EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements, the notes thereto, and the comparative summary of selected
financial data appearing elsewhere in this report. Dollars are in thousands,
except per Share and per Unit amounts.
This Form 10-K contains forward-looking statements with respect to the
operation of certain of our properties. We believe the expectations reflected in
the forward-looking statements made in this document are based on reasonable
assumptions. Certain factors could occur that might cause actual results to
vary. These include: our success or failure in implementing our business
strategy; economic conditions generally and in the commercial real estate and
finance markets specifically; our cost of capital, which depends in part on our
asset quality, our relationships with lenders and other capital providers, our
business prospects and outlook and general market conditions, and changes in
governmental regulations, tax rates and similar matters, and other factors
discussed elsewhere in this Form 10-K report filed with the Securities and
Exchange Commission. The forward-looking statements are identified by
terminology such as "may," "will," "should," "believe," "expect," "estimate,"
"anticipate," "continue," "predict" or similar terms. Although we believe that
the expectations reflected in such forward-looking statements are reasonable,
actual results may differ materially from those projected in the forward-looking
statements.
OVERVIEW
We are a fully integrated, self-administered and self-managed real estate
investment trust that develops, acquires, manages and owns community centers in
the midwestern, southeastern and mid-Atlantic regions of the United States. As
of December 31, 2001, we had a portfolio of 57 shopping centers totaling
approximately 11.4 million square feet of gross leaseable area located in 12
states. Our properties consist of 56 community shopping centers; nine of which
are power centers and three of which are single tenant facilities. We also own
one enclosed regional mall.
Our operating results are dependent primarily upon rental income received
from tenants under existing leases. Our future success is dependent in part on
our ability to collect rental payments, maintain occupancy and increase rental
rates as leases expire. An economic slowdown could result in increases in our
overall vacancy rates or declines in the rent we can charge to re-lease
properties upon expiration of current leases.
OCCUPANCY -- Occupancy in 2001 increased for our overall portfolio with a
breakdown by asset category as follows:
2001 2000
---- ----
Enclosed regional mall... 94.0% 89.9%
Community centers........ 95.6 94.2
Portfolio summary........ 95.5% 93.7%
==== ====
AVERAGE BASE RENTS -- Average base rents, per square foot, for the two
portfolio categories at December 31, 2001 and 2000 were as follows:
PERCENTAGE
2001 2000 INCREASE
---- ---- ----------
Enclosed regional mall... $ 8.58 $ 8.35 2.8%
Community centers........ 7.40 6.90 7.2%
Portfolio summary........ $ 7.44 $ 7.04 5.7%
======= ======= ===
LEASE RENEWALS -- We achieved the following in base rent for leases that
were renewed during 2001:
PER SQUARE PER SQUARE PERCENTAGE
FOOT RENT FOOT RENT INCREASE
PRIOR LEASE NEW LEASE (DECREASE) GLA
----------- ---------- ---------- ---
Enclosed regional mall... $ 13.19 $ 13.04 (1.2)% 6,679
Community centers........ $ 7.22 $ 7.63 5.6% 318,857
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NEW LEASES -- For new leases entered into during 2001, we achieved the
following increases in base rent:
PER SQUARE
FOOT RENT PER SQUARE PERCENTAGE
PORTFOLIO FOOT RENT INCREASE
AVERAGE NEW LEASE (DECREASE) GLA
---------- ---------- ---------- ---
Anchor........ $ 5.89 $ 8.05 36.6% 416,129
Non-anchor.... $ 11.26 $ 11.54 2.5% 250,263
PER SQUARE
FOOT RENT PER SQUARE PERCENTAGE
PORTFOLIO FOOT RENT INCREASE
AVERAGE NEW LEASE (DECREASE) GLA
---------- ---------- ---------- ---
Enclosed regional mall... $ -- $ -- --% --
Community centers........ $ 7.45 $ 9.36 25.6% 666,392
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. It is our opinion that we
fully disclose our significant accounting policies in the Notes to the
Consolidated Financial Statements. Consistent with our disclosure policies we
include the following discussion related to what we believe to be our most
critical accounting policies that require our most difficult, subjective or
complex judgment:
RESERVE FOR BAD DEBTS -- We provide for bad debt expense based upon the
reserve method of accounting. Historically we have provided approximately 0.5%
of rental revenues as our annual bad debt reserve based on the level of bad debt
we have experienced. Due to the economic downturn in the retail industry and the
increase in the number of retail companies filing for bankruptcy protection
(including Kmart Corporation during January 2002), we increased the bad debt
expense to approximately 0.9% of rental revenue for the year ended December 31,
2001.
We continuously monitor the collectability of our accounts receivable
(billed, unbilled and straight-line) from tenants and based on our judgment,
adjust the allowance for bad debts as necessary. It is our policy to cease
recording rental income from tenants when we believe such amounts would be
uncollectible. Management believes the allowance is adequate to absorb currently
estimated bad debts. However, if we experience bad debts in excess of the
reserves we have established, our operating income would be reduced.
Bad debt expense amounted to $735, $330 and $559 for the three years ended
December 31, 2001, 2000 and 1999, respectively.
REVENUE RECOGNITION -- Shopping center space is generally leased to retail
tenants under leases which are accounted for as operating leases. We recognize
minimum rents on the straight-line method over the terms of the leases, as
required under Statement of Financial Accounting Standard No. 13. Certain of the
leases also provide for additional revenue based on contingent percentage income
which is recorded on an accrual basis once the specified target that triggers
this type of income is achieved. The leases also typically provide for tenant
recoveries of common area maintenance, real estate taxes and other operating
expenses. These recoveries are recognized as revenue in the period the
applicable costs are incurred.
Straight line rental income was greater than the current amount required to
be paid by our tenants by $2,135, $3,383 and $2,705 for the years ended December
31, 2001, 2000 and 1999, respectively. Accounts receivable include unbilled
straight-line rent receivables of $10,560 at December 31, 2001 and $9,865 at
December 31, 2000. Straight line rent receivable at December 31, 2001, includes
approximately $1,997 due from Kmart Corporation.
REAL ESTATE -- We record real estate assets at the lower of cost or fair
value if impaired. Costs incurred for the acquisition development and
construction of properties are capitalized. For redevelopment of an existing
operating property, the undepreciated net book value plus the cost for the
construction (including demolition costs) incurred in connection with the
redevelopment are capitalized to the extent such costs do not exceed the
estimated fair value when complete. To the extent such costs exceed the
estimated fair value of such property, the excess is charged to expense.
We evaluate the recoverability of our investment in real estate whenever
events or changes in circumstances indicate that the carrying amount of an asset
may be impaired. Our assessment of recoverability of our real estate assets
includes, but is not limited to
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recent operating results, expected net operating cash flow and our plans for
future operations. For the years ended, December 31, 2001, 2000 and 1999, none
of our assets were considered impaired.
During 2001, we have completed redevelopment projects aggregating
approximately 212,300 square feet at a total cost of approximately $9,100 at
three of our shopping centers (Conyers Crossing, Clinton Valley Mall and
Roseville Plaza). We are currently expanding or redeveloping two shopping
centers (Sunshine Plaza and Lantana Plaza) for a total cost of approximately
$12,000.
In 2002 we will begin the redevelopment of our Tel-Twelve shopping center
from an enclosed regional mall to an open-air center for a total cost of
approximately $17,000. In connection with the redevelopment, we will demolish
approximately 20% of the Gross Leasable Area (133,000 square feet) of the
shopping center and construct a 139,600 square foot building for a nationally
recognized home improvement retailer.
OTHER ASSETS -- Other assets consist primarily of prepaid expenses, proposed
development and acquisition costs, and financing and leasing costs which are
amortized using the straight-line method over the terms of the respective
agreements.
Proposed development and acquisition costs amounted to $8,394 at December
31, 2001 and $5,190 at December 31, 2000, and included our investment of $5,140
in an entity that is currently developing a shopping center. The cost method is
used to account for our investment in the entity because we do not have the
ability to exercise significant influence over the investee's operating and
financial policies.
Using our best estimates based on reasonable and supportable assumptions and
projections, we review for impairment such assets whenever events or changes in
circumstances indicate that the carrying amount of these assets might not be
recoverable.
RESULT OF OPERATIONS
Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000
Total revenue increased 2.7% or $2,371 to $89,502 for the year ended
December 31, 2001 as compared to $87,131 for the year ended December 31, 2000.
Of the $2,371 increase, $722 was the result of increased minimum rents. The sale
of White Lake MarketPlace and Athens Town Center in 2001 resulted in a reduction
of $2,532 in minimum rents offset by a $3,254 increase in minimum rents in our
portfolio when compared to the year ended December 31, 2000.
Recoveries from tenants decreased $609, or 2.6% to $23,119 for the twelve
months ended December 31, 2001, as compared to $23,728 for the twelve months
ended December 31, 2000. The overall recovery ratio was 95.3% for the year ended
December 31, 2001, compared to 97.3% for the year ended December 31, 2000. The
decline in this ratio is a result of decreased occupancy during redevelopment of
four shopping centers and the sale of White Lake MarketPlace and Athens Town
Center.
In January 2001, we sold White Lake MarketPlace to Pontiac Mall Limited
Partnership for cash of $20,200, resulting in a gain on sale of approximately
$5,300. Various executive officers/trustees of the Company are partners in that
partnership. The property was offered for sale, utilizing the services of a
national real estate brokerage firm, and we accepted the highest offer from an
unrelated party. Subsequently the buyer cancelled the agreement. Pontiac Mall
Limited Partnership presented a comparable offer, which resulted in more
favorable economic benefits to us. The sale of the property was entered into
upon the unanimous approval of the independent members of our Board of Trustees.
Since January 1, 2001, Ramco-Gershenson, Inc. ("Ramco"), our management
company providing property management services to us and to other entities, has
been consolidated in our financial statements. As of January 1, 2001, Ramco
elected to be a taxable real estate investment trust subsidiary for federal
income tax purposes. In conjunction with the tax election, we entered into an
option agreement to purchase the remaining voting common stock of Ramco. In
prior years this entity was accounted for using the equity method of accounting.
Fees and management income earned by Ramco contributed $2,485 to the increase in
revenue for the year ended December 31, 2001.
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For the twelve months ended December 31, 2001, percentage rents decreased
$303 to $1,442, as compared to $1,745 for the twelve months ended December 31,
2000. The decrease is the result of tenant changes associated with redevelopment
projects and our efforts to convert percentage rent to higher minimum rent when
renewing leases. Interest and other income increased $76, to $2,700 for the
twelve months ended December 31, 2001.
Total expenses for the year ended December 31, 2001 increased 4.1%, or
$3,073 to $77,227, compared to $74,154 for the year ended December 31, 2000. The
increase was due to a $1,793 increase in depreciation and amortization and a
$2,817 increase in general and administrative expense. The increase was offset
by a $107 decrease in total recoverable expenses, including real estate taxes; a
decrease of $6 in other operating; and a $1,424 decrease in interest expense.
Depreciation and amortization increased 11.9% in 2001, to $16,842 from
$15,049 in 2000. The increase is primarily due to the redevelopment projects
completed during 2001 and amortization of leasing commissions and financing
costs. The consolidation of Ramco in 2001 contributed $299 to the increase.
General and administrative expenses were $8,337 and represented 9.3% of
total revenue for the year ended December 31, 2001, as compared to $5,520 and
6.3% of total revenue for the same period in 2000. The $2,817 increase is
principally attributable to consolidating Ramco in our financial statements in
2001. Fee and management income of $2,485 included in total revenue for the year
ended December 31, 2001, were offset against our management fee paid to Ramco
prior to 2001.
