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SECURITIES AND EXCHANGE COMMISSION [PRIVATE]
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 OR 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number: 1-12424
HGI REALTY, INC.
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(Exact name of Registrant as specified in its Charter)
MICHIGAN 38-2559212
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(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
5000 HAKES DRIVE, MUSKEGON, MI 49441
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(Address of principal executive offices) (Zip Code)
(616) 798-9100
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X____ No _______
Number of common shares outstanding at May 8, 1996 19,418,847
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HGI REALTY, INC. AND SUBSIDIARY
Index to Form 10-Q
March 31, 1996
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Consolidated Condensed Statements of Income for the
three months ended March 31, 1996 and 1995 ................. 3
Consolidated Condensed Balance Sheets as of
March 31, 1996 and December 31, 1995 ....................... 4
Consolidated Condensed Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 ................. 5
Note to Consolidated Condensed Financial Statements ......... 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition ................................... 7-9
Part II.
Other Information ........................................... 10
Signatures ................................................. 11
</TABLE>
2
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HGI REALTY, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Income
For the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1996 1995
--------- ---------
(thousands, except
per share data)
<S> <C> <C>
Revenue:
Base rent $27,212 $ 9,429
Percentage rent 608 427
Expense recoveries 7,786 2,748
Other 1,398 635
------- -------
Total revenue 37,004 13,239
Expenses:
Property operating 5,608 2,045
Real estate taxes 2,640 1,003
Interest 8,827 1,844
Depreciation and amortization 7,717 2,610
General and administrative 2,003 708
Land leases and other 129 278
------- -------
Total expenses 26,924 8,488
------- -------
Net income before gain on sale of real estate 10,080 4,751
Gain on sale of real estate - 225
------- -------
Net income before minority interest 10,080 4,976
Minority interest (2,601) (842)
------- -------
Net income $ 7,479 $ 4,134
======= =======
Net income per common share $ 0.39 $ 0.40
======= =======
Cash dividend per common share $ 0.505 $ 0.505
======= =======
Average common shares outstanding 19,121 10,236
======= =======
</TABLE>
See accompanying note to consolidated condensed financial statements.
3
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HGI REALTY, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheets
March 31, 1996 and December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -------------
(thousands)
<S> <C> <C>
ASSETS
Real estate at cost:
Land $ 133,853 $ 133,815
Buildings and improvements 951,396 926,145
Less accumulated depreciation (45,357) (37,839)
---------- ----------
Total real estate 1,039,892 1,022,121
Cash 2,164 6,567
Prepaid expenses 724 1,408
Due from related parties 1,994 1,020
Deferred charges and other assets 34,444 27,974
---------- ----------
Total assets $1,079,218 $1,059,090
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgages and other debt $ 533,599 $ 503,246
Accounts payable and accrued expenses 35,684 43,170
Dividends payable 12,989 12,950
Other liabilities 8,193 8,131
---------- ----------
Total liabilities 590,465 567,497
---------- ----------
MINORITY INTEREST 132,935 149,697
---------- ----------
SHAREHOLDERS' EQUITY:
Common shares 193 186
Additional paid-in capital 371,995 355,803
Distributions in excess of net income (16,370) (14,093)
---------- ----------
Total shareholders' equity 355,818 341,896
---------- ----------
Total liabilities and shareholders' equity $1,079,218 $1,059,090
========== ==========
</TABLE>
See accompanying note to consolidated condensed financial statements.
4
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HGI REALTY, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
For the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1995
---- ----
(thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,479 $ 4,134
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest in net income 2,601 842
Depreciation and amortization 8,016 2,704
Gain on sale of real estate - (225)
Compensation related to stock bonus arrangements 31 23
Changes in assets and liabilities:
Prepaid expenses 684 (96)
Deferred charges and other assets (7,855) (1,373)
Accounts payable and accrued expenses (1,741) 27
Other liabilities 62 150
-------- --------
Net cash provided by operating activities 9,277 6,186
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements (31,273) (18,143)
Proceeds from sale of real estate - 354
-------- --------
Net cash used in investing activities (31,273) (17,789)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (9,330) (9,878)
Dividends - minority interest (3,581) (2,012)
Proceeds from borrowings 75,676 22,556
Principal payments on mortgages and other debt (45,172) (107)
-------- --------
Net cash provided by financing activities 17,593 10,559
-------- --------
Net decrease in cash (4,403) (1,044)
Cash:
Beginning of period 6,567 4,172
-------- --------
End of period $ 2,164 $ 3,128
======== ========
</TABLE>
See accompanying note to consolidated condensed financial statements.
