<PAGE> 1
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UNITED STATES
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, 1998
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
Bingham Farms, Michigan (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (248) 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 November 11, 1998, 5,167,948 shares of Common Stock, Par Value $.01
Per share, were outstanding.
<PAGE> 2
MALAN REALTY INVESTORS, INC.
FORM 10-Q
INDEX
<TABLE>
PAGE
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 3
Statements of Operations (unaudited) for
the three months and the nine months ended
September 30, 1998 and 1997 4
Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II OTHER INFORMATION 18
SIGNATURES 19
</TABLE>
2
<PAGE> 3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate
Land, buildings and improvements $256,298 $215,785
Less: accumulated depreciation (19,810) (15,817)
-------- --------
236,488 199,968
Accounts receivable, net 2,805 1,608
Deferred financing and other 10,212 10,705
Cash and cash equivalents 329 1,717
Escrow deposits 2,200 2,140
-------- --------
Total Assets $252,034 $216,138
======== ========
LIABILITIES
Mortgages $114,358 $88,585
Convertible debentures 47,475 56,680
Convertible notes 27,000 27,000
Deferred income 1,494 2,102
Accrued distributions payable 2,196 1,620
Accounts payable and other 2,378 845
Accrued property taxes 2,726 1,184
Accrued interest payable 2,151 4,180
-------- --------
Total Liabilities 199,778 182,196
-------- --------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares authorized,
5,167,948 and 3,737,936 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively) 52 37
Additional paid in capital 74,020 50,485
Accumulated distributions in excess of net income (21,816) (16,580)
-------- --------
Total shareholders' equity 52,256 33,942
-------- --------
Total Liabilities and
Shareholders' Equity $252,034 $216,138
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Minimum rent $ 7,456 $ 6,023 $ 20,443 $ 17,913
Percentage and overage rents 20 276 626 900
Recoveries from tenants 2,615 2,350 7,264 7,066
Interest and other income 120 138 244 323
----------- ----------- ----------- -----------
Total Revenues 10,211 8,787 28,577 26,202
----------- ----------- ----------- -----------
EXPENSES
Property operating and maintenance 822 668 2,139 2,287
Other operating expenses 448 357 1,191 1,021
Real estate taxes 2,012 2,043 5,877 5,885
General and administrative 565 389 1,357 1,217
Depreciation and amortization 1,469 1,271 4,115 3,798
Loss on impairment of real estate 431 431
----------- ----------- ----------- -----------
Total Operating Expenses 5,747 4,728 15,110 14,208
----------- ----------- ----------- -----------
OPERATING INCOME 4,464 4,059 13,467 11,994
INTEREST EXPENSE 4,244 3,846 12,545 11,717
----------- ----------- ----------- -----------
NET INCOME BEFORE
EXTRAORDINARY ITEM 220 213 922 277
EXTRAORDINARY ITEM:
Loss on extinguishment of debt (156) (156)
----------- ----------- ----------- -----------
NET INCOME $ 64 $ 213 $ 766 $ 277
=========== =========== =========== ===========
EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM:
BASIC $ 0.04 $ 0.06 $ 0.21 $ 0.08
=========== =========== =========== ===========
DILUTED $ 0.04 $ 0.06 $ 0.21 $ 0.08
=========== =========== =========== ===========
EXTRAORDINARY ITEM:
BASIC ($ 0.03) ($ 0.03)
=========== =========== =========== ===========
DILUTED ($ 0.03) ($ 0.03)
=========== =========== =========== ===========
EARNINGS PER SHARE:
BASIC $ 0.01 $ 0.06 $ 0.18 $ 0.08
=========== =========== =========== ===========
DILUTED $ 0.01 $ 0.06 $ 0.18 $ 0.08
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 5,153,715 3,516,407 4,283,893 3,482,075
=========== =========== =========== ===========
DILUTED 5,185,983 3,552,374 4,316,161 3,518,042
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 766 $ 277
-------- --------
Adjustments to reconcile net income to
net cash flows provided by operating activities:
Depreciation and amortization 4,115 3,798
Amortization of deferred financing costs 1,450 1,191
Forfeited interest on debenture conversions 14
Directors compensation issued in stock 36 36
Loss on impairment of real estate 431
Loss on extinguishment of debt 156
Change in operating assets and liabilities that provided (used) cash:
Accounts receivable and other assets (2,180) (1,890)
Accounts payable, deferred income and
other accrued liabilities 438 (2,133)
-------- --------
Total adjustments 4,460 1,002
-------- --------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 5,226 1,279
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved, net
of mortgage assumed (35,296) (766)
Deposits to escrow (14,068) (13,226)
Disbursements from escrow 14,008 14,008
