<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number 1-12994
-------
THE MILLS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 52-1802283
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1300 Wilson Boulevard, Arlington, Virginia 22209
------------------------------------------------
(Address of principal executive offices - zip code)
(703) 526-5000
--------------
(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
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
24,048,331 shares of Common Stock
$.01 par value, as of November 9, 2000
1
<PAGE> 2
THE MILLS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
---------------------
<S> <C>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets as of September 30, 2000 1
and December 31, 1999.
Consolidated Statements of Income for the 2
Three Months Ended September 30, 2000 and September 30, 1999.
Consolidated Statements of Income for the 3
Nine Months Ended September 30, 2000 and September 30, 1999.
Consolidated Statements of Cash Flows for the 4
Nine Months Ended September 30, 2000 and September 30, 1999.
Notes to Consolidated Financial Statements 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
</TABLE>
Certain information contained in this Form 10-Q and the information incorporated
by reference may constitute "forward-looking statements" for the purposes of
Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are based on current expectations and are not guarantees of future
performance.
Forward-looking statements, which can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "anticipate",
"estimate", or "continue" or the negative thereof or other variations thereon or
comparable terminology, are subject to certain risks, trends and uncertainties
that could cause actual results to differ materially from those projected. Among
those risks, trends, and uncertainties are the general economic climate; the
supply and demand for retail properties; interest rate levels; the availability
of financing; and other risks associated with the development, acquisition, and
operation of retail properties, including risks that the development,
acquisition, and operation of retail properties, including risks that the
development of a project may not be completed on schedule, that the Company may
not be able to lease available space to tenants at favorable rental rates, that
tenants will not take occupancy or pay rent in accordance with their leases, or
that development or operating costs may be greater than anticipated.
The Company undertakes no duty or obligation to publicly announce any revisions
to, or updates of, these forward-looking statements that may result from future
events or circumstances.
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999
(Unaudited) (Note)
------------------ ----------------
ASSETS
<S> <C> <C>
Income producing property:
Land and land improvement $ 157,590 $ 171,024
Building and improvements 682,108 725,530
Furniture, fixtures and equipment 45,714 36,958
Less: accumulated depreciation and amortization (216,489) (239,484)
-------- --------
Total income producing property 668,923 694,028
Land held for investment and/or sale 9,930 9,924
Real estate development in progress 59,063 33,138
Investment in unconsolidated joint ventures 243,653 201,152
-------- --------
Total real estate and development assets 981,569 938,242
Cash and cash equivalents 4,534 3,035
Restricted cash 16,272 13,771
Accounts receivable, net 29,206 25,389
Notes receivable 8,427 8,351
Deferred costs, net 39,771 47,942
Other assets 5,085 2,737
-------- --------
TOTAL ASSETS $ 1,084,864 $ 1,039,467
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages, notes and loans payable $ 926,267 $ 877,273
Accounts payable and other liabilities 70,902 61,189
-------- --------
Total liabilities 997,169 938,462
Minority interests 35,359 40,978
STOCKHOLDERS' EQUITY
Common stock $.01 par value, authorized 100,000,000
shares, issued and outstanding 23,408,824 and 23,192,041
shares in 2000 and 1999, respectively 232 232
Additional paid-in capital 444,559 440,924
Accumulated deficit (389,031) (379,306)
Unamortized restricted stock award (3,424) (1,823)
-------- --------
Total stockholders' equity 52,336 60,027
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,084,864 $ 1,039,467
============ ===============
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
REVENUES:
Minimum rent $ 24,370 $ 25,787
Percentage rent 436 599
Recoveries from tenants 12,611 13,254
Other property revenue 2,373 2,307
Management fee income 2,599 1,005
Other fee income 3,187 2,325
Interest income 2,521 589
--------------- ------------------
48,097 45,866
EXPENSES:
Recoverable from tenants 10,968 11,424
Other operating 1,352 1,279
General and administrative 3,652 3,293
Interest expense 13,715 11,781
Depreciation and amortization 9,316 8,786
--------------- ------------------
39,003 36,563
Other income/(expense) 349 (99)
Gain on sale of community centers 18,370 -
Equity in earnings of unconsolidated joint ventures 1,860 3,392
--------------- ------------------
Income before extraordinary item and minority interests 29,673 12,596
Extraordinary losses on debt extinguishments - -
--------------- ------------------
Income before minority interests 29,673 12,596
Minority interests (11,994) (5,115)
--------------- ------------------
Net income $ 17,679 $ 7,481
=============== ==================
PER SHARE INFORMATION:
Net income per common share - basic:
Income before extraordinary item $ 0.76 $ 0.32
Extraordinary losses on debt extinguishment - -
--------------- ------------------
Net income $ 0.76 $ 0.32
=============== ==================
Net income per common share - diluted:
Income before extraordinary item $ 0.76 $ 0.32
Extraordinary loss on debt extinguishment - -
--------------- ---------------------
Net income $ 0.76 $ 0.32
=============== ==================
Dividends declared $ 0.5175 $ 0.5025
=============== ==================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
REVENUES:
Minimum rent $ 76,292 $ 77,752
Percentage rent 1,073 1,133
Recoveries from tenants 39,139 39,759
Other property revenue 6,873 5,728
Management fee income 6,213 3,010
Other fee income 8,099 6,310
Interest income 3,833 2,125
------------------ ------------------
141,522 135,817
EXPENSES:
Recoverable from tenants 33,616 34,634
Other operating 3,711 3,733
General and administrative 10,787 9,177
Interest expense 40,978 34,551
Depreciation and amortization 28,549 26,179
------------------ ------------------
117,641 108,274
Other income/(expense) (351) 544
Gain on sale of community centers 18,370 -
Equity in earnings of unconsolidated joint ventures 6,049 6,749
------------------ ------------------
Income before extraordinary item and minority interests
47,949 34,836
Extraordinary losses on debt extinguishments (3,147) (2,762)
------------------ ------------------
Income before minority interests 44,802 32,074
Minority interests
(18,116) (13,028)
------------------ ------------------
Net income $ 26,686 $ 19,046
================== ==================
PER SHARE INFORMATION:
Net income per common share - basic:
Income before extraordinary item $ 1.23 $ 0.89
Extraordinary losses on debt extinguishment (0.08) (0.07)
------------------ ------------------
Net income $ 1.15 $ 0.82
================= ==================
Net income per common share - diluted:
Income before extraordinary item $ 1.23 $ 0 89
Extraordinary loss on debt extinguishment (0.08) (0.07)
------------------ ------------------
Net income $ 1.15 $ 0.82
================= ==================
Dividends declared $ 1.553 $ 1.513
================= ==================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Income before minority interests $ 44,802 $ 32,074
Adjustments to reconcile income before minority interests
to net cash provided by operating activities:
Net accretion of note receivable (483) (525)
Depreciation and amortization 28,549 26,179
Provision for losses on accounts receivable (475) 315
Gain on sale of community centers (18,370) -
Gain on sale of property (1,828) (728)
Write off of abandoned projects 1,240 -
Equity in earnings of unconsolidated joint ventures (6,049) (6,749)
Amortization of incentive stock programs 1,470 429
Extraordinary loss on debt extinguishment 3,147 2,762
Other changes in assets and liabilities:
Increase in accounts receivable (7,072) (349)
Increase in notes receivable (307) 702
Increase in other assets (1,089) (758)
Increase in accounts payable and other liabilities 7,543 240
---------------- --------------
Net cash provided by operating activities 51,692 54,392
INVESTING ACTIVITIES:
Investment in real estate and development assets (108,792) (88,821)
Distributions received from unconsolidated joint ventures 17,797 15,071
Proceeds from sale of community centers 22,536 -
Investment in single tenant net leases (18,785) -
Proceeds from sale of land 500 800
Notes receivable 80 -
Deferred costs (8,565) (4,216)
---------------- --------------
Net cash used in investing activities (95,229) (77,166)
FINANCING ACTIVITIES:
Proceeds from mortgages, notes and loans payable 401,797 255,443
Repayments of mortgages, notes and loans payable (288,937) (165,692)
Refinancing costs (4,977) (4,593)
Restricted cash (3,264) (5,310)
Options exercised 565 -
Dividends (35,904) (35,337)
Distributions (24,244) (22,881)
---------------- --------------
Net cash provided by financing activities 45,036 21,630
Net decrease in cash and cash equivalents (1,499) (1,944)
Cash and cash equivalents at beginning of period 3,035 10,510
---------------- --------------
Cash and cash equivalents at end of period $ 4,534 $ 8,566
================ ========
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 40,515 $ 33,608
================ ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The Mills Corporation (the "Company") is a fully integrated,
self-managed real estate investment trust ("REIT").
