rate
risk relating to variable rate borrowings used to maintain liquidity (e.g.,
credit line borrowings ) or finance project development costs (e.g.,
construction loans). The Company's interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows. In order
to achieve this objective, the Company relies primarily on long term, fixed rate
nonrecourse loans from institutional lenders to finance its operating
properties. In addition, long term fixed rate financing is typically arranged
concurrently with or shortly after a variable rate project construction loan is
negotiated or the project is complete. The Company has not used derivative
financial or commodity instruments to manage interest rate risk.
The Company's interest rate risk is monitored closely by management. The
table below presents the principal amounts, weighted average interest rates,
fair values and other data required to evaluate the expected cash flows of the
Company under debt agreements and its sensitivity to interest rate changes.
At December 31, 1998, the Company's variable rate debt relates to
borrowings under its credit line. The credit line borrowings are assumed to be
repaid at their various repricing dates throughout 1999.
<PAGE>
Market Risk Information (Continued)
As the table incorporates only those exposures that exist as of December
31, 1998, it does not consider exposures or positions which could arise after
that date. As a result, the Company's ultimate realized gain or loss with
respect to interest rate fluctuations will depend on the exposures that arise
after December 31, 1998, the Company's hedging strategies, if any, during that
period and interest rates.
<TABLE>
<CAPTION>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt 13,900 10,300 12,625 19,952 19,856 57,768 134,401 140,225
Weighted average interest rate 8.77% 9.76% 8.38% 8.29% 9.69% 8.47% 8.74% 7.08%
Variable rate debt 18,400 - - - - - 18,400 -
Weighted average interest rate 6.38% - - - - - 6.38% -
</TABLE>
Year 2000 Issue
The year 2000 issue relates to whether computer systems will properly recognize
date sensitive information to allow accurate processing of transactions and data
relating to the year 2000 and beyond. Systems that do not properly recognize
such information could generate erroneous data or fail.
As a result of the Company's normal upgrade and replacement processes, it
has been determined that all existing network and desktop equipment is year 2000
compliant. The Company's mission critical, property management and financial
reporting software has also been modified to be year 2000 compliant. The Company
has determined that all non-mission critical software is year 2000 compliant. As
the Company owns primarily community retail centers without enclosed common
areas, the use of this technology is very limited and management does not
believe that the year 2000 issue will pose significant problems in these
systems. The Company expects that the costs to specifically remediate year 2000
information technology issues will not be significant.
The Company believes the "most reasonably likely worst case scenario"
exposure to be indirect in nature involving vendors, suppliers, and tenants.
Currently, management does not believe it is practical to measure the effects of
potential complications. The Company will continually monitor and evaluate these
areas and develop contingency plans on an as needed basis.
Inflation
The majority of leases for the shopping center properties contain provisions for
annual increases in rents and/or provisions, which may entitle MART to receive
percentage rents, based on the tenants= gross sales. Such provisions ameliorate
the risk to MART of the adverse effects of inflation. If a recession were to
begin and continue for a prolonged time, funds from operations could decline as
some tenants may have trouble meeting their lease obligations. Most of the
leases for the properties require the tenants to pay a substantial share of
operating expenses, such as real estate taxes, insurance and common area
maintenance costs, and thereby reduce MART=s exposure to increased costs. In
addition, many of the leases for the properties are for terms of less than 10
years, which may enable MART to seek increase rents upon renewal of existing
leases if rents are below the then existing market rates.
Cautionary Disclosure Relating to Forward Looking Statements
Statements made in this document include forward looking statements under the
federal securities laws. Statements that are not historical in nature, including
the words "anticipate," "estimate," "should," "expect," "believe," "intend," and
similar expressions are intended to identify forward looking statements. While
these statements reflect the Company's good faith beliefs based on current
expectations, estimates and projections about (among other things) the industry
and the markets in which the Company operates, they are not guarantees of future
performance, involve known and unknown risks and uncertainties that could cause
actual results to differ materially from those in the forward looking
statements, and should not be relied upon as predictions of future events.
Factors which could impact future results include (among other things) general
economic conditions, local real estate conditions, oversupply of available
space, financial condition of tenants, timely ability to lease or re-lease space
upon favorable economic terms, agreements with anchor tenants, interest rates,
availability of financing, competitive factors, and similar considerations. The
Company disclaims any obligation to publicly update or revise any forward
looking statement, whether as a result of new information, future events or
otherwise. For a discussion of risks and uncertainties that could cause actual
results to differ materially from those contained in the forward looking
statements, see "Risk Factors" filed as Exhibit 99.1 to the Company's Form 10-K.
8
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Independent Auditors' Report 25
Consolidated Balance Sheets -
as of December 31, 1998 and 1997 26
Consolidated Statements of Operations -
Years ended December 31, 1998, 1997, and 1996 27
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1998, 1997, and 1996 28
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997, and 1996 29
Notes to Consolidated Financial Statements 30
Exhibits, Financial Statement Schedule, and Reports
on Form 8K are included in Part IV - Item 14
Schedule:
Schedule III - Real Estate and Accumulated Depreciation 42
9
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Trustees and Shareholders
Mid-Atlantic Realty Trust:
We have audited the accompanying consolidated balance sheets of Mid-Atlantic
Realty Trust and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of operations, shareholders= equity and cash flows for
each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial statement
schedule are the responsibility of the Company=s management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mid-Atlantic
Realty Trust and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31,1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Baltimore, Maryland
February 8, 1999
10
<PAGE>
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31,
1998 1997
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- - --------------
Properties:
Operating properties (Notes C and D) $ 347,921,101 306,887,360
Less accumulated depreciation and amortization 50,540,094 42,781,532
-----------------------------------------
297,381,007 264,105,828
Development operations (Note E) 11,281,252 18,812,326
Property held for development or sale 5,422,705 5,559,864
-----------------------------------------
314,084,964 288,478,018
Cash and cash equivalents 611,107 8,427,217
Notes and accounts receivable - tenants and other (Note F) 1,504,951 880,414
Prepaid expenses and deposits 2,381,137 1,928,584
Deferred financing costs, net (Note G) 1,158,606 1,172,470
-----------------------------------------
$ 319,740,765 300,886,703
-----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ----------------------------------------------------
Liabilities:
Accounts payable and accrued expenses (Note H) $ 6,306,471 5,721,093
Notes payable (Note I) 18,400,000 3,400,000
Construction loan payable (Note D) 9,000,000 8,692,916
Mortgages payable (Note D) 125,401,850 116,065,741
Convertible subordinated debentures (Note J) 13,931,000 17,502,000
Deferred income 743,284 666,444
-----------------------------------------
173,782,605 152,048,194
-----------------------------------------
Minority interest in consolidated joint ventures 41,467,101 42,076,946
-----------------------------------------
Shareholders' equity (Note L):
Preferred shares of beneficial interest, $.01 par value,
authorized 2,000,000 shares, issued and outstanding, none - -
Common shares of beneficial interest, $.01 par value,
authorized 100,000,000 shares, outstanding 14,495,045 and
14,460,248 shares, respectively 144,950 144,602
Additional paid-in capital 131,368,001 131,281,852
Distributions in excess of accumulated earnings (27,021,892) (24,664,891)
-----------------------------------------
104,491,059 106,761,563
-----------------------------------------
Commitments (Note M)
-----------------------------------------
$ 319,740,765 300,886,703
-----------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31,
<TABLE>
<CAPTION>
------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rentals $ 41,674,780 33,115,087 26,561,699
Tenant Recoveries 7,421,059 5,569,495 5,135,024
Other (Note P) 441,291 467,638 709,577
------------------------------------------------------------
49,537,130 39,152,220 32,406,300
------------------------------------------------------------
EXPENSES:
Interest 12,081,000 12,555,017 12,354,156
Depreciation and amortization
of property and improvements 8,813,251 6,954,803 5,413,737
Operating 10,370,414 8,960,936 8,817,826
General and administrative 2,788,939 2,460,263 2,098,534
------------------------------------------------------------
34,053,604 30,931,019 28,684,253
------------------------------------------------------------
EARNINGS FROM OPERATIONS
BEFORE MINORITY INTEREST 15,483,526 8,221,201 3,722,047
Minority Interest (3,093,442) (1,418,826) (513,937)
------------------------------------------------------------
EARNINGS FROM OPERATIONS 12,390,084 6,802,375 3,208,110
Gain (loss) on properties (Note Q) (4,223) 16,836 300,599
------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY LOSS 12,385,861 6,819,211 3,508,709
Extraordinary loss from early
extinguishment of debt (32,984) (226,873) -
------------------------------------------------------------
NET EARNINGS $ 12,352,877 6,592,338 3,508,709
------------------------------------------------------------
NET EARNINGS PER SHARE - BASIC (NOTE R):
Earnings before extraordinary loss $ 0.85 0.72 0.56
Extraordinary loss on early extinguishment of debt - (0.02) -
------------------------------------------------------------
Net earnings $ 0.85 0.70 0.56
------------------------------------------------------------
NET EARNINGS PER SHARE - DILUTED (NOTE R):
Earnings before extraordinary loss $ 0.84 0.72 0.56
Extraordinary loss on early extinguishment of debt - (0.02) -
------------------------------------------------------------
Net earnings $ 0.84 0.70 0.56
------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Distributions
Number of Common Additional in Excess of Net
Common Shares at Paid-in Accumulated Shareholders'
Shares Par value Capital Earnings Equity
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 6,016,111 $ 60,161 40,389,783 (19,511,722) 20,938,222
Conversion of subordinated debentures 1,217,610 12,176 12,327,280 - 12,339,456
Share purchase plan (8,618) (86) (81,350) - (81,436)
Dividends paid - $.93 per share - - - (5,893,649) (5,893,649)
Net earnings - - - 3,508,709 3,508,709
--------------------------------------------------------------------------------
BALANCE, December 31, 1996 7,225,103 72,251 52,635,713 (21,896,662) 30,811,302
Conversion of subordinated debentures 2,827,838 28,278 28,740,766 - 28,769,044
Redemption of Operating Partnership Units - - (15,000) - (15,000)
Share-based compensation plans 382,307 3,823 899,499 - 903,322
Sale of common shares 4,025,000 40,250 49,020,874 - 49,061,124
Dividends paid - $.97 per share - - - (9,360,567) (9,360,567)
Net earnings - - - 6,592,338 6,592,338
--------------------------------------------------------------------------------
BALANCE, December 31, 1997 14,460,248 144,602 131,281,852 (24,664,891) 106,761,563
