THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED
PURSUANT TO RULE 901(d) OF REGULATION S-T.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________
Commission file number 1-12588
ALEXANDER HAAGEN PROPERTIES, INC.
(Exact name of registrant as specified in charter)
MARYLAND 95-4444963
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3500 SEPULVEDA BOULEVARD
MANHATTAN BEACH, CALIFORNIA 90266
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 546-4520
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ].
As of August 12, 1997, 13,419,067 shares of Common Stock, Par Value $.01
Per Share, were outstanding.
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ALEXANDER HAAGEN PROPERTIES, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Operations (unaudited)
for the three months and six months ended June 30,
1997 and 1996 4
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements
(unaudited) 6
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 14
SIGNATURES 15
i
ALEXANDER HAAGEN PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Rental properties $ 669,497 $ 659,565
Accumulated depreciation and amortization (112,392) (104,330)
-------- --------
Rental properties, net 557,105 555,235
Cash and cash equivalents 3,918 5,941
Tenant receivables, net 4,832 5,987
Other receivables 3,374 3,650
Receivable from management company 119 1,055
Investment in management company 621 621
Restricted cash 3,190 3,252
Deferred charges, net 17,775 18,365
Other assets 2,725 770
-------- --------
TOTAL $ 593,659 $ 594,876
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Secured debt $ 254,433 $ 242,641
7 1/2% Convertible subordinated debentures 138,599 138,599
7 1/4% Exchangeable subordinated debentures 30,000 30,000
Accrued distributions 5,904 7,039
Accrued interest 5,544 5,490
Accounts payable and other accrued expenses 3,866 5,340
Accrued construction costs 898 1,207
Tenant security and other deposits 3,894 4,287
-------- --------
Total liabilities 443,138 434,603
-------- --------
MINORITY INTERESTS
Operating Partnership 39,097 41,640
Other minorities 1,884 2,007
-------- --------
Total minority interests 40,981 43,647
STOCKHOLDERS' EQUITY
Common stock ($.01 par value, 50,000,000
shares authorized; 12,112,397 and 12,024,378
shares issued and outstanding at June 30, 1997
and December 31, 1996, respectively) 120 120
Additional paid-in capital 174,862 174,792
Accumulated distributions and deficit (65,442) (58,286)
-------- --------
Total stockholders' equity 109,540 116,626
-------- --------
TOTAL $ 593,659 $ 594,876
======== ========
See Notes to Consolidated Financial Statements.
3
ALEXANDER HAAGEN PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
--------- --------- --------- ----------
REVENUES:
Minimum rents $15,708 $15,446 $31,634 $30,662
Recoveries from tenants 4,510 4,523 9,497 9,052
Percentage rents 167 169 438 407
Other income 953 1,073 1,952 1,968
------ ------ ------ ------
Total revenues 21,338 21,211 43,521 42,089
------ ------ ------ ------
EXPENSES:
Interest 9,025 8,869 17,922 17,723
Depreciation and amortization 4,475 4,060 8,790 8,497
Property Operating Costs:
Common Area 3,218 3,123 6,567 6,302
Property taxes 1,805 1,762 3,881 3,575
Leasehold rentals 417 400 820 807
Marketing 40 283 152 471
Other operating 222 433 674 781
Non-recurring provision for unbilled
deferred rent - - - 6,900
General and administrative 1,252 1,225 2,490 2,389
------ ------ ------ ------
Total expenses 20,454 20,155 41,296 47,445
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS
BEFORE OTHER ITEMS 884 1,056 2,225 (5,356)
NET GAIN ON SALE OF RENTAL PROPERTY - 2,502 - 2,502
EQUITY IN LOSS
OF MANAGEMENT COMPANY - (38) - (38)
MINORITY INTERESTS:
Operating Partnership (212) (323) (544) 525
Other minorities (71) (81) (147) (149)
------ ------ ------ ------
NET INCOME (LOSS) $601 $3,116 $1,534 $(2,516)
====== ====== ====== ======
NET INCOME (LOSS) PER SHARE $0.05 $0.26 $0.13 $(0.21)
====== ====== ====== ======
Weighted average shares
outstanding 12,110 12,024 12,082 12,024
====== ====== ====== ======
See Notes to Consolidated Financial Statements
4
ALEXANDER HAAGEN PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
