<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12588
----------------
Center Trust, Inc.
(Exact name of registrant as specified in charter)
----------------
<TABLE>
<S> <C>
Maryland 95-4444963
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
3500 Sepulveda Boulevard, Manhattan Beach, California 90266
(Address of principal executive offices) (Zip Code)
(310) 546-4520
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. YES [X] NO [_]
As of August 13, 1999, 26,113,225 shares of Common Stock, Par Value $.01
Per Share, were outstanding.
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<PAGE>
CENTER TRUST, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998.............................................. 3
Consolidated Statements of Operations (unaudited) for the three
and six months ended June 30, 1999 and 1998.................... 4
Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 1999 and 1998............................ 5
Notes to Consolidated Financial Statements (unaudited)......... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 8
PART II OTHER INFORMATION.............................................. 14
SIGNATURES.............................................................. 15
</TABLE>
2
<PAGE>
CENTER TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Rental properties..................................... $1,067,606 $1,074,629
Accumulated depreciation and amortization............. (144,150) (141,785)
---------- ----------
Rental properties, net................................ 923,456 932,844
Cash and cash equivalents............................. 10,251 6,636
Tenant receivables, net............................... 11,010 13,543
Other receivables..................................... 4,104 7,984
Restricted cash and securities........................ 15,683 5,437
Deferred charges, net................................. 20,981 18,682
Other assets.......................................... 1,784 1,895
---------- ----------
TOTAL............................................. $ 987,269 $ 987,021
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Secured Debt........................................ $ 541,974 $ 497,386
7 1/2% Convertible subordinated debentures.......... 128,548 138,599
7 1/4% Exchangeable subordinated debentures......... 30,000 30,000
Accrued dividends and distributions................. 10,068 10,931
Accrued interest.................................... 5,388 5,873
Accounts payable and other accrued expenses......... 6,841 6,718
Accrued construction costs.......................... 1,631 1,955
Tenant security and other deposits.................. 5,956 5,957
---------- ----------
Total liabilities................................. 730,406 697,419
---------- ----------
MINORITY INTERESTS:
Operating Partnership (1,836,623 and 4,978,240 units
issued as of June 30, 1999 and December 31, 1998,
respectively)...................................... 16,722 47,717
Other minorities.................................... 1,440 1,514
---------- ----------
Total minority interests.......................... 18,162 49,231
---------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK (590,034 shares as of December
31, 1998 Redeemed on May 25, 1999)................... -- 9,903
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares
authorized; 26,113,225 24,756,693 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively....................................... 261 248
Additional paid-in capital.......................... 359,467 354,281
Accumulated distributions and deficit............... (121,027) (124,061)
---------- ----------
Total stockholders' equity........................ 238,701 230,468
---------- ----------
TOTAL............................................. $ 987,269 $ 987,021
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
CENTER TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three
Months Ended Six Months
June 30, Ended June 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Rental revenues........................... $26,615 $23,156 $52,840 $42,688
Expense reimbursements.................... 7,856 6,617 15,989 12,790
Percentage rents.......................... 391 323 1,009 562
Other income.............................. 1,331 1,268 2,521 2,493
------- ------- ------- -------
Total revenues.......................... 36,193 31,364 72,359 58,533
------- ------- ------- -------
Interest.................................. 13,511 12,172 26,606 22,426
Depreciation and amortization............. 6,098 5,916 12,124 11,305
Property operating costs:
Common area............................. 5,316 4,738 10,843 8,815
Property taxes.......................... 3,698 2,932 7,305 5,704
Leasehold rentals....................... 423 414 847 825
Marketing............................... 204 83 345 158
Other operating......................... 1,011 1,395 2,349 2,585
General and administrative................ 1,431 1,655 2,961 2,364
------- ------- ------- -------
Total expenses.......................... 31,692 29,305 63,380 54,182
------- ------- ------- -------
