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 March 31, 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 No. 1-13080
GROVE PROPERTY TRUST
(Exact name of registrant as specified in its charter)
Maryland 06-1391084
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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 April 30,
1999 was 8,559,147.
1
<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 March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3: Quantitative and Qualitative Disclosures About Market Risk 17
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 20
2
<PAGE>
<TABLE>
GROVE PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Unaudited) (Audited)
ASSETS
------
<S> <C> <C>
Real estate assets:
Land ................................................... $ 47,154 $ 47,208
Buildings and improvements ............................. 269,404 268,683
Furniture, fixtures and equipment ...................... 3,108 2,708
--------- ---------
319,666 318,599
Less accumulated depreciation .......................... (12,084) (9,651)
--------- ---------
Net real estate assets ............................... 307,582 308,948
Cash and cash equivalents ................................... 10,147 15,262
Due from affiliates ......................................... 208 262
Deferred charges, net of accumulated amortization
of $216 and $153, respectively ......................... 1,363 1,192
Other assets ................................................ 2,246 1,451
--------- ---------
Total assets .............................................. $ 321,546 $ 327,115
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgage notes payable (including fair value step up of $ 154,756 $ 162,141
$8,742 and $9,421, respectively)
Revolving credit facility .............................. 38,800 34,250
Other liabilities ...................................... 5,211 5,723
Acquisition notes payable
12,408 12,951
Distributions payable .................................. 2,213 2,062
Security deposits ...................................... 3,270 3,194
Due to affiliates ...................................... 262 139
--------- ---------
Total liabilities ......................................... 216,920 220,460
Minority interests in consolidated partnerships ............. 683 686
Minority interest in the Operating Partnership ............. 31,604 32,186
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; 8,533,850 and 8,639,659
shares issued and outstanding, respectively .......... 85 86
Additional paid-in capital ............................. 79,163 80,182
Distributions in excess of earnings .................... (6,909) (6,485)
--------- ---------
Total shareholders' equity ................................ 72,339 73,783
--------- ---------
Total liabilities and shareholders' equity ................ $ 321,546 $ 327,115
========= =========
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
GROVE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
For the Three Months Ended March 31,
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Revenues:
Rental income ............................................... $15,253 $ 7,441
Property management income- affiliates ...................... 49 94
Other property related income ............................... 174 38
Interest income ............................................. 146 15
------- -------
Total revenues .......................................... 15,622 7,588
------- -------
Expenses:
Property operating expenses ................................. 6,086 2,647
Real estate taxes ........................................... 1,410 779
Interest expense ............................................ 3,400 1,002
Depreciation ................................................ 2,433 1,143
Amortization ................................................ 63 36
General and administrative .................................. 935 355
------- -------
Total expenses .......................................... 14,327 5,962
------- -------
Income before extraordinary items and minority interests 1,295 1,626
Minority interest in consolidated partnerships .................. 15 17
Minority interest in operating partnership ...................... 387 422
------- -------
Income before extraordinary items ...................... 893 1,187
Extraordinary item related to debt extinguishment ............... 226 0
------- -------
Net income ........................................... $ 1,119 $ 1,187
======= =======
Income before extraordinary item per common share - basic and
assuming dilution ............................................ $ 0.10 $ 0.14
======= =======
Extraordinary item per common share - basic and
assuming dilution ............................................ $ 0.03 $ 0.00
======= =======
Net income per common share - basic and assuming dilution ....... $ 0.13 $ 0.14
======= =======
Weighted average number of common shares outstanding-basic ...... 8,642 8,454
Effect of warrants and stock options ............................ 84 29
------- -------
Weighted average number of shares outstanding-assuming dilution . 8,726 8,483
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
GROVE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the Three Months Ended March 31,