Interest expense decreased $1,424, from $27,756 to $26,332 for the twelve
months ended December 31, 2001. The 5.1% decrease is the result of lower
balances on our secured credit facility through Fleet National Bank ("Credit
Facility") and mortgages as well as reduced interest rates, offset by a
reduction in our capitalization of interest on development and redevelopment
projects. Capitalized interest amounted to $1,310 during the twelve months ended
December 31, 2000, and related to construction of Auburn Mile and redevelopment
projects, as compared to $348 of capitalized interest for redevelopment projects
for the same period in 2001. For the year ended December 31, 2001, weighted
average interest rates decreased to 7.2% compared to 8.3% for the same period in
2000.
Earnings from unconsolidated entities increased $615 from $198 in 2000 to
$813 for the year ended December 31, 2001. Our share of Rossford Development
LLC's income increased from $24 in 2000 to $262 in 2001. The two joint ventures
we invested in during 2001 contributed $15 to the increase. In addition,
depreciation and amortization expense arising from our net basis in the
unconsolidated entities' assets decreased by $148 from $267 in 2000 to $119 for
the year ended December 31, 2001.
During the year ended December 31, 2001, we completed $29,045 in asset sales
and recognized net gains of $5,550. The sales of properties included White Lake
MarketPlace and Athens Town Center, as well as the sales of four parcels of
land.
The increase in minority interest is the result of higher income before
minority interest for the twelve months ended December 31, 2001 when compared to
the twelve months ended December 31, 2000.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
Total revenue increased 5.1% or $4,187 to $87,131 for the year ended
December 31, 2000, compared to $82,944 for the year ended December 31, 1999. Of
this increase, minimum rents increased by $450, or 0.8%, to $59,034 in 2000 from
$58,584 in 1999. Recoveries from tenants increased $2,390 or 11.2% to $23,728
for the year ended December 31, 2000, compared to $21,338 for the year ended
December 31, 1999.
The sale of Chester Springs and Rivertowne Square in August 1999 to
RPT/Invest, LLC and the disposition of Commack (Toys R Us) and Trinity Corners
Shopping Center in December 1999 accounted for a reduction in minimum rent of
$3,066 for the year ended December 31, 2000. Development projects at White Lake
MarketPlace and Auburn Mile contributed $2,441 to minimum rent when compared to
1999. The balance of the increase in minimum rents is primarily attributable to
five redevelopment projects completed during 2000.
Recoveries from tenants increased $2,390, or 11.2% and is primarily due to a
higher level of recoverable operating expenses and real estate taxes associated
with White Lake MarketPlace and Auburn Mile developments. The overall recovery
ratio was 97.3% for the year ended December 31, 2000, compared to 96.9% for the
year ended December 31, 1999.
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For the twelve months ended December 31, 2000, percentage rents decreased
$292 to $1,745, compared to $2,037 for the twelve months ended December 31,
1999. This decrease is primarily the result of our initiative to convert tenants
to higher minimum rent, reducing our reliance on percentage rents as a potential
source of revenue. Interest and other income increased $1,639, from $985 for the
twelve months ended December 31, 1999 to $2,624. Lease termination fees were
$1,011 greater in the twelve months ended December 31, 2000 when compared to the
same period in 1999 and kiosk license income increased $255 for the period. Gain
on sale of land options during the twelve months ended December 31, 2000,
accounted for $238 of the increase.
Total expenses for the year ended December 31, 2000 increased 9.1%, or
$6,209, to $74,154 compared to $67,945 for the year ended December 31, 1999. The
increase was due to a $2,356 increase in operating expenses, including
recoverable operating expenses and real estate taxes, a $1,923 increase in
depreciation and amortization, a $37 increase in other operating expenses, a
$2,335 increase in interest expense, and a $442 decrease in general and
administrative expenses.
Real estate taxes increased $1,639, or 21.3%, from $7,713 to $9,352 for the
year ended December 31, 2000. White Lake MarketPlace and Auburn Mile development
projects contributed $1,228 to the increase in real estate taxes when compared
to 1999.
The $1,923 increase in depreciation is primarily due to the redevelopment
projects we completed during 2000 and amortization for current year additions of
tenant improvements and leasing commissions. Depreciation and amortization for
White Lake MarketPlace contributed $286 to the increase.
General and administrative expenses were $5,520 and represented 6.3% of
total revenue for the year ended December 31, 2000, compared to $5,962 and 7.2%
of total revenue for the same period in 1999. The decrease is primarily
attributable to a $249 gain on sale of real estate recognized by Ramco, one of
our unconsolidated entities in 2000, and by increased leasing and development
fees earned by the unconsolidated entity, which reduced our reimbursement
obligation.
Interest expense increased $2,335, from $25,421 to $27,756 for the twelve
months ended December 31, 2000. The 9.2% increase is the result of higher
interest rates on variable rate debt for the twelve months ended December 31,
2000, increased borrowings on the Credit Facility and increased borrowings on
the construction loans used to finance White Lake MarketPlace and the Auburn
Mile developments.
Earnings from unconsolidated entities increased $402, to $198 in 2000 from a
loss of $204 in 1999. Improved operating results of the unconsolidated entities
increased $208, from $257 in 1999 to $465 for the year ended December 31, 2000.
In addition, depreciation and amortization expense arising from our net basis in
the unconsolidated entities' assets decreased by $194 for the year ended
December 31, 2000.
During the year ended December 31, 2000, we completed $5,431 in asset sales
and recognized net gains of $3,795. The sales of properties included land
parcels at Tel-Twelve Mall in April 2000 and Roseville Plaza in December 2000.
The increase in minority interest is primarily the result of higher income
before minority interest for the twelve months ended December 31, 2000 when
compared to the twelve months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We generated $24,556 in cash flows from operating activities and $5,774 from
investing activities for the year ended December 31, 2001. Redevelopment of four
shopping centers and improvements to existing properties used $21,727 and
additional investments in unconsolidated entities used $2,469 during the year
ended December 31, 2001. Proceeds from the sale of real estate provided $29,045
during the year. Financing activities used $27,727 during the twelve months
ended December 31, 2001. Borrowings under the Credit Facility, provided $470,
net of repayments of $4,950, and repayments on construction loans used $13,575.
Cash distributions to shareholders, holders of operating partnership units, and
dividends paid to preferred shareholders amounted to $20,247.
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The following is our contractual cash obligations as of December 31, 2001.
PAYMENTS DUE BY PERIOD
--------------------------------
LESS 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL THAN 1 YEAR YEARS YEARS YEARS
-------------------------------------------- --------- ----------- -------- --------- --------
Long-term debt.............................. $ 347,275 $ 8,287 $157,194 $ 154,680 $ 27,114
Operating leases............................ 908 363 545 -- --
Unconditional construction cost
obligations............................... 5,300 5,300 -- -- --
--------- ------- -------- --------- --------
Total contractual cash obligations..... $ 353,483 $13,950 $157,739 $ 154,680 $ 27,114
========= ======= ======== ========= ========
Our mortgages and notes payable amounted to $347,275 at December 31, 2001
with a weighted average interest rate of 7.15%. The debt consists of twelve
loans secured by various properties, plus one unsecured term loan and the Credit
Facility, as described below. Ten of the mortgage loans amounting to $195,290
have maturities ranging from 2006 to 2011, monthly payments which include
regularly scheduled amortization, and have fixed interest rates ranging between
6.83% to 8.81%. One of the mortgage loans, evidenced by tax free bonds,
amounting to $6,560 secured by Oak Brook Square Shopping Center, matures in
2010, and carries a floating interest rate equal to 75% of the new issue long
term Capital A rated utility bonds, plus interest to the lender sufficient to
cause the lender's overall yield on its investment in the bonds to be equal to
200 basis points over their applicable LIBOR rate (6.41% at December 31, 2001).
In April 2001, we executed a $10,340 mortgage loan with LaSalle Bank N.A.,
secured by the property at Madison Shopping Center. The loan has a fixed
interest rate of 7.51% and matures in May 2011.
In November 2001, we converted a construction loan to finance the Auburn
Mile shopping center development located in Auburn Hills, Michigan to a new
$21,000 mortgage loan. The loan carries an interest rate of 200 basis points
over LIBOR, an effective rate of 4.75% at December 31, 2001, and matures in
September 2005.
The Credit Facility bears interest between 162.5 and 225 basis points over
LIBOR depending on certain debt ratios (effective interest rate of 6.6% at
December 31, 2001) and matures September 2003. The Credit Facility is secured by
mortgages on various properties and contains financial covenants relating to
liabilities-to-assets ratios, minimum operating coverage ratios and a minimum
equity value. As of December 31, 2001, we were in compliance with the covenant
terms.
Outstanding letters of credit issued under the Credit Facility amounted to
$818 at December 31, 2001.
Under terms of the Credit Facility, we are required to maintain interest
rate swap agreements to reduce the impact of changes in interest rate on our
floating rate debt. We have interest rate swap agreements with an aggregate
notional amount of $75,000 at December 31, 2001. Based on rates in effect at
December 31, 2001, the agreements provide for fixed rates ranging from 7.0% to
8.3% and expire at various dates through March 2004. We are exposed to credit
loss in the event of non-performance by the counter party to the interest rate
swap agreements; however we do not anticipate non-performance by the counter
party.
After taking into account the impact of converting our variable rate debt
into fixed rate debt by use of the interest rate swap agreements, at December
31, 2001, our variable rate debt accounted for approximately $76,985 of
outstanding debt with a weighted average interest rate of 5.1%. Variable rate
debt accounted for approximately 22.2% of our total debt and 14.2% of our total
capitalization.
Our debt to total market capitalization (our debt plus the market value of
our equity) ratio was 64.3% at December 31, 2001.
The properties in which Ramco-Gershenson Properties, L.P. (the "Operating
Partnership"), owns an interest and which we account for using the equity method
of accounting are subject to non-recourse mortgage indebtedness. At December 31,
2001, the pro rata share of non-recourse mortgage debt of these properties held
by unconsolidated entities was $25,796 with a weighted average interest rate of
6.2%.
The mortgage loans (other than our Credit Facility) encumbering our
properties, including properties held by our unconsolidated joint ventures, are
generally non-recourse, subject to certain exceptions for which we would be
liable for any resulting losses incurred by the lender. These exceptions vary
from loan to loan but generally include fraud or a material misrepresentation,
misstatement or omission by the borrower, intentional or grossly negligent
conduct by the borrower that harms the property or results in a loss to the
lender, filing of a bankruptcy petition by the borrower, either directly or
indirectly, and certain environmental liabilities. In addition,
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upon the occurrence of certain of such events, such as fraud or filing of a
bankruptcy petition by the borrower, we would be liable for the entire
outstanding balance of the loan, all interest accrued thereon and certain other
costs, penalties and expenses.
With respect to the Crossroads Centre shopping center, which is owned by a
joint venture in which we have a 10% interest, we have guaranteed to the joint
venture the completion of the center by October 17, 2002, and we have entered
into a master lease with the joint venture under which we are obligated to
provide net operating income sufficient to provide a 1.2 to 1.0 debt service
coverage ratio. In the event that the center is not completed by the scheduled
completion date, we would be obligated to the joint venture for any damages it
incurs due to such failure. We believe that the construction of the center has
been substantially completed in accordance with the terms of our agreement. We
have the option to purchase the Crossroads Centre shopping center from the joint
venture, exercisable by notice on or before July 16, 2002, and if we do not
exercise this option, we will be obligated to make an option payment of $3.3
million to the 90% owner of this joint venture on July 17, 2002.
Our capital structure at December 31, 2001, includes property-specific
mortgages, an unsecured term loan, the Credit Facility, our Series A Preferred
Shares, our Common Shares and a minority interest in the Operating Partnership.
At December 31, 2001, the minority interest in the Operating Partnership
represented a 29.3% ownership in the Operating Partnership which may, under
certain conditions, be exchanged for 2,944,977 Common Shares.
