UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 No. 1-13080
GROVE PROPERTY TRUST
(Exact name of registrant as specified in its charter)
Maryland 06-1391084
(State or other jurisdiction of incorporation or organization) (IRS
Employer Identification No.)
598 Asylum Avenue, Hartford, Connecticut 06105
(Address of Principal Executive Offices) (Zip Code)
(860) 246-1126
(Issuer's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Shares of Beneficial Interest, American Stock Exchange
$.01 par value
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
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
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90-days.
Yes: X No:
The number of Common Shares of Beneficial Interest outstanding as of November
6, 1998 was 8,238,074.
<PAGE>
GROVE PROPERTY TRUST
Form 10-Q
Index
- ------------------------------------------------------------------------------
Page
Part I: Financial Information 3
Item 1: Consolidated Financial Statements (unaudited) 3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 3
Consolidated Statements of Income for the Three Months
Ended September 30, 1998 and 1997 4
Consolidated Statements of Income for the Nine Months
Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II: Other Information 18
Item 1: Legal Proceedings 18
Item 2: Change in Securities and Use of Proceeds 18
Item 3: Defaults upon Senior Securities 18
Item 4: Submission of Matters to a Vote of Security Holders 18
Item 5: Other Information 18
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index E-1
2
<PAGE>
GROVE PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
September 30, 1998 December 31, 1997
(Unaudited) (Audited)
(In thousands)
ASSETS
Real estate assets:
Land $ 28,402 $ 21,403
Buildings and improvements 167,798 125,412
Furniture, fixtures and equipment 1,919 952
--------------- --------------
198,119 147,767
Less accumulated depreciation (7,631) (3,674)
--------------- --------------
Net real estate assets 190,488 144,093
Cash and cash equivalents 2,950 1,466
Due from affiliates 564 620
Deferred charges, net of accumulated
amortization of $97 and $127, respectively 971 849
Other assets 3,039 1,122
--------------- --------------
Total assets $ 198,012 $148,150
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 92,771 $ 33,457
Revolving credit facility 9,600 15,601
Other liabilities 1,623 1,387
Distributions payable 1,923 1,436
Security deposits 2,485 2,026
Due to affiliates 209 49
--------------- -------------
Total liabilities 108,611 53,956
Minority interests in consolidated
partnerships 1,065 1,357
Minority interest in Operating
Partnership 21,804 24,339
Shareholders' equity:
Preferred shares, $.01 par value
per share, 1,000,000 shares
authorized; no shares issued
or outstanding - -
Common shares, $.01 par value per
share, 34,000,000 shares authorized;
8,458,754 and 8,453,829 shares
issued and outstanding, respectively 84 84
Additional paid-in capital 68,389 68,976
Distributions in excess of earnings (1,941) (562)
--------------- --------------
Total shareholders' equity 66,532 68,498
--------------- --------------
Total liabilities and shareholders'
equity $ 198,012 $ 148,150
=============== ==============
See notes to consolidated financial statements.
3
<PAGE>
GROVE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended
September 30,
1998 1997
(In thousands, except per
share data)
Revenues:
Rental income $ 9,252 $ 5,506
Property management - affiliates 108 162
Other income 72 36
Interest income 29 48
------------- ------------
Total revenues 9,461 5,752
------------- ------------
Expenses:
Property operating and maintenance 3,060 1,777
Real estate taxes 945 600
Interest expense 1,666 955
General and administrative 443 263
Depreciation and amortization 1,614 1225
------------- ------------
Total expenses 7,728 4,820
------------- ------------
Income before minority interests 1,733 932
Minority interests in consolidated
partnerships 20 65
Minority interest in Operating
Partnership 424 347
------------- ------------
Net income $ 1,289 $ 520
============= ============
Net income per share - basic $ 0.15 $ 0.13
============= ============
Net income per share - assuming dilution $ 0.15 $ 0.13
============= ============
Weighted average number of common shares
outstanding-basic 8,477 3,954
Effect of warrants and stock options - 63
------------- ------------
Weighted average number of shares
outstanding-assuming dilution 8,477 4,017
============= ============
See notes to consolidated financial statements.
4
<PAGE>
GROVE PROPERTY TRUST
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
For the Nine Months Ended
September 30,
1998
1997
(In thousands, except per share data)
Revenues:
Rental income $ 25,130 $10,944
Property management-affiliates 341 380
Other income 156 122
Interest income 75 90
------------ ------------
Total revenues 25,702 11,536
------------ ------------
Expenses:
Property operating and maintenance 8,600 3,741
Real estate taxes 2,561 1,143
Related party management fees - 22
Interest expense 4,056 1,732
General and administrative 1,242 610
Depreciation and amortization 4,094 2,380
------------ ------------
Total expenses 20,553 9,628
------------ ------------
Income before minority interests and
extraordinary expenses 5,149 1,908
Minority interests in consolidated
partnerships 58 114
Minority interest in Operating
Partnership 1,303 658
------------ ------------
Income before extraordinary expenses 3,788 1,136
Extraordinary expenses related to debt
refinancing, net of minority interests 838 -
------------ ------------
Net income $2,950 $1,136
============ ============
Income before extraordinary expenses per
share-basic $ 0.45 $ 0.37
Extraordinary expenses per share - basic 0.10 -
------------ ------------
Net income per share - basic $ 0.35 $ 0.37
============ ============
Income before extraordinary expenses per share
- assuming dilution $ 0.45 $ 0.37
Extraordinary expenses per share - assuming
dilution 0.10 -
------------ ------------
Net income per share - assuming dilution $ 0.35 $ 0.37
============ ============
Weighted average number of common shares
outstanding - basic 8,462 3,075
Effect of warrants and stock options 6 12
------------ ------------
Weighted average number of shares outstanding -
assuming dilution 8,468 3,087
============ ============
See notes to consolidated financial statements.
