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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 September 30, 1996
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 1-13092
MALAN REALTY INVESTORS, INC.
(Exact name of registrant as specified in charter)
Michigan 38-1841410
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification Number)
30200 Telegraph Rd., Ste. 105 48025
Birmingham, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (810) 644-7110
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 October 30, 1996, 3,461,196 shares of Common Stock, Par Value
$.01 Per share, were outstanding.
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MALAN REALTY INVESTORS, INC.
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets as of September 30, 1996
(unaudited) and December 31, 1995 3
Statements of Operations (unaudited) for
the three months and the nine months
ended September 30, 1996 and 1995 4
Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
PART II OTHER INFORMATION 16
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 17
2
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Real estate
Land, buildings and improvements $207,122 $206,085
Less: accumulated depreciation (9,702) (6,114)
-------- --------
197,420 199,971
Leasehold improvements and
equipment, net 55 99
Accounts receivable, net 2,833 1,439
Deferred financing and other 11,098 11,294
Cash and cash equivalents 4,782 9,095
Escrow deposits 1,904 1,462
-------- --------
Total Assets $218,092 $223,360
======== ========
Liabilities
Mortgages $83,643 $83,734
Convertible debentures 61,285 61,285
Convertible notes 27,000 27,000
Deferred income 2,529 2,679
Accrued distributions payable 1,471 1,509
Accounts payable and other 1,398 647
Accrued property taxes 2,300 1,085
Accrued interest payable 2,210 4,178
-------- --------
Total Liabilities 181,836 182,117
-------- --------
Shareholders' Equity
Common stock ($.01 par value, 30 million shares
authorized, 3,461,196 and 3,550,204 shares
issued and outstanding at September 30, 1996 and
December 31, 1995, respectively) 35 36
Additional paid in capital 45,923 46,984
Accumulated distributions in excess of net income (9,702) (5,717)
Deferred compensation- incentive shares 0 (60)
-------- --------
Total shareholders' equity 36,256 41,243
-------- --------
Total Liabilities and
Shareholders' Equity $218,092 $223,360
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------- --------- -------- ----------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
REVENUES
Minimum rent $5,929 $5,568 $17,846 $16,006
Percentage and overage rents 285 312 809 787
Recoveries from tenants 2,469 2,180 7,309 6,175
Management fees 11 12 36 37
Interest and other income 174 106 488 345
-------- ------- -------- --------
Total Revenues 8,868 8,178 26,488 23,350
-------- ------- -------- --------
EXPENSES
Property operating and maintenance 724 591 2,499 1,586
Real estate taxes 2,017 1,963 5,952 5,567
General and administrative 700 561 2,057 1,678
Depreciation and amortization 1,241 1,138 3,680 3,231
-------- ------- -------- --------
Total Operating Expenses 4,682 4,253 14,188 12,062
-------- ------- -------- --------
OPERATING INCOME 4,186 3,925 12,300 11,288
INTEREST EXPENSE 3,966 3,488 11,873 9,654
-------- ------- -------- --------
NET INCOME $220 $437 $427 $1,634
======== ======= ======== ========
NET INCOME PER SHARE $0.06 $0.12
========= ========
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,460,435 3,465,282
========== =========
</TABLE>
See Notes to Consolidated Financial Statements
4
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $427 $1,634
------- -------
Adjustments to reconcile net income to
net cash flows provided by (used for)
operating activities:
Depreciation and amortization 3,680 3,231
Amortization of deferred financing costs 1,197 425
Amortization of deferred compensation expense 60 94
Directors compensation issued in stock 36
Change in operating assets and liabilities that
(used) cash:
Accounts receivable and other assets (2,443) (7,170)
Accounts payable, deferred income and
other accrued liabilities (152) (2,995)
------- -------
Total adjustments 2,378 (6,415)
------- -------
NET CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 2,805 (4,781)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved (1,037) (31,334)
Additions to leasehold improvements and equipment (21)
Deposits to escrow (12,742) (2,928)
Disbursements from escrow 12,300 1,609
------- -------
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES (1,479) (32,674)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock (1,097) (4,796)
Principal repayments on mortgages (92) (88)
Proceeds from line of credit 15,500
Repayment of acquisition line (50,250)
Proceeds from REMIC offering 63,000
Proceeds from mortgage 12,450
Distributions to shareholders (4,450) (4,603)
------- -------
NET CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (5,639) 31,213
------- -------
Net decrease in cash and cash equivalents (4,313) (6,242)