Income from Operations before Gain on Sale
of Assets and Minority Interests......... 4,501 2,059 8,979 4,351
Gain on Sale of Assets.................... -- -- 20,575 --
Minority interests--Operating
Partnership.............................. (40) (421) (4,129) (864)
Minority interests--Other................. (73) (68) (145) (137)
------- ------- ------- -------
Net Income before Extraordinary Loss...... 4,388 1,570 25,280 3,350
Extraordinary Loss--Early
Extinguishment of Debt.................. (4,048) -- (4,048) --
------- ------- ------- -------
Net Income................................ $ 340 $ 1,570 $21,232 $ 3,350
======= ======= ======= =======
Basic Earnings Per Share
Income before Extraordinary Loss........ $ 0.17 $ 0.08 $ 1.00 $ 0.18
Extraordinary Loss--Early
Extinguishment of Debt.................. (0.16) -- (0.16) --
------- ------- ------- -------
Net Income.............................. $ 0.01 $ 0.08 $ 0.84 $ 0.18
======= ======= ======= =======
Diluted Earnings Per Share
Income before Extraordinary Loss........ $ 0.17 $ 0.08 $ 0.93 $ 0.18
Extraordinary Loss--Early
Extinguishment of Debt.................. (0.16) -- (0.12) --
------- ------- ------- -------
Net Income.............................. $ 0.01 $ 0.08 $ 0.81 $ 0.18
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
CENTER TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 21,232 $ 3,350
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of rental properties.... 12,124 11,305
Amortization of deferred financing costs.............. 1,523 1,403
Gain on Sale of Assets................................ (20,575) --
Extraordinary loss--Early Extinguishment of Debt...... 4,048 --
Minority interests in operations...................... 4,274 1,001
Net changes in operating assets and liabilities....... (1,987) (883)
--------- ---------
Net cash provided by operating activities............. 20,639 16,176
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties............................. (18,484) (117,884)
Construction and development costs.................... (7,176) (12,714)
Proceeds from sale of rental property................. 45,415 --
--------- ---------
Net cash provided by (used by) investing activities... 19,755 (130,598)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage financing.............. (2,015) (1,691)
Proceeds from mortgages............................... 110,500 --
Repayment of mortgages................................ (63,915) --
Purchase of Convertible Debentures.................... (9,561) --
Borrowings on secured line of credit.................. 111,627 135,933
Repayment of secured line of credit................... (115,353) (96,000)
Proceeds from sale of common stock.................... 33,903 90,513
Purchase of common stock.............................. (20,071) --
Repurchase of OP Units................................ (48,142) --
Costs of obtaining financing.......................... (1,788) (698)
(Increase) Decrease in restricted cash and
Securities........................................... (10,245) 2,295
Dividends to shareholders............................. (17,930) (12,668)
Distributions to minority interests................... (3,789) (3,360)
--------- ---------
Net cash provided by financing activities........... (36,779) 114,324
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 3,615 (98)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD....... 6,636 3,613
--------- ---------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD............. $ 10,251 $ 3,515
========= =========
NON-CASH TRANSACTIONS:
Fair value of debt assumed to acquire properties...... $ -- $ 87,047
========= =========
Issuance of Operating Partnership Units to Acquire
Properties........................................... $ -- $ 16,357
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
CENTER TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis Of Presentation
Center Trust, Inc. (the "Company") is a self-administered and self-managed
real estate investment trust ("REIT"). The Company engages in the ownership,
management, leasing, acquisition, development and redevelopment of unenclosed
retail shopping centers in the western United States. As of June 30, 1999 the
Company owned 62 retail shopping centers (the "Properties") comprising 10.2
million square feet of total shopping center gross leasable area ("GLA").
The accompanying financial statements and related notes of the Company are
unaudited; however, they have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and the
instructions to Form 10-Q and the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared under generally accepted
accounting principles have been condensed or omitted pursuant to such rule. In
the opinion of management, all adjustments considered necessary for fair
presentation of the Company's financial position, results of operations and
cash flows have been included. These financial statements should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made in the 1998 financial statements
to conform to the 1999 financial statement presentation.
