1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended: Commission File Number: MARCH 31, 1996 33-2320 EXCEL PROPERTIES, LTD. (Exact name of registrant as specified in its charter) CALIFORNIA 87-0426335 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 16955 VIA DEL CAMPO, SUITE 110 SAN DIEGO, CALIFORNIA 92127 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (619) 485-9400 Securities registered pursuant to Section 12(b) of the Act: NONE Indicated 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. (1) Yes X No --- --- (2) Yes X No --- --- 2 EXCEL PROPERTIES, LTD. INDEX TO FINANCIAL STATEMENTS ---------- PAGE ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Balance Sheets March 31, 1996 (Unaudited) December 31, 1995 ................................................. 3 Statements of Income Three Months Ended March 31, 1996 (Unaudited) Three Months Ended March 31, 1995 (Unaudited)...................... 4 Statements of Changes in Partners' Equity Three Months Ended March 31, 1996 (Unaudited) Three Months Ended March 31, 1995 (Unaudited)...................... 5 Statements of Cash Flows Three Months Ended March 31, 1996 (Unaudited) Three Months Ended March 31, 1995 (Unaudited)...................... 6 Notes to Financial Statements......................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 10 PART II. OTHER INFORMATION...................................................... 13 2 3 EXCEL PROPERTIES, LTD. BALANCE SHEETS ---------- MARCH 31, 1996 DECEMBER 31, (UNAUDITED) 1995 ----------- ----------- ASSETS Real estate: Land $ 3,822,602 $ 3,822,602 Buildings 6,015,835 6,015,835 Less: accumulated depreciation (1,471,463) (1,423,718) ----------- ----------- Net real estate 8,366,974 8,414,719 Cash 1,954,390 1,817,201 Accounts receivable, less allowance for bad debts of $68,645 and $51,595 in 1996 and 1995, respectively 26,749 165,083 Notes receivable 1,014,242 1,015,672 Interest receivable 5,948 5,192 ----------- ----------- Total assets $11,368,303 $11,417,867 =========== =========== LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable: Affiliates $ 1,074 $ 867 Other 3,185 3,169 Property taxes payable 10,689 939 Tenant security deposits 5,000 5,000 Deferred rental income 40,530 40,238 ----------- ----------- Total liabilities 60,478 50,213 ----------- ----------- Partners' Equity: General partner's equity 8,570 8,691 Limited partners' equity, 235,308 units authorized, 135,299 units issued and outstanding in 1996 and 1995, respectively. 11,299,255 11,358,963 ----------- ----------- Total partners' equity 11,307,825 11,367,654 ----------- ----------- Total liabilities and partners' equity $11,368,303 $11,417,867 =========== =========== The accompanying notes are an integral part of the financial statements. 3 4 EXCEL PROPERTIES, LTD. STATEMENTS OF INCOME - UNAUDITED ---------- THREE MONTHS ENDED MARCH 31, ------------------- 1996 1995 -------- -------- Revenue: Base rent $266,619 $277,148 Percentage rents -- 1,458 -------- -------- Total revenue 266,619 278,606 -------- -------- Operating Expenses: Accounting and legal 8,897 10,320 Administrative 2,700 2,700 Bad debts 17,050 7,650 Management fees 2,377 2,475 Office expenses 4,931 2,863 Depreciation 47,745 50,462 -------- -------- Total operating expenses 83,700 76,470 -------- -------- Operating income 182,919 202,136 Interest income 47,254 31,824 -------- -------- Income before real estate sales 230,173 233,960 Gain - sale of real estate -- 99,141 -------- -------- Net income $230,173 $333,101 ======== ======== Net income allocated to: General partner $ 2,779 $ 2,495 Limited partners 227,394 330,606 -------- -------- Total $230,173 $333,101 ======== ======== Net income per weighted average limited partnership unit $ 1.68 $ 2.44 ======== ======== The accompanying notes are an integral part of the financial statements. 4 5 EXCEL PROPERTIES, LTD. STATEMENTS OF CHANGES IN PARTNERS' EQUITY - UNAUDITED ---------- THREE MONTHS ENDED MARCH 31, ---------------------------- 1996 1995 ------------ ------------ Balance at January 1 $ 11,367,654 $ 11,059,577 Net income 230,173 333,101 Partner distributions (290,002) (294,058) ------------ ------------ Balance at March 31 $ 11,307,825 $ 11,098,620 ============ ============ The accompanying notes are an integral part of the financial statements. 5 6 EXCEL PROPERTIES, LTD. STATEMENTS OF CASH FLOWS - UNAUDITED ---------- THREE MONTHS ENDED MARCH 31, -------------------------- 1996 1995 ----------- ----------- Cash flows from operating activities: Net income $ 230,173 $ 333,101 Adjustments to reconcile net income to net cash provided by operations: Depreciation 47,745 50,462 Allowance for doubtful accounts 17,050 7,650 Gain on sale of real estate -- (99,141) Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable 121,284 (10,822) Interest receivable (756) (1,474) Increase (decrease) in liabilities: Accounts payable 223 8,106 Property taxes payable 9,750 3,378 Deferred rental income 292 (20,915) ----------- ----------- Net cash provided by operating activities 425,761 270,345 ----------- ----------- Cash flows from investing activities: Proceeds from real estate sales -- 1,106,291 Real estate purchased -- (1,410,233) Collection of notes receivable 1,430 1,535 ----------- ----------- Net cash provided (used) by investing activities 1,430 (302,407) ----------- ----------- Cash flows from financing activities: Cash distributions (290,002) (294,058) ----------- ----------- Net cash used by financing activities (290,002) (294,058) ----------- ----------- Net increase (decrease) in cash 137,189 (326,120) Cash at January 1 1,817,201 641,053 ----------- ----------- Cash at March 31 $ 1,954,390 $ 314,933 =========== =========== The accompanying notes are an integral part of the financial statements. 