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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 SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NUMBER 1-12588
----------------
CENTERTRUST RETAIL 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)
(310) 546-4520
(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 at least the past 90 days. YES [X] NO [_]
As of November 10, 1998, 25,786,699 shares of Common Stock, Par Value $.01
Per Share, were outstanding.
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CENTERTRUST RETAIL PROPERTIES, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997............................. 3
Consolidated Income Statements (unaudited) for the three and
nine months ended September 30, 1998 and 1997................. 4
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1998 and 1997...................... 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
2
CENTERTRUST RETAIL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
ASSETS
------
Rental properties................................... $1,092,545 $ 783,279
Accumulated depreciation and amortization........... (135,709) (121,202)
---------- ---------
Rental properties, net.............................. 956,836 662,077
Cash and cash equivalents........................... 6,758 3,613
Tenant receivables, net............................. 10,641 6,017
Other receivables................................... 6,752 7,575
Restricted cash..................................... 5,417 9,435
Deferred charges, net............................... 19,458 19,759
Other assets........................................ 2,305 2,237
---------- ---------
TOTAL........................................... $1,008,167 $ 710,713
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Secured Debt...................................... $ 479,020 $ 313,660
7 1/2% Convertible subordinated debentures........ 138,599 138,599
7 1/4% Exchangeable subordinated debentures....... 30,000 30,000
Accounts payable and other accrued expenses....... 11,038 8,482
Accrued dividends and distributions............... 11,139 7,371
Accrued interest.................................. 3,778 5,604
Accrued construction costs........................ 2,183 10,996
Tenant security and other deposits................ 6,128 4,729
---------- ---------
Total liabilities............................... 681,885 519,441
---------- ---------
MINORITY INTERESTS:
Operating Partnership (5,187,712 and 4,280,789
units issued as of September 30, 1998 and
December 31, 1997, respectively)................. 54,512 39,685
Other minorities.................................. 1,954 1,748
---------- ---------
Total minority interests........................ 56,466 41,433
---------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK
510,034 shares outstanding as of September 30,
1998 and December 31, 1997, redeemable on May 25,
1999............................................. 8,543 8,385
---------- ---------
STOCKHOLDERS' EQUITY:
Common stock ($.01 par value, 100,000,000 shares
authorized; 25,276,665 15,664,814 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively.................. 252 157
Additional paid-in capital........................ 361,102 223,972
Accumulated distributions and deficit............. (100,081) (82,675)
---------- ---------
Total stockholders' equity...................... 261,273 141,454
---------- ---------
TOTAL........................................... $1,008,167 $ 710,713
========== =========
See Notes to Consolidated Financial Statements
3
CENTERTRUST RETAIL PROPERTIES, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 30,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
REVENUES:
Minimum rents........................... $25,336 $16,083 $68,024 $47,717
Recoveries from tenants................. 7,493 4,525 20,283 14,022
Percentage rents........................ 241 187 803 625
Other income............................ 1,118 1,043 3,611 2,995
------- ------- ------- -------
Total revenues........................ 34,188 21,838 92,721 65,359
------- ------- ------- -------
EXPENSES:
Interest................................ 12,741 9,088 35,167 27,010
Depreciation and amortization........... 6,213 4,567 17,518 13,357
Property Operating Costs:
Common Area........................... 5,564 3,288 14,379 9,855
Property taxes........................ 3,020 1,797 8,724 5,678
Leasehold rentals..................... 412 408 1,237 1,228
Marketing............................. 149 94 307 246
Other operating....................... 387 540 1,413 1,214
General and administrative.............. 2,503 1,224 6,426 3,714
------- ------- ------- -------
Total expenses........................ 30,989 21,006 85,171 62,302
------- ------- ------- -------
INCOME FROM OPERATIONS BEFORE GAIN ON SALE
OF ASSET AND MINORITY INTEREST........... 3,199 832 7,550 3,057
GAIN ON SALE OF ASSET..................... 1,055 -- 1,055 --
EQUITY IN UNCONSOLIDATED SUBSIDIARY....... -- 19 -- 19
MINORITY INTERESTS:
Operating Partnership................... (793) (182) (1,657) (726)
Other minorities........................ (69) (69) (206) (216)
------- ------- ------- -------
NET INCOME................................ $ 3,392 $ 600 $ 6,742 $ 2,134
======= ======= ======= =======
Basic and Diluted Income Per Share........ $ 0.15 $ 0.04 $ 0.33 $ 0.17
