<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
Commission file Number 0-20449
PRICE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0628740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17140 Bernardo Center Drive, Suite 300, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
(858) 675-9400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
The registrant had 13,309,006 shares of common stock, par value $.0001 per
share, outstanding at November 9, 2000.
<PAGE>
PRICE ENTERPRISES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION ...............................................3
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) ....................................3
CONSOLIDATED BALANCE SHEETS ................................................3
CONSOLIDATED STATEMENTS OF OPERATIONS ......................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS ......................................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ...............................................12
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........17
PART II - OTHER INFORMATION .................................................18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ...................................18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
September 30 December 31
2000 1999
--------- ---------
(unaudited) (Note)
Real estate assets
Land and land improvements $ 254,577 $ 248,177
Building and improvements 299,826 293,686
Fixtures and equipment 838 394
Construction in progress 12,223 9,942
--------- ---------
567,464 552,199
Less accumulated depreciation (7,936) (1,330)
--------- ---------
559,528 550,869
Investment in real estate joint ventures 14,719 4,338
Cash and cash equivalents 28,664 2,145
Accounts receivable 3,340 697
Income tax receivable 258 3,171
Notes receivable 19,639 --
Deferred rents 2,788 571
Other assets 6,559 767
--------- ---------
Total assets $ 635,495 $ 562,558
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Revolving lines of credit $ 20,400 $ 88,347
Mortgages and notes payable 146,823 8,894
Accounts payable and other liabilities 4,805 4,057
--------- ---------
Total liabilities 172,028 101,298
Commitments
Stockholders' equity
Series A preferred stock 353,404 353,404
Common stock 1 1
Additional paid-in capital 112,587 111,670
Accumulated deficit (2,525) (3,815)
--------- ---------
Total stockholders' equity 463,467 461,260
--------- ---------
Total liabilities and stockholders' equity $ 635,495 $ 562,558
========= =========
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited - amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Third Quarter Year-to-Date
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ----------------------
Predecessor Predecessor
2000 1999 2000 1999
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Rental revenues $ 17,976 $ 15,602 $ 52,902 $ 49,883
Expenses
Operating and maintenance 2,269 2,078 5,458 6,343
Property taxes 2,088 1,632 6,352 6,249
Depreciation and amortization 2,365 3,099 7,152 9,457
General and administrative 768 763 2,281 2,208
-------- -------- -------- --------
Total expenses 7,490 7,572 21,243 24,257
-------- -------- -------- --------
Operating income 10,486 8,030 31,659 25,626
Interest and other
Interest expense (2,890) (1,353) (7,200) (4,388)
Interest income 555 100 1,292 452
Equity in earnings of joint ventures 236 -- 295 --
-------- -------- -------- --------
Total interest and other (2,099) (1,253) (5,613) (3,936)
-------- -------- -------- --------
Income before gain on sale of real estate 8,387 6,777 26,046 21,690
Gain on sale of real estate 249 -- 249 4,717
-------- -------- -------- --------
Net income 8,636 6,777 26,295 26,407
Dividends paid to preferred stockholders (8,354) (8,316) (25,005) (24,947)
-------- -------- -------- --------
Net income (loss) applicable to common
stockholders $ 282 $ (1,539) $ 1,290 $ 1,460
======== ======== ======== ========
Net income per common share
Basic $ .02 $ (.12) $ .10 $ .11
Diluted .02 (.12) .10 .11
Weighted average common shares outstanding
Basic 13,309 13,304 13,309 13,299
Diluted 13,309 13,304 13,309 13,576
Dividends per preferred share $ .35 $ .35 $ 1.05 $ 1.05
</TABLE>
See accompanying notes.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited - amounts in thousands)
<TABLE>
<CAPTION>
Year-to-Date
Nine Months Ended
September 30
----------------------
Predecessor
2000 1999
--------- -----------
<S> <C> <C>
Operating activities
Net income $ 26,295 $ 26,407
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,152 9,457
Deferred rents (2,217) (1,596)
Equity in earnings of joint venture (295) --
Gain on sale of real estate (249) (4,717)