5
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GROVE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30,
1998 1997
(In thousands)
Operating Activities:
Net income $ 2,950 $ 1,136
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 4,094 2,380
Extraordinary expenses related to debt
refinancing 838 -
Minority interests 1,361 772
Non-cash compensation expense 90 90
Imputed Interest - Mortgage - 20
Change in other assets (1,917) (1,247)
Change in accounts payable, accrued expenses
and other liabilities 602 693
------------ ------------
Net cash provided by operating activities 8,018 3,844
------------ ------------
Investing activities:
Purchase of OP Units and partnership
interests (2,751) (8,333)
Deferred charges (23) (1,076)
Cash acquired on purchase of partnership
interests 62 3,013
Additions to real estate assets (35,169) (5,846)
------------ ------------
Net cash used in investing activities (37,881) (12,242)
------------ ------------
Financing activities:
Net proceeds from mortgage notes payable 63,000 26,209
Net repayments of Revolving Credit Facility (6,001) -
Proceeds from sale of common stock - 30,000
Equity offering costs (63) (2,476)
Repayment of mortgage notes payable (18,210) (41,888)
Borrowings from (loans to) affiliates, net 177 (758)
Financing costs (740) (648)
Prepayment penalty on debt refinancing (669) -
Repurchase of stock (781) -
Dividends and distributions paid (5,366) (1,422)
------------ ------------
Net cash provided by financing activities 31,347 9,017
------------ ------------
Net change in cash and cash equivalents 1,484 619
Cash and cash equivalents, beginning of period 1,466 539
------------ -----------
Cash and cash equivalents, end of period $ 2,950 $ 1,158
============ ===========
Supplemental Information:
Cash paid for interest $ 3,739 $ 1,928
Net rental property acquired in connection
with debt assumed $15,042 $ 74,809
Net rental properties contributed in
exchange for OP Units $ 61 $ 19,829
Excess of liabilities over assets assumed
on acquisition of partnership interests $ 80 $ 1,732
See notes to consolidated financial statements.
6
<PAGE>
GROVE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. FORMATION AND DESCRIPTION OF THE COMPANY
Grove Property Trust (the "Company") was organized in the State of
Maryland on April 4, 1994 as a Real Estate Investment Trust ("REIT"). The
Company currently operates fifty-nine residential communities and four
retail properties. The residential communities are generally mid-priced
multi-family communities that are located in New England.
2. ACQUISITIONS, CONSOLIDATION TRANSACTIONS, AND EQUITY OFFERINGS
On March 14, 1997, the Company completed a series of transactions (the
"Consolidation Transactions") that included the following:
The Company formed an operating partnership (the "Operating
Partnership" or the "OP") to serve as the vehicle for the consolidation
of ownership and control of the Company's operations and assets.
Pursuant to an exchange offer, the Operating Partnership purchased
from non-affiliated limited partners substantially all of the
outstanding partnership interests of twenty properties, including one
retail property ("Property Partnerships") in exchange for 1,205,324
partnership units (the "Common Units" or "OP Units") of the Operating
Partnership, or, in certain circumstances, cash. Common Units are
generally exchangeable for the Company's Common Shares on a one-for-one
basis.
Immediately prior to the consummation of the Consolidation
Transactions, the Company declared a stock dividend aggregating 26,250
Common Shares and concurrently effected a 1.125-for-one stock split
(collectively the "Stock Split"), thereby issuing on a pro rata basis a
total of 95,102 additional Common Shares to the holders of the issued
and outstanding Common Shares just prior to the Consolidation
Transactions. All amounts based on outstanding Common Shares have been
retroactively adjusted to reflect the Stock Split.
The Company issued 3,333,333 Common Shares to new equity investors
(the "New Equity Investment") in exchange for $30.0 million
(approximately $27.5 million after costs of issuance).
Pursuant to a contribution agreement among the Company, certain
companies and individuals affiliated with the Company (the "Grove
Companies") and the Operating Partnership, substantially all of the
assets and operations, the management services division of Grove
Property Services Limited Partnership and the Grove Companies'
interests in the Property Partnerships were also transferred to the
Operating Partnership.
In exchange for the above, the Grove Companies received an aggregate of
909,115 Common Units in the Operating Partnership and a cash payment of
$178,000 from the Company, and the Company received 620,102 Common
Units in the Operating Partnership. Additionally, the Company
contributed to the Operating Partnership the net proceeds received from
the New Equity Investment in exchange for 3,333,333 additional Common
Units.
In connection with the Consolidation Transactions, the Operating
Partnership entered into a three-year secured revolving acquisition and
working capital credit facility of up to $25.0 million (the "Original
Revolving Credit Facility") and a $15.1 million ten-year term mortgage
loan (the "Mortgage Loan").
On June 1, 1997, the Company acquired two related party residential
apartment complexes ("Four Winds" and "Brooksyde"). In addition, the
Company acquired an interest in Windsor Arbor Limited Partnership, the
owner of River's Bend Apartment ("Windsor Arbor"). Upon consummation of
the June 1, 1997 transactions, the Operating Partnership issued an
aggregate of 420,183 Common Units valued at $10 per unit. The Company
also assumed mortgage debt on Four Winds and Brooksyde in the aggregate
remaining principal amount of $6.2 million. To complete these
transactions, the Company borrowed $1.8 million under the Original
Revolving Credit Facility.