======= ======= ======= =======
Basic and Diluted Weighted Average Number
of Shares................................ 23,139 13,777 20,144 12,653
======= ======= ======= =======
See Notes to Consolidated Financial Statements
4
CENTERTRUST RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1997
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 6,742 $ 2,134
Adjustment to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of rental properties.... 17,518 13,357
Amortization of deferred financing costs.............. 2,149 1,664
Equity in income of unconsolidated subsidiary......... -- (19)
Gain on sale of asset................................. (1,055) --
Minority interests in operations...................... 1,863 942
Net changes in operating assets and liabilities....... (610) (2,929)
--------- --------
Net cash provided by operating activities........... 26,607 15,149
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition Properties.................................. (198,644) (32,074)
Construction and Development Costs...................... (18,341) (17,980)
Proceeds from Sale of Asset............................. 5,357 --
--------- --------
Net cash used in investing activities............... (211,628) (50,054)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage financing................ (2,709) (1,821)
Borrowings on secured line of credit.................... 191,426 57,500
Repayment of secured line of credit..................... (118,900) (32,500)
Costs of obtaining financing............................ (979) (12)
Proceeds from issuance of Common Stock.................. 141,024 34,818
Decrease (increase) in restricted cash.................. 4,018 (17)
Dividends paid to shareholders.......................... (20,711) (13,047)
Distributions paid to minority interests................ (5,003) (6,252)
--------- --------
Net cash provided by financing activities........... 188,166 38,669
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 3,145 3,764
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD......... 3,613 5,941
--------- --------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD............... $ 6,758 $ 9,705
========= ========
NON-CASH TRANSACTIONS:
Fair value of debt assumed to acquire properties........ $ 95,294
=========
Issuance of Operating Partnership Units to acquire
properties............................................. $ 16,378
=========
See Notes to Consolidated Financial Statements
5
CENTERTRUST RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
CenterTrust Retail Properties, Inc. (dba "Center Trust") (the "Company") is
a self-administered and self-managed real estate investment trust ("REIT").
The Company engages in the ownership, management, leasing, acquisition,
development and redevelopment of unenclosed retail shopping centers in the
western United States. As of September 30, 1998 the Company owned 63 retail
shopping centers (the "Properties") comprising 12.4 million square feet of
total shopping center gross leasable area ("GLA").
The accompanying financial statements and related notes of 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, 1997.
Certain reclassifications have been made in the 1997 financial statements to
conform to the 1998 financial statement presentation.
2. REDEEMABLE COMMON STOCK
In connection with the Separation Agreement, as defined in Note 4 below, the
Company has agreed to purchase, or cause to have purchased, from the Haagen
Family, on May 25, 1999, an aggregate of 3,656,818 shares of common stock and
Operating Partnership Units (the "Shares") at a price per share equal to the
greater of $17 or the then current market price (as determined in accordance
with the Separation Agreement). Under the terms of the Separation Agreement,
the Haagen Family retains all rights and privileges as owners of the Shares up
to the date of purchase and may therefore sell such shares on the American
Stock Exchange, subject to certain limitations set forth under the Securities
Act of 1933. Included in the Shares to be repurchased are 510,034 shares of
common stock which have been reflected as Redeemable Common Stock as of
September 30, 1998 and December 31, 1997.
3. STOCKHOLDER'S 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 and LFREI and its advisors. On August 14, 1997, the Stockholders
of the Company approved the Transaction.
As of December 31, 1997, the Company had sold 4,006,434 shares, to LFREI
under the terms of the Transaction for aggregate proceeds of $60.1 million.
During the first nine months of 1998, the Company has sold 9,400,000 shares to
LFREI for aggregate proceeds of $141.0 million. As of September 30, 1998,
LFREI was obligated to purchase an additional 2,260,232 Shares of Common Stock
for aggregate proceeds of $33.9 million (the "Remaining Equity Commitment").
As of September 30, 1998, LFREI owned 13,406,434 shares of Common Stock which
represents 52% of the shares outstanding.
6
CENTERTRUST RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company must sell the Remaining Equity Commitment not later than
February 14, 1999. If the Company has not drawn the Remaining Equity
Commitment by such date, LFREI will have the right on such date 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 56.3% of the outstanding Common Stock (37.9% on a Diluted
Basis).