6 7 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements reflect all adjustments of a recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements. No adjustments were necessary which were not of a recurring nature. Certain reclassifications have been made to the financial statements for the three months ended March 31, 1995 in order to conform with the current period's presentation. These financial statements should be read in conjunction with the financial statements and accompanying footnotes included in the Partnership's December 31, 1995 Form 10-K. ORGANIZATION Excel Properties, Ltd. was formed in the State of California on September 19, 1985, for the purpose of, but not limited to, acquiring real property and syndicating such property. OFFERING COSTS Offering costs and selling expenses have been charged to the limited partners' capital accounts as limited partners' interests were sold. REAL ESTATE Land and buildings are recorded at cost. Buildings are depreciated using the straight-line method over the tax life of 31.5 years. The tax life does not differ materially from the economic useful life. Expenditures for maintenance and repairs are charged to expense as incurred. Significant renovations are capitalized. The cost and related accumulated depreciation of real estate are removed from the accounts upon disposition. Gains and losses arising from the dispositions are reported as income or expense. CASH DEPOSITS At March 31, 1995, the carrying amount of the Partnership's cash deposits total $1,954,390. The bank balances are $1,986,914 of which $200,000 is covered by federal depository insurance. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE There was no interest or taxes paid for the three months ended March 31, 1996 or 1995. The Partnership also had no noncash investing or financing transactions for the three months ended March 31, 1996 or 1995. INCOME TAXES The Partnership is not liable for payment of any income taxes because as a partnership, it is not subject to income taxes. The tax effects of its activities accrue directly to the partners. Continued 7 8 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: ACCOUNTS RECEIVABLE All net accounts receivable are deemed to be collectible within the next 12 months. FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. 2. FEES PAID TO GENERAL PARTNER The Partnership has paid the General Partner or its affiliates the following fees for the three months ended March 31, 1996 and 1995: 1996 1995 --------- ------- Management fees $ 2,377 $ 2,475 Administrative fees 2,700 2,700 Accounting 1,620 1,620 3. NOTES RECEIVABLE The Company had the following notes receivable at March 31, 1996 and December 31, 1995: 1996 1995 ---------- ------- Note from sale of building, receipts of $1,390 per month at 9% interest. Secured by building sold. Due July 1997. $ 142,505 $ 143,455 Note from sale of building, interest only receipts of $5,366 per month at 8.5% interest. Secured by building sold. Due November 2003. 757,500 757,500 Note from sale of building, receipts of $1,004 per month at 8% interest. Secured by building sold. Due December 2001. 114,237 114,717 ---------- ---------- Total notes receivable $1,014,242 $1,015,672 ========== ========== Continued 8 9 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 4. MINIMUM FUTURE RENTALS The Company leases single-tenant buildings to tenants under noncancelable operating leases requiring the greater of fixed or percentage rents. The leases are either: (1) triple-net, requiring the tenant to pay all expenses of operating the property such as insurance, property taxes, repairs and utilities, or (2) requiring the tenant to reimburse the Company for substantially all of the tenant's share of real estate taxes and other common area maintenance expenses. Minimum future rental revenue for the next five years for the commercial real estate currently owned and subject to noncancelable operating leases is as follows: YEAR ENDING DECEMBER 31, 1996, remaining nine months $ 711,707 1997 930,613 1998 921,432 1999 895,978 2000 834,476 Thereafter 3,237,768 5. SALE OF PROPERTY On February 17, 1995, the Partnership sold a building in Phoenix, Arizona that was on lease to Children's World. The sales price was $1,135,000 less $28,709 in selling expenses. The Partnership recognized a gain of $99,141 on the sale which was part of a tax deferred exchange. The Partnership was able to defer the gain on the sale for tax purposes and to exchange the proceeds for another real estate asset as described in Note 6. No real estate sales were made in the first quarter of 1996. 6. PURCHASE OF PROPERTY On March 10, 1995, the Partnership purchased a 39% undivided interest in a parcel of ground in Las Vegas, Nevada for $1,410,233. The ground was leased with the Partnership's share of rent equaling $169,228 per year. The ground was subdivided into three building lots and the lessee constructed a building on one of the three lots. The building was sold in the fourth quarter of 1995. The Partnership still has a 39% undivided interest in the remaining two parcels of land. No real estate purchases were made in the first quarter of 1996. 9 10 EXCEL PROPERTIES, LTD. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS NATURE OF BUSINESS Excel Properties, Ltd., a California limited partnership (the "Partnership"), was organized to purchase commercial real estate properties for cash and to hold these assets for long-term investment. The Partnership currently owns twenty properties. The general partners of the Partnership are Excel Realty Trust, Inc., a Maryland corporation, and Gary B. Sabin, an individual. The Partnership was formed on September 19, 1985, and will continue in existence until December 31, 2015, unless dissolved earlier under certain circumstances. Properties that have been acquired by the Partnership are subject to long-term triple-net leases. Such leases require the lessee to pay the prescribed minimum rental plus all costs and expenses associated with the operations and maintenance of the property. These expenses include real property taxes, property insurance, repairs and maintenance and similar expenses, the net effect being that, under normal circumstances, no expenses will offset the rental payment. Most of the leases also provide some form of inflation hedge which calls for the minimum rent to be increased, based upon adjustments in the consumer price index, fixed rent escalation, or by receipt of a percentage of the gross sales of the tenant. Properties have been acquired free and clear of liens and encumbrances. The Partnership may seek to finance one or more of the properties and distribute the financing proceeds to the partners, but only if the financing proceeds equal or exceed 100% of the Partnership's capital invested in the property or properties (including a prorata amount of the Partnership's public offering unit selling commissions and organization expenses). To date, no properties owned by the Partnership have been the subject of any mortgage financing, therefore, at the present time, all properties remain free and clear from any mortgage loan, lien or encumbrance. The principal investment objectives of the Partnership are to provide to its limited partners: (1) preservation, protection and eventual return of the investment, (2) distributions of cash from operations including property sales, some of which may be a return of capital for tax purposes rather than taxable income, (3) distributions of cash from financing the properties, and (4) realization of long-term appreciation in value of the properties. The general partners have selected properties they believe meet certain minimum investment standards and that are most likely to accomplish the investment objectives of the Partnership. Properties were acquired through arms-length negotiations with third parties. LIQUIDITY AND CAPITAL RESOURCES As the Partnership has $1,954,390 at March 31, 1996, with no debt on any of the properties it owns, management believes that the Partnership liquidity remains in a good position. In April 1996, the Partnership distributed accumulated cash to the partners in the amount of $1,800,000. Also, in April 1996, the Partnership sold two properties for net proceeds of $898,887 and thus had cash on hand of $1,142,977 10 11 at April 30, 1996. The Partnership has no debt, and currently has monthly income (after the two April property sales) of approximately $82,000 from rental income. Management anticipates that income should be enough to cover any Partnership expenses. Also, management does not expect the Partnership to incur any significant operational expenses as the Partnership properties are subject to triple-net leases. Management anticipates that the Partnership's primary source of cash in 1996 will continue to come from rental of the real estate properties currently owned. The Partnership may also, from time to time, sell certain properties which would provide cash for distribution. Management anticipates that rental income will be sufficient to cover the operating expenses of the Partnership and allow for cash distributions to be made to the limited partners. The Partnership has the policy of paying quarterly distributions to the limited partners of the actual cash earned by the Partnership in the preceding quarter. Therefore, if expenses were to increase or income were to decrease, the Partnership would decrease the quarterly distributions to the limited partners. Management expects that the liquidity of the Partnership will change as excess cash is distributed to the unit holders (partners). The cash of the Partnership increased by $137,189 at March 31, 1996 when compared to the December 31, 1996. This increase was partly due to a decrease in accounts receivable of $121,284 which was a source of cash. Included in the change in accounts receivable was $156,000 that was due from a property sale in 1995 that was collected in January 1996. Additionally, the partnership paid distributions of $290,002 in January 1996 which was offset in part by net income of $230,173 and depreciation of $47,745 which provided an increase in cash of $277,918. The Partnership has purchased its properties for all cash. The Partnership may finance one or more of its existing properties if, among other conditions: (1) the property is held for at least two years (all properties have been owned by the Partnership for more than two years), (2) the financing proceeds equal or exceed the Partnership's investment in the property, and (3) the Partnership distributes the financing proceeds to the partners. To date, the Partnership has not leveraged any of its properties. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the notes thereto. Comparison of the three months ended March 31, 1996 to the three months ended March 31, 1995 Base rent decreased $10,529 or 4% from the previous year. Although additional rental revenue came from rent increases from existing tenants, in the prior year, the Partnership received rent from land that was purchased in February 1995 and sold in November 1995. Total rental revenue that was recognized in the first quarter of 1995 from this land was $17,000. Operating expenses increased by $9,947 from the three month ended March 31, 1995 to the three months ended March 31, 1996. The net increase was primarily due to the $9,400 increase in bad debt expense. Bad debt expense increased $4,994 due to the non-payment by Toddle House Restaurants of January rents and 1995 property tax reimbursements that were billed in 1996. Toddle House Restaurants, which is currently in Chapter 11 Bankruptcy, began paying monthly rents of $3,168 again in February 1996. Bad debt expense also increased $4,406 in the anticipation of not collecting certain rents from Ponderosa Restaurant which has vacated its premises. Other expenses and other income varied very little between the two accounting periods, except depreciation expense which decreased due to the sale of the Children's 11 12 World building in 1995. Net income decreased $102,928 during the first quarter in 1996, primarily due to a $99,141 gain on the sale of the Children's World property in 1995. Without the Children's World sale the net income of the Partnership would have decreased by $3,787 for the three months ended March 31, 1996 when compared to the same period a year ago. Management does not expect inflation to significantly impact the operations of the Partnership due to the structure of its investment portfolio. The leases all provide a minimum rental which the lessee is obligated to pay. Additionally, most leases contain some form of inflation hedge which provides for the rent to be increased. The rent increases may be in the form of scheduled fixed minimum rent increases, Consumer Price Index adjustments, or by participating in a percentage of the gross sales volume of the tenant. Since the triple-net leases require the lessees to pay for all property operating expenses, the net effect is that the income should increase as operating expenses increase due to inflation. CERTAIN CAUTIONARY STATEMENTS Certain statements in this Form 10-Q that are not historical fact and constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forwardlooking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Partnership to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risk, uncertainties and other factors include, but are not limited to, the following risks: Economic Performance and Value of Properties Dependent on Many Factors. Real property investments are subject to varying degrees of risk. The economic performance and values of real estate can be affected by many factors, including changes in the national, regional and local economic climates, local conditions such as an oversupply of space or a reductions in demand for real estate in the area, the attractiveness of the properties to tenants, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and increased operating costs. Dependence on Rental Income from Real Property. Since substantially all of the Partnership's income is derived from rental income from real property, the Partnership's income and funds for distribution would be adversely affected if a significant number of the Partnership's tenants were unable to meet their obligations to the Partnership or if the Partnership were unable to lease a significant amount of space in its buildings on economically favorable lease terms. There can be no assurance that any tenant whose lease expires in the future will renew such lease or that the Partnership will be able to re-lease space on economically advantageous terms. Illiquidity of Real Estate Investments. Equity real estate investments are relatively illiquid and therefore tend to limit the ability of the Partnership to vary its portfolio promptly in response to changes in economic or other conditions. Risk of Bankruptcy of Major Tenants. The bankruptcy or insolvency of a tenant would have an adverse impact on the property affected and on the income produced by such property. Under bankruptcy law, a tenant has the option of assuming (continuing) or rejecting (terminating) any unexpired lease. If the tenant assumes its lease with the Partnership, the tenant must cure all defaults under the lease and provide the 12 13 Partnership with adequate assurance of its future performance under the lease. If the tenant rejects the lease, the Partnership's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. The amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one years' lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). Environmental Risks. Under various federal, state and local laws, ordinances and regulations, the Partnership may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property or disposed of by it, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). Such liability may be imposed whether or not the Partnership knew of, or was responsible for, the presence of such hazardous toxic substances. PART II. OTHER INFORMATION Items 1 through 5 have been omitted since no events occurred with respect to these items. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27.1 - Financial Data Schedule (b) Reports on Form 8-K The Partnership filed no reports on Form 8-K during the quarter ended March 31, 1996. 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. Dated: May 10, 1996 EXCEL PROPERTIES, LTD. (Registrant) Excel Realty Trust, Inc. (General Partner) By: /s/ Gary B. Sabin Gary B. Sabin, President By: /s/ David A. Lund David A. Lund, Principal Financial Officer 13