7
<PAGE>
On July 2, 1997, the Company acquired certain condominium units
representing a portion of the condominium units in the Greenfield Village
complex located in Rocky Hill, Connecticut, from an unrelated party. The
Company paid approximately $4.3 million, in the aggregate, with proceeds
from the Original Revolving Credit Facility for these units.
On September 1, 1997, the Company acquired two apartment communities from
related parties, Glastonbury Center Apartments in Glastonbury,
Connecticut, and Summit and Birch Hill Apartments in Farmington,
Connecticut. The Operating Partnership issued 325,836 Common Units valued
at $10.50 per unit, assumed $9.8 million in debt and drew down $750,000
against the Original Revolving Credit Facility to acquire these properties.
On September 30, 1997, the Company acquired the remaining limited
partnership interests in Windsor Arbor for $4.9 million with proceeds from
the Original Revolving Credit Facility.
On October 31, 1997, the Company purchased an apartment community from an
unrelated party in Ellington, Connecticut, ("High Meadow"). The $4.2
million purchase price was paid utilizing borrowings under the Original
Revolving Credit Facility.
In addition, on October 31, 1997, the Company acquired two retail
properties from related parties. These acquisitions, Cornerblock and the
Wharf Building, are specialty retail properties located in Edgartown,
Massachusetts. Upon consummation of the Cornerblock and Wharf Building
transactions, the Operating Partnership issued an aggregate of 143,334
Common Units valued at $10.50 each. To complete these transactions, the
Company borrowed approximately $7.0 million under the Original Revolving
Credit Facility.
In November 1997, the Company completed the sale of 4,500,000 Common
Shares ("the November 1997 Offering"). The net proceeds from the sale
after underwriting discounts and other costs were approximately $45.2
million. The Company used the proceeds to pay off the Original Revolving
Credit Facility and certain mortgage notes payable (see Notes 5 and 6) and
for working capital purposes.
On December 1, 1997, the Company acquired an apartment community from an
unrelated party in Ellington, Connecticut, ("Pinney Brook") for
approximately $950,000. The purchase price was paid from working capital.
On December 31, 1997, the Company acquired four communities from unrelated
parties for approximately $20.0 million. The individual communities are
Briar Knoll, Ribbon Mill, Hilltop and Spring Hill Commons and are located
respectively in Manchester, Vernon and Norwich, Connecticut, and Acton,
Massachusetts. The purchase price was paid utilizing borrowings under the
Original Revolving Credit Facility and cash on hand.
On January 23, 1998, the Company purchased an apartment community,
Tanglewood Apartments, located in West Warwick, Rhode Island, from an
unrelated party. The purchase price of approximately $7.0 million was
paid utilizing borrowings under the Original Revolving Credit Facility.
On April 1, 1998, the Company purchased a specialty retail property in
Freeport, Maine, and an apartment community in Agawam, Massachusetts. The
retail property includes a 25,000 square foot complex and was purchased
for approximately $7.2 million. The apartment community includes 88 units
and was purchased from an affiliate of the Company for approximately $3.3
million. These acquisitions were financed through the assumption of a
$3.9 million first mortgage on the retail property, issuance of 5,818
Common Units, and utilizing borrowings under the Original Revolving Credit
Facility.
On June 1, 1998, the Company acquired two residential properties in East
Providence, Rhode Island, from an unrelated party. The purchase price of
$19.4 million was financed with the assumption of a $2.4 million loan and
$17.0 million from the new long-term mortgage financing described in Note
4.
On August 7, 1998, the Company acquired an apartment community located in
Sturbridge, Massachusetts, for approximately $4.0 million. The purchase
price was financed with the assumption of a $2.4 million loan and $1.6
million from the 1998 Credit Facility (as defined in Note 5).
On August 28, 1998, the Company acquired an apartment community located in
East Haven, Connecticut, for approximately $4.5 million. The purchase
price was financed with the assumption of a $2.9 million loan and $1.6
million from the 1998 Credit Facility.
The Company intends to continue to operate all of its multi-family
communities and retail commercial properties as rental properties.
8
<PAGE>
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements are presented on a consolidated basis. Included
in the Company's financial statements are the accounts of the Operating
Partnership and various property partnerships. Properties are owned
either directly by the Operating Partnership or are owned by various
limited partnerships or limited liability companies, that in turn are
substantially (89% to 99%) or wholly owned by the Operating Partnership.
All significant intercompany transactions are eliminated in consolidation.
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles for interim financial information and in conjunction with the
rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the interim financial statements presented herein
reflect all adjustments of a normal and recurring nature, which are
necessary to fairly state the interim financial statements. The results
of operations for the interim period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. These financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. Certain amounts have been reclassified in the
1997 financial statements in order to conform to the 1998 financial
statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments from financial
institutions with an original maturity of three months or less at the time
of purchase to be cash equivalents. The combined account balances at each
financial institution periodically exceed the Federal Depository Insurance
Corporation ("FDIC") insurance coverage and, as a result, there is a
concentration of credit risk related to amounts on deposit in excess of
FDIC insurance coverage. The Company believes that the risk is not
significant since its cash is on deposit with major financial institutions.
Real Estate Asset Capitalization and Depreciation
Acquisitions are recorded in accordance with the purchase method of
accounting. Expenditures for long-lived replacement-type items in
stabilized properties, such as appliances and floor coverings, are
capitalized. Furthermore, expenditures for non-recurring items under
$1,000 and for normal tenant turnover expenses (such as cleaning and
painting) and repairs and maintenance are expensed as incurred. With
respect to redevelopment properties, the Company generally capitalizes all
redevelopment related costs incurred throughout the redevelopment stage.