As of December 31, 2001, Operating Partnership Units ("OP Units") issued
were exchangeable for our Common Shares on a one-for-one basis. We, as sole
general partner of the Operating Partnership, have the option, but not the
obligation, to settle exchanged OP Units in cash based on the current trading
price of our Common Shares. Assuming the exchange of all limited partnership
interests in the Operating Partnership, there would have been 10,037 of our
common shares outstanding at December 31, 2001, with a market value of
approximately $161,086 at December 31, 2001 (based on the closing price of
$16.05 per share on December 31, 2001).
The principal uses of our liquidity and capital resources are for
acquisitions, development, redevelopment, including expansion and renovation
programs and debt repayment. To maintain our qualification as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"), we are required to distribute to our shareholders at least 90% of our
"Real Estate Investment Trust Taxable Income" as defined in the Code.
We have historically funded, and may continue to fund, some of our
acquisition and development activities by entering into joint venture
transactions with third parties in which we own 50% or less of the joint venture
entity.
As part of our business plan to improve our capital structure and reduce
debt, we will continue to pursue the strategy of selling fully-valued properties
and to dispose of shopping centers that no longer meet the criteria established
for our portfolio. Our ability to obtain acceptable selling prices and
satisfactory terms will impact the timing of future sales. Net proceeds from the
sale of properties are expected to reduce outstanding debt.
The conversion of our Tel-Twelve shopping center from an enclosed regional
mall to an open-air center is currently in process along with the proposed
redevelopment at our Shoppes of Lakeland. These redevelopments will include
demolition and rebuilding of a portion of Tel-Twelve, as well as retenanting of
the Shoppes of Lakeland. As a result of reduced rental income during the
redevelopment period, it is our estimate that net income will decrease by
approximately $3,400 for these two centers for the year ended December 31, 2002.
We anticipate that the combination of the availability under the Credit
Facility, possible equity offerings, the sale of existing properties, and
potential new debt will satisfy our expected working capital requirements
through at least the next 12 months. We anticipate adequate liquidity for the
foreseeable future to fund future developments, expansions, repositionings, and
to continue currently planned capital programs, and to make distributions to our
shareholders in accordance with the Code's requirements applicable to REITs.
Although we believe that the combination of factors discussed above will provide
sufficient liquidity, no such assurance can be given.
ECONOMIC CONDITIONS
Substantially all of the leases at our properties provide for tenants to pay
their pro rata share of operating expenses, including common area maintenance
and real estate taxes, thereby reducing our exposure to increases in operating
expenses resulting from inflation. Many of the tenants' leases contain
provisions designed to lessen the impact of inflation. Such provisions include
the ability to receive percentage rentals based on a tenant's gross sales, which
generally increase as prices rise, and or escalation clauses, which generally
increase rental rates during the terms of the leases. In addition, many of the
leases are for terms of less than ten years, which
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may enable the Operating Partnership to replace existing leases with new leases
at a higher base and/or percentage rentals if rents of the existing leases are
below the then existing market rate.
The retail industry has experienced some financial difficulties during the
past few years and certain local, regional and national retailers have filed for
protection under bankruptcy laws. If this trend should continue, our future
earnings performance could be negatively impacted.
RISKS RELATED TO OUR BUSINESS
ADVERSE MARKET CONDITIONS AND TENANT BANKRUPTCIES
The economic performance and value of our real estate assets are subject to
all the risks associated with owning and operating real estate, including risks
related to adverse changes in national, regional and local economic and market
conditions. Our current properties are located in 12 states in the midwestern,
southeastern and mid-Atlantic regions of the United States. The economic
condition of each of our markets may be dependent on one or more industries. An
economic downturn in one of these industries may result in a business downturn
for our tenants, and as a result, these tenants may fail to make rental
payments, decline to extend leases upon expiration, delay lease commencements or
declare bankruptcy.
Any tenant bankruptcies, leasing delays, or failure to make rental payments
when due could result in the termination of the tenant's lease, causing material
losses to us and adversely impacting our operating results. If our properties do
not generate sufficient income to meet our operating expenses, including future
debt service, our income and results of operations would be adversely affected.
During 2001, seven of our tenants filed for bankruptcy protection, representing
a total of 15 locations. These tenants represented approximately 1.7% of our
annualized base rental income at December 31, 2001. During January 2002, two
more of our tenants filed for bankruptcy protection, including Kmart
Corporation, which represented approximately 6.1% of our annualized base rental
income at December 31, 2001.
Any bankruptcy filings by or relating to one of our tenants or a lease
guarantor would bar all efforts by us to collect pre-bankruptcy debts from that
tenant, the lease guarantor or their property, unless we receive an order
permitting us to do so from the bankruptcy court. A tenant or lease guarantor
bankruptcy could delay our efforts to collect past due balances under the
relevant leases and could ultimately preclude full collection of these sums. If
a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due
under the lease must be paid to us in full. However, if a lease is rejected by a
tenant in bankruptcy, we would have only a general unsecured claim for damages.
Any unsecured claim we hold may be paid only to the extent that funds are
available and only in the same percentage as is paid to all other holders of
unsecured claims. It is possible that we may recover substantially less than the
full value of any unsecured claims we hold, if at all, which may adversely
affect our operating results and financial condition.
Several of our tenants represent a significant portion of our leasing
revenues. As of December 31, 2001, we received 8.7% of our annualized rent from
Wal-Mart Stores, Inc. and 6.1% from Kmart Corporation. Five other tenants each
represented at least 2.0% of our total annualized base rent. The concentration
in our leasing revenue from a small number of tenants creates the risk that,
should these tenants experience financial difficulties, our operating results
could be adversely affected.
WE ARE INVOLVED IN VARIOUS TAX DISPUTES WITH THE INTERNAL REVENUE SERVICE AND
MAY NOT BE ABLE TO RESOLVE THESE DISPUTES ON SATISFACTORY TERMS.
We are involved in a dispute with the IRS that relates to its examination of
our taxable years ended December 31, 1991, through 1995. During the third
quarter of 1994, we held more than 25% of the value of our total assets in
short-term Treasury Bill reverse repurchase agreements, which could be viewed as
non-qualifying assets for purposes of determining whether we qualify to be taxed
as a REIT. We requested that the IRS enter into a closing agreement with us that
our ownership of the short-term Treasury Bill reverse repurchase agreements
would not adversely affect our status as a REIT. The IRS deferred any action
relating to this issue pending the further examination of our taxable years
ended December 31, 1991, through 1994. As discussed below, the field examination
has since been completed and the IRS has proposed to disqualify us as a REIT for
our taxable year ended December 31, 1994, based on our ownership of the
short-term Treasury Bill reverse repurchase agreements.
In connection with the incorporation and distribution of all of the shares
of Atlantic Realty Trust in May 1996, we entered into a tax agreement with
Atlantic under which Atlantic assumed all tax liability arising out of the IRS'
then ongoing examination, excluding any tax liability relating to any actions or
events occurring, or any tax return position taken, after May 10, 1996, but
including liabilities for interest, penalties, additions to tax and costs
relating to covered taxes. In addition, the tax agreement provides that, to the
12
extent any of our taxes which Atlantic is obligated to pay under the tax
agreement can be avoided through the declaration of a "deficiency dividend"
(that is, our declaration and payment of a distribution that is permitted to
relate back to the year for which the IRS determines a deficiency in order to
satisfy the requirement for REIT qualification that we distribute a certain
minimum percentage of our "REIT taxable income" for such year), we will make,
and Atlantic will reimburse us for the amount of, such deficiency dividend.
In addition to examining our taxable years ended December 31, 1991, through
1994, the IRS examined our taxable year ended December 31, 1995. Based on these
examinations, the IRS has not only proposed to disqualify us as a REIT for our
taxable year ended December 31, 1994, based on our ownership of the short-term
Treasury Bill reverse repurchase agreements, as noted above, but has also
proposed to adjust (increase) our "REIT taxable income" for the taxable years
ended December 31, 1991, 1992, 1993, and 1995. If sustained, the adjustments
proposed by the IRS to our "REIT taxable income" would, in and of themselves,
disqualify us as a REIT for at least some of these years unless we were to pay a
deficiency dividend for each of the taxable years for which we would otherwise
be disqualified as a REIT as a result of having failed to distribute a
sufficient amount of our taxable income. We are continuing to dispute these
issues with the IRS through an administrative appeals procedure. In addition,
the IRS is currently conducting an examination of our taxable years ended
December 31, 1996, and 1997, and of our operating partnership for the taxable
years ended December 31, 1997, and 1998.
Based on the second of two examination reports issued by the IRS, we could
be liable for up to $54.1 million in combined taxes, penalties and interest
through March 31, 2002. However, this examination report acknowledges (as does
the initial examination report) that we can avoid disqualification as a REIT for
certain of our examined tax years if we distribute a deficiency dividend to our
shareholders. The distribution of a deficiency dividend would be deductible by
us, thereby reducing our liability for federal income tax. Based on the second
examination report, the proposed adjustments to our "REIT taxable income" would
require us to pay a deficiency dividend to our current shareholders resulting in
combined taxes, penalties, interest and deficiency dividends of approximately
$56.3 million as of March 31, 2002.
If the IRS successfully challenges our status as a REIT for any taxable
year, we will be able to re-elect REIT status commencing with the fifth
succeeding taxable year (or possibly an earlier taxable year if we meet certain
relief provisions of the Internal Revenue Code). Thus, for example, if the IRS
successfully challenges our status as a REIT solely for our taxable year ended
December 31, 1994, based on our ownership of the short-term Treasury Bill
reverse repurchase agreements, we will be able to re-elect REIT status no later
than our taxable year which began January 1, 1999.
In the notes to the consolidated financial statements made part of
Atlantic's quarterly report on Form 10-Q filed with the Securities and Exchange
Commission for the quarter ended September 30, 2001, Atlantic has disclosed its
liability for the tax deficiencies (and interest and penalties on the tax
deficiencies) proposed to be assessed against us by the IRS for the taxable
years ended December 31, 1991, through 1995, as reflected in each of the two
examination reports issued by the IRS. We believe, but can provide no assurance,
that Atlantic currently has sufficient assets to pay such tax deficiencies,
interest and penalties. According to the quarterly report on Form 10-Q filed by
Atlantic for its quarter ended September 30, 2001, Atlantic had net assets on
September 30, 2001, of approximately $60 million (as determined pursuant to the
liquidation basis of accounting). If the amount of tax, interest and penalties
assessed against us ultimately exceeds the amounts proposed in each of the
examination reports, however, because interest continues to accrue on the
proposed tax deficiencies, or if additional tax deficiencies are proposed or for
any other reason, then Atlantic may not have sufficient assets to reimburse us
for all amounts we must pay to the IRS, and we would be required to pay the
difference out of our own funds. Accordingly, the ultimate resolution of any
controversy over tax liabilities covered by the above-described tax agreement
may have a material adverse effect on our financial position, results of
operation or cash flows, including if we are required to distribute deficiency
dividends to our shareholders and/or pay additional taxes, interest and
penalties to the IRS in amounts that exceed the value of Atlantic's net assets.
Moreover, the IRS may assess us with taxes that Atlantic is not required under
the above-described tax agreement to pay, such as taxes arising from the
recently-commenced examination of us for the taxable years ended December 31,
1996, and 1997, and of our operating partnership for the taxable years ended
December 31, 1997, and 1998. There can be no assurance, therefore, that the IRS
will not assess us with substantial taxes, interest and penalties which Atlantic
cannot, is not required to, or otherwise does not pay.
OUR FAILURE TO QUALIFY AS A REIT WOULD RESULT IN HIGHER TAXES AND REDUCED CASH
AVAILABLE FOR OUR SHAREHOLDERS.