Changes in operating assets and liabilities:
Accounts receivable and other assets (5,540) 2,121
Accounts payable and other liabilities 749 (1,510)
--------- --------
Net cash flows provided by operating activities 25,895 30,162
Investing activities
Additions to real estate assets (26,929) (27,984)
Proceeds from the sale of real estate assets 26,071 30,385
Contributions to real estate joint ventures (10,087) (286)
Advances on notes receivable (31,005) --
Repayments on notes receivable 11,366 --
--------- --------
Net cash flows (used in) provided by investing activities (30,584) 2,115
Financing activities
Advances from revolving lines of credit and notes payable 180,690 81,900
Repayments of revolving lines of credit and notes payable (125,394) (91,864)
Dividends paid (25,005) (24,947)
Proceeds from exercise of stock options 917 115
--------- --------
Net cash flows provided by (used in) financing activities 31,208 (34,796)
--------- --------
Net increase (decrease) in cash and cash equivalents 26,519 (2,519)
Cash and cash equivalents at beginning of period 2,145 3,691
--------- --------
Cash and cash equivalents at end of period $ 28,664 $ 1,172
========= ========
Supplemental cash flow information:
Cash paid for interest $ 7,151 $ 4,666
Supplemental schedule of noncash financing activities:
Assumption of loans to acquire real estate assets 14,686 --
Receipt of common stock of former tenant in exchange for
amounts due PEI 812 --
</TABLE>
See accompanying notes.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
Note 1 - Organization and Significant Accounting Policies
Organization
Price Enterprises, Inc. (PEI) operates as a real estate investment trust (REIT)
incorporated in the state of Maryland. Our principle business is to own,
acquire, operate, manage and lease real property, primarily shopping centers. We
became a REIT in September 1997 after we spun-off our merchandising segment and
certain other assets to PriceSmart, Inc. In November 1999 Excel Legacy
Corporation (Legacy) completed its exchange offer for our common stock. In the
exchange offer, Legacy acquired approximately 91.3% of our common stock, which
represents approximately 77.5% of PEI's voting power.
In accounting for this transaction, we followed Accounting Principles Board
Opinion No. 16, "Business Combinations," which requires we treat this
transaction as a purchase. In following purchase accounting, we allocated the
cost basis of Legacy's investment in our common stock among our assets and
liabilities to adjust them to fair value at the time of the completion of the
exchange offer. We prepared the consolidated financial statements through
November 11, 1999 using PEI's historical basis of accounting and we designated
them as the predecessor in our consolidated financial statements. Comparison of
PEI's results of operations prior to completion of the exchange offer and after
completion of the exchange offer is affected by our purchase accounting
adjustments and by adopting Legacy's depreciation policy, discussed elsewhere in
this footnote.
Accounting Principles
We prepared the financial statements following the requirements of the
Securities and Exchange Commission (SEC) for interim reporting. As permitted
under those rules, certain footnotes or other financial information that are
normally required by generally accepted accounting principles (GAAP) can be
omitted. Certain prior year data have been reclassified to conform to the 2000
presentation.
We are responsible for the unaudited financial statements included in this
document. The financial statements include all normal and recurring adjustments
that are considered necessary for the fair presentation of our financial
position and operating results. You should also read the financial statements
and notes in our latest Form 10-K.
Revenues, expenses, assets and liabilities can vary during each quarter of the
year. Therefore, the results and trends in these interim financial statements
may not be the same as those for the full year.
6
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 1 - Organization and Significant Accounting Policies (continued)
Real Estate Assets and Depreciation
Prior to Legacy's exchange offer for our common stock, we recorded real estate
assets at historical costs, and adjusted them for recognition of impairment
losses. In following purchase accounting, we adjusted the historical costs of
our real estate assets to fair value. Our balance sheets at September 30, 2000
and December 31, 1999 reflect the new basis of our real estate assets.
We expense ordinary repairs and maintenance as incurred; we capitalize major
replacements and betterments and depreciate them over their estimated useful
lives.