The Company conducts all of its business through The Mills Limited
Partnership (the "Operating Partnership"), in which it owns, as of September 30,
2000, a 1% interest as the sole general partner and a 58.68% interest as a
limited partner. The Company, through the Operating Partnership, is engaged
primarily in the ownership, development, redevelopment, leasing, acquisition,
expansion and management of super-regional, retail and entertainment-oriented
centers (the "Mills" and "Block" projects), a community shopping center and a
portfolio of 25 single tenant retail net lease properties (subject to net
leases operating as CVS). As of September 30, 2000 the Operating Partnership
owns or holds an interest in the following operating
properties (see Note 10):
<TABLE>
<S> <C>
Mills Location (Metropolitan Market Served)
--------- -----------------------------------
Franklin Mills Philadelphia, PA (Philadelphia)
Gurnee Mills Gurnee, IL (Chicago)
Potomac Mills Woodbridge, VA (Washington, DC)
Sawgrass Mills Sunrise, FL (Ft. Lauderdale)
Ontario Mills Ontario, CA (Los Angeles)
Grapevine Mills Dallas, TX (Dallas/Fort Worth)
Arizona Mills Tempe, AZ (Phoenix)
The Oasis at Sawgrass Sunrise, FL (Ft. Lauderdale)
Concord Mills Concord, NC (Charlotte)
Katy Mills Katy, TX (Houston)
Opry Mills Nashville, TN (Nashville)
Block
------
The Block at Orange Orange, CA (Los Angeles)
Community Center
----------------
Liberty Plaza Philadelphia, PA
</TABLE>
In addition to the operating properties, the Company owns a portfolio of
25 single tenant retail net lease properties (subject to net leases
operating as CVS) which are located at various locations in the United
States. Also, the Company is actively involved in the development of
new Mills-type and other retail oriented projects.
7
<PAGE> 8
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
the Company's management in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for the three and nine month periods ended
September 30, 2000, are not necessarily indicative of the results that may be
expected for the full year. These financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operation contained in the Form 10-Q and the Company's audited
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
The accompanying consolidated financial statements of the Company
include the accounts of the Company and its subsidiaries, including its majority
owned subsidiary, the Operating Partnership. The accounts of the Operating
Partnership include the accounts of all Properties which are wholly owned or
controlled by the Operating Partnership as well as its wholly owned subsidiaries
Mills Management L.L.C. ("Mills Management") and Management Associates Limited
Partnership ("MALP"). In addition, the Operating Partnership owns 5% of the
voting common stock and 99% of the preferred stock of the MillsServices Corp.
("MSC"), an entity formed in connection with the Company's initial public
offering to provide development, management, leasing and finance services to the
Company and other entities owned by affiliates of the Company. As a result of
the Operating Partnership's ownership of 99% of the economic interests, MSC is
consolidated with the Operating Partnership. The Company's ownership in certain
Mills and Block operating properties, as well as certain properties under
development, are through investments in joint ventures. MSC also owns 100% of
Mills Enterprises, Inc. ("MEI"), an entity that owns FoodBrand (the Company's
food and beverage entity that was created in 1999 to master lease and operate
food courts at the Company's malls with existing operations at Katy Mills,
Franklin Mills, Opry Mills and future projects under development) and which
holds investments in other retail joint ventures. Such investments are accounted
for using the equity method of accounting (see note 6).
All significant intercompany transactions and balances have been
eliminated in consolidation. Minority interests represent the ownership
interests in the Operating Partnership not held by the Company.
2. SEGMENT REPORTING
The Company operates in one reportable segment, the development,
ownership and operation of retail properties. These properties consist of
"Mills" superregional value and entertainment oriented malls, "Block" retail and
entertainment properties, a community retail shopping center, food court
operations, a portfolio of 25 single tenant retail net lease properties and
other retail operations. Substantially all the Company's assets, revenues and
income are derived from this segment. The Company currently has no operations in
foreign countries.
8
<PAGE> 9
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 2000 presentation.
4. COMMUNITY CENTERS
On August 3, 2000, the Company sold ten of its community centers (the
"Disposed Properties") to an unrelated third party for $142.0 million. The
Company recorded a net gain of approximately $18.4 million, as well as an
additional $0.8 million of net land sales gains included in the transaction. The
net gain includes a reserve for management's estimate of certain future
contingencies.
A summary of operations for the Community Centers for the three month
and nine month periods ended September 30, 2000 and 1999 (through the date of
sale), is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues $1,928 $5,482 $12,809 $16,276
Interest expense 766 2,089 4,877 6,116
Depreciation expense 351 1,006 2,581 3,053
Other expense 842 2,424 3,369 4,320
</TABLE>
5. CVS PORTFOLIO
The Company invested approximately $8.8 million in cash from the net
proceeds from the sale of the Disposed Properties. The investment was completed
in two transactions. On September 22, 2000, the Company acquired 25 net lease
properties for an aggregate sales price of $69.4 million. The Company assumed
$64.3 million of debt and paid $5.1 million in cash. On October 3, 2000, the
Company acquired an additional 21 net lease properties (collectively the
"Acquired Properties") for an aggregate sales price of $44.6 million. The
Company assumed $40.9 million of debt and paid $3.7 million in cash. The
Acquired Properties were purchased from unrelated third parties. The Acquired
Properties are all subject to single tenant net leases operating as CVS. The
leases are triple net leases that contain indemnification for liabilities
customarily associated with possession of the site (including without
limitation, certain specified environmental liabilities). The tenants'
obligations under the leases are guaranteed by CVS Corporation, a Delaware
Corporation.
6. EARNINGS PER SHARE
The Company accounts for earnings per share pursuant to SFAS 128. Basic
EPS is calculated by dividing income available to common shareholders by the
weighted number of common shares outstanding during the period. Diluted EPS is
calculated by adjusting net income for the period for the effects on minority
interests resulting from issuance of stock pursuant to restricted stock or
option grants and dividing the resulting adjusted net income by the weighted
average shares outstanding during the period, adjusted for the dilutive effect
of options and stock grants.