Conversion of subordinated debentures 340,080 3,401 3,473,468 - 3,476,869
Share purchase plan (313,200) (3,132) (3,827,977) - (3,831,109)
Share-based compensation plans 7,917 79 467,374 - 467,453
Other, net - - (26,716) - (26,716)
Dividends paid - $1.01 per share - - - (14,709,878) (14,709,878)
Net earnings - - - 12,352,877 12,352,877
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
BALANCE, December 31, 1998 14,495,045 $ 144,950 131,368,001 (27,021,892) 104,491,059
--------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
---------------------------------------------------------
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,352,877 6,592,338 3,508,709
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,813,251 6,954,803 5,413,737
Minority interest in earnings, net 3,086,093 1,356,062 513,937
Amortization of deferred financing costs 247,901 374,432 557,319
(Gain) loss on properties 4,223 (16,836) (300,599)
Changes in operating assets and liabilities:
(Increase) decrease in assets (1,077,090) (539,087) 530,517
Increase (decrease) in liabilities 662,218 1,190,388 (99,940)
Other, net 165,664 93,858 (224,732)
----------------------------------------------------------
Total adjustments 11,902,260 9,413,620 6,390,239
----------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,255,137 16,005,958 9,898,948
----------------------------------------------------------
Cash flows from investing activities:
Acquisitions of and additions to properties (22,470,996) (30,894,917) (6,412,365)
Proceeds from sales of properties 4,498,017 26,867,723 11,175,108
Payments to minority partners (3,695,939) (1,985,568) (652,186)
Receipts from minority partners - 17,607 121,184
----------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (21,668,918) (5,995,155) 4,231,741
----------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 24,677,750 34,900,000 49,080,565
Principal payments on notes payable (9,677,750) (47,900,000) (54,210,708)
Proceeds from mortgages payable 11,600,000 - 18,900,000
Principal payments on mortgages payable (18,435,646) (38,067,252) (11,100,609)
Proceeds from construction loans payable 307,084 8,692,916 194,222
Payments on construction loans payable - - (10,293,732)
Additions to deferred financing costs (305,881) (31,837) (225,890)
Proceeds from exercise of share options 23 78,526 -
Net proceeds from sale of common shares - 49,061,124 -
Shares repurchased (3,831,109) - (81,436)
Dividends paid (14,709,878) (9,360,567) (5,893,649)
Other, net (26,922) 29,666 -
-----------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (10,402,329) (2,597,424) (13,631,237)
-----------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,816,110) 7,413,379 499,452
CASH AND CASH EQUIVALENTS, beginning of year 8,427,217 1,013,838 514,386
-----------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 611,107 8,427,217 1,013,838
-----------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 12,540,504 13,384,175 12,317,962
------------------------------------------------------------
- - -------------------------------------------------------------
Schedule of noncash investing and financing activities
- - -------------------------------------------------------------
Conversion of subordinated debentures,
net of deferred financing costs $ 34,077,075 28,769,882 12,339,456
Mortgages payable assumed 16,171,755 83,922,498 -
Operating Partnership Units issued - 36,064,913 -
Acquisition of minority interests in exchange for
notes receivable - - 2,923,000
------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
A. Summary of Significant Accounting Policies
Organization Mid-Atlantic Realty Trust was incorporated June 29, 1993, and
commenced operations effective with the completion of its initial public share
offering on September 11, 1993. Mid-Atlantic Realty Trust qualifies as a real
estate investment trust ("REIT") for Federal income tax purposes. As used
herein, the term "MART" or the "Company" refers to Mid-Atlantic Realty Trust and
entities owned or controlled by MART, including MART Limited Partnership (the
"Operating Partnership").
Description of Business
The Company is a fully integrated, self-administered real estate investment
trust which owns, acquires, develops, redevelops, leases and manages primarily
neighborhood or community shopping centers in the Middle Atlantic region of the
United States.
The Company has an equity interest in 32 operating shopping centers, 27 of
which are wholly owned by the Company and five in which the Company has
ownership interests ranging from 50% to 93%, as well as other commercial
properties. The Company also owns seven undeveloped parcels of land totaling
approximately 147 acres, which it is holding for development or sale.
All of MART's interests in properties are held directly or indirectly by,
and substantially all of its operations relating to the properties are conducted
through, the Operating Partnership. Subject to certain conditions, units of
partnership interest in the Operating Partnership ("Units") may be exchanged by
the limited partners for cash or, at the option of MART, the obligation may be
assumed by MART and paid either in cash or in common shares of beneficial
interest in MART on a one-for-one basis. MART controls the Operating Partnership
as the sole general partner, and owns approximately 82% of the Units at December
31, 1998.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities and disclosures of
contingencies at the date of the financial statements and revenues and expenses
recognized during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include all wholly owned subsidiaries and
majority-owned partnerships, including the Operating Partnership. Investments in
unconsolidated joint ventures are carried on the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
The Company owns 100% interests in corporate subsidiaries which are general
partners in several partnerships which have outside partners with 50% interests.
Based upon the structure of the respective partnership management agreements,
the Company has control over the 50%-owned partnerships and uses the full
consolidation method to account for them.
Net Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing earnings available to
common shareholders by the weighted average number of common shares outstanding.
Diluted EPS is computed after adjusting the numerator and denominator of the
basic EPS computation for the effects of all dilutive potential common shares
outstanding during the period. The dilutive effects of convertible securities
are computed using the "if-converted" method and the dilutive effects of
options, warrants and their equivalents (including fixed awards and nonvested
shares issued under share-based compensation plans) are computed using the
"treasury stock" method.
Capitalization Policy
Acquisition, development and construction costs of properties in development are
capitalized including, where applicable, salaries and related costs, real estate
taxes and interest costs. Development and construction costs and costs of
significant improvements, replacements and renovations to operating properties
are capitalized while costs of maintenance and repairs are expensed as incurred.
Direct costs incurred in the financing and leasing of properties are capitalized
as deferred costs and amortized over the term of the related mortgage or lease.
Effective March 19, 1998, the Company adopted a policy of charging internal
staff costs associated with acquisitions of operating properties to expense as
incurred as required by a consensus of the Emerging Issues Task Force of the
Financial Accounting Standards Board. Prior to that date, such costs were
capitalized as part of the cost of properties acquired. This change did not have
a material effect on net earnings for 1998.
Properties
Properties to be developed or held and used in operations are carried at cost,
reduced for impairment losses where appropriate. Properties held for sale are
carried at the lower of their carrying value (i.e. cost less accumulated
depreciation and any impairment loss recognized, where applicable) or estimated
fair value less cost to sell.
If events or circumstances indicate that the carrying value of an operating
property to be held and used may be impaired, a recoverability analysis is
performed based on estimated undiscounted future cash flows to be generated from
the property. If the analysis indicates that the carrying value is not
recoverable from future cash flows, the property is written down to estimated
fair value and an impairment loss is recognized.
15
<PAGE>
Properties (Continued)
Depreciation of buildings and leaseholds is provided using the
straight-line method over the estimated useful lives or lease terms of the
properties. Improvements for tenants are amortized on a straight-line basis over
the terms of the related tenant leases.
Share-based Compensation Plans
The Company uses the intrinsic value method to account for share-based employee
compensation plans. Under this method, compensation cost is recognized for
awards of shares to employees only if the quoted market price of the share at
the grant date (or other measurement date, if later) is greater than the amount
the employee must pay to acquire the share. Information concerning the pro forma
effects on net earnings and net earnings per share of using a fair value-based
method to account for share-based employee compensation plans, rather than the
intrinsic value method, is provided in note L.
Income Taxes
The Company has elected to qualify, and intends to continue to qualify as a REIT
pursuant to the Internal Revenue Code Sections 856 through 860, as amended. In
general, under such Code provisions a trust which, in any taxable year, meets
certain requirements and distributes to its shareholders at least 95% of its
REIT taxable income will not be subject to Federal income tax to the extent of
the income which it distributes.
Cash Equivalents
All highly liquid unrestricted investments with maturities at dates of purchase
of three months or less are considered cash equivalents.
Financial Instruments
Fair values of financial instruments approximate their carrying values in the
financial statements, except for mortgages payable and convertible subordinated
debentures for which fair value information is presented in notes D and J,
respectively. The fair values of this debt at December 31, 1998 and 1997, were
determined based on quoted market prices for publicly traded debt and discounted
estimated future payments to be made for other debt. The discount rates used
approximate the rates currently offered for borrowings with similar remaining
maturities.
B. Portfolio Acquisition
On July 1, 1997, the Company acquired a portfolio of nine shopping centers and
one medical office building in the Baltimore metropolitan area from family
members and affiliates of the Pechter family (AJHP@). At closing of the
transaction (AJHP Acquisition@), the Company formed the Operating Partnership
and members of JHP were admitted as limited partners. The Company assigned to
the Operating Partnership its beneficial interest in the properties owned by the
Company and its subsidiaries in exchange for a number of Units equal to the
number of outstanding common shares of beneficial interest of the Company. For
the JHP properties, the Operating Partnership issued to the members of JHP
3,235,000 Units. The acquisition was accounted for using the purchase method.
The aggregate fair market value of the assets acquired was approximately
$120,000,000, including the assumption of existing mortgage indebtedness with a
fair value of approximately $84,000,000.
The consolidated statement of operations for the year ended December 31,
1997, includes revenues and expenses related to JHP properties only from the
date of acquisition. The Company=s unaudited pro forma consolidated results of
operations for the years ended December 31, 1997 and 1996, assuming the
acquisition occurred at the beginning of each period, are summarized as follows
(in thousands, except per share data):
1997 1996
- - ---------------------------------------------------------------
Revenues $ 46,325 45,559
Net earnings 6,728 3,474
Earnings per share 0.71 0.56
- - ---------------------------------------------------------------
The unaudited pro forma revenues and earnings summarized above are not
necessarily indicative of the results that would have occurred if the
acquisition had been consummated at the beginning of each period.
