UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
Commission File Number 1-11478
KRANZCO REALTY TRUST
(Exact Name of Registrant as Specified in Charter)
Maryland
(State of Other Jurisdiction of
Incorporation or Organization)
23-2691327
(IRS Employer Identification No.)
128 Fayette Street, Conshohocken, Pennsylvania 19428
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code
(610) 941-9292
N/A
Former Name, Former Address and Former Fiscal Year, if Changes Since
Last Report.
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 [ ]
As of May 7, 1999, there were 10,540,748 Common Shares of Beneficial Interest,
par value $0.01 per share, outstanding.
KRANZCO REALTY TRUST
QUARTERLY REPORT FOR THE PERIOD ENDED
MARCH 31, 1999
INDEX
PART I. PAGE
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Kranzco Realty Trust and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1999 1998
(Unaudited)
------------- -------------
ASSETS:
Shopping center properties owned, at cost
Buildings and improvements $436,948,000 $437,242,000
Land 139,295,000 147,641,000
------------- -------------
576,243,000 584,883,000
Less-accumulated depreciation 63,255,000 59,793,000
------------- -------------
512,988,000 525,090,000
Properties held for sale, net 13,720,000 0
------------- -------------
Total shopping center properties owned, at cost 526,708,000 525,090,000
Cash and cash equivalents 6,902,000 2,913,000
Restricted cash 1,893,000 1,465,000
Rents and other receivables, net of allowance of
$2,532,000 and $2,160,000, March 31, 1999 and
December 31, 1998 7,173,000 7,573,000
Prepaid expenses 2,384,000 2,237,000
Deferred financing costs, net of accumulated
amortization of $1,362,000
and $1,237,000, March 31, 1999 and December 31,1998 1,986,000 2,066,000
Deferred costs, net of accumulated
amortization of $1,002,000
and $1,040,000, March 31, 1999 and December 31,1998 2,830,000 2,753,000
Other assets 1,972,000 2,419,000
------------- -------------
Total assets $551,848,000 $546,516,000
============= =============
LIABILITIES:
Mortgages and notes payable $355,677,000 $350,141,000
Tenant security deposits 1,450,000 1,453,000
Accounts payable and accrued expenses 6,845,000 3,234,000
Other liabilities 702,000 559,000
Distributions payable 6,611,000 6,650,000
------------- -------------
Total liabilities 371,285,000 362,037,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED SHARES, SERIES C, $0.01 PAR VALUE; 0
AND 44,550 SHARES, MARCH 31, 1999
AND DECEMBER 31, 1998, RESPECTIVELY 0 445,000
BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest,
Series A-1, $0.01 par value; 11,155 shares,
March 31, 1999 and December 31, 1998 1,000 1,000
Preferred shares of beneficial interest,
Series B-1 and B-2, $0.01 par value; 1,183,277
shares, March 31, 1999 and December 31, 1998 12,000 12,000
Preferred shares of beneficial interest,
Series D, $0.01 par value; 1,800,000 shares,
March 31, 1999 and December 31, 1998 18,000 18,000
Common shares of beneficial interest,
$0.01 par value; authorized 100,000,000
shares; issued and outstanding, 10,538,716 and
10,537,103 as of March 31, 1999
and December 31, 1998, respectively 105,000 105,000
Capital in excess of par value 263,409,000 263,370,000
Cumulative net income available for common shareholders 39,188,000 37,685,000
Cumulative distributions on common shares of beneficial
interest (121,972,000) (116,914,000)
------------- -------------
180,761,000 184,277,000
Unearned compensation on restricted shares of beneficial
interest (198,000) (243,000)
------------- -------------
Total beneficiaries' equity 180,563,000 184,034,000
Total liabilities and beneficiaries' equity $551,848,000 $546,516,000
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Operations
For the three For the three
months ended months ended
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
------------- -------------
REVENUES:
Minimum rent $15,974,000 $13,407,000
Percentage rent 394,000 310,000
Expense reimbursements 3,613,000 2,839,000
Interest income 86,000 123,000
Other 69,000 28,000
------------- -------------
Total revenue 20,136,000 16,707,000
------------- -------------
EXPENSES:
Interest $6,592,000 $4,871,000
Depreciation and amortization 4,165,000 3,450,000
Real estate taxes 1,953,000 1,804,000
Operations and maintenance 2,924,000 2,143,000
General and administrative 1,060,000 767,000
------------- -------------
Total expenses 16,694,000 13,035,000
------------- -------------
NET INCOME 3,442,000 3,672,000
