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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission file number 1-13092
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 10, 1999, 5,171,522 shares of Common Stock, Par Value $.01
Per share, were outstanding.
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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 September 30, 1999
(unaudited) and December 31, 1998 3
Statements of Operations (unaudited) for
the three months and the nine months ended
September 30, 1999 and 1998 4
Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1999 and 1998 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION 16
SIGNATURES 17
</TABLE>
2
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate
Land, buildings and improvements $ 266,078 $ 261,783
Less: accumulated depreciation (25,022) (21,286)
--------- ---------
241,056 240,497
Accounts receivable, net 3,002 1,662
Deferred financing and other 7,925 9,450
Cash and cash equivalents 1,626 2,898
Escrow deposits 2,198 2,330
--------- ---------
Total Assets $ 255,807 $ 256,837
========= =========
LIABILITIES
Mortgages $ 125,535 $ 122,279
Convertible debentures 44,925 44,925
Convertible notes 27,000 27,000
Deferred income 766 1,160
Accrued distributions payable 2,198 2,200
Accounts payable and other 1,790 2,871
Accrued property taxes 2,657 1,265
Accrued interest payable 2,197 3,900
--------- ---------
Total Liabilities 207,068 205,600
--------- ---------
SHAREHOLDERS' EQUITY
Common stock ($.01 par value, 30 million shares
authorized, 5,171,522 and 5,168,742 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively) 52 52
Additional paid in capital 74,130 74,117
Accumulated distributions in excess of net income (25,443) (22,932)
--------- ---------
Total shareholders' equity 48,739 51,237
--------- ---------
Total Liabilities and
Shareholders' Equity $ 255,807 $ 256,837
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUES
<S> <C> <C> <C> <C>
Minimum rent $ 7,619 $ 7,456 $ 23,074 $ 20,443
Percentage and overage rents 305 20 1,005 626
Recoveries from tenants 2,434 2,615 8,154 7,264
Interest and other income 91 120 250 244
Gain(Loss) on sale of real estate (126) 1,625
----------- ----------- ----------- -----------
Total Revenues 10,323 10,211 34,108 28,577
----------- ----------- ----------- -----------
EXPENSES
Property operating and maintenance 660 822 2,559 2,139
Other operating expenses 430 448 1,273 1,191
Real estate taxes 1,948 2,012 6,265 5,877
General and administrative 488 565 1,501 1,357
Depreciation and amortization 1,626 1,469 4,748 4,115
Loss on impairment of real estate 431 431
----------- ----------- ----------- -----------
Total Operating Expenses 5,152 5,747 16,346 15,110
----------- ----------- ----------- -----------
OPERATING INCOME 5,171 4,464 17,762 13,467
INTEREST EXPENSE 4,407 4,244 13,222 12,545
----------- ----------- ----------- -----------
INCOME BEFORE
EXTRAORDINARY ITEM 764 220 4,540 922
EXTRAORDINARY ITEM:
Loss on extinguishment of debt (156) (459) (156)
----------- ----------- ----------- -----------
NET INCOME $ 764 $ 64 $ 4,081 $ 766
=========== =========== =========== ===========
EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM
BASIC $ 0.15 $ 0.04 $ 0.88 $ 0.21
=========== =========== =========== ===========
DILUTED $ 0.15 $ 0.04 $ 0.88 $ 0.21
=========== =========== =========== ===========
EXTRAORDINARY ITEM:
BASIC $ (0.03) $ (0.09) $ (0.03)
=========== =========== =========== ===========
DILUTED $ (0.03) $ (0.09) $ (0.03)
=========== =========== =========== ===========
EARNINGS PER SHARE AFTER
EXTRAORDINARY ITEM
BASIC $ 0.15 $ 0.01 $ 0.79 $ 0.18
=========== =========== =========== ===========
DILUTED $ 0.15 $ 0.01 $ 0.79 $ 0.18
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 5,170,827 5,153,715 5,169,920 4,283,893
=========== =========== =========== ===========
DILUTED 5,182,333 5,185,983 5,181,426 4,316,161
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
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MALAN REALTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 4,081 $ 766
-------- --------
Adjustments to reconcile net income to net cash flows provided by operating
activities:
Depreciation and amortization 4,748 4,115
Amortization of deferred financing costs 1,405 1,450
Forfeited interest on debt conversions 14
Directors compensation issued in stock 36 36
Net gains on sales of real estate (1,625)
Loss on impairment of real estate 431
Loss on extinguishment of debt 459 156
Change in operating assets and liabilities that provided (used) cash:
Accounts receivable and other assets (1,517) (2,180)
Accounts payable, deferred income and