We believe that we currently operate in a manner so as to qualify as a REIT
for federal income tax purposes. If, however, we were to fail to qualify as a
REIT in any taxable year, we would be subject to federal income tax, including
any applicable alternative minimum tax, on our taxable income at regular
corporate rates, and distributions to shareholders would not be deductible by us
in computing our taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available
13
for distribution to our shareholders, which in turn could have an adverse impact
on the value of, and trading prices for, our shares. Unless entitled to relief
under certain Internal Revenue Code provisions, we also would be disqualified
from taxation as a REIT for the four taxable years following the year during
which we ceased to qualify as a REIT.
ABILITY TO SUCCESSFULLY IDENTIFY OR COMPLETE SUITABLE ACQUISITIONS AND NEW
DEVELOPMENTS.
Integral to our business strategy is our ability to continue to acquire and
develop properties. We also may not be successful in identifying suitable real
estate properties that meet our acquisition criteria and are compatible with our
growth strategy or in consummating acquisitions or investments on satisfactory
terms. We may not be successful in identifying suitable areas for new
development, negotiating for the acquisition of the land, obtaining required
permits and authorizations, completing developments in accordance with our
budgets and on a timely basis or leasing any newly-developed space. If we fail
to identify or complete suitable acquisitions or developments within our budget,
our financial condition and results of operations could be adversely affected
and our growth could slow, which in turn could adversely impact our share price.
OUR REDEVELOPMENT PROJECTS MAY NOT YIELD ANTICIPATED RETURNS, WHICH WOULD
ADVERSELY AFFECT OUR OPERATING RESULTS.
A key component of our business strategy is exploring redevelopment
opportunities at existing properties within our portfolio and in connection with
property acquisitions. To the extent that we engage in these redevelopment
activities, they will be subject to the risks normally associated with these
projects, including, among others, cost overruns and timing delays as a result
of the lack of availability of materials and labor, weather conditions and other
factors outside of our control. Any substantial unanticipated delays or expenses
could adversely affect the investment returns from these redevelopment projects
and adversely impact our operating results.
SENSITIVITY ANALYSIS
We are exposured to interest rate risk on our variable rate debt
obligations. Based on our debt and interest rates and the interest rate swap
agreements in effect at December 31, 2001, a 100 basis point change in interest
rates would affect our earnings and cash flows by approximately $768.
FUNDS FROM OPERATIONS
We generally consider funds from operations, also known as "FFO," an
appropriate supplemental measure of our financial performance because it is
predicated on cash flow analyses. We have adopted the most recent National
Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, which
was amended effective January 1, 2000. Under the NAREIT definition, FFO
represents income before minority interest, excluding extraordinary items, as
defined under accounting principles generally accepted in the United States of
America, gains on sales of depreciable property, plus real estate related
depreciation and amortization (excluding amortization of financing costs), and
after adjustments for unconsolidated partnerships and joint ventures. Our
computation of FFO may, however, differ from the methodology for calculating FFO
utilized by other real estate companies, and therefore, may not be comparable to
these other real estate companies. FFO should not be considered an alternative
to net income as an indication of our performance or to cash flows as a measure
of liquidity or our ability to pay distributions.
FFO does not represent cash generated from operating activities in
accordance with accounting principles generally accepted in the United States of
America and should not be considered an alternative to net income as an
indication of our performance or to cash flows from operating activities a
measure of liquidity or our ability to pay distributions. Furthermore, while net
income and cash generated from operating, investing and financing activities,
determined in accordance with accounting principles generally accepted in the
United States of America, consider capital expenditures which have been and will
be incurred in the future, the calculations of FFO does not.
14
The following table illustrates the calculation of FFO for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- ---------
Net Income........................................................ $ 13,863 $ 11,756 $ 11,839
Less: Gain on sale of property(1)............................... (5,207) (3,420) (1,225)
Add: Depreciation and amortization.............................. 17,148 15,584 13,339
Cumulative effect of change in accounting
principle............................................... -- 1,264 --
Minority interest in partnership........................... 5,803 4,942 4,915
--------- --------- ---------
Funds from operations-- diluted................................... 31,607 30,126 28,868
Less: Preferred share dividends................................. (3,360) (3,360) (3,407)
--------- --------- ---------
Funds from operations-- basic..................................... $ 28,247 $ 26,766 $ 25,461
========= ========= =========
Weighted average equivalent shares outstanding(2)
Basic........................................................... 10,050 10,131 10,170
========= ========= =========
Diluted......................................................... 12,070 12,132 12,170
========= ========= =========
Supplemental disclosure:
Straight-line rental income..................................... $ 2,135 $ 3,383 $ 2,705
========= ========= =========
Amortization of management contracts and covenants not to
compete...................................................... $ 224 $ 224 $ 422
========= ========= =========
- ----------
(1) Excludes gain on sale of undepreciated land of $343 in 2001, $375 in 2000
and includes $251 gain on sale of property of an unconsolidated entity in
1999.
(2) For basic FFO, represents the weighted average total shares outstanding,
assuming the redemption of all Operating Partnership Units for Common
Shares. For diluted FFO, represents the weighted average total shares
outstanding, assuming the redemption of all Operating Partnership Units for
Common Shares, the Series A Preferred Shares converted to Common Shares and
the Common Shares issuable under the treasury stock method upon exercise of
stock options.
CAPITAL EXPENDITURES
During 2001, we spent approximately $6,193 on revenue-generating capital
expenditures including tenant allowances, leasing commissions paid to
third-party brokers, legal costs relative to lease documents, and capitalized
leasing and construction costs. These types of costs generate a return through
rents from tenants over the term of their leases. Revenue-enhancing capital
expenditures, including expansions, renovations and repositionings were
approximately $12,884.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, The Financial Accounting Standards Board, also known as FASB,
issued Statement of Financial Accounting Standard No. 141 "Business
Combinations" ("SFAS 141"). This statement requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
This statement prohibits the use of the pooling of interest method of accounting
for business combinations.
We do not expect the provisions of this statement to have a material impact on
our consolidated financial statements.
The FASB issued Statement of Financial Accounting Standard No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142") in June 2001. This statement changes
the accounting for the amortization of goodwill and other intangible assets
acquired in a business combination from an amortization method to an
impairment-only method. The implementation of this statement may require the use
of significant judgment to determine how to measure the fair value of intangible
assets. We do not expect the provisions of this statement to have a material
effect on our consolidated financial statements. We will adopt SFAS 142 as
required for our first quarterly filing of our 2002 fiscal year.
15
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). This statement supersedes FASB Statement No. 122, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 144 requires an impairment loss to be recognized if the carrying amount of
a long-lived asset is not recoverable and exceeds its fair value. This statement
requires the use of one of two present value techniques to measure the fair
value of an asset. In addition, this statement would require us to account for
the sale of shopping centers as discontinued operations and not as part of our
ongoing operations. We do not expect SFAS 144 to have a material impact on our
consolidated financial statements, and SFAS 144 is effective as of January 1,
2002.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This statement, as amended, requires us to measure all
derivatives at fair value and to recognize them in the Consolidated Balance
Sheet as an asset or liability, depending on our rights and obligations under
each derivative contract. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
deferred and recorded as a component of other comprehensive income ("OCI") until
the hedged transactions occur and are recognized in earnings. If the derivative
is designated as a fair value hedge, the changes in the fair value of the
derivative and the ineffective portion of a hedged derivative are recognized in
earnings in the current period. The adoption of SFAS 133 resulted in a
transition adjustment in OCI of $348 as of January 1, 2001. This is attributable
to fair value losses on interest rate swap agreements designated as cash flow
hedges. For the year ended December 31, 2001, the change in fair market value of
the interest rate swap agreements increased OCI's loss by $2,831, to $3,179.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is included in this report under the
caption "Liquidity and Capital Resources".
16
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Financial Statements of Ramco-Gershenson Properties Trust and the Independent
Auditors' Report thereon are filed with this report:
The following financial statements of Ramco-Gershenson Properties Trust and
the Independent Auditors' Report thereon are filed with this report:
Independent Auditors' Report........................................ F-1
Balance Sheets as of December 31, 2001 and 2000..................... F-2
Statements of Income for the years ended December 31, 2001,
2000 and 1999..................................................... F-3
Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2001, 2000 and 1999.............. F-4
Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999............................................... F-5
Notes to Financial Statements....................................... F-6
Financial Statement Schedules required by Item 14(d).
Schedule II-- Valuation and Qualifying Accounts............... F-25
17
RAMCO-GERSHENSON PROPERTIES TRUST
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
Ramco-Gershenson Properties Trust:
We have audited the accompanying consolidated balance sheets of
Ramco-Gershenson Properties Trust and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, shareholders' equity
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14. These consolidated financial statements
and the financial schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ramco-Gershenson Properties
Trust and subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 3 to the consolidated financial statements, in 2001,
Ramco-Gershenson Properties Trust and subsidiaries changed its method of
accounting for derivative instruments to conform to Statement of Financial
Accounting Standards No. 133, as amended or interpreted.
Deloitte & Touche LLP
Detroit, Michigan
March 6, 2002 (March 14, 2002 as to Note 14 and April 11, 2002 as to Notes 11,
17 and 19)
18
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
Investment in real estate-- net............................... $ 496,269 $ 509,629
Cash and cash equivalents..................................... 5,542 2,939
Accounts receivable-- net..................................... 17,627 15,954
Equity investments in and advances to unconsolidated
entities.................................................... 7,837 9,337
Other assets-- net............................................ 25,454 22,425
----------- -----------
Total Assets............................................. $ 552,729 $ 560,284
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and notes payable................................... $ 347,275 $ 354,008
Distributions payable......................................... 5,062 5,076
Accounts payable and accrued expenses......................... 18,830 15,355
----------- -----------
Total Liabilities........................................ 371,167 374,439
Minority Interest............................................. 48,157 47,301
Commitments and Contingencies................................. -- --
SHAREHOLDERS' EQUITY
Preferred Shares, par value $.01, 10,000 shares authorized;
1,400 Series A convertible shares issued
and outstanding, liquidation value of $35,000............ 33,829 33,829
Common Shares of Beneficial Interest, par value $.01,
30,000 shares authorized; 7,092 and 7,128 issued and
outstanding, respectively................................ 71 71
Additional paid-in capital.................................. 150,186 150,728
Accumulated other comprehensive loss........................ (3,179) --
Cumulative distributions in excess of net income............ (47,502) (46,084)
----------- -----------
Total Shareholders' Equity.................................... 133,405 138,544
----------- -----------
Total Liabilities and Shareholders' Equity............... $ 552,729 $ 560,284
=========== ===========
See notes to consolidated financial statements.