Proceeds from sale of land 240
-------- --------
NET CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (35,116) 16
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from secondary stock offering 21,394
Principal repayments on mortgages (416) (1,405)
Proceeds from mortgages 18,000
Debt issuance costs (330)
Draws on lines of credit 21,350
Repayments on lines of credit (19,050)
Repurchase of debentures (7,059)
Proceeds from stock options exercised 38 8
Distributions to shareholders (5,425) (4,418)
-------- --------
NET CASH FLOWS PROVIDED BY (USED FOR) 28,502 (5,815)
FINANCING ACTIVITIES -------- --------
Net (decrease) in cash and cash equivalents (1,388) (4,520)
Cash and cash equivalents at beginning of
period 1,717 6,966
-------- --------
Cash and cash equivalents at end of period $ 329 $ 2,446
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR INTEREST DURING THE PERIOD $ 13,639 $ 12,629
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF 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 its wholly owned active subsidiaries,
Malan Mortgagor, Inc., Malan Meadows, Inc., Malan Revolver, Inc. and Malan
Midwest LLC. All significant inter-company balances and transactions have been
eliminated.
Reclassifications- Certain reclassifications have been made to prior years
financial statements in order to conform with the current year presentation.
Management Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
6
<PAGE> 7
2. COMPENSATION PLANS
The following table outlines the activity in the Company's stock option
and compensation plans for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Shares Options Issue/Exercise Options Exercise
Plan Issued Granted Price Exercised Price
- ------------------------ ------ ------- ------------------ --------- --------
<S> <C> <C> <C> <C>
Directors Stock Option Plan 4,000 $17.6875 2,500 $14.375-$14.50
Directors Stock
Compensation Plan 2,076 $16.625 - $17.6875
Employee Stock Option Plan 21,000 $16.625 150 $13.375
</TABLE>
The Company has a 401(k) retirement plan (the "Plan") covering
substantially all of its employees. Under the Plan, participants are able to
defer, until termination of employment with the Company, up to 20% of their
annual compensation. The Company intends to match a portion of the participants
contributions in an amount to be determined each year by the Company's Board of
Directors. Compensation expense in connection with the Plan for the nine months
ended September 30, 1998 was approximately $22,000.
7
<PAGE> 8
3. REAL ESTATE
ACQUISITIONS
In February 1998, the Company acquired the Westland Shopping Center in
Westland, Michigan for $7.925 million (the "Westland Acquisition"). Terms of the
agreement included a cash payment of $2.025 million and assumption of a $5.9
million mortgage loan.
In May 1998, the Company completed the acquisition of 12 community
shopping centers located throughout the Midwestern United States (the "Midwest
Acquisition") and agreed to acquire another community shopping center located in
Decatur, Illinois at a later date. Terms of the Midwest Acquisition included a
cash payment of $29.470 million which was funded out of proceeds of an $18
million mortgage loan and draws on the Company's lines of credit. It is
anticipated that the acquisition of the Decatur, Illinois property will be
completed in December 1998 for approximately $4.2 million after the seller
completes a redevelopment of the property.
Additional information regarding the above acquisitions is as follows:
<TABLE>
<CAPTION>
GROSS
ACQUISITION LEASABLE CAPITALIZED
DATE PROPERTY LOCATION AREA (SQ.FT) COSTS
- ----------- -------- -------- ------------- -----------
<S> <C> <C> <C>
WESTLAND ACQUISITION (IN THOUSANDS)
2/23/98 Westland Shopping
Center Westland, MI 85 $ 7,925
MIDWEST ACQUISITION
5/29/98 Wal-Mart Plaza Champaign, IL 11 1,110
5/29/98 Wal-Mart Plaza Jacksonville, IL 53 4,907
5/29/98 Wal-Mart Plaza Crawfordsville, IN 26 2,019
5/29/98 Wal-Mart Plaza Decatur, IN 36 2,995
5/29/98 Wal-Mart Plaza Huntington, IN 13 1,171
5/29/98 Wal-Mart Plaza Chanute, KS 16 1,257
5/29/98 Wal-Mart Plaza El Dorado, KS 20 1,546
5/29/98 Wal-Mart Plaza Benton Harbor, MI 14 1,460
5/29/98 Wal-Mart Plaza Owosso, MI 60 5,127
5/29/98 Wal-Mart Plaza Sturgis, MI 12 1,241
5/29/98 Wal-Mart Plaza Little Falls, MN 13 972
5/29/98 Wal-Mart Plaza Mansfield, OH 55 5,830
------- -------
414 $37,560
======= =======
</TABLE>
8
<PAGE> 9
IMPAIRMENT OF REAL ESTATE
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company wrote down the carrying cost of its
interest in a shopping center in Gary, Indiana to its net realizable value and
recorded a loss on impairment of real estate of approximately $431,000 during
the three months ended September 30, 1998.