1997 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 1,534 $ (2,516)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of rental properties 8,790 8,497
Amortization of deferred financing costs 1,109 1,028
Non-recurring provision for unbilled deferred rent - 6,900
Gain on sale of rental property - (2,502)
Minority interests in operations 691 (376)
Equity in income of management company - 38
Net changes in operating assets and liabilities (1,425) (925)
------- --------
Net cash provided by operating activities 10,699 10,144
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction and Development Costs (11,451) (16,126)
Proceeds from sale of rental property - 3,300
------- --------
Net cash used by investing activities (11,451) (12,826)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage financing (1,209) (1,126)
Borrowings on secured line of credit 15,500 18,500
Repayment of secured line of credit (2,500) (1,500)
Costs of obtaining financing (12) -
Decrease in restricted cash 62 1,013
Payment of other liabilities - (5,000)
Distributions paid to shareholders (8,658) (8,657)
Distributions to minority interests (4,524) (1,014)
Other 70 -
------- --------
Net cash (used by) provided by financing activities (1,271) 2,216
------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,023) (466)
CASH AND CASH EQUIVALENTS, AT BEGINNING
OF PERIOD 5,941 3,687
------- --------
CASH AND CASH EQUIVALENTS, AT END
OF PERIOD $ 3,918 $ 3,221
======= =======
See Notes to Consolidated Financial Statements
5
ALEXANDER HAAGEN PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements and related notes of Alexander Haagen
Properties, Inc. (the "Company") are unaudited; however, they have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and the instructions to Form 10-Q and the rules
and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared under generally accepted accounting principles have
been condensed or omitted pursuant to such rule. In the opinion of
management, all adjustments considered necessary for fair presentation of
the Company's financial position, results of operations and cash flows have
been included. These financial statements should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 1996 and the
Company's July 15, 1997 Proxy Statement.
2. INVESTMENT IN MANAGEMENT COMPANY
Equity in Income (Loss) of Management Company represents the Company's 95%
economic interest in Haagen Property Management, Inc. ("HPMI"). In
conjunction with the Initial Public Offering of the Company's common stock
and Debentures in December 1993 (the "IPO"), HPMI assumed all of the
property management functions for the Company's properties. Executive and
property management fees for the six months ended June 30, 1997 and 1996
totaled $1,942,000 and $1,907,000, respectively, and are included in
general and administrative expenses. In addition, HPMI provides leasing,
legal and construction services for the properties owned by the Company,
such fees for the six months ended June 30, 1997 and 1996 of $1,507,000 and
$1,586,000, respectively, were capitalized and are being amortized over the
useful lives of the related leases and/or properties.
As the OP owns a 95% economic interest in but does not control HPMI, the
investment is accounted for on an equity basis.
3. DEVELOPMENT PROPERTIES
Certain of the Properties had not completed their respective leasing plans
at the date of the IPO (the "Development Properties"). To facilitate
inclusion of the Development Properties in the Company's initial portfolio,
the partners of certain Predecessor Affiliates that transferred the
Development Properties to the Company had the right to receive additional
OP Units. In general, the number of additional OP Units issued was based on
the increase in net annualized cash flow from new leases signed through
March 31, 1996 and in occupancy and paying rent by June 30, 1996. Such
increase in cash flow was not fully realized until the third quarter of
1996.
On August 12, 1996, the Independent members of the Board of Directors
approved the issuance of 3,242,379 OP Units to the Predecessor Affiliates.