other accrued liabilities (1,786) 438
-------- --------
Total adjustments 1,720 4,460
-------- --------
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES 5,801 5,226
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate developed, acquired or improved, net
of mortgage assumed (11,318) (35,296)
Deposits to escrow (15,424) (14,068)
Disbursements from escrow 15,556 14,008
Net proceeds from sale of real estate 7,637 240
-------- --------
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES (3,549) (35,116)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from secondary stock offering 21,394
Principal repayments on mortgages (5,038) (416)
Proceeds from mortgages 3,800 18,000
Debt issuance costs (189) (330)
Draws on lines of credit 16,994 21,350
Repayments on lines of credit (12,500) (19,050)
Repurchase of debentures (7,059)
Proceeds from stock options exercised 4 38
Distributions to shareholders (6,595) (5,425)
-------- --------
NET CASH FLOWS PROVIDED BY (USED FOR) (3,524) 28,502
-------- --------
FINANCING ACTIVITIES
Net decrease in cash and cash equivalents (1,272) (1,388)
Cash and cash equivalents at beginning of
period 2,898 1,717
-------- --------
Cash and cash equivalents at end of period $ 1,626 $ 329
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION-
CASH PAID FOR INTEREST DURING THE PERIOD $ 13,576 $ 13,639
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
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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., 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.
2. COMPENSATION PLANS
The activity in the Directors Stock Compensation Plan for the nine months
ended September 30, 1999 consisted of 2,480 shares issued at $14.063-$15.375 per
share.
Compensation expense in connection with the Company's 401(k) retirement
plan for the nine months ended September 30, 1999 was approximately $26,000.
6
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3. MORTGAGES
In February 1999, the Company obtained a $3.8 million mortgage with
Mercantile Bank collateralized by its interest in the Southwind Theater complex
located in Lawrence, Kansas. The loan is for a seven year term due February 2,
2006 with interest fixed at 7.49% for the first five years and a provision for
readjustment after five years. Payments of interest and principal amortized over
20 years are due monthly.
In April 1999, the Company and Bloomfield Acceptance Company amended a
previous loan agreement dated May 1998 to reflect additional loan proceeds of
$3.0 million. As part of the amended agreement, the Company transferred its
interest in the Wal-Mart Plaza in Decatur, Illinois, purchased in January 1999,
to its wholly owned subsidiary, Malan Midwest, LLC as additional collateral for
the loan. Terms of the loan agreement were amended to include monthly payments
of interest on the incremental balance at the rate of 8.245% per year and
principal amortized over 30 years.
4. 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,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before extraordinary item ......................... $ 764 $ 220 $ 4,540 $ 922
======== ======== ======== =======
Net income ............................................... $ 764 $ 64 $ 4,081 $ 766
======== ======== ======== =======
BASIC EPS:
Weighted-average shares outstanding ...................... 5,171 5,154 5,170 4,284
======== ======== ======== =======
Basic earnings per share before
extraordinary item ....................................... $ 0.15 $ 0.04 $ 0.88 $ 0.21
======== ======== ======== =======
Basic earnings per share ................................. $ 0.15 $ 0.01 $ 0.79 $ 0.18
======== ======== ======== =======
DILUTED EPS:
Weighted-average shares outstanding ...................... 5,171 5,154 5,170 4,284
Shares issued upon exercise of dilutive options .......... 156 181 156 181
Shares purchased with proceeds of options ................ (145) (149) (145) (149)
-------- -------- -------- -------
Shares applicable to diluted earnings .................... 5,182 5,186 5,181 4,316
======== ======== ======== =======
Diluted earnings per share before
extraordinary item ....................................... $ 0.15 $ 0.04 $ 0.88 $ 0.21
======== ======== ======== =======
Diluted earnings per share................................ $ 0.15 $ 0.01 $ 0.79 $ 0.18
======== ======== ======== =======
</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
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5. PROPERTY TRANSACTIONS
In January 1999, the Company completed the acquisition of the Wal-Mart
Plaza, a 45,000 square foot community shoping center in Decatur, Illinois, for
$4.68 million.