Preferred Share Distributions 1,939,000 2,013,000
------------- -------------
NET INCOME FOR COMMON SHAREHOLDERS $1,503,000 $1,659,000
============= =============
Basic and Diluted Earnings per Common Share
of Beneficial Interest $0.14 $0.16
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Cash Flows
For the three For the three
months ending months ending
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,442,000 $3,672,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,165,000 3,450,000
Amortization of unearned compensation on
restricted shares of beneficial interest 45,000 32,000
Changes in assets and liabilities:
(Increase) decrease in-
Rents and other receivables 400,000 (522,000)
Prepaid expenses (147,000) (197,000)
Other assets 21,000 (10,000)
Increase (decrease) in-
Accounts payable and accrued expenses 471,000 427,000
Tenant security deposits (3,000) 46,000
Other liabilities 143,000 (23,000)
------------- -------------
Net cash provided by operating activities 8,537,000 6,875,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in shopping center properties (2,060,000) (2,685,000)
(Increase) decrease in other assets 426,000 (352,000)
Decrease in accrued acquisition costs (272,000) (96,000)
Increase in restricted cash (428,000) (302,000)
Increase in deferred costs (221,000) (122,000)
------------- -------------
Net cash used in investing activities (2,555,000) (3,557,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid on common shares of
beneficial interest (5,058,000) (4,999,000)
Distributions paid on preferred shares of
beneficial interest (1,962,000) (1,398,000)
Issuance of common shares of
beneficial interest, net 23,000 208,000
Redemption of redeemable preferred shares (445,000) (446,000)
Proceeds of mortgages and notes payable 6,000,000 0
Repayments of mortgages and notes payable (464,000) (1,268,000)
Decrease in accrued expenses for preferred
share offering 0 (390,000)
Increase in deferred financing costs (87,000) 0
------------- -------------
Net cash used in financing activities (1,993,000) (8,293,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,989,000 (4,975,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,913,000 11,423,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,902,000 $6,448,000
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accretion of discount on increasing rate
preferred shares $17,000 $22,000
============= =============
Preferred and common shares issued as part of the
purchase price for the acquisition of real estate:
Fair value of assets acquired $0 $3,665,000
Liabilities assumed 0 3,345,000
------------- -------------
Preferred shares issued $0 $0
Common shares issued $0 $320,000
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
Kranzco Realty Trust and Subsidiaries
Consolidated Statements of Beneficiaries' Equity
For the years ended December 31, 1997 and 1998
For the three months ended March 31, 1999
Unearned
Cumulative Compensation
Preferred Cumulative Distributions on
Common Preferred Shares of Capital Net Income on Common Restricted
Shares of Shares of Beneficial In Excess Available Shares of Shares of
Beneficial Par Beneficial Interest of for Common Beneficial Beneficial
Interest Value Interest Par Value Par Value Shareholders Interest Interest
------------ -------- ---------- ---------- ------------- ------------- -------------- -------------
BALANCE, JANUARY 1, 1997 10,332,784 $103,000 11,155 $1,000 $187,177,000 $26,754,000 ($76,891,000) ($131,000)
Issuance of common shares 82,697 1,000 - - 1,545,000 - - (125,000)
Forfeiture of common shares (54) - - - (1,000) - - -
Issuance
of
preferred
shares-Series B-1, B-2 - - 1,183,331 12,000 29,354,000 - - -
Issuance
of
preferred shares-Series D - - 1,800,000 18,000 42,927,000 - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 95,000 (95,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 101,000
Net income - - - - - 10,617,000 - -
Distributions
on preferred shares - - - - - (3,470,000) - -
Distributions
on common shares
of
beneficial
interest($1.92 per share) - - - - - - (19,880,000) -
------------ -------- ---------- ---------- ------------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 1997 10,415,427 $104,000 2,994,486 $31,000 $261,097,000 $33,806,000 ($96,771,000) ($155,000)
Issuance of common shares 122,748 1,000 - - 2,218,000 - - (241,000)
Forfeiture of common shares (1,072) - - - (18,000) - - -
Conversion
of
