<PAGE> 1
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 March 31, 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
Birmingham, 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 April 30, 1998, 3,822,051 shares of Common Stock, Par Value $.01
Per share, were outstanding.
<PAGE> 2
MALAN REALTY INVESTORS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 3
Statements of Operations (unaudited) for
the three months ended March 31, 1998 and 1997 4
Statements of Cash Flows (unaudited) for the
three months ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate
Land, buildings and improvements $ 223,710 $ 215,785
Less: accumulated depreciation (17,085) (15,817)
--------- ---------
206,625 199,968
Accounts receivable, net 2,505 1,608
Deferred financing and other 11,876 10,705
Cash and cash equivalents 1,585 1,717
Escrow deposits 2,014 2,140
--------- ---------
Total Assets $ 224,605 $ 216,138
========= =========
LIABILITIES
Mortgages $ 98,739 $ 88,585
Convertible debentures 55,484 56,680
Convertible notes 27,000 27,000
Deferred income 2,150 2,102
Accrued distributions payable 1,620 1,620
Accounts payable and other 1,491 845
Accrued property taxes 2,045 1,184
Accrued interest payable 2,255 4,180
--------- ---------
Total Liabilities 190,784 182,196
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares
authorized, 3,811,463 and 3,737,936 shares
issued and outstanding at March 31, 1998 and
December 31, 1997, respectively) 38 37
Additional paid in capital 51,684 50,485
Accumulated distributions in excess of net income (17,901) (16,580)
--------- ---------
Total shareholders' equity 33,821 33,942
--------- ---------
Total Liabilities and
Shareholders' Equity $ 224,605 $ 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
MARCH 31,
1998 1997
------------ -----------
<S> <C> <C>
REVENUES
Minimum rent $ 6,283 $ 5,983
Percentage and overage rents 301 304
Recoveries from tenants 2,399 2,513
Interest and other income 71 87
----------- -----------
Total Revenues 9,054 8,887
----------- -----------
EXPENSES
Property operating and maintenance 736 1,065
Other operating expenses 347 329
Real estate taxes 1,957 1,919
General and administrative 389 394
Depreciation and amortization 1,310 1,265
----------- -----------
Total Operating Expenses 4,739 4,972
----------- -----------
OPERATING INCOME 4,315 3,915
INTEREST EXPENSE 4,016 3,922
----------- -----------
NET INCOME (LOSS) $ 299 ($ 7)
=========== ===========
BASIC EARNINGS PER SHARE $ 0.08 $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,784,022 3,463,806
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.08 $ 0.00
=========== ===========
WEIGHTED AVERAGE COMMON AND
DILUTIVE SHARES OUTSTANDING 3,827,971 3,463,806
=========== ===========
</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>
Three Months Ended March 31,
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 299 ($ 7)
Adjustments to reconcile net income (loss) to
net cash flows provided by operating activities:
Depreciation and amortization 1,310 1,265
Amortization of deferred financing costs 447 383
Directors compensation issued in stock 12 12
Change in operating assets and liabilities that
used cash:
Accounts receivable and other assets (2,601) (1,307)
Accounts payable, deferred income and
other accrued liabilities (370) (2,087)
------- -------
Total adjustments (1,202) (1,734)
------- -------
NET CASH FLOWS USED FOR
OPERATING ACTIVITIES (903) (1,741)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved, net
of mortgage assumed (2,037)
Deposits to escrow (4,741) (3,408)
Disbursements from escrow 4,867 3,865
------- -------
NET CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES (1,911) 457
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on mortgages (84) (1,312)
Draws on line of credit 4,350
Proceeds from stock options exercised 36 3
Distributions to shareholders (1,620) (1,472)
------- -------
NET CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 2,682 (2,781)
------- -------
Net decrease in cash and cash equivalents (132) (4,065)
Cash and cash equivalents at beginning of
period 1,717 6,966
------- -------
Cash and cash equivalents at end of period $ 1,585 $ 2,901
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
Cash paid for interest during the period $ 5,515 $ 5,601
======= =======
</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 subsidiaries, Malan
Mortgagor, Inc., Malan Meadows, Inc. and Malan Revolver, Inc. 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.
2. COMPENSATION PLANS
The activity in the Directors Stock Compensation Plan for the three
months ended March 31, 1998 consisted of 678 shares issued at $17.687 per share.
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
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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 three months ended March 31, 1998 was $7,600.
3. MORTGAGES
In connection with the acquisition of Westland Shopping Center in
Westland, Michigan in February 1998, the Company assumed a $5.9 million mortgage
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.
3. EARNINGS PER SHARE
Earnings per share ("EPS") data were computed as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
------------------
1998 1997
---- ----
<S> <C> <C>
Net income (loss) ....................................................... $ 299 $ (7)
======= =======
Basic EPS
Weighted-average shares outstanding ...................................... 3,784 3,464
======= =======
Basic earnings per share ................................................. $ 0.08 ($ 0.0)
======= =======
Diluted EPS
Weighted-average shares outstanding ...................................... 3,784 3,464
Shares issued upon exercise of dilutive options .......................... 267 0
Shares purchased with proceeds of options ................................ (223) 0
------- -------
Shares applicable to diluted earnings .................................... 3,828 3,464
======= =======
Diluted earnings per share ............................................... $ 0.08 ($ 0.0)
======= =======
</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.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1998 to Three Months Ended March 31,
1997
Total revenue increased approximately $167,000. This is primarily
attributable to an increase in minimum rent of $300,000 offset by a decrease in
recoveries from tenants of $114,000. The increase in minimum rent is primarily
due to the acquisitions of Westland Shopping Center in Westland, Michigan in
February 1998 and the Southwind Theater complex in Lawrence, Kansas in November
1997, which accounted for $236,000 of the increase. The decrease in recoveries
from tenants is due to a decrease in property operating and maintenance expenses
discussed below.