Cash and cash equivalents at beginning of
period 9,095 11,749
------- -------
Cash and cash equivalents at end of period $4,782 $5,507
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR
INTEREST DURING THE PERIOD $12,643 $11,870
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
5
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS AND FORMATION OF REIT
In June 1994, Malan Realty Investors, Inc. (the "Company") completed an
initial public offering of common stock and convertible debentures and a private
placement of convertible notes (collectively, the "Offerings") and became a
publicly held real estate investment trust (REIT). Proceeds of the Offerings
were primarily used to acquire 46 retail properties which the Company had
managed on a third party basis prior to the Offerings. Subsequent acquisitions
of properties were made utilizing additional borrowings and the Company now owns
and operates 52 shopping centers located primarily in the Midwestern United
States. In addition to ownership and management of operations of the centers,
the Company is engaged in the leasing, acquisition, development and
redevelopment of such properties, and, on a limited basis, the management of
properties owned by unrelated third parties.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying interim consolidated 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, 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 rules. In the opinion of management, all adjustments
considered necessary for a fair presentation of the Company's consolidated
financial position, results of operations and cash flows have been included.
The results of such interim periods are not necessarily indicative of the
results of operations for the full year.
Principles of Consolidation - The accompanying consolidated financial
statements include the activity of the Company and Malan Mortgagor, Inc., its
wholly owned subsidiary. All significant inter-company balances and
transactions have been eliminated.
Reclassifications- Certain reclassifications have been made to the consolidated
financial statements for the three months and the nine months ended September
30, 1995 to conform with the consolidated financial statements for the three
months and the nine months ended September 30, 1996.
6
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Impact of Recently Adopted Accounting Standards - In March 1995, Statement of
Financial Accounting Standards (SFAS) No. 121 was issued which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The statement is effective
for financial statements for fiscal years beginning after December 15, 1995.
Management has determined that there is no effect resulting from the
implementation of SFAS No. 121 on the Company's consolidated financial
statements for the three months and the nine months ended September 30, 1996.
3. STOCK REPURCHASE PLAN
On January 19, 1995, the Company's Board of Directors approved a plan to
repurchase up to 755,000 shares of the Company's Common Stock. Under the plan,
any purchases of Common Stock are to be made in the open market or in privately
negotiated transactions subject to SEC rules and regulations regarding such
transactions. During the nine months ended September 30, 1996, the Company had
repurchased 91,500 shares at a total cost of $1.097 million.
4. STOCK OPTION AND COMPENSATION PLANS
The following table outlines the activity in the Company's stock option
and compensation plans for the nine months ended September 30, 1996:
Options (O)/ Exercise (E)/
Shares (S) Issuance (I)
Plan Issued Price
------------------ --------------- ----------------
Employee Option Plan (O) 50,000 (E) $14.375
Directors Option Plan (O) 4,000 (E) $14.375
Directors Stock
Compensation Plan (S) 2,492 (I) $14.375 - 14.50
7
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5. MORTGAGES
The Company extended a $12.45 million mortgage loan with NBD Bank
originally due September 15, 1996, until September 15, 1997. The mortgage is
collateralized by The Shops at Fairlane Meadows ("Fairlane") and calls for
monthly payments of interest only at the rate of 7.875% per annum through
December 15, 1996 at which time the rate will be subject to change. Management
anticipates that the loan will be refinanced by this date with a combination of
primarily long-term debt secured by Fairlane and either short-term unsecured
debt or debt secured by additional collateral. The Company presently has an
application pending for long-term financing with a major lender and is awaiting
final approval.
6. SUMMARIZED PRO FORMA INFORMATION
The following table of pro forma information has been presented as if (i) the
Company's acquisitions of Clinton Pointe Shopping Center ("Clinton Pointe")
and the Shops at Fairlane Meadows ("Fairlane Meadows") had occurred on January
1, 1995, and (ii) the Company had qualified as a REIT, distributed all of its
taxable income and, therefore, had incurred no tax expense during the period.