Series B-1 to common shares - - (54) - (1,000) - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 74,000 (74,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 153,000
Net income - - - - - 11,863,000 - -
Distributions
on preferred shares - - - - - (7,910,000) - -
Distributions
on common shares
of
beneficial
interest($1.92 per share) - - - - - - (20,143,000) -
------------ -------- ---------- ---------- ------------- ------------- -------------- -------------
BALANCE, DECEMBER 31, 1998 10,537,103 $105,000 2,994,432 $31,000 $263,370,000 $37,685,000 ($116,914,000) ($243,000)
Issuance of common shares 1,908 - - - 28,000 - - -
Forfeiture of common shares (295) - - - (6,000) - - -
Accretion
of
discount
on preferred shares
of beneficial interest - - - - 17,000 (17,000) - -
Accretion
of
unearned compensation on
restricted
shares
of beneficial interest - - - - - - - 45,000
Net income - - - - - 3,442,000 - -
Distributions
on preferred shares - - - - - (1,922,000) - -
Distributions
on common shares
of
beneficial
interest($0.48 per share) - - - - - - (5,058,000) -
------------ -------- ---------- ---------- ------------- ------------- -------------- -------------
BALANCE,
MARCH 31, 1999 (Unaudited) 10,538,716 $105,000 2,994,432 $31,000 $263,409,000 $39,188,000 ($121,972,000) ($198,000)
<FN>
The accompanying notes are an integral part of these statements.
</FN>
ii.
KRANZCO REALTY TRUST AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. BASIS OF PRESENTATION:
The financial statements are unaudited but reflect all adjustments which are
necessary, in the opinion of management, to present fairly the results for the
interim periods presented. These financial statements should be read in
conjunction with the financial statements and related notes contained in Kranzco
Realty Trust and its subsidiaries' Annual Report on Form 10-K for the year
ended December 31, 1998. Results from any interim period are not necessarily
indicative of the results for a full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business and Nature of Operations
Kranzco Realty Trust (a Maryland real estate investment trust) and its
subsidiaries ("KRT" or the "Company") are engaged in the ownership, management,
leasing, operation, acquisition, development, investment and disposition of
neighborhood and community shopping centers and free-standing properties. In
addition to its own properties, the Company may provide management services
for shopping centers owned by third parties. As of March 31, 1999, the Company
owned 67 properties in nineteen Northeastern, Southern and Mid-Atlantic states.
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
reported amounts of revenues and expenses during the reporting periods. The
ultimate results could differ from those estimates.
Earnings Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock.
Basic EPS is based on the weighted average number of common shares of beneficial
interest outstanding. The weighted average number of shares outstanding used in
the Basic EPS computations was 10,538,795 and 10,423,836 as of March 31, 1999
and 1998, respectively. The Diluted EPS computations have been adjusted to give
effect to common share equivalents; specifically, common share options
outstanding. The weighted average number of shares outstanding used in the
Diluted EPS computations was 10,538,795 and 10,427,342 as of March 31, 1999 and
1998, respectively. The Company's Series A-1 and B Preferred Shares and the
majority of the Company's stock options were not included in the Diluted EPS
calculation because their impact would be anti-dilutive based on current market
prices.
Statements of Cash Flows
Cash and cash equivalents include all cash and liquid investments with original
maturities of three months or less, primarily consisting of money market
accounts and government investments. Cash paid for interest was $6,861,000 and
$5,157,000 for the three months ended March 31, 1999 and 1998, respectively.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133") is effective for fiscal years beginning after December 15, 1999.
SFAS 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The Compnay does not
currently have any derivative instruments or participate in any hedging
activities, accordingly, this SFAS 133 will not have a material affect on the
financial statements.
3. INDEBTEDNESS:
At March 31, 1999 and December 31, 1998, the Company had mortgages and notes
payable outstanding of $355,677,000 and $350,141,000, respectively.