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 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, 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 addition to the above, LFREI
nominated four members to the Company's Board of Directors. Further, LFREI is
entitled to receive access to certain operating statements and other financial
reports used in operating the Company on a monthly basis.
4. INVESTMENT IN MANAGEMENT COMPANY
Through December 31, 1997, Haagen Property Management, Inc. ("HPMI")
conducted all of the executive, construction, leasing, legal, acquisition, and
property management functions pursuant to management agreements between Center
Trust Operating Partnership Ltd. (the "OP") and HPMI. Prior to December 31,
1997, the OP owned a 95% economic interest in, but did not control, HPMI. The
investment had been accounted for on the equity basis as an unconsolidated
subsidiary. No dividends were paid by HPMI during the year ended December 31,
1997. HPMI provided leasing and property management services to other
properties owned by certain third parties. In connection with an agreement
dated November 24, 1997 between Center Trust and Alexander Haagen, Sr.,
Charlotte Haagen and Alexander Haagen, III (collectively the "Haagen Family"),
(the "Separation Agreement"), the OP purchased the remaining 5% economic
interest in HPMI. As such, the balance sheet of HPMI has been consolidated as
of December 31, 1997. Executive and property management fees paid to HPMI for
the nine months ended September 30, 1997 totaled $2,889,000 and are included
in general and administrative expenses. In addition, HPMI provided
acquisition, leasing, legal and construction services for the properties owned
or acquired by Center Trust, such fees for the nine months ended September
1997, of $2,427,000 were capitalized and are being amortized over the useful
lives of the related leases and/or properties.
7
CENTERTRUST RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY ACQUISITIONS
During the three months ended September 30, 1998, the Company has acquired
three unenclosed shopping centers comprising approximately 631,000 square feet
of Company owned GLA for an aggregate purchase price of approximately $85.0
million. The acquisitions consist of the following:
COMPANY
DATE ACQUIRED PROPERTY LOCATION OWNED GLA
------------- -------- -------- ---------
August 20, 1998...... North Mountain Village Phoenix, AZ 94,379
August 26, 1998...... Torrance Promenade Torrance, CA 263,228
September 24, 1998... Mountain Square Shopping Center Upland, CA 273,280
In connection with the above acquisitions, the Company assumed a non-
recourse mortgage note of $8.2 million. The mortgage matures in May, 2001,
bears interest at 8.25% and requires monthly principal and interest payments.
In addition, the Company issued Operating Partnership Units valued at
approximately $21,000 in connection with one of the above acquisitions. The
balance of the acquisitions were funded with proceeds from the sale of common
stock to LFREI as well as borrowings on the Company's secured line of credit.
6. PER SHARE DATA
In accordance with SFAS No. 128 (Earnings Per Share), basic earnings per
share is based on the weighted average number of shares of common stock
outstanding during the period and diluted earnings per share is based on the
weighted average number of shares of common stock outstanding combined with
the incremental weighted average shares that would have been outstanding if
all dilutive potential common shares had been issued as of the beginning of
the period. The weighted average number of shares of common stock used in the
computation for the three-month periods ended September 30, 1998 and 1997 was
23,138,817 and 13,776,980, respectively. The weighted average number of shares
of common stock used in the computation for the nine-month period ended
September 30, 1998 and 1997 was 20,143,739 and 12,653,081, respectively. The
diluted weighted average number of shares used in the computation for the
nine-month period ended September 30, 1998 and 1997 was 23,138,817 and
13,776,980 respectively. The diluted weighted average number of shares used in
the computation for the nine-month period ended September 30, 1998 and 1997
was 20,143,739 and 12,653,081, respectively. Units held by limited partners in
the Operating Partnership may be exchanged for shares of common stock of
Center Trust on a one-for-one basis in certain circumstances and therefore are
not dilutive. Accordingly, the increase in weighted average shares outstanding
under the diluted method over the basic method in every period presented is
due entirely to the effect of outstanding options issued under Center Trust's
Amended and Restated 1993 Stock Option and Incentive Plan. Basic and diluted
earnings were the same for all periods presented.
7. SUBSEQUENT EVENT
In October, 1998 the Board of Directors authorized the Company to repurchase
up to $25 million of its common stock through the open market or privately
negotiated transactions over a period of twelve months.
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.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1997.
