UNITED STATES 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 1-12560
JP REALTY, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 87-0515088
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(State of organization) (I.R.S. Employer
Identification No.)
35 CENTURY PARK-WAY
SALT LAKE CITY, UTAH 84115 (801) 486-3911
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(Address of principal executive offices) (Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
17,637,547 Shares of Common Stock were outstanding as of November 13, 1998
1
JP REALTY, INC.
FORM 10-Q
INDEX
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PART I: FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1.Financial Statements 3
Condensed Consolidated Balance Sheet as of September 30, 1998
and December 31, 1997 4
Consolidated Statement of Operations for the Three Months and
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II: OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 17
2
PART I
ITEM 1. FINANCIAL STATEMENTS
--------------------
The information furnished in the accompanying financial statements listed
in the index on page 2 reflects only normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of the
aforementioned financial statements for the interim periods.
The aforementioned financial statements should be read in conjunction
with the notes to the financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Company's
quarterly reports on Form 10-Q for the three-month period ended March 31, 1998
and June 30, 1998 and the annual report on Form 10-K for the year ended
December 31, 1997, including the financial statements and notes thereto.
3
JP REALTY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
---------
September 30, December 31,
1998 1997
------------ -------------
ASSETS
Real Estate Assets, Including Assets Under
Development of $51,517 and $33,665 $ 798,917 $ 619,371
Less: Accumulated Depreciation (109,782) (98,404)
Net Real Estate Assets 689,135 520,967
Cash 1,369 5,603
Restricted Cash 3,859 2,465
Other Assets 18,683 16,649
----------- -----------
$ 713,046 $ 545,684
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings $ 444,935 $ 283,390
Accounts Payable and Accrued Expenses 20,956 18,840
Distributions Payable 9,566 --
Other Liabilities 770 617
----------- -----------
476,227 302,847
----------- -----------
Minority Interest 33,661 34,851
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Commitments and Contingencies
Shareholders' Equity
Common Stock, $.0001 par value, 124,800,000 shares
authorized, 17,420,547 shares and 17,389,827 shares
issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 2 2
Price Group Stock, $.0001 par value, 200,000 shares
authorized, issued and outstanding -- --
Excess Stock, 75,000,000 shares authorized,
none issued or outstanding -- --
Additional Paid-in Capital 232,694 232,135
Accumulated Distributions in Excess of Net Income (29,538) (24,151)
----------- ----------
203,158 207,986
----------- ----------
$ 713,046 $ 545,684
=========== ==========
See accompanying notes to financial statements.
4
JP REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- -------- ----------
Revenues
Minimum Rents $ 19,976 $ 15,313 $ 56,053 $ 41,761
Percentage and Overage Rents 268 1,095 1,453 3,087
Recoveries from Tenants 6,523 4,858 16,656 12,911
Interest 103 80 297 397
Other 176 427 373 609
--------- --------- -------- ----------
27,046 21,773 74,832 58,765
--------- --------- -------- ----------
Expenses
Operating and Maintenance 4,863 3,676 12,701 9,220
Real Estate Taxes and Insurance 2,994 2,202 8,291 6,134
General and Administrative 1,501 1,446 4,501 4,014
Depreciation 4,639 3,092 12,203 8,381
Amortization of Deferred Financing
Costs 402 232 1,146 719
Amortization of Deferred Leasing
Costs 162 161 504 476
Interest 5,563 2,733 13,359 5,899
--------- --------- --------- ----------
20,124 13,542 52,705 34,843
--------- --------- --------- ----------
6,922 8,231 22,127 23,922
Minority Interest in Income of
Consolidated Partnerships (68) (63) (205) (209)
Gain on Sale of Real Estate 234 -- 234 339
--------- --------- --------- ----------
Income Before Minority Interest of
Operating Partnership Unitholders 7,088 8,168 22,156 24,052
Minority Interest of the Operating
Partnership Unitholders (1,218) (1,408) (3,812) (4,110)
--------- --------- --------- ----------
Net Income $ 5,870 $ 6,760 $ 18,344 $ 19,942
========= ========= ========= ==========
Basic Net Income Per Share $ .33 $ .38 $ 1.04 $ 1.14
========= ========= ========= ==========
Diluted Net Income Per Share $ .33 $ .38 $ 1.03 $ 1.13
========= ========= ========= ==========
PRO FORMA DATA
Pro Forma Net Income $ 5,870 $ 6,138 $ 17,459 $ 17,765
========= ========= ========= ==========
Pro Forma Basic Earnings Per Share $ .33 $ .35 $ .99 $ 1.02
========= ========= ========= ==========
Pro Forma Diluted Earnings Per Share $ .33 $ .35 $ .99 $ 1.01
========= ========= ========= ==========
Basic Weighted Average Number of
Common Shares 17,619 17,587 17,617 17,430
Add: Dilutive Effect of Stock Options 89 164 120 170
--------- --------- --------- ----------
Diluted Weighted Average Number of
Common Shares 17,708 17,751 17,737 17,600
========= ========= ========= ==========
See accompanying notes to financial statements.