In 1996, the Company entered into a seven year, secured, fixed rate real estate
mortgage loan in the principal amount of $181,700,000 (the "Mortgage Loan"), at
a weighted average interest rate of 7.96%, which is inclusive of trustee and
servicer fees. The Mortgage Loan is secured by twenty seven shopping center
properties (the "Mortgaged Properties"). The entire outstanding principal
balance of the Mortgage Loan is due in June 2003. Interest expense for the three
months ending March 31, 1999 and 1998 in the accompanying statements of
operations is shown net of capitalized interest of $265,000 and $293,000,
respectively.
As a condition of the Mortgage Loan, the Company was required to establish a
Sinking Fund Account and a Capital and TI Reserve Account. The balance in the
Sinking Fund Account as of March 31, 1999 was $385,000. All funds in the Capital
and TI Reserve Account may be used by the Company to fund capital improvements,
repairs, alterations, tenant improvements and leasing commissions at the
Mortgaged Properties. The balance in the Capital and TI Reserve Account was
$425,000 as of March 31, 1999.
In September 1998, the Company obtained a $65,900,000 million fixed rate
mortgage from Salomon Brothers Realty Corp. This mortgage is secured by nine
properties acquired in September, 1998. The mortgage bears a fixed interest rate
of 7% per annum and requires monthly payments of interest and principal based on
a 30-year amortization. The mortgage matures on October 1, 2008. The outstanding
principal balance on the mortgage was approximately $65,640,000 as of March 31,
1999. Pursuant to the mortgage, the Company is required to make monthly escrow
payments for the payment of real estate taxes, insurance, tenant improvements
and repair reserves. The balance of the tenant improvement and repair reserve
account as of March 31, 1999 was $411,000.
In addition, the Company has eleven mortgages outstanding as of March 31, 1999
which were assumed in connection with the acquisition of certain shopping
centers. These mortgages have maturity dates ranging from 1999 through 2009.
Nine of the eleven mortgages assumed have fixed interest rates ranging from
7.50% to 10.50%. The outstanding principal balance on these mortgages at March
31, 1999 was approximately $53,287,000. The other two mortgages have interest
rates payable at a rate adjusted each year to equal the sum of Moody's A
Corporate Bond Index Daily Rate minus 0.125% per annum. The outstanding
principal balance on these mortgages at March 31, 1999 was approximately
$7,049,000.
In 1998, the Company increased its secured line of credit from Salomon Brothers
Realty Corp. to $100 million from $50 million (the "Salomon Facility"). Amounts
borrowed under the line bear interest at the one month London Interbank Offering
Rate ("LIBOR") plus 175 basis points, which interest rate was 6.71% at March 31,
1999. As of March 31, 1999, there was $48,000,000 outstanding under this
facility and an additional $5,000,000 available for future borrowing. The
facility is secured by eighteen of the Company's shopping centers or portions
thereof and the due date was extended to July 2000. The Company has an option
to extend the facility for an additional year. As a condition of the facility,
the Company was required to establish a Repair Reserve Account for immediate and
ongoing capital expenditure reserves and replacement reserves. The balance in
the Repair Reserve Account was $425,000 as of March 31, 1999.
The Company has a $3.0 million secured line of credit from Bank Leumi Trust
Company of New York. Amounts borrowed under the line bear interest at 50 basis
points above that bank's reference rate. There were no outstanding borrowings
under this facility as of March 31, 1999. The line expires June 30, 1999.
The Company has a $1.0 million unsecured line of credit from First Union
National Bank. Amounts borrowed under the line will bear interest at that bank's
prime rate. There were no outstanding borrowings under this facility as of
March 31, 1999 and the facility's expiration date was extended to April 30,
2000.
As of March 31, 1999, aggregate principal payments on all outstanding
indebtedness are due, as follows:
1999 $ 7,783,000
2000 56,082,000
2001 5,279,000
2002 4,354,000
2003 193,970,000
Thereafter 88,209,000
------------
$355,677,000
------------
4. ACQUISITIONS:
The Company acquired ten shopping centers during the year ended December 31,1998
for approximately $93,000,000 which were accounted for by the purchase method.
The results of operations of each center were included from the respective
purchase date. The pro forma financial information presented below may not be
indicative of results that would have been reported if the acquisitions had
occurred on January 1, 1998.