Total operating expenses decreased approximately $233,000 from 1997 to
1998. Property operating and maintenance expense decreased $329,000 primarily
due to lower snow removal costs in 1998. Real estate taxes increased
approximately $38,000 due to the acquisitions of Westland Shopping Center and
the Southwind Theater complex. Depreciation and amortization increased
approximately $45,000, primarily related to depreciation on capitalized roof and
parking lot expenditures incurred in the second half of 1997 and depreciation
related to the acquisitions discussed above.
Interest expense (including related amortization of deferred financing
costs) increased approximately $94,000 primarily due to increased debt levels
from the acquisitions, draws on the Company's lines of credit to fund
acquisitions and the amortization of the deferred financing costs associated
with a $25 million line of credit obtained in November 1997.
Overall, net income increased approximately $306,000 to $299,000 in
1998 from a net loss of approximately $7,000 in 1997 primarily from the
acquisitions discussed above.
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.
8
<PAGE> 9
The Company is aware that there are variations between companies in the
REIT industry as to how FFO is calculated. In 1995, the National Association of
Real Estate Investment Trusts (NAREIT) issued an opinion paper (the "White
Paper") clarifying the definitions of certain components of FFO. The primary
differences between the method in which the Company computes FFO and the White
Paper definition is in the treatment of amortization of nonrecurring deferred
financing costs and certain depreciation expense.
The following table shows the components that comprise the Company's FFO for
the three months ended March 31, 1998 and 1997. The 1997 period has been
restated to conform with the 1998 presentation:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------------------
(in thousands)
<S> <C> <C>
Net income (loss) .................................................... $ 299 $ (7)
Depreciation and amortization:
Depreciation of buildings and improvements .......................... 1,251 1,209
Amortization of tenant allowances and tenant improvements ........... 29 26
Amortization of leasing costs ....................................... 28 23
------- -------
"White Paper" FFO 1,607 1,251
Depreciation of furniture, equipment & leasehold improvements 2 8
Amortization of deferred financing costs included in interest expense:
Mortgages ........................................................... 363 294
Convertible debt .................................................... 84 88
------- -------
Funds From Operations ................................................. $ 2,056 $ 1,641
======= =======
ADDITIONAL INFORMATION:
Weighted average shares outstanding:
Basic ............................................................... 3,784 3,464
======= =======
Shares issuable upon debt conversion ................................ 4,877 5,193
======= =======
Convertible debt interest excluding amortization of deferred financing
costs ................................................................. $ 1,896 $ 2,029
======= =======
</TABLE>
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 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
9
<PAGE> 10
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.
Construction is underway in North Aurora, Illinois on a 60,000 square
foot, 17-plex theater complex to replace a freestanding Kmart whose lease
expired in March 1997. Upon completion which is scheduled for July 1998, the
Company will provide a construction allowance of approximately $3.9 million to
the theater operator, Cinemark USA ("Cinemark") and Cinemark will subsequently
ground lease the property from the Company 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 are estimated to be approximately $4.3 million and
are anticipated to be funded out of proceeds 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. Anticipated completion of the complex
is November 1998. Once completed, the Company will provide a construction
allowance to Cinemark of $3.8 million who 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 are estimated to be approximately $4.2 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. Kmart has begun the expansion and remodeling of its store
which will result in an increase in rental revenue of approximately $194,000
annually. The Company has also signed a ground lease with Kohl's Corporation at
the site. Kohl's is currently constructing an 80,000 square foot department
store at the shopping center with an anticipated opening in October 1998. The
Company also plans to develop an additional 58,000 square feet of retail space
on the property. Total costs of the project is expected to be approximately $9.0
million of which $4.0 million has been incurred through March 31, 1998. The
balance of the cost is anticipated to be funded with proceeds from the Greenwich
Capital Line.
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 $1.5 million (of which none had been incurred in the three months
ended March 31, 1998) for capital expenditures to be funded primarily out of
reserves required for the Company's collateralized mortgages and partially from
operating cash flows.
10
<PAGE> 11
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 is estimated to be
approximately $245,000 (of which $17,000 had been incurred in the three months
ended march 31, 1998). These expenditures are generally funded by operating cash
flows and increased revenues resulting from such expenditures.
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 and approximately $11.6 million 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 line of credit with First Chicago NBD 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 two year 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.
On March 31, 1998 the Company filed a Registration Statement on Form
S-2 with the Securities and Exchange Commission relating to a proposed public
offering of 1.5 million shares of common stock. Up to 225,000 additional shares
of common stock may be offered by the underwriters from their overallotment
option. The Company intends to use funds from the offering to reduce outstanding
indebtedness, redevelop certain properties and for general corporate purposes,
including possible acquisitions of additional properties.
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
11
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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
12
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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: April 30, 1998
13
<PAGE> 14
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,599
<SECURITIES> 0
<RECEIVABLES> 14,381
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,980
<PP&E> 223,710
<DEPRECIATION> 17,085
<TOTAL-ASSETS> 224,605
<CURRENT-LIABILITIES> 9,561
<BONDS> 181,223
0
0
<COMMON> 51,722
<OTHER-SE> (17,901)
<TOTAL-LIABILITY-AND-EQUITY> 224,605
<SALES> 0
<TOTAL-REVENUES> 9,054
<CGS> 0
<TOTAL-COSTS> 3,040
<OTHER-EXPENSES> 1,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,016
<INCOME-PRETAX> 299
<INCOME-TAX> 0
<INCOME-CONTINUING> 299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 299
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