19
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
REVENUES
Minimum rents ........................................................ $ 59,756 $ 59,034 $ 58,584
Percentage rents ..................................................... 1,442 1,745 2,037
Recoveries from tenants .............................................. 23,119 23,728 21,338
Fees and management income ........................................... 2,485 -- --
Interest and other income ............................................ 2,700 2,624 985
-------- -------- --------
Total Revenues .................................................. 89,502 87,131 82,944
-------- -------- --------
EXPENSES
Real estate taxes .................................................... 10,065 9,352 7,713
Recoverable operating expenses ....................................... 14,204 15,024 14,307
Depreciation and amortization ........................................ 16,842 15,049 13,126
Other operating ...................................................... 1,447 1,453 1,416
General and administrative ........................................... 8,337 5,520 5,962
Interest expense ..................................................... 26,332 27,756 25,421
-------- -------- --------
Total Expenses .................................................. 77,227 74,154 67,945
-------- -------- --------
Operating income ....................................................... 12,275 12,977 14,999
Earnings (Loss) from unconsolidated entities ........................... 813 198 (204)
-------- -------- --------
Income before gain on sale of real estate and minority
interest ............................................................. 13,088 13,175 14,795
Gain on sale of real estate ............................................ 5,550 3,795 974
Minority interest ...................................................... (5,500) (4,655) (4,629)
-------- -------- --------
Income from continuing operations ...................................... 13,138 12,315 11,140
Income from discontinued operations, net of minority interest .......... 725 705 699
-------- -------- --------
Income before cumulative effect of change in accounting principle ...... 13,863 13,020 11,839
Cumulative effect of change in accounting principle .................... -- (1,264) --
-------- -------- --------
Net income ............................................................. 13,863 11,756 11,839
Preferred stock dividends .............................................. 3,360 3,360 3,407
-------- -------- --------
Net income available to common shareholders ............................ $ 10,503 $ 8,396 $ 8,432
======== ======== ========
Basic Earnings per share:
Income from continuing operations .................................... $ 1.38 $ 1.25 $ 1.07
Income from discontinued operations .................................. 0.10 0.09 0.10
Cumulative effect of change in accounting principle .................. -- (0.17) --
-------- -------- --------
Net Income ........................................................... $ 1.48 $ 1.17 $ 1.17
======== ======== ========
Diluted Earnings per share:
Income from continuing operations ................................... $ 1.37 $ 1.25 $ 1.07
Income from discontinued operations ................................. 0.10 0.09 0.10
Cumulative effect of change in accounting principle ................. -- (0.17) --
-------- -------- --------
Net Income .......................................................... $ 1.47 $ 1.17 $ 1.17
======== ======== ========
Weighted average shares outstanding:
Basic ................................................................ 7,105 7,186 7,218
======== ======== ========
Diluted .............................................................. 7,125 7,187 7,218
======== ======== ========
See notes to consolidated financial statements.
20
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
COMMON ADDITIONAL OTHER CUMULATIVE TOTAL
PREFERRED STOCK PAID-IN COMPREHENSIVE EARNINGS/ SHAREHOLDERS'
STOCK PAR VALUE CAPITAL LOSS DISTRIBUTIONS EQUITY
--------- ---------- --------- -------------- ------------- ---------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE, JANUARY 1,
1999....................... $33,829 $ 72 $ 151,973 $ -- $(38,732) $ 147,142
Cash distributions
declared................ (12,126) (12,126)
Preferred Shares dividends
declared................ (3,407) (3,407)
Net income and comprehensive
income.................. 11,839 11,839
------- ---- --------- ------- -------- ---------
BALANCE, DECEMBER 31,
1999....................... 33,829 72 151,973 -- (42,426) 143,448
Cash distributions
declared................ (12,054) (12,054)
Preferred Shares dividends
declared................ (3,360) (3,360)
Purchase and retirement of
common shares........... (1) (1,245) (1,246)
Net income and comprehensive
income.................. 11,756 11,756
------- ---- --------- ------- -------- ---------
BALANCE, DECEMBER 31,
2000....................... 33,829 71 150,728 -- (46,084) 138,544
Cash distributions
declared................ (11,921) (11,921)
Preferred Shares dividends
declared................ (3,360) (3,360)
Purchase and retirement of
common shares........... (654) (654)
Stock options exercised.... 112 112
------- ---- --------- ------- -------- ---------
33,829 71 150,186 -- (61,365) 122,721
------- ---- --------- ------- -------- ---------
Components of comprehensive
income (loss):
Net income................. 13,863 13,863
Cumulative effect of change
in accounting
principle............... (348) (348)
Unrealized losses on
interest rate swaps..... (2,831) (2,831)
------- ---- --------- ------- -------- ---------
Total Comprehensive Income... -- -- -- (3,179) 13,863 10,684
------- ---- --------- ------- -------- ---------
BALANCE, DECEMBER 31,
2001....................... $33,829 $ 71 $ 150,186 $(3,179) $(47,502) $ 133,405
======= ==== ========= ======= ======== =========
See notes to consolidated financial statements.
21
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................. $ 13,863 $ 11,756 $ 11,839
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization........................... 17,083 15,274 13,311
Amortization of deferred financing costs................ 785 375 635
Gain on sale of real estate............................. (5,550) (3,795) (974)
(Earnings) Loss from unconsolidated entities............ (813) (198) 204
Minority Interest....................................... 5,803 4,942 4,915
Changes in operating assets and liabilities:
Accounts receivable................................... (1,231) (4,089) (2,927)
Other assets.......................................... (4,688) (7,421) (3,796)
Accounts payable and accrued expenses................. (696) 282 747
---------- ---------- ----------
Cash Flows Provided By Operating Activities.................. 24,556 17,126 23,954
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... (21,727) (27,332) (43,178)
Investment in unconsolidated entities...................... (2,469) (1,430) (2,329)
Proceeds from sale of real estate.......................... 29,045 5,431 34,425
Collection of note receivable from unconsolidated
entity.................................................. -- 9,326 --
Advances from unconsolidated entities...................... 122 924 92
Distributions received from unconsolidated entities........ 803 302 287
---------- ---------- ----------
Cash Flows Provided by (Used In) Investing Activities........ 5,774 (12,779) (10,703)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to shareholders......................... (11,942) (12,091) (12,126)
Cash distributions to operating partnership unit
holders................................................. (4,947) (4,948) (5,227)
Cash dividends paid on preferred shares.................... (3,358) (3,374) (3,253)
Repayment of Credit Facility............................... (4,950) (20,120) (34,388)
Repayment of unsecured loan................................ (2,875) (20,000) --
Principal repayments on mortgage debt...................... (4,076) (5,605) (3,179)
Purchase and retirement of common shares................... (654) (1,246) --
Payments of deferred financing costs....................... (205) (1,949) (658)
Purchase of operating partnership units.................... -- -- (97)
Borrowings on Credit Facility.............................. 5,420 33,250 25,100
Borrowings on fixed rate mortgage.......................... 10,340 25,000 --
Borrowings on variable rate mortgage....................... 2,983 -- --
(Repayment) borrowings on construction loans............... (13,575) 3,931 21,771
Proceeds from exercise of stock options.................... 112 -- --
---------- ---------- ----------
Cash Flows Used In Financing Activities...................... (27,727) (7,152) (12,057)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents......... 2,603 (2,805) 1,194
Cash and Cash Equivalents, Beginning of Period............... 2,939 5,744 4,550
---------- ---------- ----------
Cash and Cash Equivalents, End of Period..................... $ 5,542 $ 2,939 $ 5,744
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest During the Period................... $ 25,110 $ 28,905 $ 26,361
========== ========== ==========
See notes to consolidated financial statements.
22
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
We are engaged in the business of owning, developing, acquiring, managing
and leasing community shopping centers, regional malls and single tenant retail
properties. At December 31, 2001, we had a portfolio of 57 shopping centers,
with more than 11,400,000 square feet of gross leasable area, located in the
midwestern, southeastern and mid-Atlantic regions of the United States. Our
centers are usually anchored by discount department stores or supermarkets and
the tenant base consists primarily of national and regional retail chains and
local retailers. Our credit risk, therefore, is concentrated in the retail
industry.
The economic performance and value of our real estate assets are subject to
all the risks associated with owning and operating real estate, including risks
related to adverse changes in national, regional and local economic and market
conditions. The economic condition of each of our markets may be dependent on
one or more industries. An economic downturn in one of these industries may
result in a business downturn for our tenants, and as a result, these tenants
may fail to make rental payments, decline to extend leases upon expiration,
delay lease commencements or declare bankruptcy.
Any tenant bankruptcies, leasing delays, or failure to make rental payments
when due could result in the termination of the tenant's lease, causing material
losses to us and adversely impacting our operating results. If our properties do
not generate sufficient income to meet our operating expenses, including future
debt service, our income and results of operations would be adversely affected.
During 2001, seven of our tenants filed for bankruptcy protection, representing
a total of 15 locations. These tenants represented approximately 1.7% of our
aggregate base rental income during 2001. During January 2002, two more of our
tenants filed for bankruptcy protection, including Kmart Corporation which
represented approximately 6.1% of our annualized base rental income at December
31, 2001.
Revenues from our largest tenant, Wal-Mart, amounted to 8.7%, 9.2% and 10.2%
of our annualized base rent for the years ended December 31, 2001, 2000 and
1999, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and our majority owned subsidiary, the Operating
Partnership, Ramco-Gershenson Properties, L.P. (70.7% owned by us at December
31, 2001 and 70.8% at December 31, 2000), our wholly owned subsidiary, Ramco
Properties Associates Limited Partnership, a financing subsidiary and
Ramco-Gershenson, Inc, our management company. See Note 4 to the Consolidated
Financial Statements. All significant intercompany accounts and transactions
have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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 reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION -- Shopping center space is generally leased to retail
tenants under leases which are accounted for as operating leases. We recognize
minimum rents on the straight-line method over the terms of the leases, as
required under Statement of Financial Accounting Standard No. 13. Certain of the
leases also provide for additional revenue based on contingent percentage income
and is recorded on an accrual basis once the specified target that triggers this
type of income is achieved. The leases also typically provide for tenant
recoveries of common area maintenance, real estate taxes and other operating
expenses. These recoveries are recognized as revenue in the period the
applicable costs are incurred.
Straight line rental income was greater than the current amount required to
be paid by our tenants by $2,135, $3,383 and $2,705 for the years ended December
31, 2001, 2000 and 1999, respectively.
23
CASH AND CASH EQUIVALENTS -- We consider all highly liquid investments with
an original maturity of three months or less to be cash and cash equivalents.
INCOME TAX STATUS -- We conduct our operations with the intent of meeting
the requirements applicable to a real estate investment trust ("REIT") under
Sections 856 through 860 of the Internal Revenue Code of 1986 as amended, also
known as the Code, . In order to maintain qualification as a real estate
investment trust, the REIT is also required to distribute annually at least a
minimum percentage (90% for tax years beginning after December 31, 2000, and 95%
for earlier tax years) of its REIT Taxable Income (as defined in the IRC) to its
shareholders. As a real estate investment trust, the REIT will generally not be
liable for federal corporate income taxes. Thus, no provision for federal income
taxes has been included in the accompanying financial statements.
REAL ESTATE -- We record real estate assets at the lower of cost or fair
value if impaired. Costs incurred for the acquisition, development and
construction of properties are capitalized. For redevelopment of an existing
operating property, the undepreciated net book value plus the cost for the
construction (including demolition costs) incurred in connection with the
redevelopment are capitalized to the extent such costs do not exceed the
estimated fair value when complete. To the extent such costs exceed the
estimated fair value of such property, the excess is charged to expense.
We evaluate the recoverability of our investment in real estate whenever
events or changes in circumstances indicate that the carrying amount of an asset
may be impaired. Our assessment of recoverability of our real estate assets
includes, but is not limited to, recent operating results, expected net
operating cash flow and our plans for future operations. For the years ended,
December 31, 2001, 2000 and 1999, none of our assets were considered impaired.
Depreciation is computed using the straight-line method and estimated useful
lives for buildings and improvements of 40 years and equipment and fixtures of 5
to 10 years. Expenditures for improvements and construction allowances paid to
tenants are capitalized and amortized over the remaining life of the initial
terms of each lease. Expenditures for normal, recurring, or periodic maintenance
and planned major maintenance activities are charged to expense when incurred.
Renovations which improve or extend the life of the asset are capitalized.
OTHER ASSETS -- Other assets consist primarily of prepaid expenses, proposed
development and acquisition costs, and financing and leasing costs which are
amortized using the straight-line method over the terms of the respective
agreements. Using our best estimates based on reasonable and supportable
assumptions and projections, we review for impairment such assets whenever
events or changes in circumstances indicate that the carrying amount of these
assets might not be recoverable.