For the three months ended March 31, 1998
-----------------------------------------
Pro forma total revenues $18,968,000
Pro forma net income for common shareholders $1,525,000
Pro forma net income per common share $0.15
5. DISTRIBUTIONS ON COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST:
On March 16, 1999, the Trustees declared a cash distribution of $0.48 per common
share, payable to shareholders of record on March 26, 1999. The distribution of
$5,059,000 was paid on April 21, 1999. On March 17, 1998, the Trustees declared
a cash distribution of $0.48 per common share, payable to shareholders of record
on March 30, 1998. The distribution of $5,013,000 was paid on April 22, 1998.
The Company accrued the quarterly distribution on the Series A-1 Preferred
Shares of $160,000 and $153,000 as of March 31, 1999 and 1998, respectively.
These distributions were paid on April 1, 1999 and 1998, respectively.
The Company accrued $561,000 and $569,000 of the distribution on the Series B
Preferred Shares as of March 31, 1999 and 1998, respectively. The entire
distribution of $721,000 was paid on April 20, 1999 and 1998, respectively.
The Company accrued $39,000 of the distribution on the Series C Preferred Shares
as of March 31, 1998. The entire distribution of $39,000 was paid on April 30,
1998.
The Company accrued $831,000 and $843,000 of the distribution on the Series D
Preferred Shares as of March 31, 1999 and 1998, respectively. The entire
distribution of $1,069,000 was paid on April 20, 1999 and 1998, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain statements that may be deemed to
be "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included in this Form 10-Q that address
activities, events or developments that the Company expects, believes or
anticipates will or may occur in the future, including such matters as future
capital expenditures, distributions and acquisitions (including the amount and
nature thereof), the use of proceeds of offerings, expansion and other
development trends of the real estate industry, business strategies, expansion
and growth of the Company's operations and other such matters are
forward-looking statements. Such statements are based on assumptions and
expectations which may not be realized and are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Prospective investors are cautioned that any such
statements are not guarantees of future performance and that actual results or
developments may differ materially from those anticipated in the forward-looking
statements. Risks and other factors that might cause such differences, some of
which could be material, include, but are not limited to: the burden of the
Company's substantial debt obligations; the necessity of future financings to
repay the "balloon" payments required at the maturity of certain of the
Company's debt obligations; the highly competitive nature of the real estate
leasing market; adverse changes in the real estate markets including, among
other things, competition with other companies; general economic and business
conditions, which will, among other things, affect demand for retail space or
retail goods, availability and creditworthiness of prospective tenants and lease
rents; financial condition and bankruptcy of tenants, including disaffirmance of
leases by bankrupt tenants; the availability and terms of debt and equity
financing; risks of real estate acquisition, expansion and renovation; lease-up
delays; governmental actions and initiatives; environmental/safety requirements;
and other changes and factors listed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 under Item 1. Business and from time to
time in the Company's reports filed with the Securities and Exchange Commission
or otherwise publicly disseminated by the Company.
Liquidity and Capital Resources
At March 31, 1999 the Company had $6,902,000 of cash on hand. In addition to its
cash reserve, unused capacity under credit facilities totaled $9,000,000 at
March 31, 1999.
As of March 31, 1999, the Company had total mortgages and notes payable of
$355,677,000 of which $300,627,000 bears interest at fixed rates ranging from
7.50% to 10.50%. The weighted average interest rate of all of the Company's
mortgages and notes payable as of March 31, 1999 was 7.74%. As of March 31,
1999, the Company is required to make aggregate principal payments on all of its
outstanding borrowings of $7,783,000 in 1999, $56,082,000 in 2000, $5,279,000 in
2001, $4,354,000 in 2002, $193,970,000 in 2003 and $88,209,000 in 2004 and
thereafter.
In June 1996, the Company successfully completed the refinancing of
substantially all of its variable rate debt and a portion of its fixed rate
debt. The Company entered into a seven year, secured, fixed rate real estate
mortgage loan in the principal amount of $181,700,000 (the "Mortgage Loan") at a
weighted average interest rate of 7.96%, which is inclusive of trustee and
servicer fees. The entire principal balance of the Mortgage Loan is due in June
2003. As a condition of the Mortgage Loan, the Company was required to establish
a Sinking Fund Account and a Capital and TI Reserve Account. The balance in the
Sinking Fund Account was $385,000 as of March 31, 1999. The balance in the
Capital and TI Reserve Account was $425,000 as of March 31, 1999.