Following completion of Legacy's exchange offer for our common stock, we adopted
Legacy's accounting policy of depreciating real estate assets. We compute real
estate asset depreciation on a straight-line basis over their estimated useful
lives, as follows:
After November 1999 Prior to November 1999
------------------------- -------------------------
Land improvements 40 years 25 years
Building and improvements 40 years 10-25 years
Tenant improvements Term of lease or 10 years Term of lease or 10 years
Fixtures and equipment 3-7 years 3-5 years
We capitalize interest incurred during the construction period of certain assets
and this interest is depreciated over the lives of those assets. The following
table shows interest expense and the amount capitalized (amounts in thousands):
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Interest incurred $ 3,316 $ 1,700 $ 8,544 $ 5,146
Interest capitalized (426) (347) (1,344) (758)
Use of Estimates
Preparing financial statements in conformity with generally accepted accounting
principles requires we make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We continually
review our estimates and make adjustments as necessary, but actual results could
differ from what we envisioned when we made these estimates.
7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 1 - Organization and Significant Accounting Policies (continued)
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and in 1999 they voted to delay the effective date of this
SFAS by one year. SFAS No. 133 establishes a new model for accounting for
derivatives and hedging activities, where all derivatives must be recognized as
assets and liabilities and measured at fair value. While we are required to
implement this standard beginning in 2001, we do not believe it will have a
significant impact on our financial statements
Note 2 - Net Income Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share." SFAS No. 128 requires presentation of two calculations of earnings
per common share. Basic earnings per common share equals net income applicable
to common stockholders divided by weighted average common shares outstanding
during the period. Diluted earnings per common share equals net income
applicable to common stockholders divided by the sum of weighted average common
shares outstanding during the period plus common stock equivalents. Common stock
equivalents are shares assumed to be issued if outstanding stock options that
are dilutive were exercised. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to reflect these calculations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 13,309,006 13,304,473 13,309,006 13,298,884
Effect of securities:
Employee and Director stock options -- -- -- 276,937
---------- ---------- ---------- ----------
Weighted average shares outstanding - assuming dilution 13,309,006 13,304,473 13,309,006 13,575,821
========== ========== ========== ==========
</TABLE>
Note 3 - Real Estate Properties
Acquisitions
During the third quarter of 2000 we purchased a 50% interest in a joint venture
for $1.9 million to develop a shopping center in Bend, OR. During the second
quarter of 2000 we purchased a 50% interest in a real estate development joint
venture in Westminster, CO from Legacy for an initial payment of $8.1 million.
The purchase price was based on the property's existing operating income, with
additional payments estimated to be $4.8 million due through the completion of
construction.
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 3 - Real Estate Properties (continued)
During 2000, we acquired the following properties:
<TABLE>
<CAPTION>
Date Purchase Mortgage
Location Description Acquired Price (000's) Assumed (000's)
------------------------------- --------------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Middletown, OH Retail building 2/9/00 $ 6,709 $ 3,726
Terre Haute, IN Retail building 2/9/00 5,762 3,598
San Diego/Rancho Bernardo, CA Office building (1) 2/25/00 16,025 11,025 (2)
San Diego/Pacific Beach, CA Land 7/31/00 4,200 --
</TABLE>
(1) Property leased back to Legacy
(2) Indicates maximum construction loan balance. $9.5 million was
outstanding at September 30, 2000
We purchased the three buildings from Legacy and we funded these acquisitions
through advances on our unsecured revolving credit facility. The land, which was
also purchased through an advance on our unsecured revolving credit facility,
will be used to build a self storage facility.
During the first quarter of 1999, we acquired a 15 acre parcel of land in
Tucson, AZ for $2.6 million which we plan to use for future development. We
funded this acquisition through an advance under our unsecured revolving credit
facility.
Dispositions
During the third quarter of 2000, we sold the following properties:
Date Sales Price
Location Description Sold (000's)
--------------------------- ------------------------- ------------- ------------
Azusa, CA Warehouse (1) 8/25/00 $ 4,200
Sacramento/Bradshaw, CA Office building (2) 9/18/00 22,100
(1) Partial sale - self storage remains
(2) Partial sale - sold two of four buildings in office complex
As a result of the sales noted above, we recorded a gain of $249,000. We are
using the proceeds from the sale of the properties to purchase additional
properties in tax-deferred exchange transactions.
During the second quarter of 1999 we sold two properties in Dallas, TX and
Buffalo, NY for $32.5 million and recorded a $4.7 million gain on the sales.