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Operating Activities:
Net income ................................................... $ 1,119 $ 1,187
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization ....................... 2,496 1,179
Extraordinary item related to debt extinguishment ... (226) --
Minority interests .................................. 402 439
Non-cash compensation expense ....................... 30 30
Change in other assets ....................................... (643) (635)
Change in accounts payable, accrued expenses and other
Liabilities ............................................. (980) 442
-------- --------
Net cash provided by operating activities .................... 2,198 2,642
-------- --------
Investing activities:
Purchase of partnership interests ....................... (249) (214)
Additions to real estate assets ......................... (1,044) (8,375)
-------- --------
Net cash used in investing activities ............... (1,293) (8,589)
-------- --------
Financing activities:
Net proceeds from mortgage notes payable ................ 388 7,399
Net proceeds (repayments) from Revolving Credit Facility 4,550 --
Equity offering costs ................................... (11) (11)
Repayment of mortgage notes payable ..................... (7,370) (52)
Borrowings from (loans to) affiliates, net .............. 154 115
Financing costs ......................................... (234) --
Extraordinary item related to debt extinguishment ....... (79) --
Repurchase of stock ..................................... (1,358) --
Dividends and distributions paid ........................ (2,060) (1,461)
-------- --------
Net cash provided by (used in) financing activities . (6,020) 5,990
-------- --------
Net change in cash and cash equivalents ...................... (5,115) 43
Cash and cash equivalents, beginning of period ............... 15,262 1,466
-------- --------
Cash and cash equivalents, end of period ..................... $ 10,147 $ 1,509
======== ========
Supplemental Information:
Cash paid for interest .................................. $ 3,396 $ 1,004
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GROVE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. FORMATION AND DESCRIPTION OF THE COMPANY
----------------------------------------
Grove Property Trust (formerly Grove Real Estate Asset 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 sixty-one
apartment communities and four specialty retail properties. The apartment
communities are generally mid-priced or subsidized multi-family communities
that are primarily located in the southern New England area.
2. ACQUISITIONS AND EQUITY OFFERINGS
---------------------------------
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 (as
defined in Note 5).
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 $6.8
million first mortgages on the retail property, issuance of 5,818 Common
Units for $0.06 million, 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.
As of October 31, 1998 for financial purposes the Company acquired 18
apartment communities located in Greater Boston, Massachusetts, from an
unrelated party. The Operating Partnership issued 919,009 Common Units as
part of the purchase price for the assets acquired from the McNeil
Partnership, at $9.82 per unit for $9.02 million, assumed $62.3 million in
debt and drew down $18.75 million under the 1998 Credit Facility. Certain
other debt obligations of the Company relate to this acquisition (see Note
6).
On October 31, 1998, management contracts purchased in connection with the
McNeil Transaction were expensed.
On November 30, 1998 the Company acquired an apartment community, Rockingham
Glen Apartments, located in West Roxbury, Massachusetts , from an unrelated
party. The Operating Partnership issued 104,525 Common Units valued at
$10.40 per unit for $1.09 million, assumed $4.4 million in mortgage debt and
borrowed $2.9 million under the 1998 Credit Facility.
As of December 31, 1998 for financial purposes the Company acquired an
apartment community, Highland Glen Apartments, located in Westwood,
Massachusetts, from an unrelated party. The Operating Partnership issued
23,091 Common Units as part of the purchase price for the assets acquired
from the McNeil Partnership, at $11.43 per unit for $0.26 million, assumed
$6.9 million in mortgage debt and drew down $0.5 million under the 1998
Credit Facility. Certain other debt obligations of the Company relate to
this acquisition (see Note 6).
The Company intends to continue to operate all of its multi-family
communities and retail commercial properties as rental properties.
6
<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 March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999. 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, 1998.
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,
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 exclude the dilutive effects of options and
7
<PAGE>
warrants. Earnings per share, assuming dilution, is very similar to fully
diluted earnings per share.
Income per common share information is based on the weighted average number
of Common Shares outstanding during each period.
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 (see Note 7).