As of March 31, 1999, the Company has two floating rate mortgages with principal
outstanding of $7,049,000. The interest rate on both of the mortgages is equal
to the sum of Moody's A Corporate Bond Index Daily Rate minus 0.125% per annum,
rounded up the the next highest 1/8 percentage rate. The rates are reset once a
year. As of March 31, 1999, the rates of the two mortgages were 6.875% and
7.00%.
In 1998, the Company doubled its secured first mortgage loan facility from $50
million to up to $100 million from Salomon Brothers Realty Corp. (the "Salomon
Facility"). The maturity of the Salomon Facility was extended two years to July
2000, with an option for a one-year extension. Eighteen of the Company's
shopping centers or portions thereof secure the mortgage loan facility. Amounts
borrowed under the Salomon Facility bear interest at the one-month London
Interbank Offering Rate ("LIBOR") plus 175 basis points, which was 6.71% as of
March 31, 1999. The Salomon Facility requires the following covenants be met:
consolidated equity will not fall below $150 million; consolidated income
available for debt service will not be less than 1.75 to 1.0; and debt to market
cap will not be above 70%. The Company is in compliance with these covenants.
There was $48,000,000 of outstanding borrowings under this facility as of March
31, 1999. The proceeds of the Salomon Facility were used by the Company for
funding property acquisitions, general corporate purposes and capital needs.
The Company obtained a $3.0 million secured line of credit from Bank Leumi Trust
Company of New York which expires in June 1999. This line is secured by a
property in Orange, Connecticut. Amounts borrowed under the line bear interest
at 50 basis points above that bank's reference rate. There were no outstanding
borrowings under this facility as of March 31, 1999.
The Company obtained a $1.0 million unsecured line of credit from First Union
National Bank, N.A. Amounts borrowed under the line will bear interest at the
bank's prime rate. The facility was extended through April 30, 2000 and there
were no borrowings outstanding under this facility as of March 31, 1999.
The Company has scheduled the auction of six of its free-standing properties
located in four states in May 1999. Should any of the properties be sold, the
Company plans to use the proceeds to repay any outstanding indebtedness related
to the properties, fund capital expenditures and for general corporate purposes.
The National Association of Real Estate Investment Trusts ("NAREIT") defines
funds from operations as income before depreciation and amortization of real
estate assets and significant non-recurring events, less gains on sale of real
estate. Funds from operations does not represent cash flows from operations as
defined by generally accepted accounting principles and is not necessarily
indicative as a measure of liquidity of the Company. Funds from operations
should not be construed as an alternative to net income as defined by generally
accepted accounting principles as an indicator of the Company's operating
performance. Funds from operations for common shareholders increased $539,000 or
11% from $4,962,000 for the first quarter of 1998 to $5,501,000 for the first
quarter of 1999.
The Company has several tenants which are operating under Chapter 11 of the
United States Bankruptcy Code. Among the tenants are Caldor (three stores
representing approximately $2.8 million or 3.9% of the Company's annual
revenues). Caldor announced in January 1999 that it was liquidating. At the
Company's Anneslie Shopping Center in Baltimore, Maryland, the Caldor lease is
guaranteed by The May Company. The lease for the store in Hamilton, New Jersey
was purchased by Bradlees in April 1999 in a bankruptcy court auction. The
purchase is pending approval by the bankruptcy court, which management
anticipates will occur. The Company expects the lease for the Bristol,
Pennsylvania store to be rejected by Caldor in the second quarter of 1999. In
the meantime, management is seeking a potential replacement tenant for the
location. Bradlees, a tenant at the Company's Bethlehem Square shopping center,
emerged from bankruptcy protection in January 1999 and continues to operate and
pay its obligations in accordance with its lease at this location. Other tenants
in the Company's portfolio that continue to pay current rent and operate their
stores under Chapter 11 are individually less than 1% and in the aggregate just
over 1% of the Company's annual revenues. The Company believes that it is
adequately reserved for these tenants.