4. MORTGAGES AND DEBENTURES
In connection with the Westland Acquisition the Company assumed a $5.9
million mortgage loan with Wells Fargo Bank. The mortgage calls for monthly
payments of interest at the rate of 8.02% per annum and principal amortized over
30 years and is due in full November 1, 2007. Real estate taxes and insurance
are required to be escrowed monthly.
In May 1998, simultaneously with the Midwest Acquisition the Company
obtained an $18 million mortgage loan with Bloomfield Acceptance Company. The
loan is collateralized by 12 separate cross-collateralized and cross defaulted
mortgages or deeds of trust on the properties, which were acquired by a wholly
owned subsidiary, Malan Midwest, LLC. The loan calls for monthly payments of
interest at the rate of 7.43% per annum and principal amortized over 30 years
and is due in full May 2013. Real estate taxes and a replacement reserve of 15
cents per square foot or approximately $49,000 annually are required to be
escrowed monthly.
In September 1998, the Company's Board of Directors approved a plan to
repurchase and retire up to $15 million aggregate principal of the Company's
9.5% Subordinated Convertible Debentures ("Debentures") due July 2004. Through
September 30, 1998, the Company had repurchased $7.075 million principal of
Debentures. The repurchases were funded from the Company's available working
capital. Subsequent to September 30, 1998, the Company had repurchased an
additional $2.55 million principal of Debentures.
9
<PAGE> 10
5. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ................................................. $ 64 $ 213 $ 766 $ 277
======= ======= ======= =======
Basic EPS
Weighted-average shares outstanding ........................ 5,154 3,516 4,284 3,482
======= ======= ======= =======
Basic earnings per share ................................... $ 0.01 $ 0.06 $ 0.18 $ 0.08
======= ======= ======= =======
Diluted EPS
Weighted-average shares outstanding -
basic ...................................................... 5,154 3,516 4,284 3,482
Shares issued upon exercise of
dilutive options ........................................... 181 312 181 312
Shares purchased with proceeds of
options .................................................... (149) (276) (149) (276)
------- ------- ------- -------
Weighted average shares outstanding -
diluted .................................................... 5,186 3,552 4,316 $ 3,518
======= ======= ======= =======
Diluted earnings per share ................................. $ 0.01 $ 0.06 $ 0.18 $ 0.08
======= ======= ======= =======
</TABLE>
Diluted EPS reflects the potential dilution of securities that could share in
the earnings but does not include shares issuable upon conversion of securities
that would have an antidilutive effect on earnings per share.
6. SECONDARY STOCK OFFERING
In June 1998, the Company issued 1.3 million common shares at a price of $17.75
per share (the "Secondary Offering"). Net proceeds of approximately $21.4
million after underwriting discounts and expenses were used to pay down the
Company's lines of credit and for general corporate purposes including working
capital.
10
<PAGE> 11
7. SUMMARIZED PRO FORMA INFORMATION
The following unaudited table of pro forma information has been presented as if
the Secondary Offering and the Westland Acquisition and Midwest Acquisition had
occurred on January 1, 1997. In management's opinion, all adjustments necessary
to reflect these transactions have been made. The pro forma 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, 1997,
nor do they purport to represent the results of the operations of the Company
for future periods (in thousands except per share amounts).