9
<PAGE> 10
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Numerator for basic earnings per share $ 17,666 $ 26,647
============ ============
Numerator for diluted earnings per share $ 17,673 $ 26,673
============ ============
Denominators:
Denominator for basic earnings
per share -- weighted average shares 23,373 23,316
Outstanding unvested restricted stock awards --
weighted average shares (85) (85)
Denominator for basic earnings per share -- ------------- -------------
adjusted weighted average shares 23,288 23,231
Effect of dilutive securities:
Employee stock options and restricted stock awards 23 56
Denominator for basic earnings per share -- ------------- -------------
Denominator for diluted earnings per
share-adjusted weighted average shares 23,311 23,287
============ ============
Basic earnings per share $ 0.76 $ 1.15
============ ============
Diluted earnings per share $ 0.76 $ 1.15
============ ============
</TABLE>
Limited partnership units in the Operating Partnership (15,821,909 and
15,831,636 outstanding at September 30, 2000 and December 31, 1999) may be
exchanged for shares of common stock of the Company on a one-for-one basis in
specified circumstances. This exchange right has not been considered in the
computation of per share data as it does not have a dilutive effect.
7. NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The Company
intends to adopt SFAS 133 in the first quarter of fiscal 2001. The adoption of
SFAS 133 will not have a material effect on the financial position or results of
operations of the Company.
In 1999, the Securities and Exchange Commission ("SEC") staff issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 explains how generally accepted accounting principles
should be applied in the recognition of revenue in financial statements. The
Company will implement SAB 101 in the fourth quarter of 2000. The adoption of
SAB 101 will not have a material effect on the financial position or results of
operation of the Company.
10
<PAGE> 11
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. MINORITY INTERESTS
Minority interests represent the interests of the unitholders in the
Operating Partnership. The minority interest is adjusted at each period end to
reflect the ownership percentage at that particular time. The minority interest
was 40.32% and 40.57% at September 30, 2000 and December 31, 1999, respectively.
9. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Certain operating properties and properties under development are
partially owned through joint ventures ("Joint Ventures") in which the Company
is also a co-general and co-managing partner. The Company's interest in each
Joint Venture is as follows:
<TABLE>
<CAPTION>
Ownership %
Joint Venture as of September 30, 2000
------------- -------------------------
<S> <C>
Ontario Mills 50.0%
Grapevine Mills 37.5%
Arizona Mills 36.8%
The Oasis at Sawgrass 50.0%
The Block at Orange 50.0%
Concord Mills 37.5%
Katy Mills 62.5%
Opry Mills 66.7%
Arundel Mills 37.5%
Meadowlands Mills (1) 66.7%
Discover Mills 50.0%
Vaughan Mills 50.0%
</TABLE>
(1) The Company's ownership percentage for Meadowlands Mills will be
53.3%, when the conditions to the delivery of the executed joint
venture documents from escrow have been satisfied.
In addition to the above Joint Ventures, MEI holds investments in
certain retail joint ventures.
Since major business decisions require the approval of at least one
other general partner, the Company does not control these Joint Ventures
pursuant to Statement of Position 78-9. As a result, its investments are
accounted for under the equity method, where the investments are recorded at
cost and subsequently adjusted for net equity in income (loss) and cash
contributions and distributions. The Company eliminates intercompany profits on
sales of services that are capitalized by the Joint Ventures.
In connection with the Joint Venture agreements, the Company is
committed to providing certain levels of equity in addition to amounts invested
to date. The Company has guaranteed repayment of $312.5 million of Joint Venture
debt, which includes $65.6 million of joint venture partners' share of debt,
until certain debt service coverage tests are met. In addition, the Company is
contingently liable for property taxes and assessments levied against Ontario
Mills Limited Partnership by the City of Ontario Special Assessment District.
The remaining aggregate amount of the special tax assessment is approximately
$17.9 million and will be collected over the remaining 21 year period through
2020 to fund debt service on bonds issued by the City to fund the infrastructure
improvements.
11
<PAGE> 12
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company's real estate joint venture agreements contain buy-sell
provisions whereby certain partners can require the purchase or sale of
ownership interests among certain partners.
Condensed combined balance sheets at September 30, 2000 and December
31, 1999 and results of operations for the three and nine months ended September
30, 2000 and 1999 are presented below for all Joint Ventures.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
Operating Development Total
--------- ----------- -----
<S> <C> <C> <C>
ASSETS:
Income producing property $ 1,032,290 $ - $1,032,290
Construction in progress 33,019 292,872 325,891
Deferred costs, net 364,153 - 364,153
Other 147,271 10,819 158,090
-----------------------------------------------------
$ 1,576,733 $ 303,691 $1,880,424
=====================================================
LIABILITIES AND PARTNERS' EQUITY:
Debt $ 1,121,291 $ 91,706 $1,212,997
Other liabilities 91,045 21,479 112,524
Operating Partnership's accumulated equity 117,948 56,924 174,872
Joint Venture partners' accumulated equity 246,449 133,582 380,031
-----------------------------------------------------
$ 1,576,733 $ 303,691 $1,880,424
=====================================================
DECEMBER 31, 1999
Operating Development Total
--------- ----------- -----
ASSETS:
Income producing property $ 871,608 $ - $ 871,608
Construction in progress 27,949 276,219 304,168
Deferred costs, net 288,995 - 288,995
Other 146,759 12,961 159,720
-----------------------------------------------------
$ 1,335,311 $ 289,180 $1,624,491
=====================================================
LIABILITIES AND PARTNERS' EQUITY:
Debt $ 909,989 $ 37,986 $ 947,975
Other liabilities 105,938 56,344 162,282
Operating Partnership's accumulated equity 65,571 100,230 165,801
Joint Venture partners' accumulated equity 253,813 94,620 348,433
-----------------------------------------------------
$ 1,335,311 $ 289,180 $1,624,491
=====================================================
</TABLE>
12
<PAGE> 13
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
OPERATING DEVELOPMENT TOTAL
--------- ----------- -----
<S> <C> <C> <C>
REVENUES:
Minimum rent $ 37,862 $ - $ 37,862
Percentage rent 466 - 466
Recoveries from tenants 14,284 - 14,284
Other property revenue 3,899 - 3,899
Interest income 2,510 156 2,666
----------------------------------------------------
Total revenues 59,021 156 59,177
EXPENSES:
Recoverable from tenants 13,202 - 13,202
Other operating 4,411 - 4,411
Interest expense 20,777 - 20,777
Depreciation and amortization 17,944 - 17,944
----------------------------------------------------
Total expenses 56,334 - 56,334
Other income/(expense) (1,035) 728 (307)
----------------------------------------------------
Net income $ 1,652 $ 884 $ 2,536
====================================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 1,806 $ 54 $ 1,860
====================================================
THREE MONTHS ENDED SEPTEMBER 30, 1999
Operating Development Total
--------- ----------- -----
REVENUES:
Minimum rent $ 21,840 $ - $ 21,840
Percentage rent 84 - 84
Recoveries from tenants 8,654 - 8,654
Other property revenue 1,918 - 1,918
Interest income 2,107 1,843 3,950
----------------------------------------------------
Total revenues 34,603 1,843 36,446
EXPENSES:
Recoverable from tenants 8,196 - 8,196
Other operating 2,163 - 2,163
Interest expense 10,974 - 10,974
Depreciation and amortization 9,598 - 9,598