In March 1999, the Company sold a property in Colma, California containing
a 94,000 square foot freestanding Kmart store, for $7.665 million. A gain of
$1.751 million was realized on the sale.
The Company completed the sale of its interest in Miller Mall, a 130,000
square foot shopping center in Gary, Indiana for $650,000 in August 1999. The
Company incurred a loss of $126,000 on the sale.
6. SUBSEQUENT EVENTS
In October 1999, the Company obtained a $5.484 million mortgage loan with
Bank of America collateralized by its interest in the ground lease of the
Cinemark theater in North Aurora, Illinois. Terms of the mortgage include
payments of interest at 8.7% annually and principal amortized over a 30 year
term. The loan is due in full on November 1, 2009. As part of the loan
agreement, the Company transferred its interest in the ground lease to a wholly
owned subsidiary, Malan Aurora Corp.
The Company has in place a plan to repurchase and retire up to $15 million
aggregate principal of its 9.5% Subordinated Convertible Debentures
("Debentures") due July 2004. Subsequent to September 30, 1999, the Company
repurchased $2.182 million aggregate principal of Debentures at a discount to
stated principal amount.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1999 to Three Months Ended
September 30, 1998
Total revenues increased $112,000 from 1998. Minimum rent increased
approximately $163,000 resulting primarily from the Company's acquisition of the
Wal-Mart Plaza in Decatur, Illinois in March 1999 and the completion of
redevelopments at Melrose Park, Illinois in March 1999, North Aurora, Illinois
in November 1998 and Lawrence, Kansas in October 1998. Percentage rents
increased approximately $285,000 from 1998 primarily due to the implementation
of an accounting pronouncement in September 1998 that was subsequently reversed
in the fourth quarter 1998. Recoveries from tenants decreased approximately
$181,000 due to a corresponding decrease in recoverable operating expenses
discussed below. A loss of approximately $126,000 was incurred on the sale of a
property in Gary, Indiana in August of 1999.
Total operating expenses decreased approximately $595,000 from 1998 to
1999. Property operating and maintenance expense, decreased approximately
$162,000, primarily due to lower expenditures on parking lots, security and
interior maintenance costs. General and administrative expense decreased $77,000
primarily due to decreased compensation expense. Depreciation and amortization
expense increased approximately $157,000 primarily due to the acquisitions and
redevelopments discussed above. In 1998, the Company incurred a loss on
impairment of real estate of approximately $431,000 due to the write down of its
interest in the Gary, Indiana asset to its net realizable value in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121. No losses on
impairment of real estate have been incurred in 1999.
Interest expense (including related amortization of deferred financing
costs) increased approximately $163,000 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.
In 1998 the Company incurred extraordinary loss on extinguishment of debt
totaling $156,000 on the repurchase and retirement of its 9.5% Subordinated
Convertible Debentures ("Debentures") due July 2004, primarily from the write
off of deferred financing costs associated with the retired debt. No losses on
repurchases of Debentures were incurred during the three months ended September
30, 1999.
Overall, net income increased approximately $700,000 to $764,000 in 1999
primarily as a result of an increase in operating income from acquisitions and
redevelopments and the absence of the loss on impairment of real estate and
extinguishment of debt recognized in 1998.
Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
Total revenues increased $5.531 million from 1998. Approximately $1.625
million of the increase resulted from a gain of $1.751 million on the sale of a
freestanding Kmart retail building located in Colma, California in March 1999
offset by a loss of $126,000 incurred on the sale of property in Gary, Indiana
in August 1999. Minimum rents and recoveries from tenants increased $3.521
million resulting primarily from
9
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the Company's acquisition of a 12 shopping center portfolio in May 1998, the
Wal-Mart Plaza in Decatur, Illinois in March 1999 and the completion of
redevelopments at Melrose Park, Illinois in March 1999, North Aurora, Illinois
in November 1998 and Lawrence, Kansas in October 1998. Percentage rent increased
approximately $379,000 from 1998 primarily due to the implementation of an
accounting pronouncement in September 1998 that was subsequently reversed in the
fourth quarter 1998 as well as overall increases in percentage rents from Kmart
and Wal-Mart, the Company's two largest tenants.