Depreciation is provided for building and land improvements and buildings
using the straight-line method over the estimated useful lives of the
assets (10 to 30 years). Additionally, furniture, fixtures and equipment
are depreciated using an accelerated method over the estimated useful
lives of the assets (5 to 7 years).
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,
requires long-lived assets to be reviewed for impairment when events or
circumstances indicate that an impairment might exist. When an impairment
indicator is present, assets must be grouped at the lowest level for which
there are identifiable cash flows. If the sum of the undiscounted cash
flows is less than the carrying amounts of the assets, an impairment loss
must be recorded. The impairment loss is measured by comparing the fair
value of the assets with its carrying amount. To date, no losses have
been recognized and management believes that no impairment conditions
exist.
Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes the dilutive effects of options and warrants
(see Note 6). Earnings per share, assuming dilution, is very similar to
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented and restated to conform to Statement 128.
9
<PAGE>
Income per common share information is based on the weighted average
number of Common Shares outstanding during each period. On February 10,
1997, the Board of Trust Managers of the Company declared a stock dividend
aggregating 26,250 Common Shares and the concurrent effectuation of a
1.125-for-one common stock split. All shares outstanding and per share
amounts have been restated to reflect these changes in capital structure.
Stock-Based Compensation
The Company has adopted Financial Accounting Standard No. 123, Accounting
for Stock-Based Compensation. This statement defines a fair value based
method of accounting for employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those
plans in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB No. 25, compensation
cost is the excess, if any, of the quoted market price of the stock at the
grant date over the amount the employee must pay to acquire the stock.
The Company has elected to continue to account for its employee stock
compensation plans under APB No. 25.
Advertising
The Company expenses advertising costs as incurred. Advertising costs
were $156,329 and $56,394 for the three months ended September 30, 1998
and 1997, respectively, and $395,899 and $115,559 for the nine months
ended September 30, 1998 and 1997, respectively.
Deferred Charges
Deferred charges, consisting principally of loan costs, are amortized on a
straight-line basis over the term of the related obligation. When term
loans are retired prior to maturity, the unamortized deferred loan costs
are written-off and reported as an extraordinary expense item.
Revenue Recognition
Rental income attributable to leases is recorded when due from tenants and
recognized monthly as it is earned, which is not materially different than
the straight-line basis. The Company generally requires tenants to
provide a cash security deposit equal to one month's rent or pay the last
month's rent in advance. Such payments are deferred and are included in
security deposits on the accompanying consolidated balance sheets.
4. MORTGAGE NOTES PAYABLE
On June 1, 1998, the Company obtained a $63.0 million ten-year term loan
with a lender. The net proceeds of the loan were used to repay an
existing $15.0 million loan, acquire two properties in East Providence for
$17.0 million (see Note 2), pay down $27.0 million of the Revolving Credit
Facility and the remaining amount of approximately $3.0 million was
deposited in working capital reserves or used for transaction costs.
Payments of interest only are due under the new $63.0 million loan at an
effective fixed interest rate of 6.71% and the loan matures in June 2008.
As of September 30, 1998, the Company's weighted average interest rate on
its long-term debt is 7.0% and its weighted average maturity is 10.1 years.
As a result of the $15.0 million loan repayment and retirement of the
Original Revolving Credit Facility (see Note 5), the Company incurred $0.2
and $0.3 million, respectively, of expenses related to the write-off of
unamortized finance costs. In addition, the Company incurred $0.7 million
of expense in connection with the breakage of certain LIBOR swap
contracts. Accordingly, the results of operations for the nine months
ended September 30, 1998 reflect approximately $0.8 million of
extraordinary expenses (net of minority interests).
Mortgage notes payable consist of the following at September 30, 1998 (in
thousands):
Amortizing first mortgage notes $ 25,771
Interest only first mortgage notes 67,000
----------
$ 92,771
==========
The amortizing first mortgage notes have fixed interest rates between
7.04% and 10.08%. These notes mature between the years 2000 and 2031 and
are collateralized by nine of the properties with a carrying amount of
approximately $37.0 million as of September 30, 1998. Certain of these
notes are partially guaranteed by certain executive officers and
shareholders of the Company.
10
<PAGE>
There are two interest only first mortgage notes. One note has a
principal balance of $4.0 million requiring monthly payments of
interest only at a fixed rate of 7.00% and matures in 2007. This note
is collateralized by one property with a carrying amount of approximately
$6.3 million as of September 30, 1998. The other note has a principal
balance of $63.0 million requiring monthly payments of interest at an
effective fixed interest rate of 6.71% and matures in 2008. This note is
collateralized by seventeen properties with an aggregate-carrying amount
of approximately $77.4 million as of September 30, 1998.
Annual principal payments due as of September 30, 1998, are as follows (in
thousands):
Period Ending December 31,
1998 $ 111
1999 372
2000 402
2001 436
2002 472
Thereafter 90,978
---------
$92,771
=========
5. REVOLVING CREDIT FACILITY
In March 1997, the Operating Partnership entered into a three year
revolving credit facility with a bank, guaranteed by the Company for up to
$25.0 million (i.e., the Original Revolving Credit Facility). Borrowings
under the Original Revolving Credit Facility were collateralized by
thirteen properties and interest was payable monthly at a floating rate of
1.5% above the 30, 60, or 90-day LIBOR rate.