<TABLE>
<CAPTION>
Nine Months ended September 30,
1998 1997
---- ----
<S> <C> <C>
Total revenues ................................................. $ 30,095 $ 29,467
Net income ..................................................... $ 1,545 $ 1,084
Net income per share:
Basic .................................................... $ .39 $ .31
Diluted .................................................. $ .39 $ .31
</TABLE>
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1998 to Three Months Ended
September 30, 1997
Total revenue increased approximately $1.424 million primarily due to
an increase in minimum rent and recoveries from tenants of approximately $1.433
million and $265,000, respectively, resulting primarily from the Company's
acquisitions of properties. The acquisitions of a 12 shopping center portfolio
in May 1998 (the "Midwest Acquisition"), the Westland Shopping Center in
February 1998 (the "Westland Acquisition"), and the Southwind Theater complex in
Lawrence Kansas in November 1997, accounted for approximately $755,000, $223,000
and $147,000, respectively, of the increase. The increases were offset by a net
decrease in percentage rents of approximately $256,000 due to the implementation
of a new accounting pronouncement discussed below.
Total operating expenses increased approximately $1.019 million from
1997 to 1998. Property operating and maintenance expense and depreciation and
amortization increased approximately $154,000, and $198,000, respectively,
primarily due to the acquisitions discussed above. General and administrative
expense and other property operating expenses increased approximately $176,000
and $91,000, respectively, primarily due to increased personnel costs. A loss on
impairment of real estate of approximately $431,000 was incurred in the three
months ended September 30, 1998 due to the write down of the Company's interest
in a shopping center in Gary, Indiana to its net realizable value in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121, " Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of."
Interest expense (including related amortization of deferred financing
costs) increased approximately $398,000 due to increased debt levels from
borrowing on the Company's lines of credit, long-term financing related to the
acquisitions of properties and amortization of deferred financing costs on such
borrowings.
As a result of a plan, (the "Convertible Debenture Repurchase Plan"),
to repurchase and retire up to $15 million aggregate principal of the Company's
9.5% Subordinated Convertible Debentures ("Debentures") due July 2004, the
Company incurred a loss on extinguishment of debt of $156,000 related to the
repurchase of $7.075 million principal of Debentures, primarily from the write
off of deferred financing costs associated with the retired debt.
Overall, net income decreased approximately $149,000 to $64,000 in 1998
primarily as a result of an increase in operating income from acquisitions
offset by losses incurred from the write down of real estate assets and the
extinguishment of debt.
Comparison of Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997
Total revenue increased approximately $2.375 million which is
attributable to an increase in minimum rent and recoveries from tenants of
approximately $2.530 million and $198,000, respectively, offset by decreases in
percentage rent and interest and other income of approximately $274,000 and
$79,000, respectively. The increase in minimum rent is primarily attributable to
additional revenues resulting from the Midwest Acquisition, the Westland
Acquisition and the Southwind Theater which accounted for approximately $1.030
million, $536,000, and $440,000, respectively, of the increase. Recoveries from
tenants increased approximately $198,000 primarily due to increased recoveries
of real estate tax expenses and tenant utility charges. Percentage
12
<PAGE> 13
rent decreased approximately $274,000 due to the implementation of a new
accounting pronouncement discussed below. Interest and other income decreased
primarily due to nonrecurring lease termination income received in 1997 and
lower amounts of investable working capital in 1998 due to funding of ongoing
redevelopment projects.
Total operating expenses increased approximately $902,000. A decrease
in property operating and maintenance of $148,000 was primarily attributable to
lower snow removal costs in 1998. Other operating expenses and general and
administrative expenses increased approximately $170,000 and $140,000,
respectively, primarily due to increased personnel costs and additional bad debt
expense. Depreciation and amortization expense increased approximately $317,000
primarily as a result of the acquisitions discussed above. A loss on impairment
of real estate of approximately $431,000 was incurred in 1998 due to the write
down of the Company's interest in a shopping center in Gary, Indiana to its net
realizable value in accordance with SFAS No. 121.
As a result of the Convertible Debenture Repurchase Plan, the Company
incurred a loss on extinguishment of debt of $156,000 in 1998 related to the
repurchase of $7.075 principal of Debentures, primarily from the write off of
deferred financing costs associated with the retired debt.
Interest expense (including related amortization of deferred financing
costs) increased approximately $828,000 primarily due to increased debt levels
from borrowing on the Company's lines of credit, long-term financing related to
the acquisitions of properties and amortization of deferred financing costs on
such borrowing.
Overall, net income increased approximately $489,000 to a total of
$766,000 for the nine months ended September 30, 1998 primarily as a result of
an increase in operating income from acquisitions offset by losses incurred from
the write down of real estate assets and the extinguishment of debt.