Advertising
-----------
The Company expenses advertising costs as incurred. Advertising costs were
$129,642 and $106,354 for the three months ended March 31, 1999 and 1998,
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
----------------------
Total mortgage notes payable of $154,756,000 includes a fair value step up
of $8,742,000. The contractual principal amount outstanding of mortgage
notes payable is $146,014,000. The $8,742,000 step up relates to $47,989,000
of above market interest rate mortgages, which were assumed in connection
with the purchase of the McNeil Portfolio. The interest rates on the assumed
debt are between 7.46% and 12.47%. The step up was computed using the
Company's estimated current market interest rate of 7%. The step up amount
is not the legal stipulated principal amount of the respective mortgage and,
accordingly, this increase does not increase the contractual obligation of
the Company. If these loans are paid off in advance of their maturity, the
amount of the related step up on the consolidated balance sheets will be
accounted for as extraordinary income (see Note 2).
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 1998 Credit Facility and
the remaining amount of approximately $4.0 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.
On March 15, 1999 the Company prepaid The Highland Glen mortgage note of
$6.5 million. This prepayment transaction resulted in the recognition of
extraordinary income related to debt extinguishment of $0.32 million ($0.4
million fair value step up offset by $0.08 million prepayment penalty and
other expenses related to the prepayment of the mortgage).
As of March 31, 1999, the Company's weighted average interest rate on its
long-term debt is 7.81% and its weighted average maturity is 11 years.
8
<PAGE>
Mortgage notes payable consist of the following at March 31, 1999 (in
thousands):
Amortizing first mortgage notes $ 87,756
Interest only first mortgage notes 67,000
-----------
$ 154,756
===========
The amortizing first mortgage notes have fixed interest rates between 7.04%
and 12.47%. These notes mature between the years 2000 and 2031 and are
collateralized by twenty-seven of the properties with a carrying amount of
approximately $129,710 million as of March 31, 1999. Certain of these notes
are partially guaranteed by certain executive officers and shareholders of
the Company.
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 $7.8 million as of March
31, 1999. 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 $85.4 million as of March
31, 1999.
Annual principal payments due as of March 31, 1999, are as follows (in
thousands):
Period Ending March 31,
-----------------------
1999 $ 2,690
2000 5,201
2001 3,400
2002 3,562
2003 7,778
Thereafter 132,125
--------
$154,756
========
5. REVOLVING CREDIT FACILITY
-------------------------
In March, 1997, the Operating Partnership entered into the Original
Revolving Credit Facility, guaranteed by the Company for up to $25.0
million. 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 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 March 31, 1999, the 1998
Credit Facility had $38.8 million outstanding. The Operating Partnership is
required to meet certain financial covenants as defined in the 1998 Credit
Facility agreement.
6. ACQUISITION NOTES PAYABLE
-------------------------
In conjunction with the purchase of the McNeil Portfolio, the Company agreed
to issue additional Common Units and pay cash to certain continuing partners
in the event that a McNeil Portfolio property was converted to a market rate
property. The Acquisition Notes Payable are obligations related to three
McNeil Properties (Rockingham Glen, 929 House, and Glen Meadow), to pay
additional cash and issue additional Common Units when the properties are
converted to market rate properties. On November 30, 1998, the mortgages on
two of the properties (Glen Meadow and 929 House) were modified to allow
these properties to be converted to 80% market rate units and 20% moderate
income units. The Rockingham Glen mortgage was modified in the third quarter
of 1998 to allow this property to be converted to 80% market rate units and
20% moderate income units. It is anticipated that approximately $5.1 million
of the Acquisition Notes Payable will be paid on April 30, 1999 (consisting
of approximately $1.8 million in cash and $3.3 million in Common Units). The
majority of the remaining balance of the Acquisition Notes Payable of
approximately $7.3 million is expected to be paid on October 31, 1999
(consisting of approximately $4.0 million in cash and approximately $3.3
million in Common Units). When the Common Units are issued, the Acquisition
Notes Payable balance will be reduced by the value of Common Units issued
and the Company's Minority Interests in the Operating Partnership will be
increased by a corresponding amount.