2. Secured Debt
During the second quarter of 1999, the Company obtained $110.5 million in
mortgage financings. On May 7, 1999, the Company obtained a, 10 year, $52
million mortgage. The mortgage is secured by four properties and bears
interest at a fixed rate of 7.75%. Proceeds from the mortgage were used, in
part, to pay-off $34.5 million of existing fixed rate mortgages, which had a
weighted average interest rate of 8.96%. Two of the three mortgages repaid,
totaling $27.9 million, had maturities in 1999. On May 21, 1999 and June 1,
1999 the Company closed on the first two tranches of a variable rate mortgage
secured by four properties. The mortgage has a 3-year term and bears interest
at LIBOR plus 2.5%. Proceeds from the first and second tranche totaled $58.5
million and were used, in part, to repay two mortgages totaling $24.9 million,
which matured in 2004 and had an average interest rate of 9.24%. On August 2,
1999, the Company completed the third and final tranche of the variable rate
mortgage. Loan proceeds of $11.5 million from the third tranche were used, in
part, to repay a $7.3 million mortgage. This mortgage had an interest rate of
10.25% and matured in 1999.
Associated with the mortgage prepayments above, the company incurred
extraordinary losses of $4.5 million. After paying-off existing mortgages and
certain prepayment penalties, the above mortgages generated net proceeds of
$47.1 million, which were used to reduce the outstanding balance on the
Company's secured credit facility.
3. Subordinated Debentures
During the quarter ended June 30, 1999, the Company purchased $10,047,000
of its Series A and B, 7 1/2% Convertible Subordinated Debentures (the
"Debentures"). The Debentures, which mature in January, 2001, were purchased
at a 5% discount to face value, resulting in an extraordinary gain on early
extinguishment of debt of $0.5 million.
4. Redeemable Common Stock
During the quarter, the Company purchased 590,034 shares of Redeemable
Common Stock held by the Haagen Family. In connection with the Separation
Agreement between the Company and certain members of the Haagen Family, the
Company had agreed to purchase from the Haagen Family, on May 25, 1999, an
aggregate
6
<PAGE>
CENTER TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of 3,656,818 shares of common stock and Operating Partnership Units (the
"Shares") at a price per share equal to the greater of $17 or then current
market price (as determined in accordance with the Separation Agreement). A
portion of shares repurchased required that certain stock options be exercised
by the Haagen Family, resulting in a net obligation to the Company of $58.8
million.
5. Stockholder's Equity
In October 1998, the Board of Directors authorized the Company to
repurchase up to $25 million of its common stock through the open market or in
privately negotiated transactions over a period of twelve months. During the
six months ended June 30, 1999, the Company repurchased 975,100 shares for an
average price of $10.30 bringing the total number of shares acquired to
1,411,800 for an aggregate cost of $15,218,000.
6. Per Share Data
In accordance with SFAS No. 128 (Earnings Per Share), basic earnings per
share is based on the weighted average number of shares of common stock
outstanding during the period and diluted earnings per share is based on the
weighted average number of shares of common stock outstanding combined with
the incremental weighted average shares that would have been outstanding if
all dilutive potential common shares had been issued as of the beginning of
the period. The basic weighted average number of shares of common stock used
in the computation for the three-month periods ended June 30, 1999 and 1998
was 25,229,944 and 19,586,347, respectively. The basic weighted average number
of shares of common stock used in the computation for the six-month period
ended June 30, 1999 and 1998 was 25,236,600 and 18,621,379, respectively. The
diluted weighted average of shares of common stock and common stock
equivalents for the three-month period ended June 30, 1999 and 1998 were
25,229,944 and 19,586,347, respectively. The diluted weighted average of
shares of common stock and common stock equivalents for the six-month period
ended June 30, 1999 and 1998 were 34,577,710 and 18,621,379, respectively.
Units held by limited partners in the Operating Partnership may be exchanged
for shares of common stock of the Company on a one-for-one basis in certain
circumstances and therefore are not dilutive. Accordingly, the increase in
weighted average shares outstanding under the diluted method over the basic
method in every period presented is due entirely to the effect of the
conversion of the Company's convertible and exchangeable debentures.
7. Subsequent Event
Subsequent to June 30, 1999, the Company sold Empire Center in Fontana,
California. Empire Center is a 626,000 square foot community shopping center,
of which, 262,000 square feet were owned by the Company. Proceeds from the
sale were used to reduce the outstanding balance on the Company's credit
facility.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
Results of Operations
Comparison of the six months ended June 30, 1999 to the six months ended June
30, 1998.