The market capitalization of the OP was thereby increased by $41.7 million
based upon the stock price as of August 12, 1996. The Predecessor
Affiliates' interest in the OP was thereby increased from 8% to
approximately 26% effective July 1, 1996. As a result of the issuance in
the third quarter of the 3,242,379 OP Units, minority interest was
increased and additional paid-in capital decreased by approximately $31.5
million. The number of OP Units issued and outstanding as of June 30, 1997
was 4,286,456.
6
4. UNBILLED DEFERRED RENTS
During the first quarter of 1996 the Company reassessed the recoverability
of straight-line contractual rent increases as a result of the continuing
mergers and consolidations within the retail industry and the financial
difficulties of certain retailers. Accordingly, during the first quarter
the Company recorded a non-recurring non-cash charge of $6.9 million to
increase the reserve against the receivable for straight-line rents.
Additionally, the Company fully reserved against future unbilled deferred
rents effective January 1, 1996. The company believes this to be an
appropriate and conservative approach to account for future contractual
rent increases in the current retail environment.
5. RENTAL PROPERTIES
The Company regularly reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If the sum of
expected future cash flow is less than the carrying amount of the asset,
the Company recognizes an impairment loss.
6. STOCKHOLDERS' EQUITY
On June 1, 1997 the Company entered into a Stock Purchase Agreement with LF
Strategic Realty Investors, L.P. and Prometheus Western Retail, LLC,
affiliates of Lazard Freres Real Estate Investors, LLC, (together "LFREI"),
providing for LFREI to invest a total of up to $235 million in common stock
of the Company (the "Transaction").
Pursuant to the Stock Purchase Agreement the Company will sell an aggregate
of 15,666,666 shares of Common Stock to LFREI at a price of $15.00 per
share, for an aggregate purchase price of $235 million (the "Total Equity
Commitment"). The purchase price per share was determined as a result of
arm's length negotiations between the Company and its advisors on the one
hand and LFREI and its advisors on the other hand.
On July 10, 1997, the Company sold 1,306,434 shares to LFREI at $15.00 per
share (the "Initial Purchase"), for an aggregate purchase price of
approximately $19.6 million. As of July 11, 1997 LFREI owned approximately
9.8% of the outstanding Common Stock.
Subject to stockholder approval, at a Special Meeting of the Stockholders
to be held on August 14, 1997, the Company will sell 14,360,232 additional
shares of common Stock, from time to time, as it chooses, to LFREI at a
price of $15.00 per share, for an aggregate purchase price of approximately
$215.4 million (the "Remaining Equity Commitment"). Of the Remaining Equity
Commitment, the Company must sell at least 5,360,233 shares, in addition to
the 1,306,434 shares sold in the Initial Purchase, within six months of
stockholder approval and must sell the entire Remaining Equity Commitment
not later than the earlier of (i) eighteen months after stockholder
approval and (ii) March 14, 1999. If the Company has not drawn the
Remaining Equity Commitment by such dates, LFREI will have the right on
such dates to purchase such shares from the Company, at a price of $15.00
per share. If LFREI acquires all of the shares represented by the Remaining
Equity Commitment (and assuming no other change in the number of
outstanding shares), LFREI will own approximately 56.6% of the outstanding
Common Stock (36.9% on a Fully Diluted Basis).
7
Subject to certain restrictions, in the event that the Company issues or
sells shares of capital stock for cash, LFREI will be entitled to purchase
or subscribe for, either as part of such issuance or in a concurrent
issuance, that portion of the total number of shares to be issued equal to
LFREI's proportionate holdings of Common Stock prior to such issuance (but
not to exceed 37.5% of the offering).