In April 1998, the Operating Partnership entered into a new two-year
Revolving Credit Facility (the "1998 Credit Facility") with its bank and
retired the Original Revolving Credit Facility. The new 1998 Credit
Facility increased the availability of the credit line to $50.0 million
from $25.0 million and converted the line to an unsecured line from a
secured line. The 1998 Credit Facility bears interest payable monthly at
a floating rate of 1.5% above the 30, 60, or 90-day LIBOR rate. The 1998
Credit Facility is available to fund future property acquisitions and up
to $5.0 million is available to fund working capital needs. As of
September 30, 1998, the 1998 Credit Facility had $9.6 million outstanding.
6. SHAREHOLDERS' EQUITY
The following table outlines the 1997 and 1998 activity in the Operating
Partnership equity accounts:
Number of:
Limited
Company's Partners'
Operating Operating
Partnership Partnership
Units Units
Outstanding at January 1, 1997 620,102 -
Consolidation Transactions in March 1997: - -
New Equity Investment 3,333,333 -
Transfer of property interests-Grove
Companies - 909,115
Transfer of property interests-non-
affiliates - 1,205,324
June 1997 acquisitions - 420,183
Proceeds from stock options in May 1997 394 -
September 1997 acquisitions - 325,836
October 1997 acquisitions - 143,334
The November 1997 Offering 4,500,000 -
April 1998 acquisitions - 5,818
OP Units redeemed April 1998 through September
1998 - (213,264)
OP Units exchanged July 1998 through September
1998 25,722 (25,722)
Common Shares repurchased by the Company
during September 1998 (83,950) -
Executive stock grants - September 1998 63,153 -
------------------------
Outstanding at September 30, 1998 8,458,754 2,770,624
========================
Ownership Percentage 75.3% 24.7%
========================
Income is allocated to the Minority Interest in the Operating
Partnership based on its weighted average ownership percentage of
the Operating Partnership. The ownership percentage is computed by
dividing the weighted average number of OP Units held by the
Limited Partners ("Minority Interest") by the total weighted
average OP Units outstanding. Issuance of additional Common
Shares in connection with requested redemptions of OP Units or
11
<PAGE>
redemption of OP Units for cash changes the ownership percentage of both
the Minority Interest and the Company. An OP Unit and a Common Share have
essentially the same economic characteristics as they effectively share
equally in the net income or loss and distributions of the OP. OP
Units generally may be redeemed for cash or, at the election of the
Company, for Common Shares on a one-for-one basis subject to certain
adjustment provisions.
As of September 30, 1998, Common Shares have been reserved for future
issuance as follows:
OP Units not owned by the Company (see above) 2,770,624
Underwriters warrants 47,248
Stock options issued 977,723
Additional stock options issuable 590,003
-----------
4,385,598
===========
At the Company's annual meeting on June 30, 1998, the Company's
shareholders approved an increase in the number of authorized preferred
and common shares from 1,000 and 13,999,000 to 1,000,000 and 34,000,000,
respectively.
During 1998, the Board of Directors authorized management to purchase up
to 400,000 Common Shares. Purchases are being made in the open market and
are being funded from operating cash flow and the Company's 1998 Credit
Facility. As of September 30, 1998, the Company has repurchased 83,950
shares at an average price of $9.65 per share.
7. SUBSEQUENT EVENTS
On October 30, 1998, the Company acquired seventeen residential properties
in the greater Boston suburbs from an unrelated party. The purchase price
of approximately $73 million was financed with the assumption of $51
million in mortgage loans, $15 million from the 1998 Credit Facility and
the issuance of an aggregate of approximately 1,000,000 Common Units
valued at $9.82 per unit including approximately 200,000 Common Units
issued to a wholly owned subsidiary of the Company.
On November 5, 1998, the Company guaranteed an $8.2 million bank loan to
certain officers of the Company to be used by officers to purchase Common
Shares. In addition, the Company authorized 390,000 Common Shares to be
issued to such officers at $10.25 per share (the closing share price on
November 4, 1998). The officers will use approximately $4.0 million from
the $8.2 million bank loan to purchase the 390,000 Common Shares to be
issued.
Between October 1, 1998 to November 11, 1998, the Company repurchased
220,680 additional shares at an average price of $9.84 per share.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The results of operations for the three and nine months ended September 30,
1997 included 28 residential communities and one retail property,
respectively. The results of operations for the three and nine months ended
September 30, 1998 included 41 residential communities and four retail
properties, respectively. (See Note 2 to the consolidated financial
statements for details).
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report.
Results of Operations
Results of operations of the Company for the nine months ended September 30,
1998 and 1997.
Total revenues increased $14,166,000 from $11,536,000 to $25,702,000 during
the nine months ended September 30, 1998, as compared to the corresponding
period in 1997. The increase is primarily due to the operations of the
properties acquired during the period from March 14, 1997 to September 30,
1998 (the "Recent Acquisitions"). (See Note 2 to the consolidated financial
statements for details.)
Property operating and maintenance expense increased $4,859,000 from
$3,741,000 to $8,600,000 during the nine months ended September 30, 1998, as
compared to the corresponding period in 1997. The increase is primarily due
to the operations of the Recent Acquisitions.
Real estate taxes increased $1,418,000 from $1,143,000 to $2,561,000
during the nine months ended September 30, 1998, as compared to the
corresponding period in 1997. The increase is due primarily to the Recent
Acquisitions. Related party management fees decreased from $22,000 to zero
due to the acquisition by the Company of the management services division
of Grove Property Services Limited Partnership ("GPS") as part of the
Consolidation Transactions in March 1997.
Interest expense increased $2,324,000 from $1,732,000 to $4,056,000
during the nine months ended September 30, 1998, as compared to the
corresponding period in 1997. The increase is primarily due to the assumption
of mortgage debt and new debt related to the Recent Acquisitions.