----------------------------------------------------
Total expenses 30,931 - 30,931
Other income/(expense) 973 - 973
----------------------------------------------------
Net income $ 4,645 $ 1,843 $ 6,488
====================================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 1,549 $ 1,843 $ 3,392
====================================================
</TABLE>
13
<PAGE> 14
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
OPERATING DEVELOPMENT TOTAL
--------- ----------- -----
<S> <C> <C> <C>
REVENUES:
Minimum rent $ 104,397 $ - $ 104,397
Percentage rent 1,399 - 1,399
Recoveries from tenants 40,518 - 40,518
Other property revenue 15,686 - 15,686
Interest income 6,496 375 6,871
----------------------------------------------------
Total revenues 168,496 375 168,871
EXPENSES:
Recoverable from tenants 38,153 - 38,153
Other operating 10,166 - 10,166
Interest expense 52,422 - 52,422
Depreciation and amortization 56,340 - 56,340
----------------------------------------------------
Total expenses 157,081 - 157,081
Other income/(expense) 918 728 1,646
----------------------------------------------------
Net income $ 12,333 $ 1,103 $ 13,436
====================================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 5,564 $ 485 $ 6,049
====================================================
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
OPERATING DEVELOPMENT TOTAL
--------- ----------- -----
<S> <C> <C> <C>
REVENUES:
Minimum rent $ 61,661 $ - $ 61,661
Percentage rent 198 - 198
Recoveries from tenants 24,912 - 24,912
Other property revenue 5,036 - 5,036
Interest income 4,609 2,350 6,959
----------------------------------------------------
Total revenues 96,416 2,350 98,766
EXPENSES:
Recoverable from tenants 24,006 - 24,006
Other operating 6,069 8 6,077
Interest expense 29,180 - 29,180
Depreciation and amortization 26,801 - 26,801
----------------------------------------------------
Total expenses 86,056 8 86,064
Other income/(expense) 1,953 - 1,953
----------------------------------------------------
Net income $ 12,313 $ 2,342 $ 14,655
====================================================
Operating Partnership's equity in earnings
of unconsolidated joint ventures $ 4,717 $ 2,032 $ 6,749
====================================================
</TABLE>
14
<PAGE> 15
THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The primary difference between the carrying value of the Company's
investment in unconsolidated joint ventures and the Operating Partnership's
accumulated equity noted above is due to capitalized interest on the
investment balance and capitalized development and leasing costs which are
recovered by the Operating Partnership through fees earned during construction
and loans to the joint ventures included in other liabilities above.
10. INCOME RECOGNITION
The Company, as lessor, has retained substantially all the risks and
benefits of ownership and accounts for its leases as operating leases. Minimum
rent from income producing property is recognized on a straight-line basis
over the terms of the respective leases. Percentage rent is recognized when
tenants' sales have reached breakpoints stipulated in the respective leases.
Recoveries from tenants for real estate taxes and other operating expenses are
recognized as revenue in the period the applicable costs are incurred.
11. DECLARATION OF DIVIDEND
On September 20, 2000, the Company declared a dividend of $.5175 per
share which was paid on November 1, 2000 to stockholders of record as of
October 17, 2000.
12. BORROWINGS
On January 31, 2000, the Company entered into a non-recourse
mortgage loan agreement in the amount of $285 million secured by its equity
interest in Sawgrass Mills. The proceeds were used to repay prior loans
totaling $235 million and the remaining proceeds were used to pay down the
line of credit and fund the Company's development equity requirements. The new
loan is a non-amortizing loan with a repayment date of June 18, 2001. The
interest rate is payable at a variable rate, which is LIBOR plus 2.75%.
On June 14, 2000, the Company refinanced and increased its line of
credit from $100 million to $125 million. The new line of credit is comprised
of two components. The first component is a $50 million term loan which is
secured by the Company's equity interest in Franklin Mills. The loan has two
mandatory principal repayments of $5 million due on or before June 1, 2001,
and $10 million due on or before June 1, 2002. The loan matures on June 1,
2003. The interest rate is payable at a variable rate with a variable margin,
which was LIBOR plus 2.25% at September 30, 2000. The second component is a
$75 million unsecured revolving loan. The loan matures on June 1, 2002. The
interest rate is payable at a variable rate with a variable margin, which was
LIBOR plus 2.75% at September 30, 2000.
On September 22, 2000, the Company assumed $64.3 million of debt in
connection with the acquisition of 25 net lease properties. The debt is
comprised of two notes. The first indebtedness of approximately $36.0 million
is a non-amortizing loan with an anticipated balloon repayment date of October
10, 2010. Interest is payable at a fixed rate of 7.96%. The second
indebtedness of approximately $28.3 million is a non-amortizing loan with an
anticipated balloon repayment date of January 10, 2023. Interest is payable at
a fixed rate of 9.35%. Both notes may only be prepaid in whole prior to July
31, 2005, with a prepayment penalty of not less than 1% of the principal
amount repaid. After July 31, 2005, the notes may be prepaid in whole or in
part, along with a prepayment penalty that will be subject to a reinvestment
yield calculation.
15
<PAGE> 16
THE MILLS CORPORATION
(Unaudited)
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Comparison of three months ended September 30, 2000 to three months ended
September 30, 1999.
Income before extraordinary item and minority interest for the three
months ended September 30, 2000, increased by approximately $17.4 million
(135.6%) to $29.7 million as compared to the three months ended September 30,
1999. The increase was the result of an increase in revenues of approximately
$2.2 million (4.9%), an increase in other income/(expense) of approximately
$0.4 million (452.5%), a gain on the sale ten of the eleven Community Centers
(the "Disposed Properties") of approximately $18.4 million, offset by an
increase in expenses of $2.4 million (6.7%) and by a decrease in equity in
earnings on unconsolidated joint ventures of approximately $1.5 million
(45.2%).
Revenues:
Minimum rent for the three months ended September 30, 2000, decreased
approximately $1.4 million (5.5%) compared with the three months ended
September 30, 1999. The decrease was primarily due to the loss of $2.3 million
of minimum rent associated with the Disposed Properties. This was partially
offset by higher rents across the portfolio and the opening of two new anchor
tenants at Potomac Mills and Franklin Mills.
Recoveries from tenants for the three months ended September 30,
2000, decreased approximately $0.6 million (4.9%) compared with the three
months ended September 30, 1999. The decrease was primarily due to the loss of
$1.0 million of recoveries from tenants associated with the Disposed
Properties. This was partially offset by an increase in recoveries at various
properties, $0.4 million. which were related to an increase in expenses at
those properties.
Management fee income for the three months ended September 30, 2000,
increased $1.6 million (158.6%) compared with the three months ended September
30, 1999. The increase was primarily due to fees from all joint venture
projects, including Concord Mills which opened in the third quarter of 1999,
Katy Mills which opened in the fourth quarter of 1999, and Opry Mills which
opened in the second quarter of 2000.
Other fee income for the three months ended September 30, 2000,
increased $0.9 million (37.1%) compared with the three months ended September
30, 1999. The increase was due to an increase in finance fees that were
related to Opry Mills, and an increase in development fees that was related to
Discover Mills.