Rental revenues increased by $13.9 million to $72.4 million for the six
months ended June 30, 1999 from $58.5 million for the six months ended June
30, 1998. The acquisition of 4 community shopping centers subsequent to June
30, 1998 resulted in an increase of $5.8 million in revenues. The 16 community
shopping centers acquired during the first six months of 1998 contributed an
additional $9.2 million in revenues during the first half of 1999. Offsetting
these increases was a reduction of $2.2 million related to the sale of three
assets subsequent to June 30, 1998. The remaining increase in revenue was
derived from the Company's remaining properties.
Property operating costs increased by $3.6 million to $21.7 million for the
six months ended June 30, 1999 from $18.1 million for the six months ended
June 30, 1998. The increase is a result of increased property taxes and
operating costs resulting from the properties acquired during 1998.
Interest expense increased to $26.6 million for the six months ended June
30, 1999 from $22..4 million for the six months ended June 30, 1998. The
increase was caused by additional borrowings on the Company's line of credit
and the assumption of $8.2 in mortgage debt associated with the acquisition of
4 community shopping centers acquired subsequent to June 30, 1998 as well as a
full six months of interest associated with the 16 community shopping centers
acquired during the first half of 1998. Interest on the Company's credit
facility increased $2.9 million during the six-month period June 30, 1999
compared to the same period in the previous year.
General and Administrative costs increased by $0.6 million from $2.4
million for the six months ended June 30, 1998 to $3.0 million for the six
months ended June 30, 1999. The increase was primarily the result of the
change in accounting for costs related to the acquisition of community
shopping centers as mandated by the Financial Accounting Standards Board. In
addition, the Company increased its staffing in order to accommodate its
growth. These increases include senior management as well as regional property
management personnel. The Company continues to evaluate its resource needs
relative to its current activity. This has resulted in a $0.2 million decrease
in general and administrative costs for the three months ended June 30, 1999
over the same period in the prior year.
Net income increased by $17.8 million from $3.4 million for the six months
ended June 30, 1998 to $21.2 million for the six months ended June 30, 1999.
In addition to the reasons stated above, included in net income was a gain on
sale of real estate assets of $20.6 million. This gain resulted from the sale
of the Sam's Club in Fountain Valley, California, a single tenant facility and
The City Center, in San Francisco, California. Offsetting the gain on sale
were extraordinary losses resulting from the early extinguishment of debt of
$4.0 million.
8
<PAGE>
Selected Property Financial Information
Net operating income (defined as revenues, less property operating costs)
for the Company's properties is as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
---------------
1999 1998
------- -------
<S> <C> <C>
Retail Properties (62 in 1999 and 61 in 1998):
Regional Malls............................................ $ 9,440 $ 8,136
Community Centers......................................... 37,844 28,503
Single Tenants............................................ 2,970 3,629
Other income................................................ 416 178
------- -------
Net Operating Income...................................... $50,670 $40,446
======= =======
</TABLE>
The following summarizes the percentage of leased GLA (excluding non-owned
GLA as of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Retail Properties (62 in 1999 and 63 in 1998):
Community Centers.................................... 93.2% 91.9%
Regional Malls....................................... 90.0 90.9
Single Tenants....................................... 100.0 100.0
Aggregate Portfolio.................................... 93.5 92.7
</TABLE>
Funds from Operations
The Company considers funds from operations ("FFO") to be an alternative
measure of the performance of an equity REIT since such measure does not
recognize depreciation and amortization expenses as operating expenses. FFO is
defined, as outlined in the March 1995 White Paper, by the National
Association of Real Estate Investment Trusts ("NAREIT") as net income plus
depreciation and amortization of real estate, less gains on sales of
properties. Additionally, the definition also permits FFO to be adjusted for
significant non-recurring items.