Rental revenues increased by $27.3 million to $92.7 million for the nine
months ended September 30, 1998 from $65.4 million for the nine months ended
September 30, 1997. The acquisition of 24 community shopping centers
subsequent to September 30, 1997 resulted in an increase of $22.5 million in
revenues. The Company's two redevelopment projects, Medford Center and Covina
Town Square accounted for a $2.8 million increase in revenues. The balance of
the increase resulted from increased revenues at the Company's remaining
properties.
Property operating costs increased by $7.8 million to $26.0 million for the
nine months ended September 30, 1998 from $18.2 million for the nine months
ended September 30, 1997. The increase is a result of increased property taxes
and operating costs as a result of the 24 properties acquired. In addition,
the Company experienced an increase in operating costs at its two regional
malls and its two completed redevelopment projects.
Interest expense increased to $35.2 million for the nine months ended
September 30, 1998 from $27.0 million for the nine months ended September 30,
1997. The increase was caused by additional borrowings on the Company's line
of credit and the assumption of approximately $100.8 million in mortgage debt
associated with the acquisition of twenty-four community shopping centers
acquired between October 1997 and September 1998.
General and Administrative costs increased by $2.7 million from $3.7 million
for the nine months ended September 30, 1997 to $6.4 million for the nine
months ended September 30, 1998. The increase was primarily the result of the
change in accounting for costs related to the acquisition of community
shopping centers as mandated by the Financial Accounting Standards Board. In
addition, the Company has increased its staffing in order to accommodate its
growth. These increases include senior management as well as the establishment
of regional property management offices.
Net income increased by $4.6 million from $2.1 million for the nine months
ended September 30, 1997 to income of $6.7 million for the nine months ended
September 30, 1998. In addition to the reasons stated above, included in net
income for the nine months ended September 30, 1998 was a gain on sale of real
estate of $1.1 million. This gain resulted from the sale of the Sears store in
Hollywood, California, a single tenant facility.
Selected Property Financial Information
Net operating income (defined as revenues, less property operating costs)
for the Company's properties is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1998 1997
-------- -------
Retail Properties (63 in 1998 and 41 in 1997):
Regional Malls.......................................... $12,978 $13,493
Community Centers....................................... 47,928 27,454
Single Tenants.......................................... 5,480 5,948
Other income.............................................. 275 244
------- -------
Net Operating Income.................................. $66,661 $47,139
======= =======
9
The following summarizes the percentage of leased GLA (excluding non-owned
GLA and GLA leased but not yet constructed) as of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Retail Properties (63 in 1998 and 46 in 1997):
Regional Malls............................... 90.0% 91.3%
Community Centers............................ 92.2 93.8
Portfolio Sub-total (excluding Single
Tenant Facilities)........................ 91.9 93.3
Single Tenant Facilities....................... 100.0 100.0
Aggregate Portfolio............................ 92.9 94.6
Funds from Operations
Center Trust 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.
Center Trust computes FFO on both a basic and 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 and other common stock. In computing
diluted FFO Center Trust 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 Center Trust's computation of FFO and provides certain additional
disclosures (dollars in thousands, except per share amounts):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ----------------
1998 1997 1998 1997
------- ------ ------- -------
FUNDS FROM OPERATIONS
Net income................................ $ 3,392 $ 600 $ 6,742 $ 2,134
Adjustments to reconcile net income to
funds from operations:
Depreciation and Amortization:
Buildings and improvements............ 4,146 2,984 11,411 8,802
Tenant improvements and allowances.... 1,452 1,204 4,294 3,422
Leasing costs......................... 604 351 1,721 1,087
Minority Interests...................... 712 97 1,426 494
Gain on Sale of Asset................... (1,055) -- (1,055) --
Other................................... 423 -- 862 --
------- ------ ------- -------
Funds from Operations, primary............ 9,674 5,236 25,401 15,939
Debenture interest expense................ 3,143 3,143 9,427 9,427
Amortization of debenture financing
costs.................................... 325 325 975 975
------- ------ ------- -------
Funds from operations, diluted............ $13,142 $8,704 $35,803 $26,341
======= ====== ======= =======
10
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER ENDED SEPTEMBER
30, 30,
--------------- ----------------
1998 1997 1998 1997
------- ------- -------- -------
Expansion of Center Trust's portfolio:
Acquisitions............................. $85,341 $ -- $306,988 $ --
Construction and Development............. 564 38,274 2,660 48,127
Leasing.................................. 802 468 2,077 1,350
------- ------- -------- -------
$86,707 $38,742 $311,725 $49,477
======= ======= ======== =======
Releasing and maintenance of portfolio:
Construction and Development............. $ 81 $ 8 $ 88 $ 87
Leasing.................................. 208 58 405 419
------- ------- -------- -------
$ 289 $ 66 $ 493 $ 506
======= ======= ======== =======
Funds from operations, on a basic basis, increased to $25.4 million for the
nine months ended September 30, 1998, as compared to $15.9 million for the
same period in 1997. On a diluted basis, assuming conversion of the debentures
and other common stock equivalents, funds from operations increased to $35.8
million from $26.3 million. The increase in funds from operations is
principally a result of the reasons stated above under Results of Operations.