C. Operating Properties
Operating properties consist of the following:
December 31,
1998 1997
- - --------------------------------------------------------------------------------
Land $ 67,010,229 60,791,781
Land improvements 31,383,623 32,857,818
Buildings 208,062,140 172,685,206
Improvements for tenants 13,811,972 13,200,649
Development costs on completed projects 8,289,484 9,486,625
Furnitures, fixtures and equipment 2,662,261 2,374,956
Deferred leasing costs 16,701,392 15,490,325
---------------------------------
347,921,101 306,887,360
Less accumulated depreciation and amortization 50,540,094 42,781,532
---------------------------------
$ 297,381,007 264,105,828
---------------------------------
16
<PAGE>
D. Properties and Related Accumulated Depreciation and Amortization and Debt
A summary of the Company=s properties and related mortgages payable at December
31, 1998, follows:
<TABLE>
<CAPTION>
Accumulated
Cost of Depreciation
Mortgages Initial Subsequent Total and
Classification Payable Cost Improvements Cost Amortization Net Cost
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shopping centers 123,144,893 268,003,596 63,585,753 331,589,349 45,652,407 285,936,942
Bowling centers 2,200,106 71,706 2,271,812 1,166,073 1,105,739
Office buildings 2,256,957 9,439,113 1,033,809 10,472,922 2,350,434 8,122,488
Other rental properties 2,040,071 779,158 2,819,229 879,891 1,939,338
Other property 681,313 86,476 767,789 491,289 276,500
---------------------------------------------------------------------------------------------
Operating properties 125,401,850 282,364,199 65,556,902 347,921,101 50,540,094 297,381,007
Development operations 11,281,252 11,281,252 11,281,252
Property held for development or sale 5,422,705 -5,422,705 5,422,705
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
125,401,850 299,068,156 65,556,902 364,625,058 50,540,094 314,084,964
---------------------------------------------------------------------------------------------
</TABLE>
Mortgages payable at December 31, 1998 bear interest at a weighted average
effective rate of 8.74% and mature in installments through 2019. Aggregate
annual principal payments applicable to mortgages payable at December 31, 1998,
are:
1999 $ 13,899,710
2000 10,299,554
2001 3,624,978
2002 19,951,697
2003 19,856,047
Thereafter 57,769,864
- - ----------------------------------
- - ----------------------------------
Total $ 125,401,850
- - ----------------------------------
At December 31, 1998 and 1997, the estimated fair values of mortgages
payable were $131,225,000 and $122,038,000, respectively. The construction loan
payable at December 31, 1998 and 1997 related to a property on which development
was completed in 1998. The loan bears interest at 8% and is due in June 2001.
E. Development Operations
Development operations consist of the following:
December 31,
1998 1997
- - ---------------------------------------------------------------------
Land $ 3,144,000 4,231,832
Construction in progress 6,286,980 14,066,126
Preconstruction costs 1,850,272 514,368
-------------------------------------
$ 1,281,252 18,812,326
-------------------------------------
Development operations are transferred to operating property costs when a
project is completed, at which time depreciation and amortization commences.
Construction period interest cost capitalized during 1998 and 1997 was
approximately $873,000 and $445,000, respectively.
F. Notes and Accounts Receivable
The Company performs credit evaluations of prospective new tenants and requires
security deposits where appropriate. Tenants' compliance with the terms of the
leases is monitored closely and the allowance for doubtful accounts is
established based on an analysis of the risk of loss on specific tenants,
historical trends, and other relevant information. Management believes adequate
provision has been made for the Company=s credit risk for all receivables.
17
<PAGE>
G. Deferred Financing Costs
Deferred financing costs consist of the following:
December 31,
1998 1997
- - --------------------------------------------------------------------------------
Costs related to subordinated debentures $ 711,256 893,571
Costs related to line of credit 411,538 328,825
Costs related to operating properties' debt 1,626,416 1,798,961
---------------------------------
2,749,210 3,021,357
Less accumulated amortization 1,590,604 1,848,887
---------------------------------
$1,158,606 1,172,470
---------------------------------
H. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31,
1998 1997
- - --------------------------------------------------------------------------------
Trade accounts payable $ 4,077,756 3,333,177
Retainage on construction in progress 352,069 780,024
Accrued interest on subordinated debentures 309,820 389,237
Other accrued expenses 1,566,826 1,218,655
---------------------------------
$ 6,306,471 5,721,093
---------------------------------
I. Notes Payable
Notes payable consist of line of credit borrowings of $18,400,000 and $3,400,000
at December 31, 1998 and 1997, respectively. The Company has an agreement with
its primary bank that provides for a $40,000,000 secured line of credit. The
agreement provides that as long as the Company is in compliance with all loan
covenants, the loan maturity date, which at December 31, 1998, was December 31,
2001, will be extended one year automatically each year. Under the agreement,
the Bank must give the Company two years notice should it decide to terminate
the loan. Availability under the agreement is determined by the amount of
collateral provided. At December 31,1998, $40,000,000 was fully collateralized.
The line bears interest at the prime rate (7.75% at December 31,1998). However,
the Company has the option to fix the rate at LIBOR plus 1.125% for fixed
periods from three to nine months. A stand-by fee is required by the bank for
any unused portion of the line. The agreement contains covenants which provide
for the maintenance of specified debt service ratios and minimum levels of net
worth, and other requirements, among which is the requirement that the Company
maintains its status as a REIT.
The Company has received a commitment letter from its primary bank to
increase its line of credit from $40,000,000 to $75,000,000. The new credit
facility will be unsecured and is subject to agreement on final terms.
At December 31, 1998, the unused line of credit available to the Company,
subject to compliance with all terms and conditions of the agreement and net of
outstanding letters of credit of $468,235, was $21,131,765. The maximum level of
borrowings under the line of credit was $19,800,000, $21,300,000 and $21,500,000
in 1998, 1997 and 1996, respectively. The average amounts of borrowings were
approximately $14,236,000, $13,191,000 and $11,710,000, with weighted average
interest rates approximating 6.8%, 7.1% and 7.1%, in 1998, 1997 and 1996,
respectively.
J. Convertible Subordinated Debentures
Effective September 11, 1993, the Company issued $60,000,000 of convertible
subordinated debentures at 7.625% scheduled to mature in September 2003.
Interest on the debentures is paid semi-annually on March 15 and September 15.
The debentures are convertible, unless previously redeemed, at any time prior to
maturity into common shares of beneficial interest of the Company at $10.50 per
share, subject to certain adjustments. In 1998, $3,571,000 in debentures were
converted to 340,080 common shares of beneficial interest. In 1997, $29,693,000
in debentures were converted to 2,827,838 common shares of beneficial interest.
In 1996, $12,785,000 in debentures were converted to 1,217,610 common shares of
beneficial interest. The balance of the debentures, at December 31, 1998, of
$13,931,000, if fully converted, would produce an additional 1,326,762 shares.
The debentures are redeemable by the Company at any time at 100% of the
principal amount thereof, together with accrued interest. The debentures are
subordinate to all mortgages payable. At December 31, 1998 and 1997, the
estimated fair values of convertible subordinated debentures were $16,336,000
and $24,482,000, respectively.
K. Income Taxes
As discussed in Note A, the Company plans to maintain its status as a REIT and
be taxed under Sections 856-860 of the Internal Revenue Code of 1986, as
amended. Accordingly, no provision has been made for Federal income taxes. At
December 31, 1998, the income tax bases of the Company=s assets and liabilities
were approximately $237,000,000 and $173,000,000, respectively.
18
<PAGE>
L. Shareholders' Equity
Preferred Shares
At its inception on September 11, 1993, MART authorized 2,000,000 preferred
shares of beneficial interest at a par value of $.01 per share. At December 31,
1998, none of these shares were issued and outstanding.
Share-Based Compensation Plans
The Company has established a 1993 Omnibus share plan and a 1995 share option
plan (APlans@) under which trustees, officers and employees may be granted
awards of share options, share appreciation rights, performance shares and/or
restricted shares. The purpose of the Plans is to provide equity-based incentive
compensation based on long-term appreciation in value of MART's shares and to
promote the interests of the Company and its shareholders by encouraging greater
management ownership of the Company's shares. At December 31, 1998, 1,488,672
shares were reserved for future issuance under the Plans. Share options granted
generally vest over a three-year period, subject to certain conditions,
typically have an exercise price equal to the market price at the grant date or
the date that they vest and have a maximum term of ten years. The Company has
not granted any share appreciation rights or performance shares. Changes in
options outstanding under the Plans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average Average average
exercise Exercise exercise
Options price Options Price Options price
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year 570,854 $ 11.58 395,632 $ 10.19 395,632 $ 10.26
Options granted - - 209,000 13.25 - -
Options exercised (2,354) 9.97 (13,974) 9.97 - -
Options canceled (13,967) 10.67 (19,804) 10.08 - -
- -------------------------------------------------------------------------
Balance at end of year 554,533 $ 11.61 570,854 $ 11.58 395,632 $ 10.19
Options exercisable 514,490 $ 11.49 444,159 $ 11.04 348,532 $ 10.19
-------------------------------------------------------------------------
</TABLE>
Information about options outstanding at December 31, 1998 is summarized as
follows:
Exercise price Options Remaining life Options
Per share outstanding (years) Exercisable
- - ----------------------------------------------------------
$ 10.50 226,333 5.0 226,333
$ 8.94 36,600 6.8 36,600
$ 9.75 38,400 7.8 38,400
$ 11.50 10,000 8.5 6,667
$ 13.38 239,200 8.8 202,490
$ 11.38 4,000 8.4 4,000
--------------------------------------------
--------------------------------------------
554,533 514,490
--------------------------------------------
The per share weighted-average fair values of options granted during 1997
was $.92. No options were granted in 1998 or 1996. This fair value was estimated
on the dates of each grant using the Black-Scholes option-pricing model with the
following assumptions:
- - -----------------------------------
Risk-free interest rate 5.78%
Dividend yield 8.47%
Volatility factor 18.43%
Life (years) 3.00
- - -----------------------------------
19
<PAGE>
Share Based Compensation Plans (Continued)
The option prices were equal to the market prices at the date of grant or
vesting date for all of the options granted in 1997 and, accordingly, no
compensation cost has been recognized for options in the financial statements.
If the Company had applied a fair value-based method to recognize compensation
cost for the stock options issued after 1994, net earnings and net earnings per
common share would have been reduced as indicated below:
Years ended December 31,
1998 1997 1996
- - ------------------------------------------------------------------------------
Net earnings:
As reported $ 12,352,877 6,592,338 3,508,709
Pro forma 12,288,172 6,505,220 3,479,036
Net earnings per common share:
Basic
As reported 0.85 0.70 0.56
Pro forma 0.84 0.69 0.56
Diluted
As reported 0.84 0.70 0.56
Pro forma 0.84 0.69 0.56
- - ------------------------------------------------------------------------------
Restricted Share Plan In 1997, the Executive Compensation Committee recommended,
and the Board of Trustees approved, a Restricted Share Plan. The Executive
Compensation Committee believes that the grant of restricted share awards
provides a long-term incentive to persons who contribute to the growth of MART
and establishes a direct link between compensation and shareholder return.