DERIVATIVE FINANCIAL INSTRUMENTS -- In managing interest rate exposure on
certain floating rate debt, we at times enter into interest rate protection
agreements. We do not utilize these arrangements for trading or speculative
purposes. The differential between fixed and variable rates to be paid or
received is accrued, as interest rates change, and recognized currently in the
Consolidated Statement of Income. We are exposed to credit loss in the event of
non-performance by the counter party to the interest rate swap agreements,
however, we do not anticipate non-performance by the counter party.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS -- In June 2001, The Financial
Accounting Standards Board, also known as FASB, issued Statement of Financial
Accounting Standard No. 141 "Business Combinations" ("SFAS 141"). This statement
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 prohibits the use of the
pooling of interest method of accounting for business combinations. We do not
expect the provisions of this statement to have a material impact on our
consolidated financial statements.
The FASB issued Statement of Financial Accounting Standard No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142") in June 2001. This statement changes
the accounting for the amortization of goodwill and other intangible assets
acquired in a business combination from an amortization method to an
impairment-only method. The implementation of this statement may require the use
of significant judgment to determine how to measure the fair value of intangible
assets. We do not expect this statement to have a material effect on our
consolidated financial statements. We will adopt SFAS 142 as required for our
first quarterly filing of our 2002 fiscal year.
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement supersedes FASB Statement No. 122, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 144 requires an impairment loss to be recognized if the carrying amount of
a long-lived asset is not recoverable and exceeds its fair value. This statement
requires the use of one of two present value techniques to measure the fair
value of an asset. In addition, this statement would require us to account for
the sale of
24
shopping centers as discontinued operations and not as part of our ongoing
operations. SFAS 144 is not expected to have a material impact on our
consolidated financial statements and is effective as of January 1, 2002 (see
Note 19).
3. ACCOUNTING CHANGE -- DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This statement, as amended, requires us to measure all
derivatives at fair value and to recognize them in the Consolidated Balance
Sheet as an asset or liability, depending on our rights and obligations under
each derivative contract. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
deferred and recorded as a component of other comprehensive income ("OCI") until
the hedged transactions occur and are recognized in earnings. If the derivative
is designated as a fair value hedge, the changes in the fair value of the
derivative and the ineffective portion of a hedged derivative are recognized in
earnings in the current period.
Under the terms of the Credit Facility, we are required to maintain interest
rate swap agreements to reduce the impact of changes in interest rate on our
variable rate debt. We have entered into five interest rate swap agreements with
a notional amount of $75,000 as of December 31, 2001, and provide for a fixed
rate ranging from 7.0% to 8.3% at various dates through March 2004. The
differential between fixed and variable rates to be paid or received is accrued,
as interest rates change, and recognized currently in the Consolidated Statement
of Income. We are exposed to credit loss in the event of non-performance by the
counter party to the interest rate swap agreements, however, we do not
anticipate non-performance by the counter party.
The adoption of SFAS 133 resulted in a transition adjustment loss charged to
OCI of $348 as of January 1, 2001. For the year ended December 31, 2001, the
change in fair market value of the interest rate swap agreements increased the
OCI loss by $2,831, to $3,179.
4. CONSOLIDATION OF RAMCO-GERSHENSON, INC.
Through our operating partnership, Ramco-Gershenson Properties, L.P., we own
100% of the non-voting and voting common stock of Ramco-Gershenson, Inc.
("Ramco"), the management company which provides property management services to
us and to other entities. We previously accounted for our investment in Ramco
under the equity method. As of January 1, 2001, Ramco elected to be a taxable
real estate investment trust subsidiary for federal income tax purposes. In
conjunction with the tax election, we entered into an option agreement to
purchase the remaining voting common stock of Ramco. Subsequent to December 31,
2000, the assets, liabilities, revenue and expenses of Ramco have been included
in the accompanying consolidated financial statements. This increased revenues
and expenses by $2,485 for the year ended December 31, 2001.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 2000 and 1999, assumes that Ramco was included in the
consolidated financial statements as of January 1, 1999 (in thousands, except
per share data):
DECEMBER 31, DECEMBER 31,
2000 1999
----------- ------------
Revenue........................ $ 90,529 $ 85,806
Expenses....................... 76,560 69,822
--------- ---------
Operating income............... 13,969 15,984
--------- ---------
Net income..................... $ 11,756 $ 11,839
========= =========
Net income:
Basic earnings per share..... $ 1.17 $ 1.17
========= =========
Diluted earnings per share... $ 1.17 $ 1.17
========= =========
The effect of including Ramco in the Consolidated Balance Sheet was to
increase the following accounts as of January 1, 2001 and to reduce equity
investments:
Cash.................................................. $ 179
Accounts receivable................................... 1,627
Other assets.......................................... 3,447
Accounts payable and accrued expenses................. (993)
--------
Reduction in equity investments in unconsolidated
entities............................................ $ 4,260
========
25
5. ACCOUNTS RECEIVABLE -- NET
Accounts receivable include $10,560 and $9,865 of unbilled straight-line
rent receivables at December 31, 2001, and December 31, 2000, respectively.
Straight line rent receivable at December 31, 2001, includes approximately
$1,997 due from Kmart Corporation.
We provide for bad debt expense based upon the reserve method of accounting.
Historically we have provided approximately 0.5% of rental revenues as our
annual bad debt reserve based on the level of bad debt we have experienced. Due
to the economic downturn in the retail industry and the increase in the number
of retail companies filing for bankruptcy protection (including Kmart
Corporation during January 2002), we increased the bad debt expense to
approximately 0.9% of rental revenue for the year ended December 31, 2001.
We continuously monitor the collectability of our accounts receivable
(billed, unbilled and straight-line) from tenants and based on our judgment,
adjust the allowance for bad debts as necessary. It is our policy to cease
recording rental income from tenants when we believe such amounts would be
uncollectible. Management believes the allowance is adequate to absorb currently
estimated bad debts. However, if we experience bad debts in excess of the
reserves we have established, our operating income would be reduced.
An allowance for doubtful accounts has been provided against the portion of
tenant accounts receivable which is estimated to be uncollectible. Accounts
receivable in the accompanying balance sheet is shown net of an allowance for
doubtful accounts of $1,773 and $1,283 as of December 31, 2001 and 2000
respectively.
Bad debt expense amounted to $735, $330 and $559 for the three years ended
December 31, 2001, 2000 and 1999, respectively.
6. INVESTMENT IN REAL ESTATE
Investment in real estate consists of the following:
DECEMBER 31,
-------------------------
2001 2000
----------- ------------
Land.............................. $ 77,546 $ 71,809
Buildings and improvements........ 471,317 472,846
Construction in progress.......... 8,486 13,340
----------- -----------
557,349 557,995
Less: accumulated depreciation.... (61,080) (48,366)
----------- -----------
Investment in real estate-- net... $ 496,269 $ 509,629
=========== ===========
GAIN ON SALE OF REAL ESTATE -- In January 2001, we sold White Lake
MarketPlace for cash of $20,200, resulting in a gain on sale of approximately
$5,300. See Note 18. In addition, we sold our Athens Town Center property and
four parcels of land and recognized an additional aggregate gain of $250.
During 2000, we sold two parcels of land and recognized an aggregate gain of
$3,795. In addition, a subsidiary of Ramco, an unconsolidated entity, sold a
parcel of land and recognized a gain of $249. Accordingly, the cost
reimbursement by the Operating Partnership to Ramco was reduced by the amount of
the gain, thereby reducing our general and administrative expenses in 2000.
During 1999, we sold two properties for cash of $34,425 and recognized an
aggregate gain of $974.
26
7. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
We have investments in and advances to the following unconsolidated
entities:
OWNERSHIP AS OF
UNCONSOLIDATED ENTITIES DECEMBER 31, 2001
------------------------------------ ------------------
28th Street Kentwood Associates..... 50%
S-12 Associates..................... 50%
RPT/INVEST, LLC..................... 25%
RPT/INVEST II, LLC.................. 25%
Rossford Development LLC............ 10%
Ramco/West Acres LLC................ 40%
Ramco/Shenandoah LLC................ 40%
In September 2001, we invested $756 for a 40 percent interest in a joint
venture, Ramco/West Acres LLC. Simultaneously, the joint venture acquired West
Acres Commons shopping center located in Flint Township, Michigan for a purchase
price of approximately $11,000 and assumed a mortgage note of $9,407. At
December 31, 2001, the principal balance was $9,388, with fixed interest at
8.14% due April 2010.
In November 2001, we invested $1,713 for a 40 percent interest in a joint
venture, Ramco/Shenandoah LLC. The remaining 60% of Ramco/Shenandoah LLC is
owned by various partnerships and trusts for the benefit of family members of
one of our trustees, who also serves as a trustee for several of these trusts.
The joint venture acquired Shenandoah Square shopping center located in Davie,
Florida for a purchase price of approximately $16,300. At December 31, 2001,
this entity had a note payable of $12,469, with interest at 4.75%, due February
2002. On January 29, 2002, the LLC refinanced the debt and obtained a mortgage
note in the amount of $13,000, with fixed interest at 7.33% due March 2012.
Under terms of the joint venture agreements, we earned acquisition fees of
$165 and $163, respectively, from the above-mentioned joint ventures. We are
responsible for the leasing and management of the projects, for which we receive
management fees and leasing fees. The joint venture agreements included a
buy-sell provision whereby we have the right to purchase or sell the properties
during specific time periods.
In April 2000, we contributed $1,287 for a 25% interest in a joint venture,
in connection with the acquisition of East Town Plaza shopping center located in
Madison, Wisconsin. The entity has a mortgage note in the amount of $12,000,
with variable interest rate at LIBOR plus 232 basis points, due May 2003. The
effective interest rate at December 31, 2001 was 4.47%.
On September 29, 2000, we assigned 90 percent of our interest in Rossford
Development LLC to an unrelated party. Simultaneously, we invested $100 in the
entity. The joint venture reimbursed us approximately $9,700 for advances paid
for the acquisition of land and construction in progress related to the
development of the Crossroads Centre project, located in Rossford, Ohio. At
December 31, 2001, Rossford Development LLC had a construction loan payable in
the amount of $19,255, due June 2003, with variable interest at 5.57% and a note
payable in the amount of $6,773, due October 2004 with interest at 17.05% but
interest payable during the term of the note at 12%. In addition, the joint
venture has a payable to us in the amount of $369, due June 2002, with interest
at 15%.
Under terms of the joint venture agreement with Rossford Development LLC, we
are responsible for the development, leasing and management of the project, for
which we will receive fees. The joint venture agreement included a provision
whereby we have the right, but not the obligation, to purchase the project
during specific time periods. If we do not exercise this option, we will be
obligated to make an option payment of $3,300 to the 90% owner of this joint
venture on July 17, 2002.