9
<PAGE>
The Company computes FFO on both a basic and diluted basis. The diluted
basis assumes the conversion of the convertible and exchangeable debentures
into shares of common stock. The following table summarizes the Company's
computation of FFO and provides certain additional disclosures (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months
June 30, Ended June 30,
-------------------- ----------------
1999 1998 1999 1998
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Funds from Operations
Net income........................... $ 340 $ 1,570 $21,232 $ 3,350
Adjustments to reconcile net income
to funds from operations:
Depreciation and Amortization:
Buildings and improvements......... 4,236 3,865 8,518 7,265
Tenant improvements and
allowances........................ 1,301 1,234 2,558 2,842
Leasing costs...................... 530 777 984 1,117
Minority Interests................... (45) 347 3,964 714
Extraordinary Loss--
Early Extinguishment of Debt....... 4,048 -- 4,048 --
Gain on Sale of Assets............... -- -- (20,575) --
Other................................ 253 414 636 439
--------- --------- ------- -------
Funds from Operations, basic......... 10,663 8,207 21,365 15,727
Debenture interest expense........... 3,125 3,142 6,267 6,284
Amortization of debenture financing
costs............................... 323 325 648 650
--------- --------- ------- -------
Funds from operations, diluted....... $ 14,111 $ 11,674 $28,280 $22,661
========= ========= ======= =======
</TABLE>
Funds from operations, on a basic basis, increased to $21.4 million for the
six months ended June 30, 1999, as compared to $15.7 million for the same
period in 1998. On a diluted basis, assuming conversion of the debentures,
funds from operations increased to $28.3 million from $22.7 million. The
increase in funds from operations is principally a result of the reasons
stated above under Results of Operations.
Funds from operations do not represent cash flows from operations as
defined by Generally Accepted Accounting Principles and should not be
considered as an alternative to net income as an indicator of Center Trust's
operating performance or to cash flows as a measure of liquidity.
Liquidity Sources and Requirements
The Company intends to meet its short its short term cash requirements from
cash generated operations. The company anticipates that revenues generated
from the Company's real estate will be sufficient to cover operating expenses,
debt service requirements and dividends to shareholders.
The Operating Partnership has a secured revolving line of credit with a
maximum borrowing limit of $250 million (the "Credit Facility"). The Credit
Facility will primarily provide continued funding for the Company's
acquisitions, stock and debenture repurchase programs and redevelopment
activities. The Credit Facility expires in December 2000. At June 30, 1999,
outstanding borrowings on the Credit Facility was approximately
$197.2 million, with an additional $4.8 million having been utilized to
provide letters of credit.
Borrowings under the Credit Facility bear interest at LIBOR plus 137.5
basis points.
As of June 30, 1999, the Company had sold 15,666,666 shares to Lazard
Freres Real Estate Investors, LLC ("LFREI") for aggregate proceeds of $235
million. With the sale of $33.9 million of common stock to LFREI on May 19,
1999, LFREI has fully funded its obligation to purchase $235 million in common
stock of the Company at $15.00 per share.
10
<PAGE>
Mortgage loans maturing of $8.7 million in 1999 and $8.1 million in 2001,
as well as significant amounts due from 2002 to 2015, may require refinancing.
Additionally, the Company's secured line of credit is due in 2000 and the
convertible debentures of $128.5 million and exchangeable debentures of $30.0
million are due in 2001 and 2003, respectively. The Company believes, based on
the collateral available within its portfolio, that it will be able to meet
such maturities with the proceeds from either asset sales or debt
refinancings.
During the second quarter of 1999, the Company obtained $110.5 million in
mortgage financings. On May 7, 1999, the Company obtained a, 10 year, $52
million mortgage. The mortgage is secured by four properties and bears
interest at a fixed rate of 7.75%. Proceeds from the mortgage were used, in
part, to pay-off $34.5 million of existing fixed rate mortgages, which had a
weighted average interest rate of 8.96%. Two of the three mortgages repaid,
totaling $27.9 million, had maturities in 1999. On May 21, 1999 and June 1,
1999 the Company closed on the first two tranches of a variable rate mortgage
secured by four properties. The mortgage has a 3-year term and bears interest
at LIBOR plus 2.5%. Proceeds from the first and second tranche totaled $58.5
million and were used, in part, to repay two mortgages totaling $24.9 million,
which matured in 2004 and had a weighted average interest rate of 9.24%. On
August 2, 1999, the Company completed the third and final tranche of the
variable rate mortgage. Loan proceeds of $11.5 million from the third tranche
were used, in part, to repay a $7.3 million mortgage. This mortgage had an
interest rate of 10.25% and matured in 1999.