In 1997, 400,000 restricted shares were made available for the plan. Awards
totaling 1,572 shares were granted in 1998 with a market value of $13.69 per
share. Awards totaling 368,333 shares were granted in 1997 with a market value
of $13.38 per share. A total of 61,667 shares vested on January 1, 1998 and an
additional 524 shares vested on April 1, 1998. These shares are subject to
forfeiture restrictions which lapse at defined annual rates to 2008, subject to
the recipients' continued employment with the Company. The Company recognizes
the amortization of the fair value of the shares awarded as compensation costs
over the terms of the awards.
Share Repurchase Plan
At December 31, 1998, the Company was authorized to repurchase up to
approximately 410,000 common shares of beneficial interest pursuant to its share
repurchase plan. During 1998 and 1996, the Company purchased 313,200 and 8,618
shares, respectively, at an average per share cost of $12.23 and $9.45,
respectively.
M. Commitments
Minimum rental commitments under operating land leases in effect as of December
31, 1998 are as follows:
1999 $ 651,000
2000 651,000
2001 651,000
2002 651,000
2003 651,000
Thereafter 24,375,000
- - ----------------------------------
- - ----------------------------------
Total $ 27,630,000
- - ----------------------------------
Certain of the leases contain renewal or purchase options. All of the
leases require the Company to pay real estate taxes. Total annual minimum lease
payments amounted to $781,000 in 1998, $675,000 in 1997 and $601,000 in 1996.
N. Leases
The Company's shopping centers and other commercial properties are generally
leased on a long-term basis. All leases are classified as operating leases.
Future minimum lease payments receivable under noncancelable operating leases in
effect as of December 31, 1998 are as follows:
1999 $ 39,683,000
2000 36,125,000
2001 32,902,000
2002 29,732,000
2003 26,396,000
Thereafter 218,099,000
- - -------------------------------
- - -------------------------------
Total $ 382,937,000
- - -------------------------------
N. Leases (Continued)
The minimum future lease payments do not include contingent rentals which
may be paid under certain leases on the basis of a percentage of sales in excess
of stipulated amounts. Contingent rentals amounted to $1,435,000 in 1998,
$816,000 in 1997 and $1,012,000 in 1996. On a prospective basis, no more than
3.3% of annual rental revenue is derived from any one tenant, except Royal
Ahold. Royal Ahold minimum lease payments represent approximately 11% for the
years 1999 through 2003 and 32% thereafter of the total minimum lease payments
above. The percentages of total minimum lease payments in the years 1999 and
beyond are high due to the fact that Royal Ahold leases have long initial lease
terms compared with other major tenants who use renewal option terms. Renewal
option minimum lease payments are not included in the totals above.
O. Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for reporting financial information about
operating segments in interim and annual financial reports and provides for a
"management approach" to identifying the reportable segments in place of the
industry segment approach previously used.
The Company's only reportable segment is Shopping Centers. This segment
includes the operation and management of shopping centers, and revenues are
derived primarily from rents and services to tenants. These properties are
managed separately from other property types owned by the Company because they
require different operating strategies and management expertise. Fees are
charged to shopping centers, based on a percentage of revenues collected, for
services provided by personnel in other segments.
The accounting policies of the segments are the same as those of the
Company described in Note A. Segment operating results are measured and assessed
based on a performance measure known as Funds From Operations ("FFO"),
determined on a fully diluted basis (i.e., assuming conversion to common stock
of all convertible securities). The National Association of Real Estate
Investment Trusts defines FFO as net income (computed in accordance with
generally accepted accounting principles), excluding cumulative effects of
changes in accounting principles, extraordinary or unusual items and gains or
losses from debt restructurings and sales of properties, plus depreciation and
amortization, and after adjustments for minority interests and to record
unconsolidated partnerships and joint ventures on the same basis. FFO is not a
measure of operating results or cash flows from operating activities as measured
by generally accepted accounting principles, is not necessarily indicative of
cash available to fund cash needs and should not be considered an alternative to
cash flows as a measure of liquidity.
Operating results for the segments are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------------------------------
Shopping All Shopping All Shopping All
Centers Other Total Centers Other Total Centers Other Total
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $47,402,078 2,135,052 49,537,130 34,938,202 4,214,018 39,152,220 27,387,982 5,018,318 32,406,300
Expenses, exclusive of
Depreciation and
Amortization of property
And improvements 23,108,616 924,977 24,033,593 19,628,133 1,732,039 21,360,172 16,719,287 1,995,121 18,714,408
Minority interest 372,646 13,745 386,391 269,758 9,228 278,986 494,223 19,714 513,937
------------------------------------------------------------------------------------------------------------
FFO-diluted $23,920,816 1,196,330 25,117,146 15,040,311 2,472,751 17,513,062 10,174,472 3,003,483 13,177,955
------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on subordinated debentures and minority interest in
earnings in the Operating Partnership are not considered in the calculation of
FFO- diluted.
20
<PAGE>
O. Segment Information (Continued)
A reconciliation of FFO - diluted reported above to earnings from operations in
the financial statements is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Operating results:
FFO - diluted $25,117,146 17,513,062 13,177,955
Depreciation and amortization of property and improvements (8,813,251) (6,954,803) (5,413,737)
Subordinated debentures interest expense (1,206,760) (2,616,044) (4,556,108)
Operating Partnership minority interest expense (2,707,051) (1,139,840) -
-----------------------------------------
Earnings from operations in financial statements $12,390,084 6,802,375 3,208,110
-----------------------------------------
</TABLE>
Substantially, all assets of the Company, with the exception of property
held for development or sale and cash and cash equivalents, are allocable to the
Shopping Center segment. Additions to long-lived assets of the segments are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Shopping Centers:
Acquisitions $ 26,417,356 131,792,211 -
Development operations 6,738,109 15,283,225 4,649,732
Improvements for tenants and other 5,729,360 2,087,357 1,138,459
----------------------------------------------
38,884,825 149,162,793 5,788,191
All others, including acquisitions of $4,115,752 in 1997 76,022 5,109,227 623,581
----------------------------------------------
----------------------------------------------
Total $ 38,960,847 154,272,020 6,411,772
----------------------------------------------
</TABLE>
P. Other Revenues
Other revenues consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividends $ 195,693 321,185 484,428
Miscellaneous 245,598 146,453 225,149
--------------------------------------------------------
$ 441,291 467,638 709,577
--------------------------------------------------------
</TABLE>
21
<PAGE>
Q. Gain (Loss) on Properties
Gain (Loss) on properties consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
- - ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain (loss) on sales of operating properties $ (11,584) 1,047,727 720,916
Gain (loss) on sales of properties held for sale, net 7,361 122,109 293,583
Allowance for loss on operating properties - (1,148,000) (713,900)
--------------------------------------------------------------
$ (4,223) 16,836 300,599
--------------------------------------------------------------
</TABLE>
The gain (loss) on sales of operating properties includes minority interest
of $75,173 for the year ended December 31, 1997. The gain (loss) on sales of
operating properties and gain (loss) on sales of properties held for sale, net,
include minority interest of $21,194 and $96,049, respectively, for the year
ended December 31, 1996.
R. Net Earnings Per Share
The following table sets forth information relating to the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Earnings before extraordinary loss $ 12,385,861 6,819,211 3,508,709
Dividends on unvested restricted share awards (310,529) (76,667) -
-----------------------------------------
Numerator for basic earnings per share--earnings available to common shareholders 12,075,332 6,742,544 3,508,709
Adjustment to dividends on restricted share awards - 537 -
Interest on subordinated debentures 1,206,760 - -
-----------------------------------------
Numerator for diluted earnings per share--earnings available to common shareholders 13,282,092 6,743,081 3,508,709
-----------------------------------------
Denominator:(1)
Denominator for basic earnings per share--weighted average shares outstanding 14,240,533 9,308,682 6,211,092
Effect of dilutive securities:
Subordinated debentures 1,473,257 - -
Unvested portion of restricted share awards and share options 64,937 51,884 -
-----------------------------------------
Denominator for diluted earnings per share-adjusted weighted average shares 15,778,727 9,360,566 6,211,092
-----------------------------------------
</TABLE>
(1) Effects of potentially dilutive securities are presented only in
periods in which they are dilutive. At December 31, 1998, the convertible
subordinated debentures, if converted, would produce an additional 1,326,762
shares and the Units, if exchanged, would produce an additional 3,175,771
shares.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE>
PART III
ITEM 10 - TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the identity and business experience of the
trustees of MART and their remuneration, in the definitive proxy statement (to
be filed pursuant to Regulation 14A) with respect to the election of trustees at
the 1999 annual meeting of shareholders, is incorporated herein by reference.
The Executive Officers of MART are as follows:
Name Age Position and Business Experience
- - --------------------------------------------------------------------------------
LeRoy E. 73 Chairman of the Board of MART since September 1993.
Hoffberger
F. Patrick 51 President and CEO of MART since September 1993.
Hughes
Paul F. 45 Executive Vice President of MART since March 1996.
Robinson Vice President and Secretary / General Counsel of MART since
September 1993.
Eugene T. 50 Treasurer of MART since September 1993.
Grady
Janice C. 43 Controller of MART since January 1998.
Robinson Controller and Vice President of Operations of O'Conor Real
Estate Management from January 1995 to December 1997.
Accounting Manager with The Rouse Company from January 1981
to September 1994.
Each executive officer is elected for a term expiring at the next regular
annual meeting of the Board of Trustees of the Company or until his/her
successor is duly elected and qualified.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Registrant's Proxy Statement to be filed with respect to the 1999 annual meeting
of shareholders.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Registrant's Proxy Statement to be filed with respect to the 1999 annual meeting
of shareholders.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Registrant's Proxy Statement to be filed with respect to the 1999 annual meeting
of shareholders.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Mid-Atlantic Realty Trust and
Subsidiaries are included in Part II Item 8: Independent auditor's report
Consolidated balance sheets as of December 31, 1998 and 1997
Consolidated statements of operations for the years ended December 31,
1998,1997 and 1996 Consolidated statements of shareholders' equity for the
years ended December 31, 1998, 1997 and 1996 Consolidated statements of
cash flows for the years ended December 31, 1998, 1997 and 1996 Notes to
consolidated financial statements
(a) 2. Financial Statement Schedule
Schedule III - Real estate and accumulated depreciation and amortization
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
23
<PAGE>
(a) 3. Exhibits
Exhibit No.
3(a) Declaration of Trust dated June 29, 1993 (incorporated by reference to
Exhibit 3(a) to MART's Registration Statement on Form S-11, File No.
33-66386).
3(b) By-laws (incorporated by reference to the Exhibit 3(b) to MART's
Registration Statement on Form S-11, File No. 33-66386).