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 Center Trust's operating
performance or to cash flows as a measure of liquidity.
LIQUIDITY SOURCES AND REQUIREMENTS
In December 1997, the Operating Partnership entered into a new revolving
line of credit with a maximum borrowing limit of $250 million (the "Credit
Facility"). The Credit Facility will primarily provide continued funding for
the Company's planned acquisition and redevelopment activities. The Credit
Facility expires in December 2000. Borrowings under the Credit Facility are
secured by first mortgage liens on fifteen of Center Trust's properties. At
September 30, 1998, outstanding borrowings on the Credit Facility were
approximately $181.3 million, with an additional $4.2 million having been
utilized to provide letters of credit.
Borrowings under the facility bear interest at a floating rate equal to
London Inter-Bank Offering Rate ("LIBOR") plus 100 basis points. To the extent
the borrowings are in excess of the outstanding LFREI commitment, such excess
will bear interest at LIBOR plus 137.5 basis points.
Upon conversion to an unsecured facility, borrowings will bear interest at
varying rates based upon Center Trust's leverage ratio and investment grade
rating interest. The range of rates is from 75 to 137.5 basis points over
LIBOR.
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 and LFREI
and its advisors.
As of December 31, 1997, the Company had sold 4,006,434 shares, to LFREI
under the terms of the Transaction for aggregate proceeds of $60.1 million.
During the first nine months of 1998, the Company has sold 9,400,000 shares to
LFREI for aggregate proceeds of $141.0 million. As of September 30, 1998,
LFREI was obligated to purchase an additional 2,260,232 shares of common stock
for aggregate proceeds of
11
$33.9 million (the "Remaining Equity Commitment"). As of September 30, 1998,
LFREI owned 13,406,434 shares of common stock which represents 52.0% of the
shares outstanding.
Loans maturing of $28.2 million in 1999 and $18.7 million in 2002, as well
as significant amounts due from 2004 to 2015, may require refinancing.
Additionally, the Company's secured line of credit is due in 2000 and the
convertible debentures of $138.6 million and exchangeable debentures of $30.0
million are due in 2001 and 2003, respectively. The Company believes, based on
the collateral available within the portfolio, that it will be able to effect
such refinancings for the foreseeable future.
During the three months ended September 30, 1998, the Company has acquired
three unenclosed shopping centers comprising approximately 631,000 square feet
of Company owned GLA for an aggregate purchase price of approximately $85.0
million. The acquisitions consist of the following:
COMPANY
DATE ACQUIRED PROPERTY LOCATION OWNED GLA
------------- -------- -------- ---------
August 20, 1998...... North Mountain Village Phoenix, AZ 94,379
August 26, 1998...... Torrance Promenade Torrance, CA 263,228
September 24, 1998... Mountain Square Shopping Center Upland, CA 273,280
In connection with the above acquisitions, the Company assumed a non-
recourse mortgage note of $8.2 million. The mortgage matures in May, 2001,
bears interest at 8.25% and requires monthly principal and interest payments.
In addition, the Company issued Operating Partnership Units valued at
approximately $21,000 in connection with one of the above acquisitions. The
balance of the acquisitions were funded with proceeds from the sale of common
stock to LFREI as well as borrowings on the Company's secured line of credit.
Center Trust anticipates continuing to execute its acquisition and
redevelopment strategy during the next 15 months.
In October 1998, the Company announced that its Board of Directors has
approved the repurchase of up to $25 million of its common stock. Such
repurchase will be done through open market or privately negotiated
transactions over a period of twelve months. In May of 1999, the Company will
be obligated to repurchase an aggregate of 3,656,818 shares of common stock
and Operating Partnership units, currently held by Alexander Haagen, Sr. and
his family, for a purchase price of approximately $62 million.