9
<PAGE>
7. SHAREHOLDERS' EQUITY
The following table outlines the 1999 and 1998 activity in the Operating
Partnership equity accounts:
<TABLE>
<CAPTION>
Number of:
--------------------------
Limited
Company's Partners'
Operating Operating
Partnership Partnership
Units Units
----- -----
<S> <C> <C>
Outstanding at January 1, 1998 8,453,829 3,003,792
April 1998 acquisitions - 5,818
Common Units redeemed April 1998 through December 1998 - (252,153)
Common Units exchanged July 1998 through December 1998 35,307 (35,307)
Common Shares repurchased September 1998 through December (304,630) -
1998
Executive stock grants - September 1998 63,153 -
Private placement to executive officers - November 1998 392,000 -
October 1998 acquisitions - 919,009
November 1998 acquisitions - 104,525
December 1998 acquisitions - 23,091
--------------------------
Outstanding at December 31, 1998 8,639,659 3,768,775
Common Units exchanged January 1999 through March 1999 18,177 (18,177)
Common Units redeemed January 1999 through March 1999 - (22,321)
Common Shares repurchased January 1999 through March 1999 (123,986) -
--------------------------
Outstanding at March 31, 1999 8,533,850 3,728,277
==========================
Ownership Percentage 69.6% 30.4%
==========================
</TABLE>
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 Common Units held by the Limited Partners other than the
Company ("Minority Interest") by the total weighted average Common Units
outstanding. Issuance of additional Common Shares in connection with
requested redemption's of Common Units or redemption of Common Units for
cash changes the ownership percentage of both the Minority Interest and the
Company. Such transactions and the proceeds therefrom are treated as capital
transactions and result in an allocation between Shareholders' Equity and
Minority Interest in the Operating Partnership to account for the change in
the respective percentage ownership of the underlying equity of the
Operating Partnership.
A Common 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 Operating Partnership. Common 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. Common
Shares have been reserved for future issuance as follows:
Common Units not owned by the Company (see above) 3,728,277
Underwriters warrants 47,248
Stock options issued 1,124,623
Additional stock options issuable 443,100
----------
5,343,248
==========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The following disclosures of estimated fair value were determined by
management using available market information and appropriate valuation
methodologies. Judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair values.
Cash equivalents, accounts receivable and accounts payable, because of their
short-term nature, approximate fair value. Mortgage notes payable, the 1998
Credit Facility, and Acquisition Notes Payable are also carried at amounts
that approximate their fair values.
10
<PAGE>
9. SEGMENT REPORTING
-----------------
The Company's reportable segments are strategic real estate types of
investments. They are managed separately because each real estate type
requires a different strategy.
The Company has three reportable segments; residential, subsidized
residential, and retail. The residential segment includes those properties
that are rented to residents only for residential purposes. The subsidized
residential segment includes properties that are used for residential
purposes; however, these properties are operating and receive subsidization
under various programs accordingadministered by the U.S. Department of
Housing and Urban Development or the M assachusetts Housing Finance
Authority. The retail segment includes those properties whose space is
rented for stores, restaurants, and other retail uses.