9
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 4 - Notes Receivable
In February 2000 we loaned $2.8 million to Barclay Group No. 9, Ltd., which
bears interest at 25% and matures in December 2001. The loan, secured by a
property in Pueblo, CO and by a personal guarantee from the developer, is junior
to a construction loan on the property.
During the second quarter of 2000, we executed a $15 million note receivable
with Legacy due December 2002. The note was amended in September where Legacy
may borrow up to $40.0 million on the note, which bears an interest rate of
LIBOR plus 375 basis points (10.25% at September 30, 2000) on the first $15.0
million. Amounts drawn in excess of $15 million shall bear interest at a fixed
rate of 12.5% per annum. As of September 30, 2000 Legacy owed $16.5 million on
this note at a weighted average interest rate of 10.5%.
Note 5 - Debt
In June 2000, we borrowed $121.4 million from GMAC Commercial Mortgage
Corporation. The GMAC loan is secured by five retail properties located in
Westbury, NY; Signal Hill, CA; Philadelphia, PA; Wayne, NY; and Roseville, CA.
The GMAC loan bears interest at LIBOR plus 98 basis points, 7.6% at September
30, 2000, and is due on June 28, 2004. We used proceeds of the loan to repay
outstanding amounts on our existing revolving credit facility with Wells Fargo
Bank, Fleet National Bank, AmSouth Bank and Bank One.
In connection with our GMAC loan, we reduced the facility from $125 million of
total availability to $75 million of total availability. In connection with the
reduction in the credit facility, we wrote-off loan fees of approximately
$300,000. The amended facility has a remaining term of two years with an initial
interest rate of LIBOR plus 135 basis points. The rate may vary based on our
leverage, amounts loaned to Legacy, and other financial ratios. As of September
30, 2000, we owed $20.4 million on this credit facility at an interest rate of
8.03%.
In conjunction with the Middletown, OH retail building purchase from Legacy, we
assumed an existing $3.7 million mortgage secured by the property. The mortgage
matures in March 2014 and bears an interest rate of 7.63%.
In conjunction with the Terre Haute, IN retail building purchase from Legacy, we
assumed an existing $3.6 million mortgage secured by the property. The mortgage
matures in June 2003 and bears an interest rate of 8.34%.
10
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 5 - Debt (continued)
In conjunction with the San Diego/Rancho Bernardo, CA office building purchase
from Legacy, we assumed an existing $11.0 million construction loan secured by
the property. The loan matures in December 2000 and bears an interest rate of
Eurodollar plus 360 basis points. As of September 30, 2000, we owed $9.5 million
on this loan at a weighted average interest rate of 9.7%. Legacy reimburses us
for the payments on this loan.
Note 6 - Related Party Transactions
Following Legacy's completion of its exchange offer, Legacy took over daily
management of PEI, including property management, finance and administration and
our self storage business. We reimburse Legacy for these services. We expensed
$807,000 for these services during the third quarter of 2000 and $2.3 million
for these services for the nine month year-to-date period of 2000, which was
based on our historical costs for similar expenses.
During the third quarter of 2000 we recorded $281,000 in interest income from
Legacy related to the note receivable discussed in Note 4, and $494,000 for the
nine month year-to-date period of 2000.
In conjunction with the San Diego/Rancho Bernardo, CA office building purchase
from Legacy discussed in Note 3, we leased the building back to Legacy. This
lease has a term of 10 years and pays $450,000 per year in rent, which is based
on the $5 million cash portion of the purchase price.
We discuss other related party transactions with Legacy in Note 3, Note 4, Note
5 and Note 7.
Note 7 - Subsequent Events
In October 2000 we purchased an office complex in Scottsdale, AZ from Legacy for
$9.7 million. This acquisition was partially funded from the proceeds of the
sale of the Azusa property. We also assumed a $2.0 million mortgage secured by
the property in connection with this purchase. The mortgage matures February
2006 and bears an interest rate of 8.125%.
In November 2000, we sold a property in Littleton, CO for $2.0 million.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
Our disclosure and analysis in this report contain "forward-looking statements."
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historic or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with any discussion of future
operating or financial performance. From time to time, we also may provide oral
or written forward-looking statements in other materials we release to the
public. Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be incorrect. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our reports on Forms 10-K, 10-Q and 8-K filed with the SEC. Our Form 10-K
filing for the 1999 fiscal year listed various important factors that could
cause actual results to differ materially from expected and historic results.