3(c) Amendment to Declaration of Trust dated August 4, 1998
4(a) Specimen certificate for Common Shares of Beneficial Interest
(incorporated by reference to Exhibit 4(a) to MART's Registration
Statement on Form S-11, File No. 33-66386).
4(b) Trust Indenture dated September 8, 1993, between MART and Security
Trust Company, N.A. (incorporated by reference to Exhibit 4(b) to MART's
Registration Statement on Form S-11, File No. 33-66386).
10(a) Mid-Atlantic Realty Trust 1993 Omnibus Share Plan, as amended through
November 14, 1997.
10(b) Mid-Atlantic Realty Trust 1995 Stock Option Plan (incorporated by
reference to MART's Registration Statement on Form S-8, File No. 333-
12161).
10(c) Employment Agreement between BTR Realty, Inc. and F. Patrick Hughes
(incorporated by reference to Exhibit 10(b) to MART's Registration
Statement on Form S-11, File No. 33-66386).
10(d) Employment Agreement between Paul F. Robinson (incorporated by
reference to Exhibit 10(c) to MART's Registration Statement on Form S-11,
File No. 33-66386).
10(e) Amendment dated December 1, 1995 to Employment Agreement between MART and
F. Patrick Hughes and MART and Paul F. Robinson.
10(f) Commitment Letter from First National Bank of Md. For Line of Credit to
MART (incorporated by reference to Exhibit 10(d) to MART's
Registration Statement on Form S-11, File No.33-66386).
10(g) Agreement for Contribution of Interests dated April 1, 1997, among MART
and the Contributors named therein (incorporated by reference to
Exhibit (c)1 to Form 8-K filed July 15, 1997)
10(h) Agreement of Limited Partnership of MART Limited Partnership dated as of
June 30, 1997 (incorporated by reference to Exhibit (c)2 to Form 8-K
filed July 15,1997).
10(i) Partnership Purchase and Sale Agreement among BTR Gateway, Inc., MART,
and Prentiss Properties Acquisition, L.P. (incorporated by reference to
Exhibit (b)1 to Form 8-K filed September 30, 1997).
10(j) Mid-Atlantic Realty Trust Restricted Share Plan, adopted on November 14,
1997.
10(k) Mid-Atlantic Realty Trust Non-Employee Trustee Deferred Compensation
Plan, adopted on November 14, 1997.
12 Computation of Ratio of Earnings to Fixed Charges.*
21 Subsidiaries of the Registrant.*
23 Consent of KPMG LLP.*
27 Financial Data Schedule.*
99.1 Real Estate Investment Risks.*
*Filed herewith
(b) Reports on Form 8-K
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 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.
MID-ATLANTIC REALTY TRUST
Date: 3/18/99 /s/ F. Patrick Hughes
---------------------------- ---------------------------------
F. Patrick Hughes, President
and Chief Executive Officer
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
Date: 3/18/99 /s/ LeRoy E. Hoffberger
---------------------------- ----------------------------------
LeRoy E. Hoffberger, Chairman of
the Board
Date: 3/18/99 /s/ F. Patrick Hughes
---------------------------- ----------------------------------
F. Patrick Hughes, President and
Chief Executive Officer
Date: 3/18/99 /s/ Janice C. Robinson
---------------------------- ----------------------------------
Janice C. Robinson, Controller
Date: 3/18/99 /s/ Eugene T. Grady
---------------------------- ----------------------------------
Eugene T. Grady, Treasurer
Date: 3/18/99 /s/ Robert A. Frank
---------------------------- ----------------------------------
Robert A. Frank, Trustee
Date: 3/18/99 /s/ Marc P. Blum
---------------------------- ----------------------------------
Marc P. Blum, Trustee
Date: 3/18/99 /s/ M. Ronald Lipman
---------------------------- ----------------------------------
M. Ronald Lipman, Trustee
Date: 3/18/99 /s/ Jack H. Pechter
---------------------------- ----------------------------------
Jack H. Pechter, Trustee
Date: 3/18/99 /s/ Daniel S. Stone
---------------------------- ----------------------------------
Daniel S. Stone, Trustee
Date: 3/18/99 /s/ David F. Benson
---------------------------- ----------------------------------
David F. Benson, Trustee
25
<PAGE>
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
-------------------------------------------------
----------------------------
Initial cost to Company Cost capitalized subsequent to acquisition
----------------------------------------------------------------------------
December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
----------------
Mortgages Buildings and Carrying Costs
---------------------------------
Description Payable Land Improvements Improvements Land Improvements
- - --------------------------------------------------------------------------------------------------------------------
Shopping Centers
Arundel Plaza $ 1,695,566 530,951 8,755
- - --------------------------------------------------------------------------------------------------------------------
Brandywine Commons 12,164,821 36,427
- - --------------------------------------------------------------------------------------------------------------------
Burke Town Plaza 2,936,134 1,820,256
- - --------------------------------------------------------------------------------------------------------------------
Club Centre 5,447,673 2,029,919 3,600,663 37,400
- - --------------------------------------------------------------------------------------------------------------------
Colonie Plaza 1,137,567 7,755,095 715,798
- - --------------------------------------------------------------------------------------------------------------------
Columbia Plaza 999,739 6,887,711 3,962,319 203,353
- - --------------------------------------------------------------------------------------------------------------------
Del Alba 7,123,969 2,270,000 7,882,217 13,654
- - --------------------------------------------------------------------------------------------------------------------
Enchanted Forest Shopping Center 11,811,026 3,873,246 15,314,736 96,267
- - --------------------------------------------------------------------------------------------------------------------
Glen Burnie Village 3,081,553 4,598,794 57,358
- - --------------------------------------------------------------------------------------------------------------------
Harford Mall 19,193,787 599,031 8,457,331 20,620,412 (12,954)
- - --------------------------------------------------------------------------------------------------------------------
Ingleside Shopping Center 3,023,230 11,817,212 27,854
- - --------------------------------------------------------------------------------------------------------------------
Little Glen 7,145
- - --------------------------------------------------------------------------------------------------------------------
Lutherville Station - 4,031,809 14,788,180
- - --------------------------------------------------------------------------------------------------------------------
Milford Commons 673,306 3,789,682 21,464
- - --------------------------------------------------------------------------------------------------------------------
North East 5,440,538 1,087,832
- - --------------------------------------------------------------------------------------------------------------------
Owings Mills 12,682,244 4,381,666 9,547,434 138,244
- - --------------------------------------------------------------------------------------------------------------------
Patriots Plaza 1,709,846 615,942
- - --------------------------------------------------------------------------------------------------------------------
Perry Hall Square 6,000,000 3,538,825 6,604,216 271,876
- - --------------------------------------------------------------------------------------------------------------------
Radcliffe Center 11,205,665 5,663,480 12,205
- - --------------------------------------------------------------------------------------------------------------------
Rolling Road Plaza 338,791 1,632,268 2,084,030 (837,931)
- - --------------------------------------------------------------------------------------------------------------------
Rosedale Plaza 1,736,346 1,024,712 3,217,926 841,403
- - --------------------------------------------------------------------------------------------------------------------
Shawan Plaza 14,136,711 2,055,694 13,930,839 44,001
- - --------------------------------------------------------------------------------------------------------------------
Shoppes at Easton 7,459,705 2,600,000 10,379,069 41,974
- - --------------------------------------------------------------------------------------------------------------------
Skyline Village 5,229,784 555,295 6,240,003 1,088,471
- - --------------------------------------------------------------------------------------------------------------------
Smoketown Plaza 516,312 10,095,077 709,636
- - --------------------------------------------------------------------------------------------------------------------
Spotsylvania Crossing 1,544,314 6,600,616 361,754
- - --------------------------------------------------------------------------------------------------------------------
Sudley Towne Plaza 789,881 3,736,837 483,603
- - --------------------------------------------------------------------------------------------------------------------
Timonium Crossing 5,598,319 4,276,779 4,792,548 73,467
- - --------------------------------------------------------------------------------------------------------------------
Timonium Shopping Center 9,558,762 6,252,248 12,090,955 472,782
- - --------------------------------------------------------------------------------------------------------------------
Wayne Heights 1,546,720 3,837,159 66,945
- - --------------------------------------------------------------------------------------------------------------------
Wayne Avenue Plaza 8,709,041 1,650,300 9,230,960 814,598
- - --------------------------------------------------------------------------------------------------------------------
Wilkens Beltway Plaza - 3,601,891 1,142,666 475,481 2,923,200
- - --------------------------------------------------------------------------------------------------------------------
York Road Plaza 8,457,526 1,562,382 2,102,575 2,829,348
- - --------------------------------------------------------------------------------------------------------------------
123,144,893 63,222,741 204,780,855 59,746,772 1,753,712 2,085,269
---------------------------------------------------------------------------------------
Office Buildings
- - --------------------------------------------------------------------------------------------------------------------
Orchard Square $2,256,957 1,160,666 2,959,390 8,080
- - --------------------------------------------------------------------------------------------------------------------
Patriots Plaza 1,522,943 248,581
- - --------------------------------------------------------------------------------------------------------------------
Wilkens Office II 1,644,370 272,797
- - --------------------------------------------------------------------------------------------------------------------
Wilkens Office I 1,383,102 368,560
- - --------------------------------------------------------------------------------------------------------------------
Wilkens Office III 768,642 135,791
---------------------------------------------------------------------------------------
2,256,957 1,160,666 8,278,447 1,033,809 - -
---------------------------------------------------------------------------------------
Bowling Centers
Clinton 457,764 63,297
- - --------------------------------------------------------------------------------------------------------------------
Freestate 180,025 740,082 2,719
- - --------------------------------------------------------------------------------------------------------------------
Waldorf 243,139 579,096 5,690
---------------------------------------------------------------------------------------
- 423,164 1,776,942 71,706 - -
---------------------------------------------------------------------------------------