5
JP REALTY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 40,427 $ 37,152
CASH FLOWS FROM INVESTING ACTIVITIES
Real Estate Assets, Developed or Acquired,
Net of Accounts Payable (184,075) (86,486)
Proceeds from Sales of Real Estate Assets 276 410
Increase in Restricted Cash (1,394) (70)
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Net Cash Used in Investing Activities (185,193) (86,146)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Borrowings 260,977 85,414
Repayment of Borrowings (99,432) (56,087)
Net Proceeds from Sale of Common Stock -- 38,632
Proceeds from Minority Interests -- 1,000
Proceeds from Stock Options Exercise 546 220
Distributions Paid to Minority Interests and Unitholders (3,549) (3,369)
Distributions Paid to Shareholders (15,820) (15,265)
Deferred Financing Costs (2,190) (431)
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Net Cash Provided by Financing Activities 140,532 50,114
---------- ----------
Net (Decrease) Increase in Cash (4,234) 1,120
Cash, Beginning of Period 5,603 1,750
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Cash, End of Period $ 1,369 $ 2,870
========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
The following non-cash transactions occurred:
Distributions accrued for shareholders not paid $ 7,911 $ 7,634
Distributions accrued for unitholders not paid 1,655 1,600
Purchase of the Remaining 70% Interest in
Silver Lake Mall:
72,000 Operating Partnership Units Issued $ 1,863
30% Equity Investment Consolidated (1,555)
Debt Assumed 24,755
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Total $ 25,063
==========
See accompanying notes to financial statements
6
JP REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BUSINESS SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
JP Realty, Inc. (the "Company") is primarily engaged in the business of
owning, leasing, managing, operating, developing and redeveloping malls,
community centers and other commercial properties. The tenant base includes
primarily national retail chains and local retail companies. Consequently, the
Company's credit risk is concentrated in the retail industry. The Company's
properties are owned and controlled by the Company through its 83% general
partner interest in Price Development Company, Limited Partnership (the
"Operating Partnership").
Earnings per share for all periods presented has been restated to reflect
the adoption of Statement of Financial Accounting Standards No. 128, Earnings
Per Share ("SFAS 128"). SFAS 128 requires companies to present basic earnings
per share, and if applicable, diluted earnings per share, instead of primary
and fully diluted earnings per share. Basic earnings per share excludes
dilution and is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if options to purchase common stock were exercised.
2. CHANGE IN REVENUE RECOGNITION POLICY
Effective April 1, 1998, the Company prospectively adopted the provisions
of Issue No. 98-9 ("EITF 98-9") Accounting For Contingent Rent in Interim
Financial Periods, which was issued on May 21, 1998 by the Financial Accounting
Standards Board Emerging Issues Task Force and which significantly changes the
Company's recognition of percentage and overage rents revenue in interim
periods. Prior to the adoption of EITF 98-9, the Company recognized percentage
and overage rents revenue monthly on an accrual basis based on estimated annual
amounts. Under the provisions of EITF 98-9 percentage and overage rents
revenue is recognized in the interim periods in which the specified target that
triggers the contingent rental income is achieved.
Under its implementation guidelines, the Emerging Issues Task Force
("EITF") provides for and the Company has chosen prospective adoption of this
EITF consensus position in the quarter in which the consensus is reached.
As a result of adopting EITF 98-9, percentage and overage rents revenue
and total revenues decreased $912 and $2,036 during the three and nine months
ended September 30, 1998, respectively, from the amounts that would have been
reported if the change described above had not been made. In addition, if the
change in revenue recognition described above had not been made, the net income
for the three and nine month periods ended September 30, 1998 would have been
$6,625 ($.37 diluted net income per share) and $20,028 ($1.13 diluted net
income per share), respectively.
Pro forma net income, pro forma basic net income per share and pro forma
diluted net income per share for the three and nine months ended September 30,
1998 and 1997, assuming the Company had always followed the provisions of EITF
98-9 are presented on the respective consolidated statements of operations.