General and administrative expenses increased $632,000 from $610,000 to
$1,242,000 during the nine months ended September 30, 1998, as compared
to the corresponding period in 1997. This increase is primarily due
to the increased costs associated with the change in size and structure of
the Company.
Depreciation and amortization increased $1,714,000 from $2,380,000 to
$4,094,000 during the six months ended September 30, 1998, as compared to the
corresponding period in 1997. This increase is related to the Recent
Acquisitions.
The Company's income before extraordinary expenses increased $2,652,000
from $1,136,000 to $3,788,000 during the nine months ended September 30, 1998,
as compared to the corresponding period in 1997. The increase in income before
extraordinary expenses is primarily due to the operations of the Recent
Acquisitions.
In June 1998, the Company refinanced certain of its debt. In connection with
the refinancing, the Company wrote-off related unamortized deferred financing
costs and incurred prepayment penalties and related costs. These costs were
charged to operations and are reflected as extraordinary expenses related to
debt refinancing, net of minority interests.
Results of operations of the Company for the three months ended September 30,
1998 and 1997.
Total revenues increased $3,709,000 from $5,752,000 to $9,461,000 during the
three months ended September 30, 1998, as compared to the corresponding period
in 1997. The increase is primarily due to the operations of the Recent
Acquisitions.
Property operating and maintenance expenses increased $1,283,000 from
$1,777,000 to $3,060,000 during the three months ended September 30, 1998, as
compared to the corresponding period in 1997. The increase is primarily due to
additional expenses related to the Recent Acquisitions.
Real estate taxes increased $345,000 from $600,000 to $945,000 during the
three months ended September 30, 1998, as compared to the corresponding period
in 1997. This increase is related to the Recent Acquisitions.
13
<PAGE>
Interest expense increased $711,000 from $955,000 to $1,666,000 during the
three months ended September 30, 1998, as compared to the corresponding period
in 1997. The increase is primarily due to the assumption of mortgage debt and
new debt related to the Recent Acquisitions.
General and administrative expenses increased $180,000 from $263,000 to
$443,000 during the three months ended September 30, 1998, as compared to the
corresponding period in 1997. This increase is primarily due to the increased
costs associated with the change in size of the Company.
Depreciation and amortization increased $389,000 from $1,225,000 to $1,614,000
during the three months ended September 30, 1998, as compared to the
corresponding period in 1997. The increase is primarily due to additional
depreciation related to the Recent Acquisitions.
The Company's net income increased $769,000 from $520,000 to $1,289,000 during
the three months ended September 30, 1998, as compared to the corresponding
period in 1997. The increase is primarily due to the operations of the Recent
Acquisitions.
Same Community Analysis
For the nine months ended September 30, 1998 and 1997.
The 27 apartment communities (2,564 apartments) owned by Grove or its
affiliated predecessors since the beginning of 1996, a "Same Community"
comparison, experienced an increase in average monthly rental rates, offset
by a small decrease in average economic occupancy and experienced an
increase in net operating income. On a Same Community basis, the weighted
average monthly rental rate per apartment increased 3.6% to $728 from $703 and
the economic occupancy rate decreased to 95.8% from 96.5% for the first nine
months of 1998 as compared to the first nine months of 1997, respectively.
Overall, Same Community net operating income increased 7.0% to $9.64 million
from $9.01 million for the first nine months of 1998 as compared to the first
nine months of 1997. Net operating income increased due to a 2.9% increase
in revenues and 2.5% decrease in operating expenses. Revenues increased
due to the increase in rental rates partially offset by a decrease in
occupancy. Expenses decreased primarily due to a decrease in payroll,
utility costs and snow plowing as a result of the unusually mild
weather experienced in the first quarter of 1998. The following table
summarizes Same Community operations:
------------------
Nine Months Ended
September 30,
------------------ %
1998 1997 Change
---- ---- ------
Economic Occupancy 95.8% 96.5% -0.7%
==================
Average monthly rental rate per unit $ 728 $ 703 3.6%
==================
Revenues (millions) $16.22 $15.76 2.9%
Operating expenses (millions) 6.58 6.75 -2.5%
------------------ -------
Net operating income (millions) $ 9.64 $ 9.01 7.0%
================== =======
For the three months ended September 30, 1998 and 1997.
The 27 apartment communities (2,564 apartments) owned by Grove or its
affiliated predecessors since the beginning of 1996, a "Same Community"
comparison, experienced an increase in average monthly rental rates, offset
by an increase in operating expenses and experienced an increase in net
operating income. On a Same Community basis, the weighted average monthly
rental rate per apartment increased 3.3% to $734 from $711 and the economic
occupancy rate was unchanged at 96.5% for the third quarter of 1998 as
compared to the third quarter of 1997. Overall, Same Community net operating
income increased 5.0% to $3.39 million from $3.23 million for the third
quarter of 1998 as compared to the third quarter of 1997. Net operating
income increased due to a 3.5% increase in revenues partially offset by a
1.0% increase in operating expenses. Revenues increased due to the increase
in rental rates. Expenses increased primarily due to increases in gas,
landscaping, marketing and advertising which were offset by decreases in
payroll. The following table summarizes Same Community operations:
14
<PAGE>
------------------
Quarter Ended
September 30,
------------------ %
1998 1997 Change
---- ---- ------
Economic Occupancy 96.5% 96.5% 0.0%
==================
Average monthly rental rate per unit $ 734 $ 711 3.3%
==================
Revenues (millions) $5.50 $5.31 3.5%
Operating expenses (millions) 2.11 2.09 1.0%
------------------ -------
Net operating income (millions) $3.39 $3.23 5.0%
================== =======
Liquidity and Capital Resources
Cash and cash equivalents totaled $2,950,000 as of September 30, 1998. The
Company's ratio of long-term debt, including the 1998 Credit Facility to
total market capitalization on September 30, 1998 was 47.7% based on total
market capitalization of $214.66 million based on 11,229,378 Common Units and
Common Shares valued at $10.00 per share/unit (the closing price on
September 30, 1998) plus $102.37 million of long-term debt, including the
1998 Credit Facility.
Cash provided by operating activities was $8,018,000 for the nine months
ended September 30, 1998. Cash used in investing activities was $37,881,000
for the nine months ended September 30, 1998. Net cash provided by financing
activities was $31,347,000 for the nine months ended September 30, 1998.