5
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HGI REALTY, INC. AND SUBSIDIARY
Note to Consolidated Condensed Financial Statements
(unaudited)
(1) Financial Statement Presentation
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the instructions to Form
10-Q and do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles since
the user of these statements is assumed to read them in conjunction with
the most recent year-end audited financial statements. In the opinion of
management, the consolidated condensed financial statements contain all
adjustments necessary for a fair statement of financial results for the
interim periods. For further information, refer to the consolidated
financial statements and notes thereto included in the HGI Realty, Inc.
annual report on Form 10-K for the year ended December 31, 1995.
Certain reclassifications have been made to the previously reported 1995
statements in order to provide comparability with the 1996 statements
reported herein. These reclassifications have not changed the 1995
results.
6
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HGI REALTY, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition
For the three months ended March 31, 1996
(unaudited)
General Overview
HGI Realty, Inc. and Subsidiary (the "Company") has grown by developing
new outlet shopping centers, expanding existing outlet shopping centers,
acquiring outlet shopping centers and increasing rental revenue at its existing
outlet shopping centers. The operations of the Company are conducted through
Horizon/Glen Outlet Centers Limited Partnership (the "Operating Partnership").
On July 14, 1995, the Company expanded its operations by merging with
McArthur/Glen Realty Corp. ("McArthur/Glen"), an owner, operator and developer
of outlet shopping centers. The accompanying consolidated condensed financial
statements include the results of operations of McArthur/Glen from the date of
the merger. The Company owns and operates 35 centers located in 19 states. As
of March 31, 1996, the Company owned 75.3 percent of the Operating Partnership.
Results of Operations
Net income before minority interest in the current three-month period increased
$5.1 million compared to the corresponding prior-year period. The increase was
primarily attributable to the merger with McArthur/Glen and, secondarily, the
opening of three additional centers, seven expansions and the acquisition of
one property adjacent to an existing center, which collectively added 5.2
million square feet of gross leasable area (GLA). Depreciation and
amortization in the 1996 three-month period increased $5.1 million compared to
the prior year due to the increased GLA. First quarter 1996 property operating
expenses and real estate taxes increased to $8.2 million from $3.0 million in
the respective 1995 period due to the increased GLA. General and
administrative expenses, which increased $1.3 million from the prior-year
quarter of $.7 million, represented 5.4% of first quarter 1996 operating
revenues compared to 5.3% in the prior-year quarter. Although operating
efficiencies were achieved in the 1996 first quarter as a result of managing a
larger portfolio, the cost savings were offset by increased reserves for
doubtful accounts receivable.
7
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HGI REALTY, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the three months ended March 31, 1996
(unaudited)
Consolidated revenues were as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------
Percentage
1996 1995 Increase
------- ------- ----------
<S> <C> <C> <C>
Base rent $27,212 $ 9,429 188.6%
Percentage rent 608 427 42.4%
Expense recoveries 7,786 2,748 183.3%
Other 1,398 635 120.2%
------- ------- ------
$37,004 $13,239 179.5%
======= ======= ======
</TABLE>
Base rents, percentage rents and expense recoveries increased in the current
comparable three-month period principally due to increased GLA. Other income
increased in 1996 compared to 1995 from higher income related to marketing
services.
Interest expense increased $7.0 million in the current three-month comparable
period from higher debt levels, primarily as a result of the merger.