Interest income for the three months ended on September 30, 2000,
increased $1.9 million (328.0%) compared with the three months ended September
30, 1999. The increase was primarily due to the recognition of deferred
interest income relating to advances that the Company has made to the
Meadowlands joint venture. This income was recognized in the third quarter as
a result of certain events that made collectibility of interest probable,
including certain actions taken by the Corps of Engineers with respect to the
Company's fill permit.
Expenses:
Recoverable expenses for the three months ended September 30, 2000,
decreased approximately $0.5 million (4.0%). The decrease was primarily due to
a reduction of $0.6 million in recoverable expenses associated with the
Disposed Properties. This was partially offset by an increase in recoverable
expenses, at various properties.
General and administrative expenses for the three months ended
September 30, 2000, increased $0.4 million (10.9%) compared with the three
months ended September 30, 1999. The increase was primarily due to the
increase in costs associated with the Company's retail operations and expanded
operations (i.e., the opening of Concord Mills, Katy Mills and Opry Mills).
16
<PAGE> 17
THE MILLS CORPORATION
(Unaudited)
Interest expense for the three months ended September 30, 2000,
increased $1.9 million (16.4%) compared with the three months ended September
30, 1999. The increase was primarily due to the additional debt related to
Sawgrass Mills that was obtained in January 2000 (see Liquidity and Capital
Resources discussion) and a higher average debt burden related to the line of
credit. This was partially offset by a reduction of $1.3 million of interest
expense associated with the Disposed Properties.
Depreciation and amortization expense for the three months ended
September 30, 2000, increased $0.5 million (6.0%) compared with the three
months ended September 30, 1999. The increase was primarily due to
depreciation associated with the Company's FoodBrand operations.
Other income/(expense) for the three months ended September 30, 2000,
increased $0.4 million (452.5%) compared with the three months ended September
30, 1999. The increase was due to $0.8 million in land sales associated with
the sale of the Disposed Properties and a $0.8 million increase in FoodBrand
operating margins. This was partially offset by $1.2 million of costs of
abandoned projects.
The gain was related to the Company's disposition of ten of its
community centers on August 3, 2000 (see Financial Statements Footnote 4 -
Community Centers).
Equity in earnings of unconsolidated joint ventures for the three
months ended September 30, 2000, decreased $1.5 million (45.2%) compared with
the three months ended September 30, 1999. The decrease was primarily due to
$1.7 million of interest income received in the third quarter of 1999 related
to the tax increment financing on the Katy Mills Joint Venture, and a decrease
in land sales during the third quarter of 2000. This was partially offset by
an increase in operating income from various joint venture properties.
17
<PAGE> 18
THE MILLS CORPORATION
(Unaudited)
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Comparison of nine months ended September 30, 2000 to nine months ended
September 30, 1999.
Income before extraordinary item and minority interest for the nine
months ended September 30, 2000, increased by approximately $13.1 million
(37.6%) to $47.9 million as compared to the nine months ended September 30,
1999. The increase was the result of an increase in revenues of approximately
$5.7 million (4.2%), a gain on the sale ten of the eleven Community Centers of
approximately $18.4 million , offset by an increase in expenses of $9.4
million (8.7%), a decrease in other income/(expense) of $0.9 million (164.5%)
and by a decrease in equity in earnings on unconsolidated joint ventures of
approximately $0.7 million (10.4%).
Revenues:
Minimum rent for the nine months ended September 30,2000, decreased
approximately $1.5 million (1.9%) compared with the three months ended
September 30, 1999. The decrease was primarily due to the loss of $2.5 million
of minimum rent associated with the Disposed Properties. This was partially
offset by higher rents across the portfolio and the opening of two new anchors
at Potomac Mills and Franklin Mills.
Recoveries from tenants for the nine months ended September 30, 2000,
decreased approximately $0.6 million (1.6%) compared with the nine months
ended September 30, 1999. The decrease was primarily due to the loss of $1.2
million of recoveries from tenants associated with the Disposed Properties.
This was partially offset by an increase in recoveries at various properties
during the third quarter at 2000, $0.4 million, which were related to an
increase in expenses at these properties.
Other property revenue for the nine months ended September 30, 2000,
increased $1.1 million (31.5%) compared with the nine months ended September
30, 1999. The increase was due to current year recovery of accounts receivable
that were reserved in prior years, more aggressive termination policies for
underperforming tenants and an increase in income related to the Company's
pushcart program.
Management fee income for the nine months ended September 30, 2000,
increased $3.2 million (106.4%) compared with the nine months ended September
30, 1999. The increase was primarily due to fees from all joint venture
projects, including The Oasis at Sawgrass which opened in the second quarter
of 1999, Concord Mills which opened in the third quarter of 1999, Katy Mills
which opened in the fourth quarter of 1999, and Opry Mills which opened in the
second quarter of 2000.
Other fee income for the nine months ended September 30, 2000,
increased $1.8 million (28.4%) compared with the nine months ended September
30, 1999. The increase was due to an increase in development fees that was
related to Discover Mills.
Interest income for the nine months ended September 30, 2000,
increased $1.7 million (80.4%) compared with nine months ended September 30,
1999. The increase was primarily due to the recognition of deferred interest
income relating to advances that the Company has made to the Meadowlands joint
venture. This income was recognized in the third quarter as a result of certain
events that made collectibility of interest probable including certain actions
taken by the Corp of Engineers with respect to the Company's fill permit.
Expenses:
Recoverable expenses for the nine months ended September 30, 2000,
decreased $1.0 million (2.9%) compared with the nine months ended September
30, 1999. The decrease primarily was due to a reduction of $0.8 million in
recoverable expenses associated with the Disposed Properties.
18
<PAGE> 19
THE MILLS CORPORATION
(Unaudited)
General and administrative expense for the nine months ended
September 30, 2000, increased $1.6 million (17.5%) compared with the nine
months ended September 30, 1999. The increase was primarily due to the
increase in costs associated with the Company's retail operations and expanded
operations (i.e. the opening of The Oasis at Sawgrass, Concord Mills, Katy
Mills and Opry Mills).
Interest expense for the nine months ended September 30, 2000,
increased $6.4 million (18.6%) compared with the nine months ended September
30, 1999. The increase was primarily due to the additional debt related to
Sawgrass Mills that was obtained in January 2000 (see Liquidity and Capital
Resources discussion) and a higher average debt burden related to the line of
credit. This was partially offset by a reduction of $1.3 million of interest
expense associated with the Disposed Properties.
Depreciation and amortization expense for the nine months ended
September 30, 2000, increased $2.4 million (9.1%) compared with the nine
months ended September 30, 1999. The increase was due to $1.0 million increase
in depreciation associated with the Company's FoodBrand operations, $0.5
million increase in loan cost amortization related to the refinancing of
Sawgrass Mills (see Liquidity and Capital Resources discussion) in January
2000, $0.4 million increase in equipment depreciation due to software
conversions/upgrades and $0.4 million in amortization of leasing costs
associated with wholly owned property expansion/remerchandising.
Other income/(expense) for the nine months ended September 30, 2000,
decreased by $0.9 million compared with the nine months ended September 30,
1999. The decrease was primarily due to $1.2 million in costs of abandoned
projects. This was partially offset by a $0.3 million increase in current year
land sales.
The gain was related to the Company's disposition of ten of its
community centers on August 3, 2000 (see Financial Statements Footnote 4 -
Community Centers).