For a period of five years following stockholder approval (the "Standstill
Period") and any Standstill Extension Term, LFREI and its affiliates may
not (i) acquire beneficial ownership of more than 49.9% of the outstanding
shares of Common Stock, on an Adjusted Fully Diluted Basis (as defined
below), (ii) sell, transfer or otherwise dispose of any shares of Common
Stock except in accordance with certain specified limitations (including a
requirement that the Company, in its sole and absolute discretion, approve
any transfer in a negotiated transaction that would result in the
transferee beneficially owning more than 9.8% of the Company's capital
stock). As used herein, the term Adjusted Fully Diluted Basis shall mean
on a Fully Diluted Basis, except that shares of Common Stock issuable upon
conversion of the Company's outstanding convertible debt or upon exercise
of options granted under management benefit plans shall not be included.
After giving effect to the sale of 15,666,666 shares to LFREI in the
Transaction, and assuming no other change in the number of outstanding
shares, LFREI will own 49.0% of the Common Stock on an Adjusted Fully
Diluted Basis. In the event that the number of outstanding shares were to
increase for any reason (including as a result of issuance of Common Stock
upon conversion or exercise of the outstanding convertible debt or
management stock options), then LFREI would be allowed to acquire
additional shares of Common Stock, up to 49.9% on an Adjusted Fully Diluted
Basis.
In the event that the Company shall not have received stockholder approval
of the Transaction prior to December 31, 1997, LFREI has an option under
the Stock Purchase Agreement to require that the Company repurchase the
shares of Common Stock acquired in the Initial Purchase at a price equal to
the purchase price thereof, together with any accrued dividends (the "Put
Option"). If stockholder approval is not obtained, this option may be
exercised at any time prior to 11 months after the Initial Purchase;
provided that the Company will not be required to pay for the shares of
Common Stock to be so repurchased until the earlier to occur of (i) 18
months after the Initial Purchase and (ii) the consummation by the Company
of an issuance of debt or equity securities or a sale of assets that yields
net proceeds to the Company of at least $50 million. The Company does not
have the right to require LFREI to exercise the Put Option. Therefore, in
the event that stockholder approval of the Transaction is not obtained and
LFREI does not exercise the Put Option, the shares of Common Stock issued
to LFREI in the Initial Purchase will remain outstanding.
7. DISTRIBUTIONS
Approximately 76% of the distributions to stockholders for the year ended
December 31, 1996 represented a return of capital.
8. SUBSEQUENT EVENT
On August 11, 1997 the Company acquired three properties, with a total
owned gross leasable area of approximately 280,000 square feet. One is
located in Oregon and the other two are located in Washington state. Total
consideration amounted to $32.3 million which was financed by the issuance
of common stock to LFREI.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
LIQUIDITY SOURCES AND REQUIREMENTS
At June 30, 1997, outstanding debt (excluding the debentures) increased by
$11.8 million to $254.4 million from the $242.6 million outstanding at December
31, 1996, as a result of additional borrowings on the Credit Facility to fund
development activity. At June 30, 1997 the Company had drawn approximately
$54.2 million against its $90 Million Credit Facility.
The Company anticipates investing approximately $31 million in tenant
improvements and developments as well as other planned improvements over the
next eighteen months which will be spent on various expansion and redevelopment
opportunities within the existing portfolio. The Company anticipates that such
capital improvement requirements for the Properties will be funded from its
Credit Facility.
On June 1, 1997, the Company entered into a Stock Purchase Agreement with
two affiliates of Lazard Freres Real Estate Investors, LLC, LF Strategic Realty
Investors, L.P. and Prometheus Western Retail, LLC (together "LFREI"), providing
for LFREI to invest a total of up to $235 million in the Company (the
"Transaction").
Pursuant to the Stock Purchase Agreement, the Company will sell an
aggregate of 15,666,666 shares of Common Stock to LFREI at a price of $15.00 per
share, for an aggregate purchase price of $235 million (the "Total Equity
Commitment"). The purchase price per share was determined as a result of arm's
length negotiations between the Company and its advisors on the one hand and
LFREI and its advisors on the other hand. On July 10, 1997, the Company sold
1,306,434 shares to LFREI at $15.00 per share (the "Initial Purchase"), for an
aggregate purchase price of approximately $19.6 million. As of July 11, 1997,
LFREI owned approximately 9.8% of the outstanding Common Stock.