On September 15, 1998, the Company declared a dividend of $0.17 per share,
which was paid on October 16, 1998. The dividends declared during the period
resulted in a 59.1% pay out of funds from operations for the three months
ended September 30, 1998.
On September 15, 1998, the Operating Partnership declared a distribution of
$0.17 per Common Unit to the limited partners of the OP that was paid on
October 16, 1998.
In April 1998, the Operating Partnership entered into the 1998 Credit
Facility with its bank and retired the Original Revolving Credit Facility.
The 1998 Credit Facility increased the availability of the credit line to
$50.0 million from $25.0 million and converted the line to an unsecured line
from a secured line. The 1998 Credit Facility bears interest payable monthly
at a floating rate of 1.5% above the 30, 60, or 90-day LIBOR rate. The 1998
Credit Facility is available to fund future property acquisitions and up to
$5.0 million is available to fund working capital needs. As of September 30,
1998, borrowings of $9.6 million were outstanding under the 1998 Credit
Facility.
During 1998, the Board of Directors authorized management to purchase up to
400,000 Common Shares. Purchases are being made in the open market and are
being funded from operating cash flow and the Company's 1998 Credit Facility.
As of September 30, 1998, the Company has repurchased 83,950 shares at an
average price of $9.65 per share.
The Company intends to meet its short-term liquidity requirements through
cash flow provided by operations and borrowings under the 1998 Credit
Facility. The Company considers its ability to generate cash to be adequate
and expects it to continue to be adequate to meet operating requirements and
pay shareholder dividends in accordance with REIT requirements. The Company
may use other sources of capital to finance additional acquisitions
including, but not limited to, the selling of additional equity interests in
the Company, non-distributed Funds From Operations, the issuance of debt
securities, funds from the 1998 Credit Facility, and exchanging Common
Shares or Common Units for properties or interests in properties.
Year 2000
In the course of the Company's planned upgrade of its information systems to
accommodate growth of its business, the Company will assure that its
computer software and hardware will be year 2000 compliant. The Company
anticipates that the upgrade of its information systems will be completed
during 1998 and 1999 and believes that the cost thereof will not have a
material impact on net income, assets or liabilities. The Company has begun
to identify the other non-information systems that depend on microprocessors
in the conduct of its business. Because of the nature of the Company's
business, it does not depend to any material extent on electronic
interchange of data or information with its residents, suppliers or vendors.
15
<PAGE>
- -------------------------------------------------------------------------------
Assessment Remediation Testing Implementation
- -------------------------------------------------------------------------------
Information 100% Complete 50% Complete 40% Complete 50% Complete
Technology
Expected Expected Expected
completion date, completion completion
October 1999 date, October date, October
1999 1999
- -------------------------------------------------------------------------------
Equipment 100% Complete 50% Complete 0% Complete 0% Complete
with
Embedded Expected Expected Expected
Chips or completion date, completion completion
Software September 1999 date, date,
September 1999 September 1999
- -------------------------------------------------------------------------------
Products 100% Complete 100% Complete 100% Complete 75% Complete
Expected
completion
date,
September 1999
- -------------------------------------------------------------------------------
3rd Party Expected 0% Complete 0% Complete 0% Complete
completion
date for
surveying
all third
parties,
March 1999
- -------------------------------------------------------------------------------
Funds from Operations
Industry analysts generally consider funds from operations ("FFO") an
appropriate measure of performance of an equity REIT. FFO is defined as
income before gains (losses) on investments and extraordinary items (computed
in accordance with generally accepted accounting principles) plus real estate
depreciation, less preferred dividends and after adjustment for significant
non-recurring items, if any. This definition conforms to the recommendations
set forth in a White Paper adopted by the National Association of Real Estate
Investment Trusts ("NAREIT") in early 1995. The Company believes that in
order to facilitate a clear understanding of its operating results, FFO
should be examined in conjunction with the net income as presented in the
financial statements and information included elsewhere in this Report. 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. FFO should not be
considered as an alternative to net income as an indication of the Company's
performance or as an alternative to cash flow as a measure of liquidity.
FFO increased from $1.8 million to $3.2 million for the three months ended
September 30, 1998 from the three months ended September 30, 1997. Dividends
declared for the three months ended September 30, 1998 were $0.17 per share,
representing 59.1% of FFO, while dividends declared for the three months
ended September 30, 1997 were $0.1575 per share representing 56.7% of FFO.
FFO was calculated as follows (in thousands):
For the Three For the Nine Months
Months Ended Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Income before minority interests
and extraordinary items $1,733 $932 $5,149 $1,908
Real estate depreciation and
amortization 1,538 1,079 3,928 2,059
Non-recurring expenses - - - 69
-------------------- ---------------------
Funds from operations before
minority interests 3,271 2,011 9,077 4,080
Minority interests in
consolidated partnerships 32 180 95 286
-------------------- ---------------------
FFO $3,239 $1,831 $8,982 $3,750
==================== =====================
Seasonally
Historically, net income from the Properties has been lower in the first and
second quarters than in the remainder of the year due to higher utility
charges, snow removal and other weather-related expenses. In addition,
rental rates increase ratably during the year which results in higher rental
revenues in the second half of the year.