Further discussion, including additional pro forma effects of the new
accounting policy, is included in Management's Discussions and Analysis of
Financial Condition and Results of Operations.
3. BORROWINGS
On September 4, 1998, Provo Mall Development Company, Ltd., a
consolidated partnership of which the Operating Partnership is the general
partner, entered into a $50,000 construction loan facility. The construction
loan facility will be used to fund the development and construction of Provo
Towne Centre in Provo, Utah. The construction loan (i) matures on July 1, 2001
with an optional two-year extension and (ii) is collateralized by Provo Towne
Centre and guaranteed by the Operating Partnership. The first borrowing on the
construction loan facility was October 19, 1998 for approximately $22,688.
7
JP REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BORROWINGS (CONTINUED)
On August 6, 1998, the Company, through a consolidated partnership of the
Operating Partnership, acquired NorthTown Mall. The partnership obtained a new
first mortgage in the amount of $84,500 with a ten-year term at 6.68% per
annum. In addition, the Operating Partnership borrowed $43,500 from its
$200,000 unsecured credit facility to fund the acquisition. The Operating
Partnership has also issued a letter of credit to the first mortgage holder in
the amount of $9,500 to guarantee the completion of additional property
development work. The Company does not expect any material losses to result
from the letter of credit, and management is therefore of the opinion that the
fair value of this instrument is zero.
The Operating Partnership borrowed $9,000 on April 21, 1998, $11,000 on
July 20, 1998, and $9,000 on August 10, 1998 from its $200,000 unsecured credit
facility to fund construction projects. At September 30, 1998, the balance
outstanding on this credit facility was $102,500.
On March 16, 1998, the Operating Partnership entered into a $10,000
unsecured credit facility. The credit facility will be used for general
business and cash management purposes.
On March 11, 1998, the Operating Partnership issued $100,000 in ten-year
senior notes bearing annual interest at a rate of 7.29% with interest payments
due semi annually. Principal payments of $25,000 are due annually beginning
March 2005. The Operating Partnership had entered into an interest rate
protection agreement in anticipation of issuing these notes and received $270
as a result of this agreement making the effective rate of interest on these
notes at 7.24%. Proceeds from the notes were used to partially repay
outstanding borrowings under the Operating Partnership's $200,000 unsecured
credit facility.
On July 30, 1996, Spokane Mall Development Company, a consolidated
partnership of which the Operating Partnership is the General Partner, entered
into a $50,000 construction loan facility. The construction loan facility was
used to fund the development of the Spokane Valley Mall in Spokane, Washington.
The construction loan (i) has a three-year term with an optional two-year
extension and (ii) is collateralized by the Spokane Valley Mall and guaranteed
by the Operating Partnership. As of September 30, 1998, borrowings on the loan
were $44,948.
4. PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma summary financial information for the
nine months ended September 30, 1998 and 1997, is presented as if the
acquisitions of NorthTown Mall, Silver Lake Mall, Visalia Mall, Salem Center
and the additional common stock offering on January 22, 1997, had been
consummated as of January 1, 1997.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
1998 1997
---------- ----------
Total Revenues $ 83,147 $ 77,898
Net Income $ 17,759 $ 19,409
Basic Net Income Per Share $ 1.01 $ 1.10
Diluted Net Income Per Share $ 1.00 $ 1.09
The pro forma financial information summarized above is presented for
information purposes only and may not be indicative of what actual results of
operations would have been had the acquisitions and offering been completed as
of the beginning of the periods presented, nor does it purport to represent the
results of operations for future periods.
8
JP REALTY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. SHAREHOLDERS' EQUITY
The following table summarizes changes in shareholders' equity since
December 31, 1997:
ACCUMULATED
ADDITIONAL DISTRIBUTIONS
COMMON PAID-IN IN EXCESS OF
SHARES* STOCK CAPITAL NET INCOME TOTAL
---------- -------- --------- ---------- ---------
Shareholders' Equity at December 31, 1997 17,589,827 $ 2 $ 232,135 $ (24,151) $ 207,986
Stock Option Compensation -- -- 10 -- 10
Issued Shares Common Stock -
Stock Options Exercised 30,435 -- 546 -- 546
Operating Partnership Units Converted 285 -- 3 -- 3
Net Income for the Period -- -- -- 18,344 18,344
Distributions Paid -- -- -- (15,820) (15,820)
Distributions Accrued -- -- -- (7,911) (7,911)
---------- -------- --------- --------- ---------
Shareholders' Equity at September 30, 1998 17,620,547 $ 2 $ 232,694 $ (29,538) $ 203,158
========== ======== ========= ========= =========
* Includes Price Group Stock
6. SUBSEQUENT EVENTS
On October 21, 1998, a grand opening was held for Sears, a fourth anchor
tenant in Red Cliffs Mall in St. George, Utah. Sears added approximately
70,385 square feet of GLA in its new store and a tire and battery shop of
approximately 9,564 square feet of GLA.