Equity in earnings of unconsolidated joint ventures for the nine
months ended September 30, 2000, decreased $0.7 million (10.4%) compared with
the nine months ended September 30, 1999. The decrease was primarily due to
$1.7 million of interest income received in the third quarter of 1999 related
to the tax increment financing on the Katy Mills Joint Venture. The decrease
was partially offset by increases in operating income at various operating
joint venture properties and an increase in lease buyout fees at four of the
Company's joint venture properties which was partially offset by higher
interest expense on the joint venture properties.
Extraordinary losses on debt extinguishment for the nine months ended
September 30, 2000, increased $0.4 million (13.9%) compared with the nine
months ended September 30, 1999. In 1999, the Company incurred $2.7 million in
extraordinary loss on debt extinguishment that was related to the refinancing
of the Community Centers versus $3.1 million in extraordinary loss on debt
extinguishment that was related to the refinancing of Sawgrass Mills in 2000
(see Liquidity and Capital Resources discussion).
19
<PAGE> 20
THE MILLS CORPORATION
(Unaudited)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000 the Company's balance of cash and cash
equivalents was $3.4 million, not including its proportionate share of cash
held in unconsolidated entities. The terms of this line of credit are as
follows:
<TABLE>
<CAPTION>
AMOUNT
TOTAL OUTSTANDING
FACILITY AT 9/30/00
MATURITY INTEREST RATE TERMS (000's) (000's)
-------- ------------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Line of Credit........................... 06/01/02 LIBOR + 2.75% Interest Only $ 75,000 $ 75,000
</TABLE>
Pursuant to the line of credit, the Company is subject to certain
performance measurements and restrictive covenants. The Company was compliance
with the applicable covenants at September 30, 2000.
FINANCING ACTIVITIES. The weighted average life of the Company's
indebtedness was 3.4 years at September 30, 2000 (including funded
construction and operating debt of the unconsolidated joint ventures), with
investment-grade interest rates (8.03%) weighted average interest rate for the
Company's indebtedness and funded construction and operating debt of the
unconsolidated joint ventures at September 30, 2000).
On January 31, 2000, the Company entered into a non-recourse mortgage
loan agreement in the amount of $285 million secured by its equity interest in
Sawgrass Mills. The proceeds were used to repay prior loans totaling $235
million and the remaining proceeds were used to pay down the line of credit
and to fund the Company's development equity requirements. The new loan is a
non-amortizing loan with a repayment date of June 18, 2001. The interest rate
is payable at a variable rate, which is LIBOR plus 2.75%.
On May 20, 2000, the Arundel Mills joint venture entered into a loan
agreement in the amount of $191 million, of which approximately $23 million
was outstanding at September 30, 2000. The loan commitment matures on May 30,
2003. The interest rate is LIBOR plus 1.65%. The loan is guaranteed severally
by the Company and its joint venture partner, Simon Property Group, L.P.
On June 14, 2000, the Company refinanced and increased its line of
credit from $100 million to $125 million. The new line of credit is comprised
of two components. The first component is a $50 million term loan which is
secured by the Company's equity interest in Franklin Mills. The loan has two
mandatory principal repayments of $5 million due on or before June 1, 2001,
and $10 million due on or before June 1, 2002. The loan matures on June 1,
2003. The interest rate is payable at a variable rate with a variable margin,
which was LIBOR plus 2.25% at September 30, 2000. The second component is a
$75 million unsecured revolving loan. The loan matures on June 1, 2002. The
interest rate is payable at a variable rate with a variable margin, which was
LIBOR plus 2.75% at September 30, 2000.
On October 2, 2000, the Arizona Mills Joint Venture entered into a
non-recourse mortgage loan agreement in the amount of $146 million. The
proceeds were used to repay a prior construction loan totaling approximately
$142 million and the remaining proceeds were used to fund the joint venture's
capital requirements. The new loan is a 30-year amortizing loan with an
anticipated balloon repayment date of October 5, 2010. The interest rate is
payable at a fixed rate of 7.895%.
20
<PAGE> 21
THE MILLS CORPORATION
(Unaudited)
On August 3, 2000, affiliates of the Company completed a transaction
whereby the Company disposed of its interests in Gwinett Marketfair in Duluth,
Georgia; Mount Prospect in Mount Prospect, Illinois; Western Hills Plaza in
Cincinnati, Ohio; West Falls Church in Falls Church, Virginia; Butterfield
Plaza in Downers Grove, Illinois; Coopers Plaza in Voorhees, New Jersey;
Crosswinds Center in St. Petersburg, Florida; Fashion Place in Columbia, South
Carolina; Germantown Commons in Germantown, Maryland; and Montgomery Village
in Gaithersburg, Maryland (collectively the "Disposed Properties") for an
aggregate sales price of $142.0 million. The Disposed Properties were sold by
the Company to Kejack, Inc., an unrelated third party. The Company netted
$25.5 million in proceeds and the buyer assumed $111 million of existing debt
which had a maturity date of February 1, 2029. The Company invested
approximately $8.8 million of the proceeds into a low risk portfolio of
single-tenant, A-rated credit net leases, and the remaining proceeds will be
used to fund the Company's development equity requirements. The investment was
completed in two transactions. On September 22, 2000, the Company acquired 25
net lease properties and on October 3, 2000, the Company acquired an
additional 21 properties (collectively the "Acquired Properties"). The
aggregate purchase price was $114.0 million. The Acquired Properties were sold
to the Company by Wolverine Equity Company 99J Limited Partnership (25 net
lease properties) and various investor corporations which were the beneficial
owners of various business trusts (21 net lease properties). The sellers were
unrelated third parties. The properties are all subject to single-tenant net
leases operating as CVS. The leases are triple net leases that contain
indemnification for liabilities customarily associated with possession of the
site (including, without limitation, certain environmental liabilities). The
tenants' obligation under the leases are guaranteed by CVS Corporation, a
Delaware Corporation. The Company assumed $105.2 million in debt, and paid
$8.8 million for the Acquired Properties.
On September 22, 2000, the Company assumed $64.3 million of debt in
connection with the acquisition of 25 net lease properties. The debt is
comprised of two notes. The first indebtedness of approximately $36.0 million
is a non-amortizing loan with an anticipated balloon repayment date October
10, 2010. Interest is payable at a fixed rate of 7.96%. The second indebtednes
of approximately $28.3 million is a non-amortizing loan with an anticipated
balloon repayment date of January 10, 2023. Interest is payable at a fixed rate
of 9.35%. Both notes may only be prepaid in whole prior to July 31, 2005,
without a prepayment penalty of not less than 1% of the principal amount
repaid. After July 31, 2005, the notes may be prepaid in whole or in part,
along with a prepayment penalty that will be subject to a reinvestment yield
calculation.
On October 3, 2000, the Company assumed $40.9 million of debt in
connection with the acquisition of 21 net lease properties. The debt is
comprised of twenty-one notes. All the notes are amortizing loans that mature
on dates ranging from January 6, 2018 to January 6, 2019. Interest is payable
at a fixed rate that ranges from 6.35% to 6.77%. The notes may not be prepaid,
in whole or in part, at any time.
On February 4, 1999, the Company received a five year, $750 million
capital commitment from Kan Am, a significant unit holder of the Operating
Partnership and joint venture partner, to fund future development projects.
Subject to terms and conditions, Kan Am will continue to fund certain project
level capital as they have on several of the Company's prior projects.