16
<PAGE>
Inflation
Substantially all of the leases at the properties are for a term of one-year
or less, which may enable the Company to seek increased rents upon renewal or
reletting. Such short-term leases generally lessen the risk to the Company
of the potential adverse effects of inflation.
Acquisitions/Dispositions
The Company continuously evaluates properties for possible acquisition or
disposition. Individual properties may be acquired through direct purchase
of the property or through the purchase of the entity owning such property
and may be made for cash or securities of the Company or the Operating
Partnership. In connection with any acquisition, the Company may incur
additional indebtedness. If the Company acquires or disposes of any
property, such acquisition or disposition could have a significant effect on
the Company's financial condition, results of operations or cash flows.
Recent Developments
On October 30, 1998, the Company acquired seventeen residential properties in
the greater Boston suburbs from an unrelated party. The purchase price of
approximately $73 million was financed with the assumption of $51 million in
mortgage loans, $15 million from the 1998 Credit Facility and the issuance of
an aggregate of approximately 1,000,000 Common Units valued at $9.82 per unit
including approximately 200,000 Common Units issued to a wholly owned
subsidiary of the Company.
In November 1998, the Company's Board of Trust Managers and its Compensation
Committee approved changes in the compensation arrangements for the Company's
executive officers. These changes included approval of payments to executive
officers to facilitate the acquisition of Common Shares by them, which
amounts, as approved, would aggregate approximately $5.0 million, plus an
amount sufficient to pay such executive officers related federal and state
income taxes, payable over a period of 36 months. However, the amount and
timing of any such payments is subject to adjustment by the Compensation
Committee depending on future developments including future results of
operations.
On November 5, 1998, the Company guaranteed an $8.2 million bank loan to
certain officers of the Company to be used by officers to purchase Common
Shares. In addition, the Company authorized 390,000 Common Shares to be issued
to such officers at $10.25 per share (the closing share price on November 4,
1998). The officers will use approximately $4.0 million from the $8.2 million
bank loan to purchase the 390,000 Common Shares to be issued.
Between October 1, 1998 to November 11, 1998, the Company repurchased 220,680
additional shares at an average price of $9.84 per share.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of 1996
Certain statements contained in this report, and in particular in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," statements in other filings with the Securities and Exchange
Commission and statements in other public documents of the Company may be
forward looking and are subject to a variety of risks and uncertainties.
Forward looking statements would typically include words like "believes,"
"anticipates" or "estimates." Many factors could cause actual results to
differ materially from these statements. These factors include, but are not
limited to, (i) population shifts which may increase or decrease the demand
for rental housing, (ii) the value of commercial and residential rental
properties in the Northeast where all of the Company's properties are
located, in recent years, have fluctuated considerably, (iii) the effect on
the Company's properties of competition from new apartment complexes which
may be completed in proximity to such properties thereby increasing
competition, (iv) the effect of weather and other conditions which can
significantly affect property operating expenses, (v) the ability of the
Company to successfully integrate the operation of properties it has acquired
or may acquire into its business and (vi) other factors which might be
described from time to time in the Company's filings with the Securities and
Exchange Commission. In addition, the Company is subject to the effects of
changes in general business economic conditions.
17
<PAGE>
Part II. Other Information
Item 1: Legal Proceedings
NONE
Item 2: Change in Securities and Use of Proceeds
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) Exhibits
No. Description
2.1 Agreement dated as of April 22, 1998 among The Grove Corporation and
the twenty-two limited partnerships identified on Schedule 1 thereto
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated October 30, 1998 (Commission File No.
1-13080))
2.2 Amendment dated as of August 31, 1998 to Conveyance Agreement dated
as of April 22, 1998 among The Grove Corporation and the twenty-one
limited partnerships identified on Schedule 1 thereto (incorporated
by reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated October 30, 1998 (Commission File No. 1-13080))
27 Financial Data Schedule
(b) Reports on Form 8-K
NONE
18
<PAGE>
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.
REGISTRANT:
GROVE PROPERTY TRUST
November 13, 1998 By: /s/Joseph R. LaBrosse
_________________________
Name: Joseph R. LaBrosse
(On behalf of the registrant and as Chief
Financial Officer)
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
2.1 Agreement dated as of April 22, 1998 among The
Grove Corporation and the twenty-two limited
partnerships identified on Schedule 1 thereto
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated October
30, 1998 (Commission File No. 1-13080))
2.2 Amendment dated as of August 31, 1998 to Conveyance
Agreement dated as of April 22, 1998 among The
Grove Corporation and the twenty-one limited
partnerships identified on Schedule 1 thereto
(incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K dated October
30, 1998 (Commission File No. 1-13080))
27 Financial Data Schedule
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<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> 2,950
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,524
<PP&E> 198,119
<DEPRECIATION> 7,631
<TOTAL-ASSETS> 198,012
<CURRENT-LIABILITIES> 6,240
<BONDS> 102,371
0
0
<COMMON> 84
<OTHER-SE> 66,448
<TOTAL-LIABILITY-AND-EQUITY> 198,012
<SALES> 0
<TOTAL-REVENUES> 25,702
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,497
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,056
<INCOME-PRETAX> 3,788
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,788
<DISCONTINUED> 0
<EXTRAORDINARY> 838
<CHANGES> 0
<NET-INCOME> 2,950
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