On October 28, 1998, Provo Mall Development Company, Ltd. held a grand
opening of its newly developed Provo Towne Centre in Provo, Utah. Provo Mall
Development Co. Ltd. is a consolidated partnership of the Operating Partnership,
its general partner. Provo Towne Centre added approximately 718,900
square feet of additional total GLA to the Company's existing portfolio.
9
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
The Company completed its initial public offering on January 21, 1994,
and conducts all of its business operations through its 83% controlling general
partner interest, in Price Development Company, Limited Partnership (the
"Operating Partnership").
The Company is a fully integrated, self administered and self-managed
REIT primarily engaged in the ownership, leasing, management, operation,
development, redevelopment and acquisition of retail properties in the
Intermountain Region, as well as in Oregon, Washington and California. The
Company's existing portfolio consists of 50 properties, including 17 enclosed
regional malls, 25 community centers, two freestanding retail properties and
six mixed-use commercial properties. The Company's operations before
depreciation were positively impacted by the August 1998 acquisition of
NorthTown Mall, the Operating Partnership's December 1997 acquisition of Salem
Center and the June 1997 acquisitions of the Silver Lake Mall and Visalia Mall,
as well as its development activities which added a combined 1,346,000 square
feet of gross leasable area ("GLA") to the retail portfolio of which 840,000
square feet of GLA was added from August 1997 through November 1997, 15,000 in
March 1998 and 491,000 was added in August 1998. The Company also completed an
additional public offering in January 1997, raising approximately $40.7 million
in gross proceeds through the sale of 1,500,000 shares of its common stock.
CHANGE IN REVENUE RECOGNITION POLICY
As described in Note 2 to the financial statements, the Company adopted
EITF 98-9 ("EITF 98-9") Accounting For Contingent Rent in Interim Financial
Periods, effective April 1, 1998, which significantly changes the Company's
recognition of percentage and overage rents revenue in interim periods. Prior
to the adoption of EITF 98-9, the Company recognized percentage and overage
rents revenue monthly on an accrual basis based on estimated annual amounts.
As a result of the change, percentage and overage rents revenue is recognized
in interim periods when the specified target that triggers the contingent
rental income is achieved.
Under its implementation guidelines, the EITF provides for, and the
Company has chosen, prospective adoption of this EITF consensus position in the
quarter in which the consensus is reached. As a result, the Company's reported
revenues and net income were reduced in the second and third quarter of 1998 by
approximately $.10 earnings per diluted share, will be increased in the fourth
quarter of 1998 by approximately $.10 earnings per diluted share (thus having
no material impact on the 1998 calendar year period) and will be reduced in the
first quarter of 1999 compared to the first quarter of 1998 by approximately
$.05 earnings per diluted share. In Company leases containing percentage and
overage rent targets, the majority of such targets are triggered during the
fourth quarter of each year. Therefore revenues and net income will
hereinafter be reduced in the first, second and third quarters of each year and
increased in the fourth quarter as compared to results reported prior to the
implementation of EITF 98-9. Over the course of a full calendar year there
will be no material impact, just a shift in earnings to later in the year.
PRO FORMA PRESENTATION
Set forth below are pro forma data which assume that the Company's
accounting for percentage and overage rents revenue had always conformed to the
provisions of EITF 98-9.
10
PRESENTATION OF PRO FORMA DATA
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
Total Revenues $ 27,046 $ 21,021 $ 73,762 $ 56,136
Net Income 5,870 6,138 17,459 17,765
Basic Net Income Per Share .33 .35 .99 1.02
Diluted Net Income Per Share .33 .35 .98 1.01
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO NINE MONTH ENDED
SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS)
Total revenues for the nine months ended September 30, 1998 increased
$16,067 or 27% to $74,832 as compared to $58,765 in 1997. This increase is
primarily attributable to a $14,292 or 34% increase in minimum rents to $56,053
as compared to $41,761 in 1997. Additionally, percentage and overage rents
decreased $1,634 or 53% to $1,453 as compared to $3,087 in 1997. The decrease
in percentage and overage rents is the result of implementing the new
accounting guidance from EITF No. 98-9 (see Note 2 to financial statements).