The Company believes that the Transaction, represents an opportunity to
improve long-term stockholder value by providing the Company with access to
significant equity capital at an attractive cost and additionally provides
strategic resources not otherwise readily available to it, thereby enhancing the
Company's short-term and long-term growth prospects and better positioning it to
capitalize on shopping center acquisition and development opportunities in the
Geographic Region.
The Transaction is expected to enable the Company to accomplish its
financing objectives for 1997 and 1998 in a single transaction on favorable
terms compared with those that might have been available in the public markets.
Additionally, the Transaction will enable management to focus on acquisitions
and intensively managing the Company's existing properties rather than being
required to divert management time and attention to the process of raising
capital.
The Company believes that, as a result of the Transaction, it will have
greater access to the capital markets and a lower cost of capital because the
Transaction will (i) increase its equity market capitalization and total
capitalization; (ii) establish an association with a highly-regarded
institutional investor, LFREI, which should enhance the Company's access and
attractiveness to significant institutional investors; and (iii) through the
participation rights granted to LFREI under the Stockholders Agreement, provide
a potential buyer for substantial portions of future offerings by the Company of
its equity securities or debt securities convertible into equity. Moreover,
because of its substantial investment in the Company, LFREI will have
significant incentives to make available to the Company its resources,
experience and advice on accessing capital markets and to assist the Company in
achieving a lower cost of capital. The Company believes that improved access to
the capital markets should enhance its ability to grow and increase stockholder
value.
9
The Company intends to use a portion of the capital raised in the
Transaction to reduce its outstanding debt levels. In addition, the Company's
strategic plan calls for the application of the significant capital to be raised
in the Transaction to execute an attractive growth strategy for the purpose of
increasing the Company's asset base and cash flow in a controlled but
significant fashion over a relatively short period of time. Management's goal
is to increase funds from operations and cash available for distribution to
stockholders through the strategic deployment of the capital and other resources
to be made available to the Company through its affiliation with LFREI.
For a more detailed description of the Transaction, please refer to the
Notes to the Company's June 30, 1997 Consolidated Financial Statements and the
Company's July 15, 1997 Proxy Statement.
PROPERTY ACQUISITIONS
On August 11, 1997 the Company acquired three properties, with a total
owned gross leasable area of approximately 280,000 square feet. One is located
in Oregon and the other two are located in Washington state. Total consideration
amounted to $32.3 million paid for by the issuance of common stock to LFREI.
HISTORICAL RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 1997 to the six months ended June
30, 1996.
Revenues increased by $1.4 million to $43.5 million for the six months
ended June 30, 1997 from $42.1 million for the six months ended June 30, 1996.
The revenue increase was primarily a result of the lease-up of the Development
Properties, principally Media City Center, Empire Center and Baldwin Hills
Crenshaw Plaza.
Interest expense increased to $17.9 million for the six months ended June
30, 1997 from $17.7 million for the six months ended June 30, 1996. An increase
due to borrowings on the Company's line of credit to finance construction and
redevelopment activity at various properties was offset by a reduction from a
partial loan repayment in connection with a property sale in 1996.
Property operating costs increased by $0.2 million to $12.1 million for the
six months ended June 30, 1997 from $11.9 million for the six months ended June
30, 1996. The increase is a result of increased property taxes and an overall
inflationary increase in operating costs at the Company's properties.
During the first quarter of 1996 the Company reassessed the recoverability
of straight-line contractual rent increases as a result of the continuing
mergers and consolidations within the retail industry and the financial
difficulties of certain retailers. Accordingly, the Company recorded a non-
recurring non-cash charge of $6.9 million to increase the reserve against the
receivable for straight-line rents. Additionally, the Company fully reserved
against unbilled deferred rents effective with the first quarter of 1996. The
company believes this to be an appropriate and conservative approach to account
for the straight-lining of contractual rent increases in the current retail
environment.