Other unconsolidated entities had the following debt outstanding at December
31, 2001:
28th Street Kentwood Associates -- $10,419, due July 2003, with fixed
interest at 8.43%
S-12 Associates-- $1,407, due May 2016, with fixed interest at 7.50%
RPT/INVEST, LLC-- $22,000, due August 2002 with variable interest at 4.18%
27
Combined condensed financial information of our unconsolidated entities is
summarized as follows:
2001 2000 1999
-------- -------- --------
ASSETS
Investment in real estate -- net ...................................... $104,594 $ 63,805 $ 33,526
Other assets .......................................................... 6,151 8,428 5,341
-------- -------- --------
Total Assets ..................................................... $110,745 $ 72,233 $ 38,867
======== ======== ========
LIABILITIES
Mortgage notes payable ................................................ $ 94,080 $ 58,804 $ 34,223
Other liabilities ..................................................... 3,287 4,335 1,606
-------- -------- --------
Total Liabilities ................................................ 97,367 63,139 35,829
Owners' equity ........................................................ 13,378 9,094 3,038
-------- -------- --------
Total Liabilities and Owners' Equity ............................. $110,745 $ 72,233 $ 38,867
======== ======== ========
Company's equity investments in unconsolidated entities ............... $ 7,139 $ 8,915 $ 6,357
Advances to unconsolidated entities ................................... 698 422 1,285
-------- -------- --------
Total Equity Investments in and Advances to
Unconsolidated Entities ........................................ $ 7,837 $ 9,337 $ 7,642
======== ======== ========
REVENUES
Property revenues ..................................................... $ 13,986 $ 9,450 $ 3,705
Fees and management income ............................................ 3,841 2,544
Leasing/development cost reimbursements ............................... 2,485 2,323
-------- -------- --------
Total Revenues ................................................... 13,986 15,776 8,572
-------- -------- --------
EXPENSES
Property expenses ..................................................... 9,302 8,276 3,087
Employee expenses ..................................................... 6,574 5,932
Office and other expenses ............................................. 1,683 1,908
Total Expenses ................................................... 9,302 16,533 10,927
-------- -------- --------
Earnings (loss) before gain on sale of real estate .................... 4,684 (757) (2,355)
Gain on sale of real estate ........................................... 249 251
-------- -------- --------
Excess (deficiency) of revenues over expenses ......................... 4,684 (508) (2,104)
Cost reimbursement from Operating Partnership ......................... 1,682 2,722
-------- -------- --------
Income ................................................................ $ 4,684 $ 1,174 $ 618
======== ======== ========
Company's share of income ............................................. $ 932 $ 465 $ 257
======== ======== ========
Our share of the unconsolidated entities' income of $932, $465 and $257, for
the years ended December 31, 2001, 2000 and 1999, was reduced by $119 in 2001,
$267 in 2000, and $461 in 1999, which represents depreciation and amortization
adjustments arising from our net basis adjustments in the unconsolidated
entities' assets. These adjustments result in net earnings (loss) of $813, $198
and ($204) from the unconsolidated entities' for the years ended December 31,
2001, 2000 and 1999, respectively. In addition, our investment in RPT/Invest is
approximately $722 lower than the net basis in the unconsolidated entity as a
result of deferring the gain on the sale of the two properties sold to the joint
venture.
For the year ended December 31, 2001, Ramco, the management company which
provides property management services to us and to other entities, is included
in the consolidated financial statements. Prior to January 1, 2001, Ramco was
accounted for under the equity method.
28
8. OTHER ASSETS
Other assets at December 31 are as follows:
2001 2000
---------- ---------
Leasing costs.................................. $ 14,908 $ 13,101
Prepaid expenses and other..................... 6,765 5,652
Deferred financing costs....................... 5,872 5,667
---------- ---------
27,545 24,420
Less: accumulated amortization................. (10,485) (7,185)
---------- ---------
17,060 17,235
Proposed development and acquisition costs..... 8,394 5,190
---------- ---------
Other assets -- net............................ $ 25,454 $ 22,425
========== =========
Proposed development and acquisition costs include $5,140 at December 31,
2001 and 2000, for an investment in a shopping center currently under
development. Our investment in this entity is accounted for using the cost
method of accounting because we do not have the ability to exercise significant
influence over the investee's operating and financial policies
We may not be successful in identifying suitable real estate properties that
meet our acquisition criteria or to develop proposed sites on satisfactory
terms. We may not be successful negotiating for the acquisition of the land,
obtaining required permits and completing developments in accordance with our
budgets and on a timely basis. If we are not successful, costs incurred may be
impaired and our financial condition and results of operations could be
adversely affected.
9. MORTGAGES AND NOTES PAYABLE
Mortgages and notes payable at December 31 consist of the following:
2001 2000
----------- -----------
Fixed rate mortgages with interest rates ranging from 6.83%
to 8.81% due at various dates through 2011.......................... $ 195,290 $ 188,786
Floating rate mortgages at 75% of the rate of long-term
Capital A rated utility bonds, due January 1, 2010, plus
supplemental interest to equal LIBOR plus 200 basis points.
The effective rate at December 31, 2001, was 6.41%
and at December 31, 2000, was 7.95%................................. 6,560 6,800
Floating rate mortgage with interest rate at prime or LIBOR
plus 200 basis points, due September 2005. The effective
rate at December 31, 2001, was 4.75%................................ 21,000 --
Construction loan financing, converted to floating rate
mortgage during 2001................................................ -- 18,017
Construction loan financing........................................... -- 13,575
Unsecured term loan, with an interest rate at LIBOR plus 400
basis points, due September 2003. The effective rate at
December 31, 2001, was 6.03% and at December 31, 2000, was
10.64%.............................................................. 22,125 25,000
Credit Facility, with an interest rate at LIBOR plus 200
basis points, due September 2003, maximum available
borrowings of $110,000. The effective rate at December 31,
2001, was 6.64% and at December 31, 2000, was 8.66%................. 102,300 101,830
----------- -----------
$ 347,275 $ 354,008
=========== ===========
The mortgage notes and construction loans are secured by mortgages on
properties that have an approximate net book value of $325,667 as of December
31, 2001. The Credit Facility is secured by mortgages on various properties that
have an approximate net book value of $164,702 as of December 31, 2001.
29
The $110,000 Credit Facility bears interest between 162.5 and 225 basis
points over LIBOR depending on certain debt ratios (using 200 basis points over
LIBOR at December 31, 2001, the effective interest rate was 6.6%) and is secured
by mortgages on various properties.
At December 31, 2001, outstanding letters of credit issued under the Credit
Facility, not reflected in the accompanying consolidated balance sheet, total
approximately $818.
The Credit Facility and the unsecured term loan contain financial covenants
relating to loan to asset value, minimum operating coverage ratios, and a
minimum equity value. As of December 31, 2001, we were in compliance with the
covenant terms.
The mortgage loans (other than our Credit Facility) encumbering our
properties, including properties held by our unconsolidated joint ventures (See
Note 7), are generally non-recourse, subject to certain exceptions for which we
would be liable for any resulting losses incurred by the lender. These
exceptions vary from loan to loan but generally include fraud or a material
misrepresentation, misstatement or omission by the borrower, intentional or
grossly negligent conduct by the borrower that harms the property or results in
a loss to the lender, filing of a bankruptcy petition by the borrower, either
directly or indirectly, and certain environmental liabilities. In addition, upon
the occurrence of certain of such events, such as fraud or filing of a
bankruptcy petition by the borrower, we would be liable for the entire
outstanding balance of the loan, all interest accrued thereon and certain other
costs, penalties and expenses.
The following table presents scheduled principal payments on mortgages and
notes payable as of December 31, 2001:
Year end December 31,
2002................. $ 8,287
2003................. 125,510
2004................. 17,322
2005................. 14,362
2006................. 108,988
Thereafter........... 72,806
-----------
Total................ $ 347,275
===========
10. LEASES
Approximate future minimum rentals under noncancelable operating leases in
effect at December 31, 2001, assuming no new or renegotiated leases nor option
extensions on lease agreements, are as follows:
Year ended December 31,
2002.................... $ 54,593
2003.................... 51,556
2004.................... 46,284
2005.................... 40,007
2006.................... 35,766
Thereafter.............. 239,106
-----------
Total................... $ 467,312
===========
We lease office space under an operating lease that had an initial term of
five years commencing on July 1, 1999. Rent expense under this lease amounted to
$363 in 2001 and 2000 and $298 in 1999. Future minimum rental payments are as
follows:
Year ended December 31,
2002.................... $ 363
2003.................... 363
2004.................... 182
------
Total................... $ 908
======
30
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (EPS) (in thousands, except share and per share data):
2001 2000 1999
----------- ----------- -----------
Numerator:
Income from continuing operations, net of
preferred stock dividends .................................. $ 9,778 $ 8,955 $ 7,733
Income from discontinued operations ............................ 725 705 699
Cumulative effect of change in accounting principle ............ -- (1,264) --
-------------------------------------------------
Income available to common shareholders for
basic and dilutive EPS ..................................... $ 10,503 $ 8,396 $ 8,432
=========== =========== ===========
Denominator:
Weighted-average common shares for basic EPS .................. 7,104,714 7,185,603 7,217,993
Effect of dilutive securities:
Options outstanding ........................................ 20,465 1,778 --
----------- ----------- -----------
Weighted-average common shares for dilutive EPS ............... 7,125,179 7,187,381 7,217,993
=========== =========== ===========
Basic EPS:
Income from continuing operations ............................ $ 1.38 $ 1.25 $ 1.07
Income from discontinued operations .......................... 0.10 0.09 0.10
Cumulative effect of change in accounting principle .......... -- (0.17) --
----------- ----------- -----------
Net Income ...................................................... $ 1.48 $ 1.17 $ 1.17
=========== =========== ===========
Diluted EPS:
Income from continuing operations ............................. $ 1.37 $ 1.25 $ 1.17
Income from discontinued operations ........................... 0.10 0.09 0.10
Cumulative effect of change in accounting principle ........... -- (0.17) --
----------- ----------- -----------
Net Income ...................................................... $ 1.47 $ 1.17 $ 1.17
=========== =========== ===========
In 2001, 2000 and 1999, conversion of the Series A Preferred Shares and of
the Operating Partnership Units would have been antidilutive and, therefore,
were not considered in the computation of diluted earnings per share.
12. CHANGE IN METHOD OF ACCOUNTING FOR PERCENTAGE RENTAL REVENUE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which among other topics, requires that real estate companies should not
recognize contingent percentage rents until the specified target that triggers
this type of income is achieved. We had previously recorded percentage rents
throughout the year based on rent estimated to be due from the tenant.
We elected to adopt the provisions of SAB 101 as of April 1, 2000. The
cumulative effect of such adoption is a reduction in percentage rental revenue
retroactive to January 1, 2000, of approximately $1,264.
The following pro forma amounts reflect the effect of retroactive
application of the change in method of accounting for percentage rents that
would have been made in 1999 had the new method been in effect:
1999
---------
Pro forma amounts assuming the new method of Accounting is
applied retroactively:
Net income........................................................ $ 11,656
Preferred dividends............................................... (3,407)
---------
Net income available to common shareholders....................... $ 8,249
=========
Earnings per share:
Basic.......................................................... $ 1.14
=========
Diluted........................................................ $ 1.14
=========
31
13. COMMITMENTS AND CONTINGENCIES
During the third quarter of 1994, we held more than 25% of the value of our
total assets in short-term Treasury Bill reverse repurchase agreements, which
could be viewed as non-qualifying assets for purposes of determining whether we
qualify to be taxed as a REIT. We requested that the IRS enter into a closing
agreement with us that our ownership of the short-term Treasury Bill reverse
repurchase agreements will not adversely affect our status as a REIT. The IRS
deferred any action relating to this issue pending the further examination of
our taxable years ended December 31, 1991, through 1994. As discussed below, the
field examination has since been completed and the IRS has proposed to
disqualify us as a REIT for our taxable year ended December 31, 1994, based on
our ownership of the short-term Treasury Bill reverse repurchase agreements. Our
former tax counsel, Battle Fowler LLP, had rendered an opinion on March 6, 1996,
that our investment in the short-term Treasury Bill reverse repurchase
agreements would not adversely affect our REIT status. This opinion, however, is
not binding upon the IRS or any court.