In management's opinion, all adjustments necessary to reflect the acquisitions
of Clinton Pointe and Fairlane Meadows have been made. The proforma information
is not necessarily indicative of what the actual results of operations of the
Company would have been had such transactions actually occurred as of January 1,
1995, nor do they purport to represent the results of the operations of the
Company for future periods (in thousands except for per share data).
Nine Months Ended
September 30, 1995
------------------
Total revenues.................................... $26,079
Net income........................................ $ 1,942
Net income per share.............................. $ 0.56
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS'
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 to Three Months Ended
September 30, 1995
Results of operations from rental properties increased from 1995 to 1996
primarily due to the Company's acquisition of The Shops at Fairlane Meadows
("Fairlane") purchased September 15, 1995. Accordingly, results of operations
for the three months ended September 30, 1995 include only the results of
Fairlane for the 16 day period from September 15 through September 30, 1995.
Total revenue increased approximately $690,000, which is attributable to
increases in minimum and percentage rents and recoveries from tenants of
approximately $623,000 and management fees and interest and other income of
$67,000. The increases in rents and recoveries from tenants are primarily
attributable to revenues added by the acquisition of Fairlane of approximately
$493,000, the receipt of a nonrecurring percentage rent of approximately $80,000
from a tenant at Bricktown Square and increased leasing activity and percentage
rents at the Wal-Mart Properties of approximately $115,000. These increases are
offset in part by revenues lost due to lease terminations by Kmart Corporation
and Builders Square which took affect in the latter part of 1995. The
increase in interest and other income resulted primarily from investment
earnings due to increased levels of investable cash due to the build up of cash
reserves that are required under the Company's REMIC financing.
Total operating expenses increased approximately $429,000 from 1995 to
1996. Increases in property operating and maintenance, real estate taxes and
depreciation and amortization of approximately $133,000, $54,000 and $103,000,
respectively, primarily due to the acquisition of Fairlane, accounted for the
majority of this increase. General and administrative expenses increased
approximately $139,000 from 1995 to 1996 primarily due to increases in payroll
and related taxes, bad debt expense recognized during the quarter and increased
expenses related to administration of the Company's REMIC financing.
Interest expense (including related amortization of deferred financing
costs) increased approximately $478,000. The increase is due primarily to
increased debt levels from 1995 offset by interest rate reductions and an
adjustment attributable to conversions of $2.5 million aggregate principal
amount of the Company's 9.5% subordinated convertible debentures into shares of
common stock which occurred in the Third Quarter 1995. The interest adjustment
accounted for a net decrease in interest expense of approximately $14,000. The
conversion of the Company's acquisition line of credit to a Securitized
Mortgage Loan at more favorable rates coupled with additional borrowings
thereon accounted for an increase of approximately $118,000 while interest on
a $12.45 million mortgage utilized for the acquisition of Fairlane Meadows
increased approximately $214,000. Increases in amortization of deferred
financing costs of approximately $160,000 related primarily to the Securitized
Mortgage Loan and the Fairlane
9
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mortgage comprise the balance of the increase from 1995.
Overall, net income decreased approximately $217,000 primarily as a
result of increases in non-cash expenses such as depreciation and
amortization of approximately $103,000 and amortization of deferred financing
costs of $160,000 offset by additional operating income.
Comparison of Nine Months Ended September 30, 1996 to Nine Months Ended
September 30, 1995
Results of operations from rental properties increased from 1995 to 1996
primarily due to the Company's acquisitions of Clinton Pointe purchased June
5, 1995 and Fairlane Meadows purchased September 15, 1995. Accordingly, results
of operations for the nine months ended September 30, 1995 include only the
results of Fairlane for the 16 day period from September 15 through September
30, 1995 and include only the results of Clinton Pointe for the 117 day
period from June 5 through September 30, 1995.