General and administrative expenses increased $0.1 million to $2.5 million
for the six months ended June 30, 1997 from $2.4 million for the six months
ending June 30, 1996. The increase was due to an overall inflationary increase.
Income from operations increased by $7.6 million from a loss of $5.4
million for the six months ended June 30, 1996 to income of $2.2 million for the
six months ended June 30, 1997 for the reasons stated above.
During the quarter ended June 30, 1996, the Company sold a Vons market (a
single tenant facility) in Ventura, California for $3.3 million in cash,
resulting in a gain on sale of $2.5 million.
10
Selected Property Financial Information
Net operating income (defined as revenues, less property operating costs)
for the Company's properties is as follows:
SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
Stabilized Properties (36 in 1997 and 38 in 1996):
Regional Malls $ 9,281 $ 7,988
Power Centers 8,323 7,833
Community Centers 8,252 8,609
Single Tenants 3,851 3,979
Redevelopment Properties:
Covina Town Square 1,101 1,270
Medford Center 465 336
Other income 154 138
------ ------
Net Operating Income $31,427 $30,153
====== ======
The following summarizes the percentage of leased GLA (excluding non-owned
GLA and GLA leased but not yet constructed) as of:
June 30, 1997 December 31, 1996
------------- -----------------
Stabilized Properties (36):
Regional Malls 89.9% 92.5%
Power Centers 91.2 95.4
Community Centers 95.1 95.9
Single Tenants 100.0 100.0
Redevelopment Properties
Covina Town Square 88.9 88.3
Medford Center 97.3 97.0
Aggregate Portfolio 94.1% 95.8%
===== =====
During the six months of 1997 the Company signed leases for approximately
303,000 square feet, including 115,000 square feet at its Re-Development
Properties. Such signed leases resulted in an increase in the overall rent per
square foot of the Company's portfolio to $10.86 per square foot at June 30,
1997 from $10.61 per square foot at December 31, 1996.
In the first quarter of 1997 the non-owned IKEA store and several other
tenants in Empire Center (Fontana, California) vacated their premises. The
leased space of Empire Center decreased to 66.2% at June 30, 1997 from 90.3% at
December 31, 1996. Leased space at the Company's aggregate portfolio decreased
to 94.1% at June 30, 1997 from 95.8% at December 31, 1996.
Certain of the Properties had not completed their respective leasing plans
at the date of the IPO (the "Development Properties"). To facilitate inclusion
of the Development Properties in the Company's initial portfolio, the partners
of certain Predecessor Affiliates that transferred the Development Properties to
the Company had the right to receive additional OP Units. In general, the
number of additional OP Units issued was based on the increase in net annualized
cash flow from new leases signed through March 31, 1996 and in occupancy and
paying rent by June 30, 1996. Such increase in cash flow was not fully realized
until the third quarter of 1996.
11
On August 12, 1996, the Independent members of the Board of Directors
approved the issuance of 3,242,379 OP Units to the Predecessor Affiliates. The
market capitalization of the OP was thereby increased by $41.7 million based
upon the stock price as of August 12, 1996. The Predecessor Affiliates'
interest in the OP was thereby increased from 8% to approximately 26% effective
July 1, 1996. The number of OP Units issued and outstanding as of June 30, 1997
was 4,286,458.
Funds from Operations
The Company considers funds from operations ("FFO") to be an alternative
measure of the performance of an equity REIT since such measure does not
recognize depreciation and amortization expenses as operating expenses. FFO has
been defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income plus depreciation and amortization of real estate, less
gains on sales of properties. Management concurs with NAREIT in believing that
reductions for the depreciation and amortization of real estate and its related
costs are not meaningful in evaluating income-producing real estate.