Associated with the mortgage prepayments above, the company incurred
extraordinary losses of $4.5 million. After paying-off existing mortgages and
certain prepayment penalties, the above mortgages generated net proceeds of
$47.1 million, which were used to reduce the outstanding balance on the
Company's secured credit facility.
During the quarter ended June 30, 1999, the Company purchased $10,047,000
of its Series A and B, 7 1/2% Convertible Subordinated Debentures (the
"Debentures"). The Debentures, which mature in January, 2001, where purchased
at a 5% discount to face value, resulting in an extraordinary gain on early
extinguishment of debt of $0.5 million.
The Company anticipates continuing to execute its stock and debenture
repurchase programs, as well as its acquisition and redevelopment strategy
over the next 12 months. The Company believes that such activities will be
funded from the Company's credit facility, future debt refinancings and
financings, and the disposition of certain non-strategic assets.
During the six months ended June 30, 1999, the Company has acquired one
unenclosed shopping center comprising 180,000 square feet of Company owned GLA
and the anchor tenant at its Southpointe Plaza Shopping Center in Sacramento,
California. These acquisitions were funded from borrowings under the Credit
Facility.
Cash Flows
Net cash provided by operating activity increased by $4.4 million to $20.6
million for the six months ended June 30, 1999 from cash provided of $16.2
million for the six months ended June 30, 1998 as a result of the cash flows
generated by the 1998 Acquisition. Cash provided by investing activity was
$19.8 million for the six months ended June 30, 1999 compared to cash used by
investing activity of $130.6 million for the same period of 1998. The
significant change was a results of the sale of two assets in the first half
of 1999 coupled with the fact that in the first half of 1998 we acquired 16
assets as compared to one asset in the first half of 1999. Cash used by
financing activities was $36.8 million for the six months ended June 30, 1999
compared to cash provided of $114.3 million for the six months ended June 30,
1998. The principal cause of the change in financing activity is the use of
funds to repurchase the Haagen Family interests in the Company as well as
other common stock and convertible debenture repurchases. In addition, the
Company sold $56.6 million less in common stock to LFREI in 1999 than it sold
in 1998.
11
<PAGE>
Inflation
Center Trust's long term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions
include clauses enabling Center Trust to receive percentage rents based upon
tenants' gross sales, which generally increase as prices rise, and/or, in
certain cases, escalation clauses are often related to increases in the CPI or
similar inflation indices. In addition, many of Center Trust's leases are for
terms of less than ten years, which permits Center Trust to seek to increase
rents upon re-rental at market rates if rents are below then existing market
rates. Many of Center Trust's leases require the tenants to pay a pro rata
share of operating expenses, including common area maintenance, real estate
taxes, insurance and utilities, thereby reducing Center Trust's exposure to
increases in costs and operating expenses from inflation.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process information containing a 2-
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send tenant invoices,
provide building services or engage in similar normal business activities. In
addition, there is a possibility that the Company may be unable to provide an
adequate operating environment for some of its tenants due to the failure of
building mechanical or security systems. The Company could be subject to
litigation for failure to provide an adequate operating environment for its
tenants as a result of such Year 2000 related system disruptions. More
immediately, the tenants could cease paying rent, which could impact the
Company's liquidity. There is also a possibility that if any of the Company's
major tenants do not become Year 2000 compliant on schedule, such tenant's
operations and financial condition could be adversely affected, which may
impact the tenant's ability to meet its rent obligations.
The Company has identified three areas of concern regarding Year 2000
Compliance; (i) internal information technology systems including the
Company's network hardware and software; (ii) computer and other operational
systems at its properties; and (iii) systems of significant third party
vendors and tenants.
The Company has evaluated its internal information technology systems and
has concluded that its most significant systems are currently Year 2000
compliant. The Company will continue to evaluate the readiness of its other
less significant systems in order to identify and correct potential Year 2000
issues.