The August 1998 acquisition of NorthTown Mall, the June 1997 acquisitions
of Silver Lake Mall and Visalia Mall and the December 1997 acquisition
of Salem Center, contributed $7,900 to the minimum rent increase and $138 to
percentage and overage rents. Revenues from completed development activities
contributed $3,985 to the increase in minimum rents. The additional $2,407
increase in minimum rents was the result of increases experienced for the
balance of the property portfolio.
Recoveries from tenants increased $3,745 or 29% to $16,656 as compared to
$12,911 in 1997. Property operating expenses, including operating and
maintenance, and real estate taxes and insurance increased $3,481 or 38% and
$2,157 or 35% respectively. The acquisition of NorthTown Mall, Silver Lake
Mall, Visalia Mall and Salem Center contributed $2,528 to recoveries from
tenants, $2,038 to property operating expenses, including operating and
maintenance, and $1,067 to real estate taxes and insurance. Recoveries from
tenants as a percentage of property operating expenses were 79% compared to 84%
in 1997.
Depreciation and amortization increased $4,277 or 45% to $13,853 as
compared to $9,576 in 1997. This increase is primarily due to the acquisitions
and the increase in newly developed GLA.
Interest expense increased $7,460 or 126% to $13,359 as compared to
$5,899 in 1997. This increase resulted from additional borrowings used to
acquire NorthTown Mall, Silver Lake Mall, Visalia Mall and Salem Center and
to complete newly constructed GLA. Interest capitalized on projects under
construction was $3,112 in 1998 as compared to $2,506 in 1997.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THREE MONTHS ENDED
SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS)
Total revenues for the three months ended September 30, 1998 increased
$5,273 or 24% to $27,046 as compared to $21,773 in 1997. This increase is
attributable to a $4,663 or 30% increase in minimum rents to $19,976 as
compared to $15,313 in 1997. Additionally, percentage and overage rents
decreased $827 or 76% to $268 as compared to $1,095 in 1997. The decrease in
percentage and overage rents is the result of implementing the new accounting
guidance from EITF No. 98-9 (see Note 2 to financial statements).
The August 1998 acquisition of NorthTown Mall and the December 1997
acquisition of Salem Center, contributed $2,507 to the minimum rent increase.
Revenues from completed development activities contributed $965 to the minimum
rent increase. The additional $1,191 increase in minimum rents was the result
of increases experienced for the balance of the property portfolio.
11
Recoveries from tenants increased $1,665 or 34% to $6,523 as compared to
$4,858 in 1997. Property operating expenses, including operating and
maintenance, and real estate taxes and insurance increased $1,187 or 32% and
$792 or 36% respectively. The acquisition of NorthTown Mall and Salem Center
contributed $834 to recoveries from tenants, $516 to property operating
expenses, including operating and maintenance, and $372 real estate taxes and
insurance. Recoveries from tenants as a percentage of property operating
expenses were 83% compared to 83% in 1997.
Depreciation and amortization increased $1,718 or 49% to $5,203 as
compared to $3,485 in 1997. This increase is primarily due to the acquisitions
and the increase in newly developed GLA.
Interest expense increased $2,830 or 104% to $5,563 as compared to $2,733
in 1997. This increase resulted from additional borrowings used to acquire
NorthTown Mall and Salem Center and to complete newly constructed GLA.
Interest capitalized on projects under development was $1,132 in 1998 as
compared to $735 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of its liquidity and capital resources have
historically been for distributions, property acquisitions, property
development, expansion and renovation programs and debt repayment. To maintain
its qualification as a REIT under the Internal Revenue Code of 1986, as amended
(the "Code"), the Company is required to distribute to its shareholders at
least 95% of its "Real Estate Investment Trust Taxable Income," as defined in
the Code. During the quarter ended September 30, 1998, the Company declared a
distribution of $.45 per share payable October 20, 1998 to the shareholders of
record as of October 6, 1998.
The Company's principal source of liquidity is its cash flow from
operations generated from its real estate investments. As of September 30,
1998, the Company's cash and restricted cash amounted to approximately $5.2
million. In addition to its cash and restricted cash, unused capacity under
its credit facilities totaled $98 million.
The Company expects to meet its short-term cash requirements, including
recurring capital expenditures related to maintenance and improvement of
existing properties, through undistributed funds from operations, cash balances
and advances under the credit facilities. Exclusive of construction and
development activities, capital expenditures (both revenue and non-revenue
enhancing) for the existing properties are budgeted in 1998 to be approximately
$5 million.