During the three months ended March 31, 1999, the Company invested approximately
$2,060,000 in the expansion and improvement of existing shopping center
properties. The Company expects to meet its short-term liquidity requirements
through net cash flow provided from operations, existing cash, long-term or
short-term borrowings and the Capital and TI Reserve account. The Capital and TI
Reserve account may be utilized by the Company for the funding of costs related
to capital improvements, repairs, alterations, tenant improvements and leasing
commissions in the centers secured by the Mortgage Loan. To meet its long-term
liquidity requirements, such as refinancing its balloon mortgages, financing
acquisitions and major capital improvements, the Company intends to either
utilize long-term borrowings, issue debt securities and/or offer additional
equity securities.
Management believes it has adequate access to capital to continue to meet its
short-term and long-term requirements and objectives.
The Company has completed a review of its Information Technology ("IT") Systems
and non-IT Systems regarding Year 2000 compliance. All required changes to
internal IT systems found thus far have been completed and successfully tested.
All desktop and network IT systems are believed to be Year 2000 compliant. A
second documentation and test phase is currently in progress. All of the
Company's tenants have been notified of the issues regarding the Year 2000.
One fire alarm at one shopping center property has been found to be only
partially Y2K compliant. It will be upgraded or replaced at the vendor's
recommendation as soon as possible. One alarm monitoring company is still in the
process of testing their remediation efforts of internal systems. If they do not
produce adequate documentation of such tests by their target date of June 1999,
a new monitoring company will be chosen.
The Company expects to have completed all phases of its systems remediation by
June of 1999 and will post Y2K readiness information on its web site shortly.
Costs for modifications to current IT systems have not been separated from
ongoing IT expenses due to their limited nature. Similarly, no budget has been
allocated for future costs due to their minor contribution to ongoing IT
operations.
There can be no guarantee that the Company will identify all IT and non-IT
systems that may be vulnerable to Year 2000 issues prior to January 1, 2000 or
February 29, 2000. To the extent that systems are overlooked or remediation
measures are themselves subject to error, the Company may experience loss of
normal operation which could adversely effect the Company's operating results
and financial condition.
Tenants of the Company's properties may own or maintain IT and non-IT systems
which are not Year 2000 compliant. To the extent that such tenants are unable to
process payments or otherwise perform business as usual, the Company's operating
results and financial condition could be adversely effected. However, all leases
will remain in full effect and tenants will remain liable for all amounts due to
the Company after the change to the Year 2000. Requiring tenants'
representations of Year 2000 compliance would have little if any effect on the
situation and the Company does not intend to pursue this course.
Vendors of the Company may own or maintain IT and non-IT systems which are not
Year 2000 compliant. To the extent that such vendors are unable to render
critical services, the Company's operating results and financial condition could
be adversely effected. In particular, outages of utilities such as gas, electric
and phone service could have a severely negative impact on the Company's ongoing
operations at any of its locations. The Company is in contact with certain
vendors regarding the Year 2000, but requiring all vendors' representations of
Year 2000 compliance would have little if any effect on the situation and the
Company does not intend to pursue this course.
Due to the widely varying potential impacts of the Year 2000 problem, the
Company does not believe it is reasonable to assign dollar amounts attendant to
the various risks and outcomes at this time.
Based on current information, the Company does not consider it necessary to
develop a formal contingency plan. Ad-hoc contingency plans regarding some of
the Company's IT systems are being assembled, and a formal plan will be
considered as a part of our ongoing Year 2000 planning.
RESULTS OF OPERATIONS
Net income for common shareholders decreased $156,000, or 9%, from $1,659,000 or
$0.16 per common share in the first quarter of 1998 to $1,503,000 or $0.14 per
common share in the first quarter of 1999. This decrease was due to a
combination of factors as described in further detail below.
Minimum rent increased $2,567,000, or 19%, from $13,407,000 in the first quarter
of 1998 to $15,974,000 in the first quarter of 1999. The increase was primarily
due to the additional rents from the acquisition of the additional ten centers
in 1998 of approximately $2,181,000, combined with an increase in the minimum
rents of approximately $386,000 from the other fifty-seven shopping centers.
Percentage rent increased $84,000, or 27%, from $310,000 in the first quarter of
1998 to $394,000 in the first quarter of 1999. The increase was due to an
additional $135,000 of percentage rent being recognized at the nine properties
purchased in the third quarter of 1998. This increase was offset by a decrease
in percentage rent at the Company's additional centers.