Other Rental Properties
Business Center 395,536 1,190,692 100,306
- - --------------------------------------------------------------------------------------------------------------------
Southwest 283,039 628,792 45,149
- - --------------------------------------------------------------------------------------------------------------------
Waldorf Firestone 9,261 161,543 4,911
- - --------------------------------------------------------------------------------------------------------------------
- 404,797 1,635,274 734,009 45,149 -
---------------------------------------------------------------------------------------
Development Operations 11,281,252
Property Held 5,422,705
Other Property 681,313 86,476
---------------------------------------------------------------------------------------
$125,401,850 70,634,073 228,434,083 61,672,772 1,798,861 2,085,269
=======================================================================================
</TABLE>
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
Schedule III - Real Estate and Accumulated Depreciation - Continued
<TABLE>
<CAPTION>
---------------------------------------------------------------
Amount at which carried at close of period Life on which
depreciation on
---------------------------------------------------------------
December 31, 1998 latest income
Buildings and Accumulated Date of Date statement is
Description Land Improvements Total depreciation Construction Acquired Computed
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shopping Centers
Arundel Plaza 1,695,566 539,706 2,235,272 11,230 12/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Brandywine Commons 12,201,248 12,201,248 1,284,815 11/95 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Burke Town Plaza 4,756,390 4,756,390 2,118,587 7/79-7/82 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Club Centre 2,029,919 3,638,063 5,667,982 317,630 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Colonie Plaza 1,137,567 8,470,893 9,608,460 2,646,757 12/87 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Columbia Plaza 1,203,092 10,850,030 12,053,122 2,675,303 6/88 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Del Alba 2,270,000 7,895,871 10,165,871 47,043 9/98 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Enchanted Forest Shopp3,873,246r 15,411,003 19,284,249 804,371 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Glen Burnie Village 3,081,553 4,656,152 7,737,705 243,524 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Harford Mall 586,077 29,077,743 29,663,820 12,383,995 12/73 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Ingleside Shopping Cen3,023,230 11,845,066 14,868,296 451,539 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Little Glen 7,145 7,145 291 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Lutherville Station 18,819,989 18,819,989 921,127 10/93 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Milford Commons 673,306 3,811,146 4,484,452 84,058 12/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
North East 1,087,832 5,440,538 6,528,370 66,293 2/96- 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Owings Mills 4,381,666 9,685,678 14,067,344 673,002 12/95 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Patriots Plaza 2,325,788 2,325,788 1,025,623 6/84 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Perry Hall Square 3,538,825 6,876,092 10,414,917 862,041 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Radcliffe Center 11,205,665 5,675,685 16,881,350 700,218 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Rolling Road Plaza 338,791 2,878,367 3,217,158 1,337,242 6/73 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Rosedale Plaza 1,024,712 4,059,329 5,084,041 863,817 10/89 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Shawan Plaza 2,055,694 13,974,840 16,030,534 991,409 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Shoppes at Easton 2,600,000 10,421,043 13,021,043 988,222 9/94 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Skyline Village 555,295 7,328,474 7,883,769 2,283,107 5/88 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Smoketown Plaza 516,312 10,804,713 11,321,025 3,413,246 4/87 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Spotsylvania Crossing 1,544,314 6,962,370 8,506,684 2,256,045 5/87 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Sudley Towne Plaza 789,881 4,220,440 5,010,321 1,540,501 7/84 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Timonium Crossing 4,276,779 4,866,015 9,142,794 268,562 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Timonium Shopping Cent6,252,248 12,563,737 18,815,985 536,710 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Wayne Heights 1,546,720 3,904,104 5,450,824 71,333 1/98 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Wayne Plaza 1,650,300 10,045,558 11,695,858 184,538 2/98 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Wilkens Beltway Plaza 475,481 7,667,757 8,143,238 1,821,220 5/81 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
York Road Plaza 1,562,382 4,931,923 6,494,305 1,779,008 11/85 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
64,976,453 266,612,896 331,589,349 45,652,407
---------------------------------------------------------------
Office Buildings
Orchard Square 1,160,666 2,967,470 4,128,136 199,363 7/97 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Patriots Plaza 1,771,524 1,771,524 637,612 8/85 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Wilkens Office II 1,917,167 1,917,167 608,565 1/87 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Wilkens Office I 1,751,662 1,751,662 672,082 1/85 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Wilkens Office III 904,433 904,433 232,812 1/91 5-50 yrs.
---------------------------------------------------------------
1,160,666 9,312,256 10,472,922 2,350,434
---------------------------------------------------------------
Bowling Centers
Clinton 521,061 521,061 292,602 8/71 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Freestate 180,025 742,801 922,826 620,050 3/78 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Waldorf 243,139 584,786 827,925 253,421 3/79 5-50 yrs.
---------------------------------------------------------------
423,164 1,848,648 2,271,812 1,166,073
---------------------------------------------------------------
Other Rental Properties
Business Center 395,536 1,290,998 1,686,534 299,951 4/90 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Southwest 45,149 911,831 956,980 509,357 4/68 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
Waldorf Firestone 9,261 166,454 175,715 70,583 9/78 5-50 yrs.
- - -----------------------------------------------------------------------------------------------------------------------
449,946 2,369,283 2,819,229 879,891
---------------------------------------------------------------
Development Operations 11,281,252 11,281,252 91-98
Property Held 5,422,705 5,422,705 7/73-
12/98
Other Property 767,789 767,789 491,289 9/82- 3-10 yrs.
12/98
- - ----------------------------------------------------------------------------------
72,432,934 292,192,124 364,625,058 50,540,094
==================================================================================
</TABLE>
1
<PAGE>
(1) The changes in total cost of properties are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Balance beginning of year $ 331,259,550 210,258,781 213,822,056
Additions during the year:
Acquisitions 26,417,356 136,321,147 3,126,553
Improvements 5,672,676 2,697,464 1,498,868
Development Operations 6,738,109 15,633,614 4,715,773
-----------------------------------------------------
38,828,141 154,652,225 9,341,194
Deductions during year:
Allowance for loss - (1,148,000) (713,900)
Cost of real estate sold (5,462,633) (32,340,056) (11,965,663)
Retirements and disposals - (163,400) (224,906)
-----------------------------------------------------
(5,462,633) (33,651,456) (12,904,469)
-----------------------------------------------------
Balance end of year $ 364,625,058 331,259,550 210,258,781
-----------------------------------------------------
</TABLE>
(2) The changes in accumulated depreciation are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Balance beginning of year $ (42,781,532) (42,702,472) (39,430,308)
Depreciation and amortization (8,813,251) (6,954,803) (5,413,737)
Retirements, disposals and sales 1,054,689 6,875,743 2,141,573
------------------------------------------------------------
Balance end of year $ (50,540,094) (42,781,532) (42,702,472)
------------------------------------------------------------
</TABLE>
(3) The aggregate basis of properties for Federal income tax purposes is
approximately $230,500,000 at December 31, 1998.
(4) See Item 2 for geographic location of properties.
(5) Freestate includes one bowling center in Illinois.
2
<PAGE>
EXHIBIT 12.1 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIO INFORMATION)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings (loss) from operations (2) $12,390 6,802 3,208 2,444 1,713
Less: sales of residential property, net
Add:
Interest expense (3) 12,081 12,555 12,354 11,928 10,876
Interest portion of rentals (4) 260 225 227 113 97
Earnings available for fixed charges $24,731 19,582 15,789 14,485 12,686
Fixed Charges:
Interest expense (3) 12,081 12,555 12,354 11,928 10,876
Interest capitalized 873 445 104 565 31
Interest portion of rentals (4) 260 225 227 113 97
Fixed Charges $13,214 13,225 12,685 12,606 11,004
Ratio of earnings to fixed charges $ 1.87 1.48 1.24 1.15 1.15
Excess of Fixed Charges over Earnings $ 0 $0 $0 $0 $0
There were no preferred shares outstanding during any of the periods above, and
therefore the ratio of earnings to combined fixed charges and preferred shares
dividend requirements would have been the same as the ratio of earnings to fixed
charges for the periods indicated.
(1) The computations above use the Consolidated Financial Statements of
Mid-Atlantic Realty Trust and Subsidiaries for the years December 31, 1998,
1997, 1996, 1995, and 1994.
(2) Effective January 1, 1996, the Company changed its reporting of gains or
losses on sales of properties held for sale. During the year ended December
31, 1995, and previously, gains or losses on sales of properties held for
sale had been included in the revenues of the consolidated statements of
operations and were therefore included in earnings from operations. The
Company is not in the business of buying land for resale. Therefore,
management believes that gains or losses on sales of properties held for
sale should not be included in earnings or losses from operations, and
should be an adjustment to earnings from operations to arrive at net
earnings. The comparative prior year earnings (losses) from operations have
been reclassified to reflect this change.
(3) Effective January 1, 1996, the Company changed its reporting of
amortization of deferred financing costs. During the year ended December
31, 1995, and previously, the annual amortization of deferred financing
costs was reported in the depreciation and amortization of property and
improvements expense line in the consolidated statements of operations. In
1996, the Company began reporting the amortization of deferred financing
costs in the interest expense line in the consolidated statements of
operations. The comparative prior year interest expense amounts above have
been reclassified to reflect this change.
(4) Amounts reflect a one-third portion of rentals, the portion deemed
representative of the interest factor.
</TABLE>
<PAGE>
EXHIBIT 21. PARENT AND SUBSIDIARIES OF REGISTRANT
The subsidiaries of MART are listed below. All are engaged in the ownership
and/or development of commercial real estate in the United States. All are
included in the consolidated financial statements filed as part of this Annual
Report.