The following table presents information about reported segment profit or
loss and segment assets. The Company does not allocate income taxes or
unusual items to segments. In addition, not all segments have significant
noncash items other than depreciation and amortization in reporting profit
or loss (dollars in thousands):
<TABLE>
Three Months Ended March 31, 1999
---------------------------------
<CAPTION>
Subsidized
Residential Residential Retail Total
----------- ----------- ------ -----
<S> <C> <C> <C> <C>
Revenues ...................... $ 11,413 $ 3,455 $ 660 $ 15,528
Interest Expense .............. $ 1,938 $ 806 $ 70 $ 2,814
Depreciation and amortization.. $ 1,889 $ 357 $ 143 $ 2,389
Segment Profit ................ $ 2,194 $ 1,237 $ 288 $ 3,719
Extraordinary income .......... $ 0 $ 324 $ 0 $ 324
Segment Assets ................ $237,335 $ 54,351 $ 19,657 $311,343
FFO ........................... $ 4,065 $ 1,269 $ 429 $ 5,763
</TABLE>
<TABLE>
Three Months Ended March 31, 1998
---------------------------------
<CAPTION>
Subsidized
Residential Residential Retail Total
----------- ----------- ------ -----
<S> <C> <C> <C> <C>
Revenues ...................... $ 7,069 $ 0 $ 398 $ 7,467
Interest Expense .............. $ 527 $ 0 $ 70 $ 597
Depreciation and amortization.. $ 1,089 $ 0 $ 78 $ 1,167
Segment Profit ................ $ 2,051 $ 0 $ 137 $ 2,188
Extraordinary income .......... $ 0 $ 0 $ 0 $ 0
Segment Assets ................ $135,296 $ 0 $ 10,880 $146,176
FFO ........................... $ 3,104 $ 0 $ 216 $ 3,320
</TABLE>
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before income taxes.
The following presentation of reconciliation of reportable segment revenues,
profit or loss, and assets, to the Company's consolidated totals.
For the Three Months Ended
March 31,
1999 1998
---- ----
Revenues
- --------
Total revenues for reportable segments $15,528 $7,467
Other revenues 94 121
------- ------
Total consolidated revenues $15,622 $7,588
======= ======
11
<PAGE>
For the Three Months Ended
March 31,
1999 1998
---- ----
Profit or Loss
- --------------
Total profit/loss for reportable segments $ 3,719 $ 2,188
Other profit or loss (2,424) (562)
------- -------
Income before extraordinary item and
minority interests $ 1,295 $ 1,626
======= =======
Assets
- ------
Total assets for reportable segments $311,343 $146,176
Other revenues 10,203 9,777
-------- --------
Total consolidated revenues $321,546 $155,953
======== ========
Three Months Ended March 31, 1999
---------------------------------
Other Significant Items
- -----------------------
Segment Consolidated
Totals Non-segment Totals
------ ----------- ------
Interest expense $ 2,814 $ 586 $ 3,400
Depreciation and amortization $ 2,389 $ 107 $ 2,496
Three Months Ended March 31, 1999
---------------------------------
Other Significant Items
- -----------------------
Segment Consolidated
Totals Non-segment Totals
------ ----------- ------
Interest expense $ 597 $ 405 $ 1,002
Depreciation and amortization $ 1,167 $ 12 $ 1,179
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The results of operations for the three months ended March 31, 1999 include the
three multifamily properties that the Company has owned since inception (the
"Original Properties"), a fourth property that was acquired on January 12, 1996,
twenty properties acquired on March 14, 1997 , the fourteen properties
subsequently acquired in 1997 (collectively referred to as the "1997
Properties") and the twenty-sevenproperties purchased in 1998 (the "1998
Properties"). In addition, all of the previously mentioned properties of the
Company are collectively referred to as the "Properties".
The results of operations for the three months ended March 31, 1999 include the
61 residential communities and four retail properties owned since January 1,
1998.
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
Results of Operations of the Company for the Three Months Ended March 31, 1999
- --------------------------------------------------------------------------------
and 1998.
- ---------
Total revenues increased $7,812,000 from $7,441,000 to $15,253,000 during the
three months ended March 31, 1999, as compared to the corresponding period in
1998. The increase is primarily due to the operations of the properties acquired
during the period from April 1998 to December 31, 1998 (the "Recent
Acquisitions"). (See Note 2 to the consolidated financial statements for
details.)