The Company computes FFO on both a primary and a fully diluted basis and
considers Operating Partnership Units as the equivalent of shares for the
purpose of these computations. The fully diluted basis assumes the conversion
of the convertible and exchangeable debentures into shares of common stock. In
computing fully-diluted FFO the Company adds back the amortization of deferred
financing costs related to the outstanding debentures, principally representing
the underwriting discount on the convertible debentures. The following table
summarizes the Company's computation of FFO and provides certain additional
disclosures (dollars in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
FUNDS FROM OPERATIONS
Net income (loss) $ 601 $ 3,116 $ 1,534 $(2,516)
Adjustments to reconcile net income (loss) to
funds from operations:
Depreciation and Amortization:
Buildings and improvements 2,901 2,962 5,818 6,063
Tenant improvements and allowances 1,147 806 2,218 1,894
Leasing costs 422 277 736 511
Non-recurring provision for deferred rent - - - 6,900
Gain on sale of rental property - (2,502) - (2,502)
Minority Interests 138 264 397 (663)
----- ------ ------ ------
Funds from Operations, primary 5,209 4,923 10,703 9,687
Debenture interest expense 3,142 3,142 6,284 6,284
Amortization of debenture financing costs 325 324 650 650
----- ------ ------ ------
Funds from operations, fully diluted $8,676 $ 8,389 $17,637 $16,621
===== ====== ====== ======
SUPPLEMENTAL DISCLOSURES
Capital Expenditures:
Expansion of the Company's portfolio $4,140 $ 8,035 $ 9,853 $10,280
Releasing and maintenance of portfolio 30 265 79 337
----- ------ ------ ------
$4,170 $ 8,300 $ 9,932 $10,617
===== ====== ====== ======
Capitalized leasing costs:
Expansion of the Company's portfolio $ 381 $ 767 $ 882 $ 1,623
Releasing and maintenance of portfolio 227 6 361 143
----- ------ ------ ------
$ 608 $ 773 $ 1,243 $ 1,766
===== ====== ====== ======
12
The Company considers any space that was vacant or unbuilt at the date of
its initial public offering to be expansion of its portfolio.
Funds from operations, on a primary basis, increased to $10.7 million for
the six months ended June 30, 1997, as compared to $9.7 million for the same
period in 1996. On a fully diluted basis, assuming conversion of the debentures,
funds from operations increased to $17.6 million from $16.6 million. The
increase in funds from operations is principally a result of the reasons stated
above under Results of Operations. During the first quarter of 1996 the Company
recorded a non-recurring non-cash charge of $6.9 million to increase the reserve
against the receivable for straight-line rents. The non-recurring charge was not
included in the computation of FFO as the Company considers it to be a
significant non-recurring event that if deducted would materially distort the
comparative measurement of Company performance. Additionally, the Company fully
reserved against straight-line rents effective in the first quarter of 1996.
Funds from operations do not represent cash flows from operations as
defined by Generally Accepted Accounting Principles and should not be considered
as an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
CASH FLOWS
Net cash provided by operating activities increased $0.6 million from the
$10.1 million for the six months ended June 30, 1996 to $10.7 million for the
six months ended June 30, 1997, due, principally, to the reasons stated above
under results of operations.
Net cash used by investment activities decreased to $11.5 million for the
six months ended June 30, 1997 from $12.8 million for the six months ended June
30, 1996. Net cash used by financing activities increased to $1.3 million for
the six months ended June 30, 1997 from $2.2 million provided by financing
activities in the six months ended June 30, 1996. The decrease in cash used by
investment activities was a result of decreased development activity at the
Company's properties. The principal cause of the decrease in cash provided by
financing activities was the result of a decrease in borrowings on the Company's
Credit Facility and an increase in distributions to Minority Interests as a
result of the issuance of additional OP Units discussed above.
13
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
14
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.
ALEXANDER HAAGEN PROPERTIES, INC.
By: /s/ Stuart J.S. Gulland
------------------------------------------
Stuart J.S. Gulland
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
and Director
Dated: August 12, 1997