Definitive joint venture agreements have been executed for Arundel Mills and
Discover Mills wherein Kan Am's required contribution is $35 million and $70
million, respectively. Kan Am has agreed to fund approximately $70 million, in
addition to its existing investment towards the development of Meadowslands'
Mills, such time as the project moves forward. In addition, Kan Am has agreed to
work with the Company to identify such other projects, and to use best efforts
to provide funding for such projects, in the approximate amount of $150 million
in each of 2001, 2002 and 2003. Consistent with prior partnerships, Kan Am will
fund 50% to 100% of a specific project's equity requirement and receive a
percentage of ownership interest equal to half of the percentage of equity that
they have funded, subject to further adjustment for the interest of other
partners in such partnerships. Kan Am must raise capital from other investors to
meet its funding commitments to the Company, and there can be no assurance that
Kan Am will be able to raise such capital in the amounts or at times necessary
to enable it to meet such commitments. Through the period covered by this
report, Kan Am has satisfied its funding obligations as and when required by
applicable joint venture agreements.
Effective October 28, 1996, the Company filed a universal shelf
registration statement on Form S-3 to offer a maximum of $250.0 million of
common stock, preferred stock and common stock warrants. A balance of
approximately $128 million of common stock, preferred stock and common stock
warrants remain available to the Company for issuance pursuant to this shelf
registration.
21
<PAGE> 22
THE MILLS CORPORATION
(Unaudited)
At September 30, 2000, the Company had consolidated debt of
approximately $926.3 million and gross unconsolidated joint venture debt of
approximately $1.2 billion. The Company's pro rata share of gross
unconsolidated joint venture debt was $484.1 million (net of tax increment
financing) at September 30, 2000. Of this amount, the Company guaranteed
$246.9 million (additionally, the Company has guaranteed $65.6 million of its
joint venture partners' share of debt). The Company's consolidated debt plus
its pro rata share of gross unconsolidated joint venture debt totaled
approximately $1.4 billion. Of this amount, $721.7 million was fixed rate debt
and $688.7 million was variable rate debt. Scheduled principal repayments of
the Company's consolidated indebtedness and its pro rata share of gross
unconsolidated joint venture debt through 2004 are $1.1 billion with $348.4
million due thereafter. The Company and its partners expect to refinance or
repay these obligations with cash generated from operations, external
borrowings (including refinancing of existing loans) or equity issuances.
The Company's EBITDA (earnings before interest, taxes, depreciation,
amortization and extraordinary items) to interest expense coverage ratio
(including the Company's proportionate share of EBITDA and interest expense of
unconsolidated joint ventures) for the trailing 12 months was 2.42 and 2.70 at
September 30, 2000 and September 30, 1999, respectively.
22
<PAGE> 23
THE MILLS CORPORATION
(Unaudited)
Development, Remerchandising and Expansion. The Company is involved
in the following development, remerchandising and expansion efforts:
The Company's most significant development efforts currently are
focused on the development of five projects: Arundel Mills, Discover Mills,
Colorado Mills, Vaughan Mills and Meadowlands Mills.
Arundel Mills broke ground on July 15, 1999 and is scheduled to open
on November 17, 2000. The project is being financed principally with external
borrowings and equity contributions from joint venture partners and the
Operating Partnership. The Operating Partnership's equity requirements for
Arundel Mills willbe limited to $18 million, which has been funded as of
September 30, 2000. The project's remaining costs are being financed through
contributions from other partners in the Arundel Mills joint venture and through
proceeds of a $191 million construction loan.
The Company has formed a joint venture with Kan Am to develop
Discover Mills on a 225-acre site located near Atlanta, Georgia. As of
September 30, 2000, the Discover Mills joint venture has acquired the land
assemblage for the project, and has begun construction. Discover Mills is
targeted to open in 2001. Kan Am will fund all of the required equity for this
project and the remaining project costs are expected to be financed through a
construction loan.
The Company has identified a 130 acre site in Lakewood, Colorado,
which is ten miles west of downtown Denver. On March 22, 2000, Colorado Retail
Development, L.L.C. (an affiliate of the Operating Partnership) and the
Stevinson Partnership Ltd., the fee owner of the Colorado Mills site, entered
into a Contribution Agreement that, among other things, provides that upon the
satisfactory completion of customary due diligence and feasibility studies, the
parties will form a joint venture and the Stevinson Partnership, Ltd. will
contribute the site to the joint venture. It is anticipated that Colorado
Retail Development, L.L.C. which will hold a 75% interest in the joint venture,
will be fully obligated to fund all cash equity requirements for the
development of the shopping center and will receive a 9% cumulative preferred
return on its equity contributions. The Stevinson Partnership, Ltd. which will
hold a 25% interest, will receive capital account credit for the negotiated
value of the land contributed, and will receive a 9% cumulative preferred
return. Colorado Mills is targeted to open in late 2001 or early 2002.
In February 1998, the Company announced that it had secured a site in
Vaughan, Ontario for the development of Vaughan Mills, the first Mills project
to be developed outside of the United States. The project will be developed
jointly by an affiliate of the Operating Partnership and by Cambridge Shopping
Centres, Ltd. as tenants in common. The Company anticipates that the Operating
Partnership's equity requirement for Vaughan Mills may total as much as $30
million, of which approximately $21 million has been funded as of September
30, 2000. The Company has completed the land assemblage and is targeting a
2000 groundbreaking.
The Company has acquired a mortgage interest in a 592-acre site
located on the New Jersey Turnpike (I-95) adjacent to the Meadowlands Sports
Complex and approximately five miles from New York City. Commencement of
construction is contingent upon the completion of ongoing Environmental Impact
Statement and the federal/state permitting process. A Special Area Management
Plan (SAMP) for the Meadowlands area was published in the Federal Register on
April 22, 1999. On July 20, 2000, the Corps of Engineers announced that it had
completed the Draft Environmental Impact Statement on Mills ' Section 404 Fill
Permit and the close of public comment occurred in October, 2000. The
guidelines proposal in the SAMP would, upon their anticipated adoption in the
fourth quarter of 2000, permit development of 2.0 million square feet of gross
leasable area (GLA) for Meadowlands Mills plus office and hotel space. The
project would be developed on an entitled site of 90.5 acres plus roads and
retention facilities. Upon procurement of all necessary entitlements, it is
anticipated that the project will be developed by a joint venture to be formed
among the Operating Partnership, Kan Am, Empire Ltd. and Bennett S. Lazare, an
individual. The Operating Partnership's equity requirements have not yet been
determined. As of September 30, 2000, the Company and Kan Am has funded
approximately $22 million and $24 million of their required equity
respectively. The Company has targeted a 2001 groundbreaking for this project.
23
<PAGE> 24
THE MILLS CORPORATION
(Unaudited)
In addition to the above, the Company is also conducting due
diligence on several other proposed sites for its Mills and Block projects,
including sites in Atlanta, Georgia; Cleveland, Ohio; Chicago, Illinois; San
Francisco, California; South Weymouth; Massachusetts (Boston); St. Louis,
Missouri; and Tampa, Florida. The Company is also continuing to evaluate
various prospective international sites, including a site identified in Spain,
with a concentrated focus on Western Europe as well as other domestic sites
for other Mills-type projects and other retail-oriented projects.