The properties experienced an increase in rental rates and an increase in
occupancy. The weighted average monthly rental rates increased to $775 for the
three months ended March 31, 1999 from $700 for the same period in 1998.
Economic occupancy increased to an aggregate weighted average occupancy of 95.7%
for the three months ended March 31, 1999 from an aggregate weighted average
occupancy of 94.3% for the same period in 1998.
Property operating and maintenance expenses increased $3,439,000 from $2,647,000
to $6,086,000 during the three months ended March 31, 1999, as compared to the
corresponding period in 1998. The increase is primarily due to the operations of
the Recent Acquisitions.
Real estate taxes increased $631,000 from $779,000 to $1,410,000 during the
three months ended March 31, 1999, as compared to the corresponding period in
1998. The increase is due primarily to the Recent Acquisitions.
Interest expense increased $2,398,000 from $1,002,000 to $3,400,000 during the
three months ended March 31, 1999, as compared to the corresponding period in
1998. The increase is primarily due to the assumption of mortgage debt and new
debt related to the Recent Acquisitions.
General and administrative expenses increased $580,000 from $355,000 to $935,000
during the three months ended March 31, 1999, as compared to the corresponding
period in 1998. This increase is primarily due to the increased costs associated
with the change in size and structure of the Company.
Depreciation and amortization increased $1,317,000 from $1,179,000 to $2,496,000
during the three months ended March 31, 1999, as compared to the corresponding
period in 1998. This increase is related to the Recent Acquisitions.
The Company's income before extraordinary items decreased $294,000 from
$1,187,000 to $893,000 during the three months ended March 31, 1999, as compared
to the corresponding period in 1998. The decrease in income before extraordinary
items is primarily due to increased interest expense due to borrowings related
to property acquisitions.
In March 1999 the Company prepaid The Highland Glen mortgage note of $6.5
million. This prepayment transaction resulted in the recognition of
extraordinary income related to debt extinguishment of $0.32 million ($0.4
million fair value step up offset by $0.08 million prepayment penalty).
13
<PAGE>
SAME COMMUNITY ANALYSIS
For the Three Months Ended March 31, 1999 and 1998.
- ---------------------------------------------------
The Same Community analysis includes 35 apartment communities (3,506 apartments)
owned by Grove or its affiliated predecessors since the beginning of 1998. On a
Same Community basis, the weighted average monthly rental rate per apartment
increased 4.3% to $734 from $704 and the economic occupancy rate increased to
95.7% from 94.2% for the first quarter of 1999 versus the first quarter of 1998.
Overall, Same Community net operating income increased 8.2% to $4.26 million
from $3.93 million for the first quarter of 1999 versus the first quarter of
1998. Net operating income increased 8.2% due to a 6.4% increase in revenues
offset by a 4.0% increase in operating expenses. Revenues increased due to
increases in rental rates and occupancy. Expenses increased primarily due to
increased snow removal costs as compared to the unusually mild weather
experienced in the first quarter of 1998.
The following table summarizes Same Community operations:
------------------
Three Months Ended
March 31, %
------------------
1999 1998 Change
---- ---- ------
Economic Occupancy 95.7% 94.2% 1.5%
=====================
Average monthly rental rate per unit $ 734 $ 704 4.3%
=====================
Revenues (millions) $7.40 $6.96 6.4%
Operating expenses (millions) 3.14 3.02 4.0%
------------------------------
Net operating income (millions) $ 4.26 $3.93 8.2%
==============================
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $10,147,000 as of March 31, 1999. The
Company's ratio of long-term debt, including the 1998 Credit Facility to total
market capitalization on March 31, 1999 was 57.3% based on total market
capitalization of $337.64 million based on 12,262,127 Common Units and Common
Shares valued at $11.75 per share/unit (the closing price on March 31, 1999)
plus $193.55 million of long-term debt, including the 1998 Credit Facility.