Total revenue increased approximately $3.138 million which is
attributable to increases in minimum and percentage rents and recoveries from
tenants of approximately $2.996 million and management fees and interest and
other income of $142,000. The increases in rents and recoveries from tenants
are primarily attributable to revenues added by the acquisitions of Clinton
Pointe and Fairlane approximately $2.693 million. Increases in percentage
rents also contributed to this increase in revenue, primarily due to increased
sales at the Company's largest tenants, Kmart and Wal-Mart, and a nonrecurring
percentage rent payment of approximately $80,000 from a tenant at Bricktown
Square. These were partially offset by percentage rents lost from tenants, such
as Dillons, who are no longer operating in their spaces. Increased recoveries
from tenants due to additional operating expenses discussed below, offset by
revenues lost due to lease terminations by Kmart Corporation and Builders Square
which took affect in the latter part of 1995, make up the balance of the
increase in rent and recoveries from tenants. The increase in interest and other
income resulted primarily from brokerage commissions and lease termination
income earned in 1996 as well as investment earnings due to increased levels of
investable cash due to the buildup of cash reserves that are required under the
Company's REMIC financing.
Total operating expenses increased approximately $2.126 million.
Increases in property operating and maintenance, real estate taxes and
depreciation and amortization were approximately $913,000, $385,000 and
$449,000, respectively. The acquisitions of Clinton Pointe and Fairlane account
for approximately $575,000, $295,000 and $366,000, respectively of these
increases in expenses. Additional repair and maintenance performed at the
other properties, increases in taxes due to reassessments, and depreciation and
amortization of building and parking lot improvements accounted for the balance
of the increases. General and administrative expenses increased approximately
$379,000, primarily due to increases in payroll, state income and franchise
taxes, bad debt expense and professional and other fees related to the
administration of the Company's REMIC financing.
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The following table summarizes the contributions of each of the
Company's portfolio acquisitions to income for the nine months ended September
30, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30
1996 1995
----------------------------- ------------------------------------
Date Direct Direct Direct Direct
Acquired Operating Operating Operating Operating
Properties (or Developed) Revenues Expenses (1) Income Revenues Expenses(1) Income
- ---------- ------------- -------- ----------- ------ -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Bricktown Square 1987-1989 $ 4,072 $1,299 $ 2,773 $ 3,864 $1,322 $ 2,542
Claridge Properties 6/24/94 15,249 5,326 9,923 15,389 5,061 10,328
------- ------ ------- ------- ------ -------
Core Portfolio 19,321 6,625 12,696 19,253 6,383 12,870
Wal-Mart
Properties 11/30/94 3,223 741 2,482 2,988 555 2,433
Clinton Pointe S.C. 6/5/95 1,556 544 1,012 634 199 435
The Shops at
Fairlane Meadows 9/15/95 1,864 541 1,323 93 16 77
------- ------ ------- ------- ------ -------
TOTAL $25,964 $8,451 $17,513 $22,968 $7,153 $15,815
======= ====== ======= ======= ====== =======
</TABLE>
(1) Direct operating expenses include property operating and maintenance and
real estate taxes but do not include general and administrative, depreciation
and amortization or interest expenses.
Interest expense, including related amortization of deferred financing
costs, increased approximately $2.219 million. The increase is due
primarily to increased debt levels from 1995 offset by interest rate reductions
and decreases attributable to conversions of $2.510 million aggregate principal
amount of the Company's 9.5% subordinated convertible debentures into shares of
common stock which occurred during 1995. The debenture conversions accounted
for a net decrease in interest expense of approximately $118,000. The
conversion of the Company's acquisition line of credit to a Securitized
Mortgage loan at more favorable rates coupled with additional borrowings
thereon accounted for an increase of approximately $839,000 while an increase
in interest on a $12.45 million mortgage utilized for the acquisition of
Fairlane Meadows increased approximately $714,000. Increase in amortization
of deferred financing costs of approximately $784,000 related primarily to
the Securitized Mortgage Loan and the Fairlane mortgage comprise the balance
of the increase from 1995.
Overall, net income decreased $1.207 million primarily as a result of
increases in non-cash expenses such as depreciation and amortization of
approximately $449,000 and amortization of deferred financing costs of $784,000
offset by additional operating income.
11
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Funds From Operations
Management considers Funds From Operations ("FFO") to be an
appropriate measure of performance of an equity real estate investment trust.