Impact of Recently Adopted Accounting Standard
In May 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 98-9, "Accounting for Contingent Rents in Interim
Financial Periods." EITF 98-9 defers the recognition of contingent rental income
until the specified target that triggers the contingent rental income is
achieved. The effect of reporting after the effective date of May 22, 1998 will
be to delay the recognition of percentage rental income until the lease year end
of each tenant whose lease contains such clauses. The effect of the change
required by EITF 98-9 was to reduce percentage and overage rents approximately
$284,000 in both the three months and nine months ended September 30, 1998.
Year 2000 Date Conversion
Certain computer systems that have time-sensitive programs may not
properly recognize the year 2000 which could result in major system failures or
miscalculations. The Company has performed an inquiry of its major software
vendors as to the likelihood of such a problem existing in the software products
which the Company utilizes. Based on such inquiry, the Company does not believe
that a year 2000 problem exists within its system or that any such problem that
may arise would have a material impact on the Company's operations. The Company
has not assessed the impact of any year 2000 problem within outside parties such
as vendors or tenants.
13
<PAGE> 14
FUNDS FROM OPERATIONS
Management considers Funds From Operations ("FFO") to be an appropriate
measure of performance of an equity real estate investment trust. Effective
beginning with the quarter ended June 30, 1998, the Company adopted the method
of calculating FFO as prescribed by the National Association of Real Estate
Investment Trusts (NAREIT) as further clarified in a 1995 opinion paper (the
"White Paper") which utilizes net income or loss excluding gains and losses from
sales of property and debt restructuring, further adjusted for certain non-cash
items including depreciation and amortization of real estate assets and other
nonrecurring items. 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 primary differences between the method in which the Company
previously computed FFO and the White Paper definition is in the treatment of
amortization of nonrecurring deferred financing costs and certain depreciation
expense. Also effective with the quarter ended June 30, 1998, the Company began
reporting FFO on both a basic and diluted basis. The diluted basis assumes the
conversion of the Company's convertible debentures and convertible notes into
shares of common stock as well as other common stock equivalents including those
which are antidilutive to earnings per share.
The following table shows the components that comprise the Company's
FFO for the three months and the nine months ended September 30, 1998 and 1997
and a reconciliation of basic to diluted FFO. The 1997 periods have been
restated to conform with the 1998 presentation (in thousands):
<TABLE>
<CAPTION>
Three Months September 30, Nine Months September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME $ 64 $ 213 $ 766 $ 277
Depreciation of buildings and improvements 1,411 1,215 3,940 3,634
Amortization of tenant allowances and
improvements 28 24 85 72
Amortization of leasing costs 29 24 85 69
Loss on impairment of real estate 431 431
Loss on extinguishment of debt 156 156
------- ------- ------- -------
FUNDS FROM OPERATIONS, BASIC $ 2,119 $ 1,476 $ 5,463 $ 4,052
Interest expense on convertible securities 1,854 1,922 5,635 5,980
Amortization of deferred financing costs on
convertible securities 78 87 244 263
------- ------- ------- -------
FUNDS FROM OPERATIONS, DILUTED $ 4,051 $ 3,485 $11,342 $10,295
------- ------- ------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 5,154 3,516 4,284 3,482
------- ------- ------- -------
Diluted, assuming conversion of convertible
securities 9,951 8,695 9,141 8,694
------- ------- ------- -------
</TABLE>
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is the principal source of capital to fund
the Company's ongoing operations. Current efforts to increase cash flow have
centered on additional acquisitions of properties and redevelopment
opportunities at certain of the Company's existing properties.
In June 1998, the Company issued 1.3 million shares of common stock at
a price of $17.75 per share. Net proceeds after underwriting discounts and
expenses of $21.4 million were used to pay down the Company's lines of credit
and for general corporate purposes including working capital.
Acquisitions
In February 1998, the Company acquired the Westland Shopping Center in
Westland, Michigan for $7.925 million. Terms of the agreement included
assumption of a $5.9 million, 8.02% mortgage with Wells Fargo Bank and a cash
payment of $2.025 million, which was funded out of proceeds from the Company's
line of credit with Greenwich Capital Markets, Inc. (the "Greenwich Capital
Line"). The mortgage calls for monthly payments of interest and principal
amortized over a 30-year life and is due in full in November 2007. Net operating
income from the 85,000 square foot center, which has Dick's Sporting Goods and
Med Max, Inc. as its anchor tenants, is anticipated to be approximately $893,000
annually.