Cash provided by operating activities was $2,197,863 for the three months ended
March 31, 1999. Cash used in investing activities was $1,292,993 for the three
months ended March 31, 1999. Net cash used in financing activities was
$6,019,618 for the three months ended March 31, 1999.
On March 17, 1999, the Company declared a dividend of $0.18 per share, which was
paid on April 15, 1999. The dividends declared during the period resulted in a
61.7% pay out of funds from operations for the three months ended March 31,
1999.
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 March 31, 1999, borrowings of
$38.8 million were outstanding under the 1998 Credit Facility.
Acquisition Notes Payable are obligations related to three McNeil Properties
(Rockingham Glen, 929 House, and Glen Meadow), to pay additional cash and issue
additional Common Units when the properties are converted to market rate
properties. On November 30, 1998, the mortgages on two of the properties (Glen
Meadow and 929 House) were modified to allow these properties to be converted to
80% market rate units and 20% moderate income units. The Rockingham Glen
mortgage was modified in the third quarter of 1998 to allow this property to be
converted to 80% market rate units and 20% moderate income units. It is
anticipated that approximately $4.1 million of the Acquisition Notes Payable
will be paid on April 30, 1999 (consisting of approximately $0.7 million in cash
and $3.4 million in Common Units). The majority of the remaining balance of the
Acquisition Notes Payable of approximately $8.3 million is expected to be paid
on October 31, 1999 (consisting of approximately $4.1 million in cash and
approximately $4.2 million in Common Units). When the Common Units are issued,
the Acquisition Notes Payable balance will be reduced by the value of Common
Units issued and the Company's Minority Interests in the Operating Partnership
will be increased by a corresponding amount.
14
<PAGE>
During 1998, the Board of Directors authorized the Company to purchase up to
400,000 Common Shares. In the first quarter of 1999, the Board of Directors
authorized the Company to purchase up to an additional 500,000 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 March 31, 1999, the
Company has repurchased 428,616 shares from inception at an average price of
$10.13 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.
The Company regularly 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.
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. To date, the Company
anticipates that the upgrade of its information systems will be completed during
1999 and believes that the cost thereof is not material and will not have a
material impact on net income, assets or liabilities. The Company has incurred $
0 specifically related to Year 2000 compliance and anticipates $ 50,000 of
future related costs. The Company has identified 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. The following table outlines the Company's status to date
of risks associated with the Year 2000 problem:
<TABLE>
<S> <C> <C> <C> <C>
- -------------------- -------------------- -------------------- -------------------- --------------------
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- -------------------- -------------------- -------------------- -------------------- --------------------
INFORMATION 100% Complete 70% Complete 70% Complete 70% Complete
TECHNOLOGY
Expected Expected Expected
completion date, completion date, completion date,
October 1999 October 1999 October 1999
- -------------------- -------------------- -------------------- -------------------- --------------------
OPERATING
EQUIPMENT WITH 100% Complete 50% Complete 30% Complete 20% Complete
EMBEDDED CHIPS OR
SOFTWARE Expected Expected Expected
completion date, completion date, completion date,
September 1999 September 1999 September 1999
- -------------------- -------------------- -------------------- -------------------- --------------------
3RD PARTY Expected 50% Complete 50% Complete 50% Complete
completion date
for surveying all
third parties,
June 1999
- -------------------- -------------------- -------------------- -------------------- --------------------
</TABLE>
Although the Company believes that there will be no direct material effects on
its net income, assets or liabilities from the Year 2000 problem as it relates
to the above stated systems, it is not possible to quantify any potential
indirect effects that may result from the lack of Year 2000 readiness on the
part of other third parties with whom the Company conducts its business.
Widespread disruptions in the national or international economy, including
disruptions affecting the financial markets, resulting from Year 2000 issues,
could also have an adverse impact on the Company. The likelihood and effect of
such disruptions to residential, subsidized residential, and retail properties
is not determinable at this time. The Company's fallback position, if a
disruption does occur, is to rebuild its information systems from
contemporaneous manual monthly records maintained at the Company's main office.