The Company's principal long-term liquidity requirements will be the
repayment of principal on the $95 million mortgage debt, which matures in 2001
and requires principal payments in an amount necessary to reduce the debt to
$83.1 million as of January 21, 2000, the repayment of the $100 million senior
notes principle payable at $25 million a year starting in March 2005, the
repayment of the $84.5 million first mortgage, which requires a balloon payment
of approximately $72.1 million in September 2008, and the retirement of
outstanding balances under the credit facilities.
An additional long-term capital need of the Company relates to the
completion of construction of the regional mall in Spokane, Washington, through
its consolidated partnership, Spokane Mall Development Company Limited
Partnership. On July 30, 1996, this consolidated partnership entered into a
$50 million construction loan facility to meet its development and construction
needs regarding the Spokane project. The mall opened August 13, 1997, and
currently contains approximately 710,000 square feet of total GLA. Continued
payments for initial tenant construction allowances and completion of
construction will increase borrowings on the loan. The Company estimates the
total cost of this project will be approximately $67 million. The difference
between the estimated cost of the project and amount of the construction loan
facility is comprised of costs incurred to date for the purchase of land and
payment of fees and other development costs. As of September 30, 1998,
borrowings on the loan were approximately $44.9 million.
The Operating Partnership is continuing the development of Provo Towne
Centre, an enclosed regional mall in Provo, Utah through its consolidated
partnership Provo Mall Development Company, Ltd. On September 4, 1998, Provo
Mall Development Company, Ltd entered into a $50 million construction loan
facility to meet its development and construction needs regarding the Provo
project. The construction loan facility is guaranteed by the Operating
Partnership. The Provo project has incurred costs of approximately $56.8
million as of September 30, 1998 which have been funded from the Company's
credit facilities. The first draw made on the construction loan facility was
made on October 19, 1998 for approximately $22.7 million, of which $13.5
million was used to pay down the Operating Partners credit facilities and $9.2
for construction activities. This property will also represent a future long-
term capital need for the Company, as the total cost of the project is
estimated to be approximately $71 million. The Company expects to fund this
project through advances under its credit
12
facilities in combination with its construction loan facility. Provo Towne
Centre opened October 28, 1998 and contains approximately 718,900 square feet
of total GLA.
The Company is also contemplating the expansion and renovation of several
of its existing properties and additional development projects and acquisitions
as a means to expand its portfolio. The Company does not expect to generate
sufficient funds from operations to meet such long-term needs and intends to
finance these costs primarily through advances under the credit facilities
together with equity and debt offerings and individual property financing. The
availability of such financing will influence the Company's decision to proceed
with, and the pace of, its development and acquisition activities.
On September 2, 1997 the Company and the Operating Partnership filed a
shelf registration statement on Form S-3 with the Securities and Exchange
Commission for the purpose of registering common stock, preferred stock,
depositary shares, common stock warrants, debt securities and guaranties. This
registration statement, when combined with the Company's unused portion of its
previous shelf registration, would allow for up to $400 million of securities
to be offered by the Company and the Operating Partnership. On March 11, 1998,
the Operating Partnership under its shelf registration, issued $100 million of
ten-year senior unsecured notes bearing annual interest at a rate of 7.29%.
The Operating Partnership had entered into an interest rate protection
agreement in anticipation of issuing these notes and received $270 as a result
of this agreement making the effective rate of interest on these notes at
7.24%. Interest payments are due semi annually on March 11th and September
11th of each year. Principal payments of $25 million are due annually
beginning March 2005. The proceeds were used to partially repay outstanding
borrowings under the credit facility.
The Company intends to incur additional borrowings in the future in a
manner consistent with its policy of maintaining a ratio of debt-to-total
market capitalization of less than 50%. The Company's ratio of debt-to-total
market capitalization was approximately 48% at September 30, 1998.
YEAR 2000 ISSUES
In the past, many computer software programs were written using two digits
rether than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 reather than
the year 2000. This is generally referred to as the Year 2000 ("Y2K") issue.
If this situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which culd distrupt the Company's
operations.
The Company has developed a comprehensive strategy for updating its
systems for Y2K compliance. The Company's information technology
("IT") systems include software and hardware purchased from outside vendors, as
well as in-house developed software. The Company believes that vendor
developed software and hardware will be made Y2K compliant through vendor-
provided updates or replacement with other Y2K compliant software and hardware
that will be installed, tested and in use prior to the end of 1999. In-house
developed software is currently being identified and assessed. Modifications
will then be made as necessary to bring such in-house developed software into
Y2K compliance and validate such compliance prior to the end of 1999.