In May 1998, the Company completed the acquisition of 12 community
shopping centers, each anchored by a Wal-Mart store and having approximately
329,000 feet of gross leasable area ("GLA"). Total cost of the acquisition was
approximately $29.6 million which was funded out of proceeds of an $18 million,
15-year, 7.43% fixed rate mortgage loan with Bloomfield Acceptance Company and
funds from existing lines of credit. Terms of the loan include monthly payments
of interest and principal amortized over a 30 year life totaling approximately
$124,000 and escrows for real estate taxes and a reserve for deferred
maintenance equal to 15 cents per square foot or approximately $49,000 annually.
The loan is collateralized by 12 cross-collateralized and cross-defaulted
mortgages or separate deeds of trust on the properties which were acquired by a
wholly owned subsidiary, Malan Midwest, LLC. Net operating income from the
centers is anticipated to be approximately $2.9 million annually.
As part of the purchase agreement, the Company also agreed to acquire
an additional community shopping center having approximately 40,000 square feet
of GLA for approximately $4.2 million. The acquisition is anticipated to be
completed in December 1998 after the seller completes a redevelopment and
expansion of the property to approximately 56,000 square feet.
Redevelopments
In September 1998, construction was completed on a 61,000 square foot,
17-plex theater complex in North Aurora, Illinois to replace a freestanding
Kmart whose lease expired in March 1997. In November 1998 the Company provided a
construction allowance of approximately $3.9 million to the theater operator,
Cinemark USA ("Cinemark") who is ground leasing the property for a base term of
twenty years with an initial annual rent of approximately $746,000, plus
reimbursement of real estate taxes and operating costs. The previous lease with
Kmart provided approximately $126,000 annually in net cash flow. The total costs
of the development to the Company including capitalized interest, taxes and
leasing commissions were approximately $4.4 million and were funded out of
proceeds from the Greenwich Capital Line.
The Company completed the redevelopment of a 40,000 square foot former
Kmart site in Lincoln, Illinois
15
<PAGE> 16
in September 1998. Stage Stores, Inc. is leasing 15,000 square feet of the
building at an annual rent of approximately $69,000 for a ten year term. The
Company intends to re-lease the balance of the building to other national and/or
regional retailers. Total cost of renovating the building including a tenant
building allowance was approximately $860,000 which was funded from the
Greenwich Capital Line.
In February 1998, construction began at the Company's property in
Melrose Park, Illinois on a 58,000, 10-plex theater complex under a separate
agreement with Cinemark to replace a freestanding former Builders Square
building which had been vacant since 1995. Completion of the complex is
anticipated to take place in December 1998. Once completed, the Company will
provide a construction allowance to Cinemark of approximately $3.8 million.
Cinemark will then ground lease the property for a term of twenty years with
initial annual rent of approximately $963,000 plus reimbursement of real estate
taxes and operating costs. Total costs of the development including capitalized
interest, taxes and leasing commissions are estimated to be approximately $4.5
million, and are anticipated to be funded out of proceeds from the Greenwich
Capital Line.
Redevelopment of the Company's existing retail center in Lawrence,
Kansas is progressing. In October 1998, Kohls' Corporation ("Kohls' ") completed
construction of an 80,000 square foot department store at the center. Kohls' is
ground leasing the property for a 20 year term at an initial annual rent of
$360,000 with increases after 10 and 15 years, respectively, plus reimbursement
of real estate taxes and operating costs. The expansion and remodeling of the
Kmart store at the center which will result in an increase in rental revenue to
the Company of approximately $194,000 annually is anticipated to be completed in
December 1998. The Company also plans to develop approximately 60,000 square
feet of additional retail space on the property in 1999. Total cost of the
project, including additional land acquired previously, is expected to be
approximately $9.0 million of which $5.3 million has been incurred through
September 30, 1998. The balance of the cost is anticipated to be funded with
proceeds from the Greenwich Capital Line.
Another former Kmart store in Arkansas City, Kansas is being
subdivided and redeveloped to accommodate a 24,000 square foot Ace Hardware
store. The Company has entered into a lease with Westlake Hardware, Inc. for a
term of 10 years at an annual rent of approximately $56,000 plus reimbursement
of real estate taxes and operating expenses. Cost of the redevelopment is
estimated to be approximately $591,000 and is anticipated to be funded from the
Greenwich Capital Line. A Spring 1999 completion date is anticipated.