The Company calculates FFO as net income or (loss) excluding gains and losses
from sales of property, further adjusted for certain non-cash items including
depreciation and amortization and amortization of deferred financing costs
included in interest expense. It is the opinion of the management that
reduction for or inclusion of these items is not meaningful in evaluating
income-producing real estate which, in general, has historically not
depreciated. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs, including distributions. FFO
should not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a measure
of liquidity or the ability to pay distributions but rather, as a supplemental
tool to be used in conjunction with these factors in analyzing the Company's
overall performance.
The Company is aware that there are variations between companies in the
REIT industry as to how FFO is calculated. The following table shows the
components that comprise the Company's calculation of FFO for the nine months
ended September 30, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Sept.30,
1996 1995
------ ------
<S> <C> <C>
Net income............................................................... $ 427 $1,634
Depreciation & amortization:
Depreciation of buildings & improvements............................... 3,569 3,150
Amortization of tenant allowances & tenant improvements................ 34 24
Depreciation of furniture, equipment & leasehold improvements.......... 44 49
Amortization of leasing costs.......................................... 34 8
Amortization of deferred financing costs included in interest expense:
Mortgages.............................................................. 933(1) 150(1)
Convertible debt....................................................... 264 275
------ ------
Funds From Operations................................................... $5,305 $5,290
====== ======
Additional information:
Weighted average shares outstanding:
Primary................................................................. 3,465 3,543
====== ======
Fully diluted............................................................ 8,659 8,883
====== ======
Convertible debt interest excluding amortization of deferred financing
costs.................................................................... $6,088 $6,194
====== ======
</TABLE>
(1) Includes amortization of approximately $328,000 for 1996 and $55,000
for 1995 related to approximately $3.1 million settlement cost on hedging
contract.
12
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LIQUIDITY AND CAPITAL RESOURCES
The Company is authorized to repurchase up to 755,000 shares of its
Common Stock under a plan approved by its Board of Directors on January 19,
1995. For the nine months ended September 30, 1996, the Company had
repurchased 91,500 shares at a total cost of approximately $1.097 million or an
average of $11.98 per share.
The Company has a $63 million loan (the "Securitized Mortgage Loan")
outstanding which is administered under a real estate mortgage investment
conduit (REMIC). Certificates issued by the REMIC trust carry ratings from
(AAA) to (A) by both Fitch Investors Services, Inc. and Duff & Phelps Credit
Rating Co. Under the loan agreement, the Company is required to fund certain
reserves on a monthly basis and request disbursement of funds as certain
requirements are met. The Capital Improvements/Replacement Reserve requires an
annual deposit (funded monthly) equal to $0.20 per qualifying square foot as
defined in the loan agreement or approximately $575,000 per year. The Basic
Carrying Cost Reserve which is utilized to pay real estate taxes, ground
lease payments and insurance payments related to the properties which
collateralize the loan requires a monthly deposit equal to one-twelfth of the
estimated annual cost of these expenses or approximately $1.290 million for
1996.
An additional provision in the loan agreement provides that in the event
that the long-term debt rating of either of the two major tenants of the
properties, Kmart or Wal-Mart, is downgraded to (BB+) or lower, the Company
will be required to maintain an additional amount in the Basic Carrying Cost
Reserve equal to 1/4 of the applicable real estate tax obligation borne by
those tenants. In January 1996, the long-term debt rating of Kmart was lowered
to (BB) and accordingly, the Company made an additional deposit to the Basic
Carrying Cost account in compliance with this provision of $561,000,
representing 1/4 of the Kmart properties estimated real estate taxes for 1996.
In January 1996, the Company completed an agreement with Builders
Square, ("Builders") a subsidiary of Kmart Corporation, for its property located
in Manchester, Missouri whereby the Company assumed a sublease agreement between
Builders and Levitz Furniture for a portion of the building. Builders received
a net cash payment of approximately $319,000 and is released from further
obligation under its lease. Under the terms of the sublease, which expires May
2002, the Company receives an increase in the annual base rental amount of
$75,000 over what was previously being paid by Builders.