The Company is currently in the process of identifying significant non-IT
systems which may be impacted by the Y2K problem, including those relating to
property management (e.g. alarm systems and HVAC systems). The Company will
then determine through inquiries of equipment suppliers, as well as testing of
such equipment, the extent of renovations required, if any. The Company
believes identification will be completed before the end of the Company's
current fiscal year, and that modifications, validation and implementation will
be completed during 1999.
The Company is also identifying third parties with which it has a
significant relationship that, in the event of a Y2K failure, could have a
material impact on its financial position or operating results. Third parties
include energy and utility suppliers, creditors, service and product suppliers
and the Company's significant tenants. These relationships, especially those
associated with certain suppliers and tenants, are material to the Company and
a Y2K failure for one or more of these parties could result in a material
adverse effect on the Company's operating results and financial position. The
Company is making inquiries of these third parties to assess their Y2K
readiness. The Company expects that this process will be on-going throughout
the current and the next fiscal year.
The Company currently estimates that the costs to address Y2K issues will
not exceed $100,000. Costs include salary and fringe benefits for personnel,
hardware and software costs, and consulting and travel expenses associated with
addressing Y2K issues. These costs will be expensed as incurred or, in the
case of equipment or software replacement, will be capitalized
13
and depreciated over the expected useful life. The Company recognizes that the
total cost estimate is likely to increase as it completes its assessment of
non-IT systems. The Company is not currently able to reasonably estimate the
ultimate cost to be incurred for the assessment, remediation, upgrade,
replacement and testing of its impacted non-IT systems.
The worst case Y2K scenarios could be as insignificant as a minor
interruption in property management services provided to tenants at the
Company's properties resulting from unanticipated problems encountered in the
IT systems of the Company or any of the significant third parties with whom the
Company does business. The pervasiveness of the Y2K issue makes it likely that
previously unidentified issues will require remediation during the normal
course of business. In such a case, the Company anticipates that transactions
could be processed manually while IT and other systems are repaired and that
such interruptions would have a minor effect on the Company's operations. On
the other hand, a worst case Y2K scenario could be as far reaching as an
extended loss of utility service resulting from interruptions at the point of
power generation, on-line transmission, or local distribution to the Company's
properties. Such an interruption could result in an inability to provide
property tenants with access to their spaces thereby affecting the Company's
ability to collect rents and pay its obligations which could result in a
material adverse effect on the Company's operating results and financial
position.
These statements contained in this Quarterly Report of Form 10-Q that are
not purely historical fact are forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's
expectations, budgets, estimates, contemplations and year 2000 compliance. All
forward looking statements included in this document are based on information
available to the Company on the date hereof, and the actual results could
differ materially from those in such forward looking statements. Certain
factors that might cause such differences include those relating to changes in
economic climate, local conditions, law and regulations, the relative
illiquidity of real property investments, the potential bankruptcy of tenants
and, the development or expansion of properties and unexpected developments
surrounding the year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not Applicable.
14
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is not aware of any pending or threatened litigation at
this time that will have a material adverse effect on the Company or any
of its properties.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
15
EXHIBIT
NUMBER
- ------
DESCRIPTION
-----------
3.1 Amended and Restated Articles of Incorporation the Company (3(a))*
3.2 Amended and Restated Bylaws of the Company (3(b)){**}
4.1 Specimen of Common Stock Certificate (4){*}
10.1 Amended and Restated Agreement of Limited Partnership of Price
Development Company, Limited Partnership (10(a)){*}
10.2 Agreement of Limited Partnership of Price Financing Partnership, L.P.
(10(b)){*}
10.3 Loan Agreements related to Mortgage Debt and related documents (10(c)){*}
i) Deed of Trust, Mortgage, Security Agreement and Assignment of
Leases and Rents of Price Financing Partnership, L.P.
ii) Intentionally Omitted
iii) Indenture between Price Capital Corp. and a Trustee
iv) Limited Guarantee Agreement (Guarantee of Collection) for outside
investors
v) Limited Guarantee Agreement (Guarantee of Collection) for Price
Group Investors
vi) Cash Collateral Account Security, Pledge and Assignment Agreement
among Price Financing Partnership, L.P., Price Capital Corp. and
Continental Bank N.A.
vii) Note Issuance Agency Agreement between Price Capital Corp. and
Price Financing Partnership, L.P.
viii) Management and Leasing Agreement among Price Financing Partnership,
L.P. and Price Development Company, Limited Partnership
ix) Assignment of Management and Leasing Agreement of Price Financing
Partnership, L.P.