Total operating expenses increased $1.236 million from 1998 to 1999.
Property operating and maintenance expense, other operating expenses, real
estate taxes and depreciation and amortization increased $420,000, $82,000,
$388,000 and $633,000, respectively, primarily due to the acquisitions and
redevelopments discussed above. General and administrative expense increased
$144,000, primarily due to increased compensation expense and increased state
franchise and income taxes due to the acquisitions referred to above. In 1998,
the Company incurred a loss on impairment of real estate of approximately
$431,000 due to the write down of its interest in the Gary, Indiana asset to its
net realizable value in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121. No losses on impairment of real estate have been
incurred in 1999.
Interest expense (including related amortization of deferred financing
costs) increased approximately $677,000 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 the pay down of a portion of the Company's Securitized
Mortgage Loan in connection with the sale of property in Colma, California, the
Company incurred an extraordinary loss on extinguishment of debt of $459,000,
primarily from the charge off of deferred financing costs associated with the
pay down and a related prepayment penalty. This is an increase of $303,000 rom
1998 when a loss of $156,000 was incurred on the repurchase and retirement of
Debentures.
Overall, net income increased approximately $3.315 million to $4.081
million in 1999 primarily as a result of a net gain on the sale of property
combined with an increase in operating income resulting from acquisitions and
redevelopments offset by an increase in extraordinary losses incurred on the
extinguishment of debt.
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 developed a high-level plan to address the
risks posed by the Year 2000 issue which includes the testing of internal
systems and inquiry of third parties with which the Company conducts business
including major tenants, vendors, contractors and creditors. The Company has
obtained written confirmation of Year 2000 readiness from major third parties.
Implementation and testing of Year 2000 remedies for all critical systems has
been completed and the results of such precedures indicate that no significant
year 2000 problems within the Company or its major third parties remain
unremedied at this time.
There are Year 2000 issues that will generally affect all businesses
including the Company, such as the Year 2000 compliance of public utility
companies and governmental agencies. If such issues occur, then there could be
an interruption in, or failure of, the Company's normal business activities,
that could have a material adverse effect on the Company's operations, liquidity
and financial condition. At this time, there is insufficient information to
evaluate the likelihood of such an occurrence.
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While the Company would generally expect to manage business interruptions
relating to Year 2000 issues in a manner similar to other potential interruption
issues encountered in the regular course of business, the Company is developing
certain contingency plans relating specifically to Year 2000 issues. For
example, the current contingency plan would allow the Company to operate for a
short period of time without the intervention of computers. The Company intends
to modify its contingency plans as necessary as it progresses with its Year 2000
project. However, the contingency plans are expected to provide relief only for
short periods, after which there could be an interruption in, or failure of, the
Company's normal business activities, that could have a material adverse effect
on the Company's operations, liquidity and financial condition. The Company does
not expect the costs to address the Year 2000 issue to be material.
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 prescribed by the National Association of Real Estate
Investment Trusts (NAREIT), as further clarified in a 1995 opinion 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 Company reports 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.
11
<PAGE> 12
The following table shows the components that comprise the Company's FFO for the
three months and the nine months ended September 30, 1999 and 1998 and the
reconciliation of basic to diluted FFO, (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME ............................................................ $ 764 $ 64 $ 4,081 $ 766
DEPRECIATION AND AMORTIZATION
Depreciation of buildings and improvements ........................ 1,534 1,411 4,511 3,940
Amortization of tenant allowances and tenant
improvements .................................................... 51 28 127 85
Amortization of leasing costs ..................................... 40 29 106 85
(Gain) loss on sale of real estate ................................ 126 -- (1,625) --
Loss on impairment of real estate ................................. -- 431 -- 431
Loss on extinguishment of debt .................................... -- 156 459 156
------- ------- ------- -------
FUNDS FROM OPERATIONS, BASIC ......................................... $ 2,515 $ 2,119 $ 7,659 $ 5,463
Interest expense on convertible securities ........................ 1,641 1,854 4,922 5,635
Amortization of deferred financing costs on
convertible securities ........................................... 71 78 214 244
------- ------- ------- -------
FUNDS FROM OPERATIONS, DILUTED ........................................ $ 4,227 $ 4,051 $12,795 $11,342
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .............................................................. 5,171 5,154 5,170 4,284
Shares issued upon conversion of
convertible securities ........................................... 4,231 4,765 4,231 4,825
Shares issued upon exercise of options net
of share repurchased with proceeds ............................... 11 32 11 32
------- ------- ------- -------
Diluted ............................................................. 9,413 9,951 9,412 9,141
======= ======= ======= =======
</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.