The Company is also in the process of evaluating computer and other
operational systems at its properties that may have embedded microprocessors
with potential Year 2000 issues. The potential Year 2000 issues at the
properties principally relate to automated utility systems such as heating,
ventilation and air conditioning systems and security and safety devices such
as lighting systems and alarms. The Company has identified the areas and
systems that use embedded microprocessors to determine whether any
modifications are necessary. The Company expects to make all necessary
modifications by the end of the third quarter of 1999.
The Company places a high degree of reliance on computer systems of third
parties such as vendors and tenants. The Company has completed a survey of all
third parties with whom it does significant business to determine their Year
2000 Compliance readiness and the extent to which the Company is vulnerable to
any third party Year 2000 issues. The Company has received statements of
compliance from its primary third party vendors and tenants which state that
their systems will be in compliance prior to December 31, 1999. However, there
can be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems,
would not have a material adverse effect on the Company. The Company believes
it has viable alternatives for each of its significant vendors.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on
12
<PAGE>
which the Company plans to complete the Year 2000 modifications and testing
processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could come from those plans, as information not
currently known to the Company becomes available.
The Company continues to develop, refine and document its contingency plans
for its internal information technology systems, its properties and its
significant third party vendors in the event that the Company experiences Year
2000 issues. It is anticipated that such plans will be complete in sufficient
time prior to December 31, 1999.
Factors Affecting Future Results
Management's Discussion and Analysis of Financial Condition arid Results of
Operations contains certain forward-looking statements that are subject to
risk and uncertainty. Investors and potential investors in securities are
cautioned that a number of factors could adversely affect the Company's
ability to obtain these results, including (a) the inability to lease
currently vacant space in Center Trust's properties, (b) the inability of
tenants to pay contractual rent and other expenses; (c) bankruptcies of
tenants; (d) decisions by tenants, and anchor retailers which own their own
space, to close stores at the Company's properties; (e) increases in certain
operating costs at the Company's properties; (f) decreases in rental rates
available from tenants leasing space at Center Trust's properties (g)
unavailability of financing for acquisition, development and redevelopment of
properties by the Company (h) increases in interest rates, (i) ability to
dispose of properties; (j) environmental issues; (k) governmental compliance
issues, and (l) a general economic downturn resulting in lower retail sales
and, in turn, store closures, rent delinquencies, reduced percentage rents and
other downward pressure on occupancies and rents at retail properties.
13
<PAGE>
PART II--OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
During the three months ended June 30, 1999, the Company sold 2,260,232
shares of Common Stock, to an affiliate of Lazard Freres Real Estate
Investors, LLC, under the terms of the Stock Purchase Agreement approved by
the shareholders in August, 1997. The proceeds of $33.9 million were used to
reduce the outstanding balance on the Company Line of Credit.
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K on May 4, 1999 under Item 5--filing supplemental data.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CENTER TRUST RETAIL PROPERTIES, INC.
/s/ Stuart J.S. Gulland
By: _________________________________
Stuart J.S. Gulland
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
/s/ Edward A. Stokx
By: _________________________________
Edward A. Stokx
Vice President and Controller
(Principal Accounting Officer)
Dated: August 16, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,251
<SECURITIES> 0
<RECEIVABLES> 11,010
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,067,606
<DEPRECIATION> 144,150
<TOTAL-ASSETS> 987,269
<CURRENT-LIABILITIES> 0
<BONDS> 700,522
0
0
<COMMON> 261
<OTHER-SE> 238,440
<TOTAL-LIABILITY-AND-EQUITY> 987,269
<SALES> 0
<TOTAL-REVENUES> 72,359
<CGS> 0
<TOTAL-COSTS> 21,689
<OTHER-EXPENSES> (1,216)<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,606
<INCOME-PRETAX> 25,280
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (4,048)
<CHANGES> 0
<NET-INCOME> 21,232
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.81
<FN>
<F1>Includes depreciation and amortization of $12,124, $4,274 allocated to minority
interests, $2,961 in G&A costs and $20,575 gain on sale of assets.
</FN>
</TABLE>