Center Trust believes that future acquisitions as well as the obligations
outlined above will be funded from the LFREI Equity Commitment, Center Trust's
Credit Facility, future debt refinancings and financings, and proceeds from
the sale of certain non-core assets.
CASH FLOWS
Net cash used in investment activities increased to $211.6 million for the
nine months ended September 30, 1998 from $50.0 million for the nine months
ended September 30, 1997 as a result of the purchase of nineteen properties
during 1998. Net cash provided by financing activities increased to $188.2
million for the nine months ended September 30, 1998 from $38.7 million in the
nine months ended September 30, 1997. The principal cause of the increase in
cash provided by financing activities was the result of the sale of Common
Stock to LFREI and borrowings on Center Trust's Secured line of Credit. Cash
provided by operations increased to $26.6 million from $15.1 for the nine
months ended September 30, 1998 over the same period in the prior year. The
primary cause of the increase was the increase in the Company's real estate
portfolio.
INFLATION
Center Trust's long term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions
include clauses enabling Center Trust to receive percentage rents based upon
tenants' gross sales, which generally increase as prices rise, and/or, in
certain cases, escalation clauses are often related to increases in the CPI or
similar inflation indices. In addition, many of Center Trust's leases are for
terms of less than ten years, which permits Center Trust to seek to increase
rents upon re-rental at
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market rates if rents are below then existing market rates. Many of Center
Trust's leases require the tenants to pay a pro rata share of operating
expenses, including common area maintenance, real estate taxes, insurance and
utilities, thereby reducing Center Trust's exposure to increases in costs and
operating expenses from inflation.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process information which is date
sensitive is commonly referred to as the Year 2000 Compliance issue. As the
Year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
As Center Trust principally relies on third party vendors for its
applications, Center Trust has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which Center Trust is vulnerable to any third party Year 2000
issues. Center Trust has received statements of compliance from its primary
third party vendors which state their systems will be in compliance by 1999.
However, there can be no guarantee that the systems of other companies on
which Center Trust's systems, and operations, rely will be timely converted,
or that a failure to convert by another company, or a conversion that is
incompatible with Center Trust's systems, would not have a material adverse
effect on Center Trust.
The total cost to Center Trust of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which
Center Trust plans to complete the Year 2000 modifications and testing
processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans as information not
currently known to the Company becomes available.
FACTORS AFFECTING FUTURE RESULTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements that are subject to
risk and uncertainty. Investors and potential investors in Center Trust's
securities are cautioned that a number of factors could adversely affect
Center Trust's ability to obtain these results, including (a) the inability to
lease currently vacant space in Center Trust's properties, (b) the inability
of tenants to pay contractual rent and other expenses; (c) bankruptcies of
tenants; (d) decisions by tenants, and anchor retailers which own their own
space, to Close Stores at Center Trust's properties; (e) increases in certain
operating costs at Center Trust's properties; (f) decreases in rental rates
available from tenants leasing space at Center Trust's properties (g)
unavailability of financing for acquisition, development and redevelopment of
properties by Center Trust; (h) increases in interest rates, and (i) a general
economic downturn resulting in lower retail sales and, in turn, store
closures, rent delinquencies, reduced percentage rents and other downward
pressure on occupancies and rents at retail properties.
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PART II--OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES
During the three and nine months ended September 30, 1998, the Company sold
3,366,667 and 9,400,000 shares of Common Stock, respectively to an affiliate
of Lazard Freres Real Estate Investors, LLC, under the terms of the Stock
Purchase Agreement approved by the shareholders in August, 1997. The proceeds
of $50.5 million and $141.0 million, respectively, were used to purchase
community Shopping Centers as well as reduce the outstanding balance on the
Company's Line of Credit.
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
Exhibit 27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K on August 19, 1998 under Item 5--Other Events, filing quarterly
supplemental financial and operating data.
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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.
CENTER TRUST RETAIL PROPERTIES, INC.
By: /s/ Stuart J.S. Gulland
_________________________________
Stuart J.S. Gulland
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Edward A. Stokx
_________________________________
Edward A. Stokx
Vice President and Controller
(Principal Accounting Officer)
Dated: November 12, 1998
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