Acquisitions
In January 1999, the Company completed the acquisition of the Wal-Mart
Plaza, a 45,000 square foot community shopping center in Decatur, Illinois, for
$4.68 million. The acquisition was originally part of a larger portfolio of
Wal-Mart anchored shopping centers which was acquired by the Company in 1998 and
was delayed to accomodate the completion of an expansion of the center. The
acquisition was funded out of proceeds from the Company's line of credit with
Bank One (the "Bank One Line") and from
12
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available cash reserves.
Redevelopments
In March 1999, construction was completed at the Company's property in
Melrose Park, Illinois on a 61,000 square foot, 10-plex theater complex. The
theater was constructed under an agreement with Cinemark USA ("Cinemark") and
replaced a freestanding former Builders Square building which had been vacant
since 1995. In accordance with the agreement, upon completion, the Company
provided a construction allowance to Cinemark of approximately $3.9 million
which was funded primarily out of proceeds of a $3.8 million mortgage with
Mercantile Bank discussed further below. Total costs of the development,
including capitalized interest, taxes and leasing commissions, were
approximately $4.8 million.
Construction was completed in March 1999 on a new 24,000 square foot Ace
Hardware Store in Arkansas City, Kansas. The former Kmart store was redeveloped
and subdivided at a cost of approximately $619,000, including capitalized
interest, taxes and leasing commissions, which was funded primarily from the
Company's line of credit with Greenwich Capital Markets, Inc. (the "Greenwich
Capital Line"). The Company is negotiating with several national and regional
retailers to lease the remaining 16,000 square feet of the building.
In June 1999, construction was completed at the Company's property in
Lincoln, Illinois to redevelop the unleased 25,000 square feet of a 40,000
square foot former Kmart store into an office supply store under a lease
agreement with Staples, Inc. Total cost of the redevelopment was approximately
$769,000, including capitalized interest, taxes and leasing commissions, and was
funded out of available working capital.
Phase II of the redevelopment of the Pine Ridge Plaza in Lawrence, Kansas
began in July 1999 with the commencement of construction of a 5,000 square foot
International House of Pancakes restaurant which is anticipated to be completed
by the end of 1999. Current plans also call for the addition of two "big box"
national retailers consisting of 20-25,000 square feet each and approximately
15,000 square feet of additional in-line retail space. Construction on one of
the two big box retailers is anticipated to begin sometime in the first quarter
2000, after finalization of lease terms. Total costs of the Phase II development
are anticipated to range from approximately $3.7 million to $4.0 million
depending on the final scope of the project and are anticipated to be expended
over the next twelve to eighteen months. Possible sources of funding for the
project include the Company's lines of credit and property specific financing.
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 1999, the Company anticipates spending approximately $1.1 million
(of which $711,000 had been incurred in the nine months ended September 30,
1999) 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 1999 excluding costs
associated with the redevelopement projects discussed above is estimated to be
approximately
13
<PAGE> 14
$275,000 (of which $188,000 had been incurred in the nine months ended September
30, 1999). These expenditures are generally funded by operating cash flows and
increased revenues resulting from such expenditures.
Sources of Capital
In March 1999, the Company sold a property in Colma, California containing
a freestanding Kmart store, for $7.665 million. In conjunction with the sale,
the Company paid down $3.625 million on its Securitized Mortgage Loan to have
the property released from the collateral pool. Net proceeds from the sale of
$3.5 million after mortgage repayment and selling expenses were used to reduce
the outstanding balance on the Company's lines of credit.
In August 1999, the Company completed the sale of its interest in Miller
Mall, a 130,000 square foot shopping center in Gary, Indiana for $650,000. Net
proceeds after expenses of sale of approximately $425,000 were used for general
working capital purposes.