We note these factors for investors as permitted by the Private Securities
Litigation Reform Act of 1995. Readers can find them in Part I of our 1999 Form
10-K under the heading "Factors That May Affect Future Performance." You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a complete set of all
potential risks or uncertainties.
In Management's Discussion and Analysis we explain our general financial
condition and results of operations including:
- why revenues, costs and earnings changed from the prior period
- funds from operations (FFO)
- how we used cash for capital projects and dividends and how we
expect to use cash in 2000
- where we plan on obtaining cash for future dividend payments and
future capital expenditures
As you read Management's Discussion and Analysis, it may be helpful to refer to
our financial statements and accompanying notes beginning on page 3. In
Management's Discussion and Analysis we explain the changes in specific line
items in the statements of operations. Where changes are due to more than one
reason, we list the reasons in order of importance.
12
<PAGE>
Rental Revenues
Percent
Amount Change Change
------- ------ -------
3rd Quarter 2000 $17,976 $2,374 15%
3rd Quarter 1999 15,602 -- --
Year-to-Date 2000 52,902 3,019 6%
Year-to-Date 1999 49,883 -- --
Revenues increased $2.4 million to $18.0 million in the third quarter of 2000
compared to the same period in 1999 primarily because:
- revenues from properties we owned in both 1999 and 2000 increased
$1.5 million
- properties we acquired during the first quarter of 2000 generated
$0.4 million of additional revenues
- expansion of our self storage business provided an additional $0.4
million
Revenues increased $3.0 million to $52.9 million in the nine month year-to-date
period of 2000 compared to the same period in 1999 primarily because:
- revenues from properties we owned in both 1999 and 2000 increased
$2.8 million
- properties we acquired during the first quarter of 2000 generated
$1.0 million of additional revenues
- expansion of our self storage business provided an additional $0.8
million
- partially offsetting these increases were revenues from two
properties we sold in the second quarter of 1999, which contributed
$1.5 million of revenues in the first quarter of 1999
Expenses
Percent
Amount Change Change
------- ------- -------
3rd Quarter 2000 $ 7,490 $ (82) -1%
3rd Quarter 1999 7,572 -- --
Year-to-Date 2000 21,243 (3,014) -12%
Year-to-Date 1999 24,257 -- --
Expenses decreased $0.1 million to $7.5 million in the third quarter of 2000
compared to 1999 primarily because:
- expenses from properties we owned in both 1999 and 2000 were reduced
by $0.3 million primarily from a reduction in depreciation expense
due to our change to Legacy's accounting policy of depreciating real
estate assets
- this decrease in expenses was partially offset by:
- expansion of our self storage business which increased
expenses by $0.1 million and
- properties we acquired in 2000 which increased expenses by
$0.1 million
13
<PAGE>
Expenses decreased $3.0 million to $21.2 million in the nine month year-to-date
period of 2000 compared to the same period in 1999 primarily because:
- expenses from properties we owned in both 1999 and 2000 were reduced
by $1.9 million primarily from a reduction in depreciation expense
due to our change to Legacy's accounting policy of depreciating real
estate assets
- expenses from two properties we sold in the second quarter of 1999,
which contributed $0.9 million of expenses in the prior year
- we recovered bad debt expense of $1.0 million previously written off
related to the Homeplace bankruptcy, a former tenant
- these decreases in expenses were partially offset by:
- expansion of our self storage business which increased
expenses by $0.4 million and
- properties we acquired in 2000 which increased expenses by
$0.3 million
Operating Income
Percent
Amount Change Change
------- ------- -------
3rd Quarter 2000 $10,486 $2,456 31%
3rd Quarter 1999 8,030 -- --
Year-to-Date 2000 31,659 6,033 24%
Year-to-Date 1999 25,626 -- --
Operating income increased for the third quarter and year-to-date periods of
2000 compared to the same periods in the prior year primarily because of the
changes in Rental Revenues and Expenses discussed above.