The Company is in the process of expanding and/or remerchandising
Potomac Mills, Grapevine Mills and The Block at Orange. The costs of these
expansions and remerchandising programs is estimated at $22 million. Of the
estimated costs of $22 million, $12 million will be financed with external
sources and $10 million will be funded by the Operating Partnership. As of
September 30, 2000, the Operating Partnership had funded approximately $4.4
million of the required equity to finance these programs.
Capital Resources. The Company anticipates that its operating
expenses, interest expense on outstanding indebtedness, recurring capital
expenditures and distributions to stockholders in accordance with REIT
requirements will be provided by cash generated from operations, potential
ancillary land sales and future borrowings.
The Company will need significant amounts of equity and debt capital
to fund its development projects going forward. Access to capital is dependent
upon many factors which are outside of the Company's control. In recent years,
capital costs have increased requiring the Company to reexamine its
development and financing strategies. The Company believes that it will have
the capital and access to additional capital resources sufficient to expand
and develop its business and complete those projects currently under
development. In the event such capital cannot be obtained, however, the
Company's immediate and long-term development plans could be curtailed.
Distributions. The Company has paid and intends to continue to pay
regular quarterly distributions to its stockholders. Distributions are payable
at the discretion of the Board of Directors and depend on a number of factors,
including net cash provided by operating activities, its financial condition,
capital commitments, debt repayment schedules and such other factors as the
Board of Directors deems relevant.
CASH FLOWS
Comparison of Nine Months Ended September 30, 2000 to Nine Months
Ended September 30, 1999. Net cash provided by operating activities decreased
approximately $2.7 million (5.0%) to $51.7 million for the nine months ended
September 30, 2000 as compared to $54.4 million for the nine months ended
September 30, 1999. Net cash used in investing activities increased
approximately $18.0 million (23.4%) to $95.2 million for the nine months ended
September 30, 2000, as compared to $77.2 million for the nine months ended
September 30, 1999, primarily as a result of increased expenditures for real
estate and development assets and advances to certain joint ventures, and a
decrease in distributions received from unconsolidated entities. Net cash
provided by financing activities increased approximately $23.4 million
(108.3%) to $45.0 million for the nine months ended September 30, 2000 as
compared to $21.6 million for the nine months ended September 30, 1999. The
increase was primarily due to the net increase in proceeds offset by an
increase in repayments.
24
<PAGE> 25
THE MILLS CORPORATION
(Unaudited)
FUNDS FROM OPERATIONS
The Company considers Funds From Operations ("FFO") a widely used and
appropriate measure of performance for an equity REIT which provides a
relevant basis for comparison among REITs. FFO as defined by National
Association of Real Estate Investment Trusts (NAREIT) means income (loss)
before minority interest (determined in accordance with accounting principles
generally accepted in the United States (GAAP)), excluding gains (losses) from
debt restructuring and sales of depreciated property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. FFO is presented to assist investors in
analyzing the performance of the Company. The Company's method of calculating
FFO may be different from methods used by other REITs and, accordingly, may
not be comparable to such other REITs. FFO (i) does not represent cash flows
from operations as defined by GAAP, (ii) is not indicative of cash available
to fund all cash flow needs and liquidity, including its ability to make
distributions and (iii) should not be considered as an alternative to net
income (determined in accordance with GAAP) for purposes of evaluating the
Company's operating performance.
FFO for the nine months ended September 30, 2000, increased to $73.9
million compared to $66.7 million for the comparable period in 1999. FFO
amounts were calculated in accordance with NAREIT's definition of FFO as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Funds from operations calculation:
Income before extraordinary item and
minority interest........................................ $ 29,673 $12,596 $47,949 $ 34,836
Adjustments:
Add: Depreciation and amortization of
real estate assets....................................... 7,936 7,665 24,403 23,153
Add: Real estate depreciation and amortization of
unconsolidated joint ventures............................ 6,633 3,106 19,968 8,690
Less: Gain on disposition of
community centers........................................ (18,370) - (18,370) -
--------- ------- -------- --------
Funds from operations........................................ $ 25,872 $23,367 $ 73,950 $ 66,679
========= ======= ======== ========
</TABLE>
SEASONALITY
The regional shopping center industry is seasonal in nature, with
mall tenant sales peaking in the fourth quarter due to the Christmas season.
As a result, a substantial portion of the percentage rents are not paid until
the fourth quarter. Furthermore, most new lease-up occurs towards the latter
part of the year in anticipation of the holiday season and most vacancies
occur toward the beginning of the year. In addition, the majority of the
temporary tenants take occupancy in the fourth quarter. Accordingly, cash flow
and occupancy levels are generally lowest in the first quarter and highest in
the fourth quarter. This seasonality also impacts the quarter-by-quarter
results of net operating income and FFO, although this impact is largely
mitigated by recognizing minimum rent on a straight-line basis over the term
of related leases in accordance with GAAP.
25
<PAGE> 26
THE MILLS CORPORATION
(Unaudited)
ECONOMIC TRENDS
Because inflation has remained relatively low during the last three
years, it has had little impact on the operation of the Company during that
period. Even in periods of higher inflation, however, tenant leases provide,
in part, a mechanism to help protect the Company. As operating costs increase,
leases permit a pass-through of the common area maintenance and other
operating costs, including real estate taxes and insurance, to the tenants.
Furthermore, most of the leases contain base rent steps and percentage rent
clauses that provide additional rent after a certain minimum sales level is
achieved. These provisions provide some protection to the Company during
highly inflationary periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
26
<PAGE> 27
THE MILLS CORPORATION
(Unaudited)
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Exhibit Index attached hereto is hereby incorporated by reference
to this items.
A report on Form 8-K was filed by the Company on August 16, 2000 to
report certain operational information concerning the Company and the
properties owned or managed by it as of June 30, 2000. A Report on
Form 8-K was filed by the Company on August 18, 2000, to report the
Company's disposition of certain assets. The report included
unaudited pro forma information. No other reports on Form 8-K were
filed by registrant for the applicable quarter covered by this
report.
27
<PAGE> 28
THE MILLS CORPORATION
(Unaudited)
SIGNATURE
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.
<TABLE>
<CAPTION>
THE MILLS CORPORATION
<S> <C>
November 14, 2000 By : /s/ Kenneth R. Parent
---------------------- ---------------------------------------
(Date) Kenneth R. Parent
Executive Vice President, Finance
and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
28
<PAGE> 29
THE MILLS CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<S> <C>
+3.1 Amended and Restated Certificate of Incorporation of the Company
+3.2 Amended and Restated Bylaws of the Company
**3.3 Limited Partnership Agreement of the Operating Partnership (filed as part of
Exhibit 10.3)
*4.1 Specimen Common Stock Certificate of Company
*4.2 Agreement dated March 15, 1994, among Richard L. Kramer, the A.J. 1989 Trust,
the Irrevocable Intervivos Trust for the Benefit of the Kramer Children, the N
Street Investment Trust, Equity Resources Associates, Herbert S. Miller, The
Mills Corporation and The Mills Limited Partnership (filed as Exhibit 10.19)
**4.3 Non-Affiliate Registration Rights and Lock-Up Agreement
**4.4 Affiliate Registration Rights and Lock-Up Agreement
</TABLE>
-------------------------------------------------------------------------------
* Incorporated by reference to the Registrant's Registration Statement
on Form S-11, Registration No. 33-71524, which was declared
effective by Securities and Exchange Commission on April 14, 1994.
** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the first quarter ended June 30, 1994.
*** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the second quarter ended June 30, 1997.