In February 1999, the Company obtained a $3.8 million mortgage with
Mercantile Bank collateralized by its interest in the Southwind Theater complex
located in Lawrence, Kansas. The loan is for a seven year term due February 2,
2006 with interest fixed at 7.49% for the first five years and a provision for
readjustment after five years. Payments of interest and principal amortized over
20 years are due monthly. Proceeds of the loan were utilized to pay a portion of
the construction allowance due Cinemark for the theater in Melrose Park,
Illinois.
In April 1999, the Company and Bloomfield Acceptance Company amended a
previous loan agreement dated May 1998 to reflect additional loan proceeds of
$3.0 million. As part of the amended agreement, the Company transferred its
interest in the Wal-Mart Plaza in Decatur, Illinois purchased in January 1999 to
its wholly owned subsidiary, Malan Midwest, LLC, as additional collateral for
the loan. Terms of the loan agreement were amended to include monthly payments
of interest on the incremental balance at the rate of 8.245% per year and
principal amortized over 30 years. The additional loan proceeds were used to pay
down the Greenwich Capital Line and for general working capital purposes.
Subsequent to September 30, 1999, the Company obtained a $5.484 million
mortgage loan with Bank of America collateralized by its interest in the ground
lease of the Cinemark theater in North Aurora, Illinois. Terms of the mortgage
include payments of interest at 8.7% annually and principal amortized over a 30
year term. The loan is due in full on November 1, 2009. As part of the loan
agreement, the Company transferred its interest in the ground lease to a wholly
owned subsidiary, Malan Aurora Corp. Funds from the loan were used to pay down
the outstanding balances on the Company's lines of credit.
The Company has in place a plan to repurchase and retire up to $15 million
aggregate principal of its 9.5% Subordinated Convertible Debentures
("Debentures") due July 2004. Through September 30, 1999, the Company had
repurchased $9.625 million of Debentures. Subsequent to September 30, 1999, the
Company repurchased $2.182 million aggregate principal of Debentures at a
discount to stated principal amount. The repurchases were funded out of
available working capital.
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 two lines of
credit available for temporary working capital needs and intends to enter into
other secured and unsecured financing agreements in the future as the need
arises.
14
<PAGE> 15
In March 1999, the Company extended the Bank One Line through March 31,
2000. The Bank One Line calls for monthly payments of interest at the rate of
200 basis points over LIBOR and is collateralized by the Company's interest in
Orchard-14 Shopping Center in Farmington Hills, Michigan. The Greenwich Capital
Line is a revolving line of credit which expires in 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. Total maximum borrowings under the
Greenwich Capital Line and the Bank One Line as of September 30, 1999 were $17.2
million and $4.5 million, respectively, and there was $15.5 million outstanding
on the Greenwich Capital Line as of that date.
The Company has entered into a letter agreement with the lender to extend
the Greenwich Capital Line for two years and amend certain terms of the
agreement including the interest rate and collateral properties. The Company is
also in discussions with several lenders to obtain permanent financings on
several of its unencumbered 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.
INFLATION
The Company's long-term leases contain provisions to mitigate the adverse
impact of inflation on its results of 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 ten years, which permits the Company to seek increases in
rents upon re-rental at then current 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.
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has exposure to interest rate risk on its debt obligations and
interest rate instruments. Based on the Company's outstanding variable rate debt
at September 30, 1999, a one percent increase or decrease in interest rates
would decrease or increase, respectively, the Company's earnings and cash flows
by approximately $155,000 on an annualized basis.
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:
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: November 10, 1999
17
<PAGE> 18
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,824
<SECURITIES> 0
<RECEIVABLES> 10,927
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,751
<PP&E> 266,078
<DEPRECIATION> 25,022
<TOTAL-ASSETS> 255,807
<CURRENT-LIABILITIES> 9,608
<BONDS> 197,460
0
0
<COMMON> 74,182
<OTHER-SE> (25,443)
<TOTAL-LIABILITY-AND-EQUITY> 255,807
<SALES> 0
<TOTAL-REVENUES> 34,108
<CGS> 0
<TOTAL-COSTS> 10,097
<OTHER-EXPENSES> 6,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,222
<INCOME-PRETAX> 4,540
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,540
<DISCONTINUED> 0
<EXTRAORDINARY> (459)
<CHANGES> 0
<NET-INCOME> 4,081
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.79
</TABLE>