Property sites consist mainly of single-story and low-rise buildings with very
little reliance on microprocessors imbedded in systems that are part of property
operating systems. Any possible disruption can be avoided by manually operating
these property systems.
15
<PAGE>
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 $2.7 million to $3.6 million for the three months ended March
31, 1999 from the three months ended March 31, 1998. Dividends declared for the
three months ended March 31, 1999 were $0.18 per share, representing 60.8% of
FFO, while dividends declared for the three months ended March 31, 1998 were
$0.17 per share representing 71.3% of FFO.
FFO was calculated as follows (in thousands):
For the Three Months
Ended March 31,
1999 1998
---- ----
Income before minority interests and
extraordinary items $1,295 $1,626
Real estate depreciation and amortization 2,375 1,135
----------- ----------
Funds from operations before minority 3,670 2,761
interests
Minority interests in consolidated partnerships 30 29
=========== ==========
FFO $3,640 $2,732
=========== ==========
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.
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.
"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
16
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily from its 1998
Credit Facility. A hypothetical 100 basis point adverse move (decrease) in
interest rates along the entire interest rate yield curve would adversely affect
the net fair value of all interest sensitive financial instruments by $388,000
at March 31, 1999.
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
--- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, the Company filed a Current Report
on Form 8-K dated January 14, 1999 (reporting under Items 5 and 7)
regarding the Company's acquisition of one residential property; a Current
Report on Form 8-K/A no. 1 dated December 2, 1998, amending Item 7 as
originally filed; and a Current Report on Form 8-K/A no. 1 dated January
14, 1999, amending Item 7 as originally filed. Amendments to such Current
Reports included the following financial statements:
12/2/98 FORM 8-K:
- -----------------
(a) Financial Statements of business acquired.
Abington Glen and Rockingham Glen
- ---------------------------------
Statement of Revenue and Certain Expenses for the nine months ended September
30, 1998 and the year ended December 31, 1997.
(b) Pro Forma Financial Statements.
Pro Forma Condensed Consolidated Balance Sheet of Grove Property Trust
(the "Company") (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet of the Company as of
September 30, 1998.
Notes to the Pro Forma Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of the Company
for the nine months ended September 30, 1998 and the year ended
December 31, 1997.
Notes to the Pro Forma Condensed Consolidated Statements of Income.
1/14/99 FORM 8-K:
- -----------------
(a) Financial Statements of business acquired.
Highland Glen
- -------------
Statement of Revenue and Certain Expenses for the nine months ended September
30, 1998 and the year ended December 31, 1997.
18
<PAGE>
(b) Pro Forma Financial Statements.
Pro Forma Condensed Consolidated Balance Sheet of the Company
(Unaudited):
Pro Forma Condensed Consolidated Balance Sheet of the Company as of
September 30, 1998.
Notes to the Pro Forma Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of the Company
for the nine months ended September 30, 1998 and the year ended
December 31, 1997.
Notes to the Pro Forma Condensed Consolidated Statements of Income.
19
<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
May 13, 1999 By: /S/ JOSEPH R. LABROSSE
-------------------------------------
Name: Joseph R. LaBrosse
(On behalf of the registrant and as
Chief Financial Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,147
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,964
<PP&E> 319,666
<DEPRECIATION> 12,084
<TOTAL-ASSETS> 321,546
<CURRENT-LIABILITIES> 23,364
<BONDS> 193,556
0
0
<COMMON> 85
<OTHER-SE> 72,254
<TOTAL-LIABILITY-AND-EQUITY> 289,259
<SALES> 0
<TOTAL-REVENUES> 15,622
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,400
<INCOME-PRETAX> 893
<INCOME-TAX> 0
<INCOME-CONTINUING> 893
<DISCONTINUED> 0
<EXTRAORDINARY> 226
<CHANGES> 0
<NET-INCOME> 1,119
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