Expense reimbursements increased $774,000, or 27%, from $2,839,000 in the first
quarter of 1998 to $3,613,000 in the first quarter of 1999. The increase was due
to the additional revenues recorded from the ten centers purchased in 1998 of
approximately $240,000 as well as an increase in the recovery percentage of
reimbursable expenses due to an increase in the overall occupancy rate from the
prior year.
Interest income decreased $37,000, or 30%, from $123,000 in the first quarter of
1998 to $86,000 in the first quarter of 1999. The decrease was primarily due to
the additional cash available for investment during the first quarter of 1998.
This cash was the remaining proceeds of the issuance of the Company's 9 1/2%
Series D Cumulative Redeemable Preferred Shares which were issued in December
1997.
Interest expense increased $1,721,000, or 35%, from $4,871,000 in the first
quarter of 1998 to $6,592,000 in the first quarter of 1999. The increase is
primarily due to the interest expense incurred in connection with the additional
ten centers acquired in 1998 of approximately $1,218,000. The Company also
incurred an additional $450,000 of interest expense in 1999 as compared to 1998
as a result of additional borrowings made on the Salomon Facility. In addition,
interest expense was reduced by capitalized interest on projects under
construction and land under development in the amount of $293,000 and $265,000
for the first quarter of 1998 and 1999, respectively.
Depreciation and amortization increased $715,000, or 21%, from $3,450,000 in the
first quarter of 1998 to $4,165,000 in the first quarter of 1999. Depreciation
expense on buildings and improvements increased approximately $504,000 in the
first three months of 1999 versus the first three months of 1998 due to the ten
additional centers acquired in 1998.
Real estate taxes increased $149,000, or 8%, from $1,804,000 in the first
quarter of 1998 to $1,953,000 in the first quarter of 1999. The increase was
primarily due to the increase in expense
Operations and maintenance expenses increased $823,000, or 39%, from $2,101,000
in the first quarter of 1998 to $2,924,000 in the first quarter of 1999. The
Company increased its provision for troubled tenants by approximately $400,000
over the first quarter of 1998. The Company regularly evaluates the allowance
for troubled tenants based on known facts and market conditions. The operations
and maintenance increase was also attributable to an increase in snow removal
costs of approximately $320,000 in 1999. In 1998, the Company experienced lower
costs as a result of the mild winter experienced at the Company's centers.
General and administrative expenses increased $293,000, or 38%, from $767,000 in
the first quarter of 1998 to $1,060,000 in the first quarter of 1999. The
increase is primarily due to an increase in professional fees as well as an
increase in salary costs over the prior year.
INFLATION
Most of the retail tenant leases at the shopping center properties contain
provisions which will entitle the Company to receive percentage rents based on
the tenants' gross sales. Such percentage rents minimize the risk to the Company
of the adverse effects of inflation. Most of the leases at the shopping center
properties require the tenants to pay a substantial share of operating expenses,
such as real estate taxes, insurance and common area maintenance costs, and
thereby reduce the Company's exposure to increased costs. In addition, many of
the leases at the shopping center properties are for terms of less than ten
years, which may enable the Company to seek increased rents upon renewal of
existing leases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risk is to changes in interest rates.
The Company has $355,677,000 of debt outstanding as of March 31, 1999 of which
85% has been borrowed at fixed rates ranging from 7.00% to 10.50%. As these debt
instruments mature, the Company typically refinances such debt at their existing
market interest rates which may be more or less than interest rates on the
maturing debt.
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes 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
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.4 Amendment to Amended and Restated Declaration of Trust, dated
September 22, 1997.
(b) Reports on Form 8-K
A Report on Form 8-K dated January 4, 1999 was filed by the Company with
the Securities and Exchange Commission on January 4, 1999. The Company reported
the termination of its previously announced exchange offer for shares of New
America Network, Inc("NAI"). The Company also reported a $1 million investment
for a minority interest in NAI.
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.
KRANZCO REALTY TRUST
Date: May 7, 1999 /S/ Norman M. Kranzdorf
Chief Executive Officer and President
Date: May 7, 1999 /S/Robert H. Dennis
Chief Financial Officer and Treasurer