State of Incorporation
Name or Formation Interest
- - ---- ---------------------- ----------
CORPORATIONS:
BTR Arkor, Inc. Maryland 100%
BTR Atlanta Daycare, Inc. Maryland 100%
BTR Business Center, Inc. Maryland 100%
BTR Chandler, Inc. Maryland 100%
BTR East Greenbush, Inc. Maryland 100%
BTR Fallston Corner, Inc. Maryland 100%
BTR Free State Bowls, Inc. Maryland 100%
BTR Gateway, Inc. Maryland 100%
BTR Holdings, Inc. Maryland 100%
BTR Manassas, Inc. Maryland 100%
BTR Marigot, Inc. Maryland 100%
BTR Marina, Inc. Maryland 100%
BTR McClintock, Inc. Maryland 100%
BTR New Ridge, Inc. Maryland 100%
BTR Northwood Properties, Inc. Maryland 100%
BTR Odenton Properties, Inc. Maryland 100%
BTR Ray Road, Inc. Maryland 100%
BTR Real Estate Enterprises, Inc. Maryland 100%
BTR Salisbury, Inc. Maryland 100%
BTR Southdale, Inc. Maryland 100%
BTR Union Hills, Inc. Maryland 100%
BTR Waldorf Development Corporation Maryland 100%
BTR Waldorf Tire, Inc. Maryland 100%
BTR Yuma, Inc. Maryland 100%
Burke Town Plaza, Inc. Maryland 100%
Brandywine Commons, Inc. Maryland 100%
Clinton Development Company, Inc. Maryland 100%
Colonie Plaza, Inc. Maryland 100%
Columbia Plaza, Inc. Maryland 100%
Commonwealth Plaza, Inc. Maryland 100%
Concourse Realty Management, Inc. Maryland 100%
Davis Ford Properties, Inc. Maryland 100%
Essanwy, Inc. Maryland 100%
Easton Shoppes, Inc. Maryland 100%
Fredericksburg Plaza, Inc. Maryland 100%
Harrisonburg Plaza, Inc. Maryland 100%
Kingston Crossing, Inc. Maryland 100%
MART Acquisition, Inc. Maryland 100%
New Town Village, Inc. Maryland 100%
North East Station, Inc. Maryland 100%
Orchard Landing Apartments, Inc. Maryland 100%
Orchard Landing Limited, Inc. Maryland 100%
Page Plaza Associates, Inc. Maryland 100%
Park Sedona, Inc. Maryland 100%
Rolling Road Plaza, Inc. Maryland 100%
Rosedale Partners, Inc. Maryland 100%
Rosedale Plaza, Inc. Maryland 100%
Route 642 Properties, Inc. Maryland 100%
Sedona Sewer, Inc. Maryland 100%
Southdale Mortgage, Inc. Maryland 100%
Southwest Development Properties, Inc. Maryland 100%
Timonium Shopping Center, Inc. Maryland 100%
Wake Plaza, Inc Maryland 100%
Wyaness, Inc. Maryland 100%
<PAGE>
LIMITED LIABILITY COMPANIES:
Perry Hall Square, LLC Maryland 100%
Pittsfield Center, LLC Maryland 100%
Radcliffe, LLC Maryland 100%
Round Hollow, LLC Maryland 100%
Stonehenge, LLC Maryland 100%
Talton, LLC Maryland 100%
Timonium Shopping Center Associates, LLC Maryland 100%
Yorkway Associates, LLC Maryland 100%
The following are partnerships in which Mid-Atlantic Realty Trust has
partnership interests:
State of
Name Formation Interest
- - ---- ---------------------------------
Arizona & Warner Limited Partnership Maryland 50%
BBG Joint Venture Maryland 93%
BBG Properties Limited Partnership Maryland 93%
Fredericksburg Plaza Limited Partnership Maryland 93%
Gateway International Limited Partnership Maryland 100%
Harbour Island Associates Maryland 100%
Kensington Associates Maryland 93%
MART Limited Partnership Maryland 82%
Northwood Limited Partnership Maryland 67%
Ritchie Limited Liability Partnership Maryland 67%
Rosedale Plaza Limited Partnership Maryland 100%
Route 642 Limited Partnership Maryland 93%
Scotia Associates Limited Partnership Maryland 50%
Southdale Limited Partnership Maryland 50%
Union Hills Limited Partnership Maryland 50%
Wyaness Associates Maryland 100%
<PAGE>
EXHIBIT 23, ACCOUNTANTS' CONSENT
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees MID-ATLANTIC REALTY TRUST:
We consent to the incorporation by reference in the following registration
statements of Mid- Atlantic Realty Trust: Form S-3, File No. 33-66386; Form S-8,
File No. 333-12161; Form S-3, File No. 333-20813; Form S-8, File No. 333-56885;
and Form S-3, File No. 333-59061, in each case, of our report dated February 8,
1999, relating to the consolidated balance sheets of Mid- Atlantic Realty Trust
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1998, which report appears in
the December 31, 1998 annual report on Form 10-K of Mid-Atlantic Realty Trust.
KPMG LLP
Baltimore, Maryland
March 18, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000909298
<NAME> MID-ATLANTIC REALTY TRUST
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1 1 1
<CASH> 611 8,427 1,014
<SECURITIES> 0 0 0
<RECEIVABLES> 1,505 880 1,373
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 314,085 288,478 167,556
<DEPRECIATION> 50,540 42,782 42,702
<TOTAL-ASSETS> 319,741 300,887 173,278
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 139,333 133,568 117,405
<COMMON> 145 145 72
0 0 0
0 0 0
<OTHER-SE> 104,346 106,617 30,739
<TOTAL-LIABILITY-AND-EQUITY> 319,741 300,887 173,278
<SALES> 0 0 0
<TOTAL-REVENUES> 49,537 39,152 32,406
<CGS> 0 0 0
<TOTAL-COSTS> 34,054 30,931 28,684
<OTHER-EXPENSES> 3,093 1,419 514
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 12,081 12,555 12,354
<INCOME-PRETAX> 12,386 6,819 3,509
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 12,386 6,819 3,509
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> (33) (227) 0
<CHANGES> 0 0 0
<NET-INCOME> 12,353 6,592 3,509
<EPS-PRIMARY> 0.85 0.70 0.56
<EPS-DILUTED> 0.84 0.70 0.56
<FN>
<F1> Mid-Atlantic Realty Trust (MART) is in the specialized real estate industry
for which teh current/noncurrent distinction is deemed in practice to have
little or no relevance. Therefore, MART prepares unclassified balance sheets
which do not report current assets or current liabilities.
</FN>
</TABLE>
EXHIBIT 99.1, RISK FACTORS
MID-ATLANTIC REALTY TRUST
RISK FACTORS
Statements made by or on behalf of Mid-Atlantic Realty Trust in
documents filed by it with the Securities and Exchange Commission include
forward looking statements under the federal securities laws. Statements that
are not historical in nature, including the words "anticipate," "estimate,"
"should," "expect," "believe," "intend," and similar expressions, are intended
to identify forward-looking statements. While these statements reflect the
Company's good faith beliefs based on current expectations, estimates and
projections about (among other things) the industry and the markets in which the
Company operates, they are not guarantees of future performance, involve known
and unknown risks and uncertainties that could cause actual results to differ
materially from those in the forward looking statements, and should not be
relied upon as predictions of future events. The Company disclaims any
obligation to publicly update or revise any forward looking statement, whether
as a result of new information, future events or otherwise. The following is a
discussion of factors that could impact future results:
Real Estate Investment Risks
General. Real property investments are subject to varying types and
degrees of risk that may hinder or otherwise affect the Company's ability to
generate revenues. These risks could adversely affect the Company's cash flow
and cash available for distributions to shareholders. The following factors,
among others, may adversely affect the value of the Company's real estate and
the Company's ability to generate revenues:
o changes in the general economic climate;
o local conditions (such as an oversupply of space or a
reduction in demand for real estate in an area);
o competition from other shopping centers, properties,
developers or real estate owners;
o variable operating costs;
o government regulations;
o changes in interest rates;
o the availability of financing; and
o potential liability due to changes in environmental
and other laws.
<PAGE>
In addition, real estate investments are relatively illiquid and,
therefore, will limit the Company's ability to react promptly in response to
changes in economic or other conditions. Because the Internal Revenue Code, as
amended in 1986, limits a REIT's ability to make sales of properties held for
fewer than four years, the Company may not be able to sell properties without
adversely affecting returns to shareholders.
Ability to Rent Unleased Space. Many factors may affect the ability of
the Company to rent unleased space. One of the major factors is a covenant found
in many leases with existing tenants that restricts the use of other space at a
property. The Company cannot assure that any tenant whose lease expires in the
future will renew such lease or that the Company will be able to re-lease space
on economically advantageous terms. In addition, the Company may incur costs in
making improvements or repairs to a property that are required by a new tenant.
Risk of Bankruptcy of Tenants. If a significant number of tenants are
unable to meet their obligations to the Company, the Company's cash receipts and
cash available for distribution will decrease. Also, a tenant may experience a
downturn in its business, which may weaken its financial condition and result in
a reduction or failure to make rental payments when due. If a lessee or
sublessee defaults in its obligations to the Company, then the Company may be
delayed in enforcing its rights as lessor or sublessor. In addition, the Company
may incur substantial costs and experience significant delays associated with
protecting its investment, including costs incurred in renovating and re-leasing
the property.
At any time, one or more of the Company's tenants may seek the
protection of the bankruptcy laws, which could result in the rejection and
termination of their lease. Such an event would reduce cash receipts and cash
available for distribution and, therefore, reduce the amount of distributions
the Company can make to its shareholders. The Company is subject to risks that:
o any present tenant that has filed for bankruptcy
protection will not continue making payments under
its lease;
o any tenant may file for bankruptcy protection in the
future; or
o any tenants that file for bankruptcy protection may
not continue to make rental payments in a timely
manner.
Effect of Uninsured Loss on Performance. The Company carries
comprehensive liability, fire, flood, extended coverage and rental loss
insurance with policy specifications and insured limits that are customary for
similar properties. Certain types of losses (such as from wars or earthquakes),
however, are uninsurable or insurable only at costs that are not economically
justifiable. If an uninsured loss occurs, the Company may lose both its invested
capital in, and anticipated profits from, the property. Nevertheless, the
Company would still be obligated to repay any recourse mortgage indebtedness on
the property.
2
<PAGE>
Debt Financing and Existing Debt Maturities. The Company is subject to
a variety of risks associated with debt financing. Examples of these risks
include the following:
o the Company's cash from operating activities may be
insufficient to meet required payments;
o the Company may be unable to pay or refinance
indebtedness on its properties;
o if interest rates or other factors result in higher
interest rates on refinancing, these factors will
diminish the Company's returns on its development and
redevelopment activities, reduce cash from operating
activities, and hamper the Company's ability to make
distributions or payments to shareholders;
o if the Company is unable to secure refinancing of
indebtedness on acceptable terms, it may be forced to
dispose of properties upon disadvantageous terms,
which may cause losses to the Company and affect its
funds from operations; and
o if properties are mortgaged to secure payment of
indebtedness and the Company is unable to meet its
payments, the mortgagee may foreclose upon the
properties, resulting in a loss of income and a
valuable asset to the Company.
In addition, in June 1998 the Division of Banking Supervision and
Regulation of the Board of Governors of the Federal Reserve System issued a
supervisory letter which addressed the subject of lending standards for business
loans. The supervisory letter noted, among other things, a significant increase
in bank lending to REITs and concluded that bank examiners should increase their
understanding of REITs and related lending and credit risks associated with
lending to REITs. The Company is uncertain of the future effects of the
supervisory letter on the Company. Any changes in bank lending practices as a
result of the supervisory letter may affect the Company's ability to
successfully negotiate new credit facilities.