Liquidity and Capital Resources
The Company received a $65.0 million mortgage in the first quarter of 1996 from
an institutional lender at a fixed interest rate of 8.574%, has received a
$21.5 million mortgage commitment from a life insurance company, and is
negotiating with another life insurance company for an additional $10.0 million
mortgage commitment. Proceeds from the $65.0 million mortgage were used to
reduce current debt maturities and amounts outstanding under revolving credit
facilities.
During 1996, the Company plans to continue expansion or development of 13
centers prior to December 31, 1996 at an estimated cost of $108.0 million. The
Company plans to fund this expansion and development and $24.3 million in
current debt maturities with existing cash balances, cash flow from operations
and additional borrowings.
8
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HGI REALTY, INC. AND SUBSIDIARY
Management's Discussion and Analysis of Results of Operations
and Financial Condition (continued)
For the three months ended March 31, 1996
(unaudited)
The Company believes it will have access to the capital resources necessary to
expand and develop its business. The Company anticipates that existing cash
balances and cash flow from operations, together with cash from borrowings and
other sources, will be adequate to meet the capital and liquidity needs of the
Company. The Company expects to meet its short-term borrowing requirements
primarily through its existing revolving credit facilities, which aggregate
$220.0 million, and a $125.0 million construction line of credit which had
availability of $67.8 million and $76.1 million, respectively, at March 31,
1996. The revolving credit facilities were not fully collateralized resulting
in a borrowing base limitation of $174.0 million at March 31, 1996. The
Company believes it has sufficient unencumbered assets to fully collateralize
these credit facilities and intends to do so by year-end. To meet its
long-term liquidity requirements, the Company intends to obtain funds through
construction credit facilities, revolving credit facilities, equity offerings,
or long-term fixed-rate debt financing in a manner consistent with its debt to
total market capitalization policy.
The Company declared a $.505 dividend per common share in the first quarter of
1996. In order to qualify as a Real Estate Investment Trust ("REIT") for
federal income tax purposes, the Company is required to pay dividends to its
shareholders of at least 95% of its REIT taxable income. The Company intends
to pay those dividends from cash flow from operations which is expected to
increase due to future growth in rental revenues on existing outlet shopping
centers and cash flow from expansions, acquisitions and new developments.
Although the Company intends to make distributions to its shareholders in
accordance with the requirements of the Internal Revenue Code of 1986, as
amended, it also intends to retain 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 outlet shopping
centers.
Funds From Operations
The Company believes that Funds From Operations ("FFO") provides an indicator
of the financial performance of the Company and is influenced by both the
operations of the properties and the capital structure of the Company. FFO is
defined as net income (computed in accordance with generally accepted
accounting principles), excluding gains or losses from debt restructuring plus
depreciation and amortization of real estate assets and adjustments for other
noncash items and unconsolidated partnerships and joint ventures. The Company
expects that FFO will be the most significant factor considered by the Board of
Directors in determining the amount of cash distributions the Company will make
to shareholders. FFO does not represent cash flow from operations as defined
by generally accepted accounting principles and is not necessarily indicative
of cash available to fund all cash flow needs.
9
<PAGE> 10
For the comparable three months ended March 31, 1996 and 1995, FFO before
minority interest increased $10.3 million, or 136 percent compared to the
prior-year period, primarily as a result of the merger.
10
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HGI REALTY, INC. AND SUBSIDIARY
Part II - Other Information
Item 6: Exhibits and Reports on Form 8-K
a) None
b) None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HGI REALTY, INC.
--------------------
Registrant
Date: May 10, 1996 By: /s/ Richard A. Phillips
-------------------------------------------
Richard A. Phillips, Vice-President,
Controller and Chief Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,164
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,085,249
<DEPRECIATION> 45,357
<TOTAL-ASSETS> 1,079,218
<CURRENT-LIABILITIES> 0
<BONDS> 533,599
<COMMON> 193
0
0
<OTHER-SE> 355,625
<TOTAL-LIABILITY-AND-EQUITY> 1,079,218
<SALES> 0
<TOTAL-REVENUES> 37,004
<CGS> 0
<TOTAL-COSTS> 8,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,827
<INCOME-PRETAX> 10,080
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,080
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,479
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