On December 1, 1995 the Company's lease with Builders Square at its
Melrose Park, Illinois property was terminated. On an annual basis, revenues
from this lease were approximately $650,000. The building is presently being
marketed for lease and it is likely that the site will be redeveloped to help
procure a new tenant. While the loss of revenue is anticipated to be
short-term, it is possible that no revenue could be generated from this space
for a year or more.
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Dillons, a tenant at the Company's Wichita, Kansas property, vacated
its space in November 1995. Dillons' lease remains in effect through November
30, 2001; however, as a result of the closure, the Company will no longer
receive percentage rent from this tenant which totaled approximately $132,000
for the lease year ended November 30, 1995. To help offset this decrease in
total revenue generated from the property, the Company plans to enter into a
lease termination agreement with Dillons and redevelop and re-tenant the
property at a higher base rent. While the Company anticipates this loss of
revenue to be short-term it cannot predict at this time when such re-tenanting
will occur.
The Company was informed in March 1996 that Kmart would not be
exercising its option to extend its lease on its freestanding store in North
Aurora, Illinois. Accordingly, this lease will expire on March 31, 1997. Cash
flows generated from the store are approximately $80,000 annually. The Company
is pursuing re-leasing of this building and it is likely that this site will be
redeveloped to help procure a new tenant. If the Company does not re-lease the
property by the termination date, future cash flows will be affected
temporarily.
In March 1996, the Company entered into a sale and leaseback
agreement with an existing tenant at its Lawrence, Kansas shopping center.
Under the agreement, the tenant will construct a new theater on property located
near the shopping center, which, upon completion will be purchased by the
Company for approximately $4.2 million. The Company will lease back the theater
to the tenant for a term of twenty years at a base rent of approximately
$500,000 per year. The Company anticipates the project to be completed in the
second quarter of 1997 and to be funded out of long-term financing
collateralized by the acquired property.
In addition to the potential redevelopments discussed above, several
other new developments and redevelopments are being contemplated by the Company
and may be completed within the next year. It is anticipated that the
additional revenue generated by these projects as well as the Company's existing
equity in each will create sufficient value so that each project will fully fund
itself using property specific financing and subsequent long-term loans.
The Company extended a $12.45 million mortgage loan with NBD Bank
originally due September 15, 1996, until September 15, 1997. The mortgage is
collateralized by The Shops at Fairlane Meadows ("Fairlane") and calls for
monthly payments of interest only at the rate of 7.875% per annum through
December 15, 1996 at which time the rate will be subject to change. Management
anticipates that the loan will be refinanced by this date with a combination of
primarily long-term debt secured by Fairlane and either short-term unsecured
debt or debt secured by additional collateral. The Company presently has an
application pending for long-term financing with a major lender and is awaiting
final approval.
In March 1996, the Company's 9.5% Convertible Subordinated Debentures,
due August 2004, received a rating of B3 by Moody's Investors Services, Inc.
14
<PAGE> 15
The Company incurs capital expenditures in the ordinary course of
business in order to maintain its properties. Such capital expenditures
typically include roof, parking lot and other structural repairs, some of which
are reimbursed by tenants. The Company anticipates spending approximately $1
million on such expenditures in 1996 of which approximately $969,000 were
incurred during the nine months ended September 30, 1996. Included in the
anticipated expenditures are approximately $909,000 for major roof repairs and
replacements on four properties. These expenditures are anticipated to be
funded primarily out of the Capital Improvement/Replacement Reserve required for
the Company's Securitized Mortgage Loan and partially from operating cash flows.
Occasionally it is necessary for the Company to provide inducements such
as building allowances or space improvements and/or to pay leasing commissions
to outside brokers in order to procure new tenants or renegotiate expiring
leases with current tenants. The total cost of these expenditures in 1996 is
anticipated to be approximately $333,000 of which approximately $189,000 has
been incurred through September 30, 1996. These expenditures are generally
funded by operating cash flows from increased revenues resulting from such
expenditures.
While it is anticipated that the Company's cash flow from operations
will generally be sufficient to fund its cash needs for payment of expenses,
capital expenditures (other than acquisitions and redevelopments) and
distributions necessary to maintain its status as a REIT for federal income tax
purposes, the Company may from time to time experience temporary shortages of
working capital. In order to alleviate these shortages, the Company intends to
enter into secured and unsecured financing agreements in the future as the need
arises.