Competition. Numerous commercial developers, real estate companies and
other owners of real estate (including those that operate in the region in which
the Company's properties are located) compete with the Company in seeking land
for development, properties for acquisition and tenants for properties. Certain
of these competitors may have greater capital and resources than the Company,
and this fact could impair the Company's ability to acquire properties in the
future.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, the Company may become liable for the costs of
removal or remediation of certain hazardous or toxic substances on or in the
Company's real property. Liability may be
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imposed regardless of whether the Company or tenant knew of, or was responsible
for, the presence of such hazardous or toxic substances. The costs of any
required remediation or removal of substances may be substantial, and the
Company's liability as to any property is generally not limited under those
laws, ordinances and regulations. The liability could exceed the value of the
Company's property and/or aggregate assets. The presence of, or the failure to
properly remediate, substances when released may adversely affect the Company's
ability to sell the affected real estate or to borrow using the real estate as
collateral. At the time of this filing, the Company has not been notified by any
governmental authority of any non-compliance, liability or other claim in
connection with any of the Company's properties, and the Company is not aware of
any other environmental condition with respect to any of the its portfolio
properties that it believes would have a material adverse effect on its
business, assets or results of operations. However, the Company cannot assure
that there are no potential environmental liabilities, that no environmental
liabilities may develop, that no prior owner created any material environmental
condition not known to the Company, or that future uses or conditions,
including, without limitation, changes in applicable environmental laws and
regulations, will not result in liability.
Americans with Disabilities Act. The Company's properties and any
additional developments or acquisitions must comply with Title III of the
Americans with Disabilities Act. To comply with the ADA's requirements, the
Company may be required to remove structural, architectural or communication
barriers to handicapped access and utilization in certain public areas of the
Company's properties. Noncompliance could result in injunctive relief,
imposition of fines or an award of damages to private litigants. If the Company
is required to make changes to bring any of the properties into compliance with
the ADA, expenses associated with such changes could adversely affect the
Company's ability to make expected distributions. The Company believes that its
competitors face similar costs to comply with the requirements of the ADA.
Dependence on the Middle Atlantic Area
The Company's performance depends on the economic conditions in markets
in which its properties are concentrated. Since the Company's properties are
located in the Middle Atlantic area, the Company's results could be adversely
affected if conditions, such as an oversupply of space or a reduction in demand
for real estate, in the Middle Atlantic area become more competitive than other
geographic areas. The existence of these conditions could have a greater adverse
impact on the Company than they might have on a real estate company with
properties in a number of different geographic areas.
No Limitation in Organizational Documents on Incurrence of Debt
The Company's documents do not limit the amount of indebtedness that it
may incur. Although the Board of Trustees attempts to maintain a balance between
total outstanding indebtedness and the value of the Company's portfolio (i.e., a
ratio of secured debt and preferred stock to real estate value of 50% or less),
it could alter this balance at any time. If the Company becomes more highly
leveraged, then the resulting increase in debt service
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could diminish the Company's ability to make expected distributions to its
shareholders and make payments on its outstanding indebtedness. If the Company
defaults on its obligations under any outstanding indebtedness, it could lose
its interest in any properties that secure that indebtedness.
Dependence of Key Personnel
The Company's success depends largely upon the efforts of a small
number of senior executives, including F. Patrick Hughes, President and Chief
Executive Officer of the Company. Even though the Company has key man insurance
covering the life of Mr. Hughes in the amount of $1,000,000, the loss of the
services of Mr. Hughes or other key executives could have a materially adverse
effect on the Company. In the event the Company loses the services of any of its
key personnel, the Company will continue to engage in commercial real estate
activities.
Adverse Consequences of Failure to Qualify as a REIT
The Company Believes, But Cannot Guarantee, That it Qualifies as a
REIT. The Company believes that it has operated in a manner that permits it to
qualify as a REIT under the Code for each taxable year since its formation in
1993. Qualification as a REIT, however, involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations. In addition, REIT qualification involves the
determination of various factual matters and circumstances not entirely within
the Company's control. For example, in order to qualify as a REIT, at least 95%
of the Company's gross income in any year must be derived from qualifying
sources, and the Company must distribute annually to shareholders 95% of its
REIT taxable income (excluding net capital gains). Therefore, although the
Company believes that it is organized and operating in a manner that permits it
to remain qualified as a REIT, the Company cannot guarantee that it will be able
to continue to operate in such a manner. In addition, if the Company is ever
audited by the Internal Revenue Service (the "IRS") with respect to any past
year, the IRS may challenge the Company's qualification as a REIT for such year.
Similarly, the Company cannot assure that new legislation, new
regulations, administrative interpretations or court decisions will not change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. The Company is not aware, however, of any
currently pending tax legislation that would adversely affect its ability to
continue to operate as a REIT.
The Company's Failure to Qualify as a REIT Would Have Serious Adverse
Consequences. If the Company fails to qualify as a REIT, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Such increased tax liability in a
given year could significantly reduce, or possibly eliminate, the amount of cash
the Company has available for investment or distribution to shareholders for
that year. In addition, the Company will also be disqualified
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from treatment as a REIT for the next four taxable years, unless it is entitled
to relief under certain statutory provisions.
If the Company does not qualify as a REIT, it will no longer be
required to make annual distributions to shareholders. To the extent that the
Company made distributions to shareholders in anticipation of its qualifying as
a REIT, it might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax. The Company's failure to qualify as a
REIT would also constitute a default under certain of its debt obligations and
would significantly reduce the market value of its shares.
The Company May Need to Borrow Money to Qualify as a REIT. The
Company's ability to make distributions to shareholders could be diminished by
increased debt service obligations if it needs to borrow money in order to
maintain its REIT qualification. For example, differences in timing between when
the Company receives income and when it has to pay expenses could require it to
borrow money to meet the requirement that it distribute to its shareholders at
least 95% of its net taxable income (excluding net capital gain) each year. The
incurrence of large expenses also could require the Company to borrow money to
meet this requirement. The Company might need to borrow money for these purposes
even if it believes that market conditions are not favorable for such
borrowings. In other words, the Company may have to borrow money on unfavorable
terms.
The Company is Subject To Some Taxes Even If it Qualifies as a REIT.
Even if the Company qualifies as a REIT, it is subject to some federal, state
and local taxes on its income and property. For example, the Company pays tax on
certain income it does not distribute. Also, the Company's income derived from
properties located in certain states are subject to local taxes. Further, if the
Company entered into certain prohibited transactions, its net income from such
transactions would be subject to a 100% tax.
Anti-Takeover Effect of Ownership Limitations
To maintain the Company's qualification as a REIT, not more than 50% in
value of the Company's outstanding Shares may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code). In
addition, the Code imposes certain other limitations on the ownership of the
Shares of a REIT. For the purpose of preserving the Company's tax status as a
REIT, the Company's charter prohibits actual or constructive ownership of more
than 9.9% of the outstanding Shares, either in the aggregate or of any class, by
any person (the "Beneficial Ownership Limitations"), unless waived by the Board
of Trustees. In addition, the Beneficial Ownership Limitations restrict the
ownership, under applicable attribution rules of the Code (which are different
from those applicable with respect to the Beneficial Ownership Limitations) of
more than 9.9% of the outstanding Shares, either in the aggregate or of any
class. The rules addressing constructive ownership are complex and may cause
Shares owned, actually or constructively, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of the outstanding
Shares, either in the aggregate or of any class, by an individual or entity
could cause that individual or entity (or another individual or
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entity) to constructively own more than 9.9% of the outstanding Shares. Such a
situation will subject such Shares to the Beneficial Ownership Limitations.
Actual or constructive ownership of Shares in excess of such limits would either
cause the violative transfer or ownership to be void or cause such Shares to be
converted to Excess Shares.
Additionally, these ownership restrictions have the collateral
effect of deterring non-negotiating acquisitions of, and proxy fights for, the
Company by a third party. Limiting the ownership of the Company's Shares may
discourage a change of control of the Company and may also (i) deter tender
offers for the Shares, which offers may be attractive to the shareholders, (ii)
limit the opportunity for shareholders to receive a premium for the Shares that
might otherwise exist if an investor attempted to assemble a block of Shares in
excess of the 9.9% Beneficial Ownership Limitation, or (iii) limit the
opportunity for shareholders to effect a change in control of the Company.
Risks Inherent in Development and Acquisition Activities
Developing or expanding existing properties in the Company's real
estate portfolio is an integral part of the Company's strategy for maintaining
and enhancing the value of that portfolio. The Company may also choose to
acquire additional properties in the future. While the Company's policies with
respect to its activities are intended to limit some of the risks otherwise
associated with those activities (including not commencing construction on a
project prior to obtaining a commitment from an anchor tenant), the Company
nevertheless will incur certain risks, including risks related to delays in
construction and lease-up, costs of materials, financing availability,
volatility in interest rates, labor availability and the failure of properties
to perform as expected.
Increased Market Interest Rates Could Reduce Share Prices
The annual dividend rate on Shares as a percentage of its market price
may influence the trading price of such stock. Also, an increase in market
interest rates may lead purchasers to demand a higher annual dividend rate,
which could adversely affect the market price of the Shares. A decrease in the
market price of the Shares could reduce the Company's ability to raise
additional equity in the public markets.
Risks Relating to Year 2000 Compliance
Many existing computer software programs and operating systems that are
date dependent may use "00" as the year 1900 rather than the year 2000. This
mistake could result in a system failure or cause other disruptions of
operations. In the conduct of the Company's operations, the Company relies upon
commercial computer software primarily provided by independent software vendors,
and the Company has performed an assessment of its vulnerability to the
so-called "Year 2000 issue" with respect to its computer systems. The Company's
assessment is based upon formal and informal communications with the software
vendors, literature supplied with the software, and literature supplied in
connection with maintenance contracts. As a result of the Company's normal
upgrade and replacement
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process, it has determined that all existing network and desktop equipment is
Year 2000 compliant. The Company's mission critical, property management and
financial reporting software has also been modified to be Year 2000 compliant.
The Company has determined that all non-mission critical software is Year 2000
compliant. As the Company owns primarily community retail centers without
enclosed common areas, the use of this technology is very limited, and
management does not believe that the Year 2000 issue will pose significant
problems in these systems. The Company expects that the costs to specifically
remediate Year 2000 information technology issues will not be significant. The
Company believes the "most reasonably likely worst case scenario" exposure to be
indirect in nature, and this exposure will involve vendors, suppliers, and
tenants. Currently, management does not believe that it is practical to measure
the effects of potential complications. However, the Company will continually
monitor and evaluate these areas and develop contingency plans on an as needed
basis.
Specifically, the success of the Company's efforts to address the Year
2000 issue depends to a large extent not only on the corrective measures that
the Company undertakes, but also on the efforts undertaken by other independent
entities that provide goods and services to the Company and tenants that lease
space from the Company. In particular, the Company's risk may increase as a
result of tenants experiencing problems with Year 2000 issues. Although it is
not possible to evaluate the magnitude of any potential increased risk at this
time, Year 2000 issues could adversely affect the Company's tenants and their
businesses. From now until 2000 the Company will endeavor to monitor the Year
2000 efforts of its tenants and will implement a course of action and procedures
designed to reduce any increased potential risk as a result of Year 2000 issues.
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