Interest Expense
Percent
Amount Change Change
------- ------ -------
3rd Quarter 2000 $2,890 $1,537 114%
3rd Quarter 1999 1,353 -- --
Year-to-Date 2000 7,200 2,812 64%
Year-to-Date 1999 4,388 -- --
Interest expense increased $1.5 million in the third quarter of 2000 compared to
1999 because during the third quarter of 2000 we had an average of $161.6
million debt outstanding compared to $95.9 million in the third quarter of 1999.
In addition, the average interest rate increased to 7.68% at September 30, 2000
from 6.79% at September 30, 1999. Interest expense increased $2.8 million in the
nine month year-to-date period of 2000 compared to 1999 because during the nine
month year-to-date period of 2000 we had an average of $137.2 million debt
outstanding compared to $99.5 million for the same period in 1999. We discuss
our outstanding debt further in "Liquidity and Capital Resources" located
elsewhere in this Form 10-Q.
14
<PAGE>
Interest Income
Percent
Amount Change Change
------ ------ -------
3rd Quarter 2000 $ 555 $455 455%
3rd Quarter 1999 100 -- --
Year-to-Date 2000 1,292 840 186%
Year-to-Date 1999 452 --
Interest income increased $0.5 million in the third quarter and $0.8 million in
the nine month year-to-date period of 2000 compared to the same periods in 1999
primarily because of our interest-bearing notes receivable.
Funds From Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30
---------------------- -----------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 8,636 $ 6,777 $ 26,295 $ 26,407
Depreciation and amortization 2,365 3,099 7,152 9,457
Gain on sale of real estate (249) -- (249) (4,717)
-------- ------- -------- --------
Funds from operations 10,752 9,876 33,198 31,147
Straight-line rents (747) (507) (2,358) (1,766)
-------- ------- -------- --------
Adjusted funds from operations $ 10,005 $ 9,369 $ 30,840 $ 29,381
======== ======= ======== ========
</TABLE>
Real estate industry analysts typically use funds from operations (FFO) as
another measurement of performance for real estate-oriented companies. In
general, FFO adjusts net income for noncash charges such as depreciation,
amortization and most non-recurring gains and losses. The National Association
for Real Estate Investment Trusts (NAREIT), defines FFO as net income, excluding
depreciation and amortization expense, and gains (losses) from certain sales of
property. We also adjust the NAREIT definition to eliminate straight-line rents
to arrive at adjusted FFO because of their significance in our operations.
Straight-line rent accruals are noncash revenues associated with fixed future
minimum rent increases.
FFO during the third quarter of 2000 increased 8.9% to $10.8 million compared to
1999 primarily because of the changes in revenues and expenses discussed
previously.
FFO during the nine month year-to-date period of 2000 increased 6.6% to $33.2
million compared to 1999 primarily because of the changes in revenues and
expenses discussed previously.
FFO and adjusted FFO do not represent the generally accepted accounting
principles definition of cash flows from operations and should not be considered
as an alternative to net income as an indicator of our operating performance or
to cash flows as a measure of liquidity.
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Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash flows to meet the
short and long-term cash requirements of our business operations. Capital
resources represent those funds used or available to be used to support our
business operations and consist of stockholders' equity and debt.
Cash flow from operations has been the principal source of capital to fund our
ongoing operations and dividend payments, while use of our credit facilities and
mortgage financing have been the principal sources of capital required to fund
our growth. While we are positioned to finance our business activities through a
variety of sources, we expect to satisfy short-term liquidity requirements
through net cash provided by operations and through borrowings.
We continue to evaluate various properties for acquisition or development, which
includes acquiring development properties from Legacy once they are completed.
We also continue to evaluate other investment opportunities. During the nine
month year-to-date period of 2000 we:
- purchased four properties for $32.7 million. In conjunction with
these purchases, we assumed two long-term mortgages secured by two
of the properties totaling $7.3 million and one construction loan
for $11.0 million related to the office property
- purchased a 50% interest in two real estate joint ventures for $10.0
million
- executed a $40.0 million loan facility of which Legacy has
borrowed $16.5 million from us as of September 30, 2000. Legacy will
use $25 million of this note to complete development on a retail
project which we may purchase, consistent with our plan to acquire
development properties from Legacy once they are completed. The note
bears interest at LIBOR plus 375 basis points on the first $15.0
million and at a fixed rate of 12.5% for any amount outstanding over
$15.0 million. At September 30, 2000 the weighted average interest
rate was 10.5%
We funded these activities through advances on our revolving line of credit. To
the extent that investment opportunities exceed available cash flow from the
sources mentioned above, we may raise additional capital through bank credit
facilities and/or secured mortgage financing.