10.4 Employment and Non-Competition Agreement between the Company and John
Price (10(d)){*}
10.5 Indemnification Agreement for Directors and Officers (10(f)){*}
10.6 Registration Rights Agreement among the Company and the Limited Partners
of Price Development Company, Limited Partnership (10(g)){*}
10.7 Amendment No. 1 to Registration Rights Agreement, dated August 1, 1995,
among the Company and the Limited Partners of Price Development Company,
Limited Partnership{***}
10.8 Exchange Agreement among the Company and the Limited Partners of Price
Development Company, Limited Partnership (10(g)){*}
10.9 1993 Stock Option Plan (10(i)){*}
10.10 Amendment to Groundlease between Price Development Company and Alvin
Malstrom as Trustee and C.F. Malstrom, dated December 31, 1985.
(Groundlease for Plaza 9400) (10(j)){*}
10.11 Lease Agreement between The Corporation of the President of the Church of
Jesus Christ of Latter Day Saints and Price-James and Assumptions, dated
September 24, 1979. (Groundlease for Anaheim Plaza) (10(k)){*}
10.12 Indenture of Lease between Ambrose and Zelda Motta and Cordova Village,
dated July 26, 1974, and Amendments and Transfers thereto. (Groundlease
for Fort Union Plaza) (10(l)){*}
10.13 Lease Agreement between Advance Management Corporation and Price Rentals,
Inc. and dated August 1, 1975 and Amendments thereto. (Groundlease for
Price Fremont) (10(m)){*}
10.14 Groundlease between Aldo Rossi and Price Development Company, Dated June
1, 1989, and related documents. (Groundlease for Halsey Crossing)
(10(n)){*}
16
EXHIBIT
NUMBER
- ------
DESCRIPTION
-----------
10.15 Loan Agreements related to 1995 Credit Facility {***}
i) Credit Agreement, dated March 8, 1995, between Price Development
Company, Limited Partnership and Lexington Mortgage Company
ii) Note dated March 8, 1995
iii) Guaranty of Payment dated March 8, 1995 between the Company and
Lexington Mortgage Company
iv) Cash Collateral Account Security, Pledge and Assignment Agreement
dated March 8, 1995 between Price Development Company, Limited
Partnership, Bank One, Utah, N.A. and Lexington Mortgage Company
v) Amended and Restated Credit Agreement dated June 29, 1995 between
Price Development Company, Limited Partnership, Merrill Lynch
Mortgage Capital, Inc. and Capital Market Assurance
Corporation
vi) Amendment to Cash collateral Account, Security, Pledge and
Assignment Agreement dated June 29, 1995
vii) Reaffirmation of Guaranty dated June 29, 1995
(b) Current Reports on Form 8-K
On August 17, 1998, the Company filed a current report on Form 8-K,
dated August 6, 1998, reporting the acquisition of NorthTown Mall.
The Financial Statements Filed Were As Follows:
NORTHTOWN MALL
Historical Statement of Revenues and Certain Expenses for the Year
Ended December 31, 1997
Historical Statement of Revenues and Certain Expenses for the Six-
Month Periods Ended June 30, 1998 and 1997 (unaudited)
Notes to Historical Statements of Revenue and Certain Expenses
JP REALTY, INC.
Pro Forma - Unaudited:
Condensed Consolidated Balance Sheet as of June 30, 1998
Condensed Consolidated Statement of Operations for the Six-Month
Period Ended June 30, 1998 and for the Year Ended December 31, 1997
Estimated Twelve-Month Pro Forma Statement of Taxable Net Operating
Income and Operating Funds Available
{*} Documents were previously filed with the Company's Registration Statement
on Form S-11, File No. 33-68844, under the exhibit numbered in
parentheticals, and are incorporated herein by reference.
{**} Document was previously filed with the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and is incorporated herein by
reference.
{***}Documents were previously filed with the Company's Annual Report of Form
10-K for the year ended December 31, 1995 and is incorporated herein by
reference.
17
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.
JP REALTY, INC.
(Registrant)
NOVEMBER 13, 1998 /s/ G. Rex Frazier
----------------- ----------------------
(Date) G. Rex Frazier
PRESIDENT, CHIEF OPERATING
OFFICER, AND DIRECTOR
NOVEMBER 13, 1998 /s/ M. Scott Collins
----------------- ------------------------
(Date) M. Scott Collins
VICE PRESIDENT--CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL
& ACCOUNTING OFFICER)
18