INFLATION
The Company's long-term leases contain provisions to mitigate the
adverse impact of inflation on its results from operations. Such provisions
include clauses entitling the Company to receive (i) scheduled base rent
increases and (ii) percentage rents based upon tenants gross sales, which
generally increase as prices rise. In addition, many of the Company's
non-anchor leases are for terms of less than 10 years, which permits the Company
to seek increases in rents upon re-rental at market rates if rents provided in
the expiring leases are below then existing market rates. Most of the Company's
leases require tenants to pay a share of operating expenses, including common
area maintenance, real estate taxes, insurance and utilities, thereby reducing
the Company's exposure to increases in costs and operating expenses resulting
from inflation.
15
<PAGE> 16
MALAN REALTY INVESTORS, INC.
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
NONE
Item 5: Other Information
NONE
Item 6: Exhibits and Reports on Form 8-K
a) Exhibit Index:
11 Computation of Earnings Per Share
Filed with
this document
27 Financial Data Schedule Filed with
this document
b) Reports on Form 8-K
NONE
16
<PAGE> 17
MALAN REALTY INVESTORS, INC.
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.
MALAN REALTY INVESTORS, INC.
By: /s/ Anthony S. Gramer
---------------------------
Anthony S. Gramer
Chief Executive Officer and President
By: /s/ Elliott J. Broderick
---------------------------
Elliott J. Broderick
Chief Accounting Officer
Dated: October 31, 1996
17
<PAGE> 18
14
EXHIBIT INDEX
EXHIBIT NO. DESRIPTION
- ----------- ---------------------
11 Computation of per share earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
MALAN REALTY INVESTORS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1996 1995
----- -----
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- -------
<S> <C> <C> <C> <C>
INCOME $220 $220 $437 $437
NET INCOME
INTEREST ON CONVERTIBLE
DEBT 2,117 2,039
--------- --------- --------- ---------
TOTAL $220 2,337 $437 $2,476
========= ========= ========= =========
NUMBER OF SHARES
WEIGHTED AVERAGE
SHARES OUTSTANDING 3,460,435 3,460,435 3,427,255 3,427,255
SHARES ISSUED UPON
CONVERSION OF CONVERTIBLE DEBT 5,193,234 5,337,686
--------- --------- --------- ---------
TOTAL 3,460,435 8,653,669 3,427,255 8,764,941
========= ========= ========= =========
NET INCOME PER SHARE $0.06 $0.27 $0.13 $0.28
===== ===== ===== =====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1996 1995
---- ----
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- -------
<S> <C> <C> <C> <C>
INCOME $427 $427 $1,634 $1,634
NET INCOME
INTEREST ON CONVERTIBLE
DEBT 6,352 6,194
--------- --------- --------- ---------
TOTAL $427 6,779 $1,634 $7,828
========= ========= ========= =========
NUMBER OF SHARES
WEIGHTED AVERAGE
SHARES OUTSTANDING 3,465,282 3,465,282 3,543,344 3,543,344
SHARES ISSUED UPON
CONVERSION OF CONVERTIBLE DEBT 5,193,234 5,339,805
--------- --------- --------- ---------
TOTAL 3,465,282 8,658,516 3,543,344 8,883,149
========= ========= ========= =========
NET INCOME PER SHARE $0.12 $0.78 $0.46 $0.88
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,686
<SECURITIES> 0
<RECEIVABLES> 13,931
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,617
<PP&E> 207,177
<DEPRECIATION> 9,702
<TOTAL-ASSETS> 218,092
<CURRENT-LIABILITIES> 9,908
<BONDS> 171,928
0
0
<COMMON> 45,958
<OTHER-SE> (9,702)
<TOTAL-LIABILITY-AND-EQUITY> 218,092
<SALES> 0
<TOTAL-REVENUES> 26,488
<CGS> 0
<TOTAL-COSTS> 8,451
<OTHER-EXPENSES> 5,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,873
<INCOME-PRETAX> 427
<INCOME-TAX> 0
<INCOME-CONTINUING> 427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 427
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.78
</TABLE>