We also anticipate obtaining construction loans to fund our retail and self
storage development activities.
From time to time we will consider selling properties to better align our
portfolio with our geographic and tenant composition strategies. We may also
participate in tax deferred exchange transactions, which allow us to dispose of
properties and reinvest the proceeds in a tax efficient manner. During the third
quarter of 2000 we sold parts of two properties from our portfolio for $26.3
million. We anticipate a temporary reduction in operating income due to the time
lag between selling a property and reinvesting the proceeds. We are also under
contract to sell and are contemplating selling certain other properties. These
potential sales may not be completed due to uncertainties associated with
contract negotiations and buyer due diligence contingencies.
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In June 2000 we borrowed $121.4 million from GMAC Commercial Mortgage
Corporation. The GMAC loan is secured by five retail properties located in
Westbury, NY; Signal Hill, CA; Philadelphia, PA; Wayne, NY; and Roseville, CA.
The GMAC loan bears interest at LIBOR plus 98 basis points, 7.63% at September
30, 2000, and is due on June 2004. We used proceeds of the loan to repay
outstanding amounts on our existing revolving credit facility with Wells Fargo
Bank, AmSouth Bank and Bank One.
In connection with our GMAC loan, we reduced the facility from $125 million of
total availability to $75 million of total availability. In connection with the
reduction in the credit facility, we wrote-off loan fees of approximately
$300,000. The amended facility has a remaining term of two years with an initial
interest rate of LIBOR plus 135 basis points. The rate may vary based on our
leverage, amounts loaned to Legacy, and other financial ratios. As of September
30, 2000, we owed $20.4 million on this credit facility at an interest rate of
8.03%. Current interest rates on this facility range from 8.03% to 8.48%.
Inflation
Because a substantial number of our leases contain provisions for rent increases
based on changes in various consumer price indices, based on fixed rate
increases, or based on percentage rent if tenant sales exceed certain base
amounts, we do not expect inflation to have a material impact on future net
income or cash flow from developed and operating properties. In addition,
substantially all leases are triple net, which means specific operating expenses
and property taxes are passed through to the tenant.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
short-term LIBOR interest rates. We do not have any foreign exchange or other
significant market risk, nor did we have any derivative financial instruments at
September 30, 2000.
Our exposure to market risk for changes in interest rates relates primarily to
our unsecured line of credit and GMAC loan. We enter into fixed rate mortgages
and variable rate debt obligations to support general corporate purposes,
including acquisitions, capital expenditures and working capital needs. We
continuously evaluate our level of variable rate debt with respect to total debt
and other factors, including our assessment of the current and future economic
environment.
We had $141.8 million in variable rate debt outstanding at September 30, 2000.
Based upon this debt level, a hypothetical 10% adverse change in interest rates
would increase interest expense by approximately $1.1 million on an annual
basis, and likewise decrease our earnings and cash flows. We cannot predict
market fluctuations in interest rates and their impact on our variable rate
debt, nor can there be any assurance that fixed rate long-term debt will be
available to us at favorable rates, if at all. Consequently, future results may
differ materially from the estimated adverse changes discussed above.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by
reference:
(10.1) First Amended and Restated Promissory Note and Revolving Line
of Credit dated September 27, 2000 by and among PEI and Excel
Legacy (incorporated by reference to Exhibit 10.3 to Excel
Legacy Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 filed with the Commission on
November 9, 2000 (File No. 0-23503)).
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
We filed a report on Form 8-K on July 26, 2000 relating to the
$121.4 million we borrowed from GMAC Commercial Mortgage
Corporation. We did not file any other reports on Form 8-K during
the quarter ended September 30, 2000.
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.
PRICE ENTERPRISES, INC.
Registrant
Date: November 9, 2000 /s/ Gary B. Sabin
----------------------------------------
Gary B. Sabin
President & Chief Executive Officer
Date: November 9, 2000 /s/ James Y. Nakagawa
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James Y. Nakagawa
Chief Financial Officer
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