Capital Expenditures
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. In 1998, the Company anticipates spending
approximately $915,000 (of which approximately $386,000 had been incurred in the
nine months ended September 30, 1998) for capital expenditures to be funded
primarily out of reserves required for the Company's collateralized mortgages
and partially from operating cash flows.
The Company will occasionally provide inducements such as building
allowances or space improvements and/or 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 1998 excluding costs
associated with the redevelopment projects discussed above is estimated to be
approximately $243,000 (of which $109,000 had been incurred in the nine months
ended September 30, 1998). These expenditures are generally funded by operating
cash flows and increased revenues resulting from such expenditures.
16
<PAGE> 17
Working Capital
In June 1998, Elias Brothers Restaurants, Inc., an outlot tenant at the
Company's community shopping center in Owosso, Michigan, exercised an option to
purchase its demised premises. Net proceeds from the sale of approximately
$240,000 were used to pay down a portion of the balance on the existing mortgage
and for working capital.
In September 1998, the Company's Board of Directors approved the
Convertible Debenture Repurchase Plan, a plan to repurchase and retire up to $15
million aggregate principal of the Company's 9.5% Subordinated Convertible
Debentures due July 2004. Through September 30, 1998, the Company had
repurchased $7.075 million principal of Debentures . The repurchases were funded
from the Company's available working capital. Subsequent to September 30, 1998,
the Company had repurchased an additional $2.55 million principal of Debentures.
The Company has entered into a letter of intent to sell its interest
in the Miller Mall, a 130,000 square foot shopping center in Gary, Indiana. A
definitive purchase agreement for the property is expected to be executed in the
Fourth Quarter 1998. It is anticipated that net proceeds from a sale will be
approximately $700,000 and will be used to pay down outstanding indebtedness.
The Company anticipates that its 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 to maintain the
Company's current distribution policy. The Company currently has $4.5 million
available for temporary working capital needs on its line of credit with First
Chicago NBD (the "NBD Line") and approximately $17.9 million total available on
the Greenwich Capital Line and intends to enter into other secured and unsecured
financing agreements in the future as the need arises.
The NBD Line calls for monthly payments of interest at the rate of 200
basis points over LIBOR, is collateralized by the Company's interest in
Orchard-14 Shopping Center in Farmington Hills, Michigan and is due March 31,
1999. The Greenwich Capital Line is a revolving line of credit which
expires November 1999 and is collateralized by 16 properties owned by the
Company's wholly owned subsidiary, Malan Revolver, Inc. The Greenwich Capital
Line requires monthly payments of interest only at LIBOR plus 150 basis points.
As of November 11, 1998, approximately $15 million was outstanding on the
Greenwich Capital Line and there were no outstanding borrowings on the NBD Line.
Each of the above statements regarding future revenues or expenses may
be a "forward looking statement" within the meaning of the Securities Exchange
Act of 1934. Such statements are subject to important factors that could cause
actual results to differ materially from those in the forward looking statement,
including the factors set forth in the Management's Discussion and Analysis of
Financial Condition and Results of Operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
17
<PAGE> 18
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:
27 Financial Data Schedule Filed with
this document
b) Reports on Form 8-K
NONE
18
<PAGE> 19
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
--------------------------------------------
Chief Executive Officer and President
By: /s/ Elliott J. Broderick
--------------------------------------------
Chief Accounting Officer
Dated: November 12, 1998
19
<PAGE> 20
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,529
<SECURITIES> 0
<RECEIVABLES> 13,017
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,546
<PP&E> 256,298
<DEPRECIATION> 19,810
<TOTAL-ASSETS> 252,034
<CURRENT-LIABILITIES> 10,945
<BONDS> 188,833
0
0
<COMMON> 74,072
<OTHER-SE> (21,816)
<TOTAL-LIABILITY-AND-EQUITY> 252,034
<SALES> 0
<TOTAL-REVENUES> 28,577
<CGS> 0
<TOTAL-COSTS> 9,207
<OTHER-EXPENSES> 5,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,545
<INCOME-PRETAX> 922
<INCOME-TAX> 0
<INCOME-CONTINUING> 922
<DISCONTINUED> 0
<EXTRAORDINARY> (156)
<CHANGES> 0
<NET-INCOME> 766
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