In connection with the incorporation and distribution of all of the shares
of Atlantic Realty Trust in May 1996, we entered into a tax agreement with
Atlantic under which Atlantic assumed all our tax liability arising out of the
IRS' then ongoing examination, excluding any tax liability relating to any
actions or events occurring, or any tax return position taken after May 10,
1996, but including liabilities for additions to tax, interest, penalties and
costs relating to covered taxes. Under the tax agreement, a group of our
Trustees consisting of Stephen R. Blank, Arthur Goldberg and Joel Pashcow has
the right to control, conduct and effect the settlement of any claims for taxes
for which Atlantic assumed liability. Accordingly, Atlantic does not have any
control as to the timing of the resolution or disposition of any such claims. In
addition, the tax agreement provides that, to the extent any tax which Atlantic
is obligated to pay under the tax agreement can be avoided through the
declaration of a "deficiency dividend" (that is, our declaration and payment of
a distribution that is permitted to relate back to the year for which the IRS
determines a deficiency in order to satisfy the requirement for REIT
qualification that we distribute a certain minimum amount of our "REIT taxable
income" for such year), we will make, and Atlantic will reimburse us for the
amount of, such deficiency dividend.
In addition to examining our taxable years ended December 31, 1991, through
1994, the IRS examined our taxable year ended December 31, 1995. The IRS revenue
agent issued an examination report on March 1, 1999 (which is hereinafter
referred to as the "First Report"). As previously noted, the First Report
proposes to disqualify us as a REIT for our taxable year ended December 31,
1994, based on our ownership of the short-term Treasury Bill reverse repurchase
agreements. In addition, the First Report proposes to adjust our "REIT taxable
income" for our taxable years ended December 31, 1991, 1992, 1993, and 1995. In
this regard, we and Atlantic received an opinion from special tax counsel, Wolf,
Block, Schorr and Solis-Cohen, on March 25, 1996, that, to the extent there is a
deficiency in our "REIT taxable income" for our taxable years ended December 31,
1991, through 1994, and provided we timely make a deficiency dividend, our
status as a REIT for those taxable years would not be affected. The First Report
acknowledges that we may avoid disqualification for failure to meet the
distribution requirement with respect to a year for which our income is
increased can be avoided by payment of a deficiency dividend. However, the First
Report notes that the payment of a deficiency dividend cannot cure our
disqualification as a REIT for the taxable year ended December 31, 1994, based
on our ownership of the short-term Treasury Bill reverse repurchase agreements.
We believe that most of the positions set forth in the First Report are
unsupported by the facts and applicable law. Accordingly, on April 30, 1999, we
filed a protest with the Appeals Office of the IRS to contest most of the
positions set forth in the First Report. The Appeals Officer returned the case
file to the revenue agent for further development. On October 29, 2001, the
revenue agent issued a new examination report (which is hereinafter referred to
as the "Second Report") that arrived at very much the same conclusions as the
First Report. We filed a protest of the Second Report with the IRS on November
29, 2001, and expect to have a meeting with the appellate conferee in the near
future. If a satisfactory result cannot be obtained through the administrative
appeals process, judicial review of the determination is available to us. In
addition, the IRS is currently conducting an examination of us for the taxable
years ended December 31, 1996, and 1997, and of one of our subsidiary
partnerships for the taxable years ended December 31, 1997, and 1998, and may
shortly begin examination of us and/or the subsidiary partnership for subsequent
taxable years.
Based on the Second Report, we could be liable for up to $54.1 million in
combined taxes, penalties and interest through March 31, 2002. However, the
Second Report acknowledges (as does the First Report as noted above) that we can
avoid disqualification as a REIT for certain of our examined tax years if we
distribute a deficiency dividend to our shareholders. The distribution of a
deficiency dividend would be deductible by us, thereby reducing our liability
for federal income tax. Based on the Second Report, the proposed adjustments to
our "REIT taxable income" would require us to pay a deficiency dividend to our
current shareholders resulting in combined taxes, penalties, interest and
deficiency dividends of approximately $56.3 million as of March 31, 2002.
32
If, notwithstanding the above-described opinions of legal counsel, the IRS
successfully challenges our status as a REIT for any taxable year, we will be
able to re-elect REIT status commencing with the fifth succeeding taxable year
(or possibly an earlier taxable year if we meet certain relief provisions under
the Internal Revenue Code).
In the notes to the consolidated financial statements made part of
Atlantic's most recent quarterly report on Form 10-Q filed with the Securities
and Exchange Commission for the quarter ended September 30, 2001, Atlantic has
disclosed its liability for the tax deficiencies (and interest and penalties on
the tax deficiencies) proposed to be assessed against us by the IRS for the
taxable years ended December 31, 1991, through 1995, as reflected in each of the
First Report and Second Report. We believe, but can provide no assurance, that
Atlantic currently has sufficient assets to pay such tax deficiencies, interest
and penalties. According to the quarterly report on Form 10-Q filed by Atlantic
for its quarter ended September 30, 2001, Atlantic had net assets on September
30, 2001, of approximately $60 million (as determined pursuant to the
liquidation basis of accounting). If the amount of tax, interest and penalties
assessed against us ultimately exceeds the amounts proposed in each of the First
Report and Second Report, however, because interest continues to accrue on the
proposed tax deficiencies, or if additional tax deficiencies are proposed or for
any other reason, then Atlantic may not have sufficient assets to reimburse us
for all amounts we must pay to the IRS, and we would be required to pay the
difference out of our own funds. Accordingly, the ultimate resolution of any
controversy over tax liabilities covered by the above-described tax agreement
may have a material adverse effect on our financial position, results of
operations or cash flows, including if we are required to distribute deficiency
dividends to our shareholders and/or pay additional taxes, interest and
penalties to the IRS in amounts that exceed the value of Atlantic's net assets.
Moreover, the IRS may assess us with taxes that Atlantic is not required under
the above-described tax agreement to pay, such as taxes arising from the
recently-commenced examination of us for the taxable years ended December 31,
1996, and 1997, and of our subsidiary partnership for the taxable years ended
December 31, 1997, and 1998. There can be no assurance, therefore, that the IRS
will not assess us with substantial taxes, interest and penalties which Atlantic
cannot, is not required to, or otherwise does not pay.
On December 31, 2001, Ramco/Shenandoah LLC had a $12,469 unsecured note
payable, which is due in February 2002. We unconditionally guaranteed this debt
and, therefore, we were contingently liable for this amount. Subsequent to
December 31, 2001, Ramco/Shenandoah LLC obtained a mortgage note payable in the
amount of $13,000 and used part of the proceeds to pay off the original note. We
did not guarantee the subsequent financing.
In connection with the development and expansion of various shopping centers
as of December 31, 2001, we have entered into agreements for construction costs
of approximately $5,300.
14. SHAREHOLDERS' EQUITY
Convertible Series A Preferred Shares -- In October, 1997 we entered into an
agreement with certain clients advised by Morgan Stanley Asset Management, Inc.
("MSAM"), and Kimco Realty Corporation ("Kimco") pursuant to which such entities
agreed to invest up to an aggregate of $35,000 in the Operating Partnership. The
MSAM clients and Kimco initially purchased Preferred Operating Partnership Units
which, after shareholder approval in December 1997, were converted into our
Series A Convertible Preferred Shares ("Series A Preferred Series") and,
ultimately, may be converted into Common Shares. The initial investments of
$11,667 were made in October 1997. During 1998, we issued 933,000 Series A
Preferred Shares receiving net proceeds of approximately $22,682.
The MSAM clients are required to purchase 19.4% of the first $50,000 in a
follow-on public offering of our Shares at the offering price less the
underwriter's fees, commissions, and discounts per share. Upon consummation of
such public offering, all outstanding Series A Preferred Shares will be
exchanged into Common Shares, at a conversion price of $17.50 per share, which
conversion price is subject to adjustment in certain circumstances.
The Series A Preferred Shares rank senior to the Common Shares with respect
to dividends and upon liquidation, dissolution or winding up of the Company. The
Series A Preferred Shares are entitled to receive cumulative dividends, payable
quarterly in arrears, at an annual rate equal to the greater of (i) 9.60% of the
stated value ($25.00 per share) and (ii) the dividend rate expressed as an
annual rate which is implicit in the amount of dividends actually paid with
respect to Common Shares, based on a $17.50 per share price for the Common
Shares, determined as of each quarterly dividend payment date (the "Payable
Component").
33
The Payable Component will be increased by an amount equal to an annual rate
of 3% under certain circumstances. The holders of Series A Preferred Shares have
the right to vote on all matters which holders of Common Shares are entitled to
vote upon on an as converted basis, as though such holders own Common Shares. In
addition, the Trust will not be permitted to engage in or effect certain types
of transactions or actions without the approval of holders of at least 51% of
the outstanding Series A Preferred Shares voting separately as a class. The
conversion price for Common Shares of $17.50 contain anti-dilution rights and
will be adjusted to reflect the effects of stock dividends, distributions,
subdivisions or combination.
The Series A Preferred Shares are subject to mandatory conversion on the
date which is the earlier of a qualified underwritten offering or the maturity
date which is on October 3, 2002. At the option of the holders, the Series A
Preferred Shares will be convertible in whole or in part into Common Shares at
the stated value plus unpaid dividends prior to the maturity date or qualified
underwritten offering date. The maturity date will be accelerated and all Series
A Preferred Shares will be redeemed in cash at the stated value plus unpaid
dividends in the event that it is determined by the IRS that it will, for any
period, deny to us the tax benefits associated with REIT qualification and
either or both of the following circumstances arise: (i) we do not receive
(within a period of 60 days of the date established by the IRS as the date of
which the deficiency dividend or other additional taxes are required to be paid)
the full indemnity payment for such loss of tax benefits that we are entitled to
receive from Atlantic pursuant to the Tax Agreement with Atlantic, or (ii)
counsel reasonably satisfactory to MSAM is unable to provide to the holders of
the Series A Preferred Shares affirmative advice that, commencing not later than
with the taxable year ending December 31, 2001, we will, notwithstanding such
determination by the IRS, be able to elect to be qualified and taxed as a REIT
under the Code, and its proposed method of operation will enable it so to
qualify for following years.
On March 14, 2002, we entered into an agreement with the MSAM clients to
redeem all 1,200,000 of the Series A Preferred Shares they hold upon
consummation of a public offering of Common Shares on or before September 26,
2002. We may also elect to redeem the shares before that date if we secure
alternative financing of the redemption price. The redemption price for the
shares depends on the public offering price of the Common Shares sold in the
public offering or the price at which the Common Shares trade on the New York
Stock Exchange, but the redemption price will not be less than $22.14 per Series
A Preferred Share, or approximately $26.6 million in the aggregate. If the
public offering price of the Common Shares sold in the offering is greater than
$17.50 per share, the redemption price for the Series A Preferred Shares would
be greater than $22.14 per share, based upon the formula contained in the
redemption agreement.
Dividend Reinvestment Plan -- We have a dividend reinvestment plan that
allows for participating shareholders to have their dividend distributions
automatically invested in additional shares of beneficial interest in the
Company based on the average price of the shares acquired for the distribution.
15. BENEFIT PLANS
STOCK OPTION PLANS
1996 Share Option Plan -- In May 1996, we adopted the 1996 Share Option Plan
(the "Plan") to enable our employees to participate in the ownership of the
Company. The Plan was amended in June 1999 to provide for the maximum number of
common shares available for issuance under the Plan to equal 9 percent of the
total number of issued and outstanding common shares (on a fully diluted basis
assuming the exchange of all OP units and Series A Preferred Shares for common
shares), which number would equal approximately 1,083 common shares at December
31, 2001. The Plan provides for the award of up to 1,083 stock options to
purchase common shares of beneficial interest, at the fair market value at the
date of grant, to executive officers and employees of the Company. The Plan is
administered by the independent trustee members of the Compensation Committee of
the Board of Trustees, whose members are not eligible for grants under the Plan.
Stock options granted under the Plan vest and become exercisable in installments
on each of the first three anniversaries of the date of grant and expire ten
years after the date of grant. No more than 50,000 share options may be granted
to any one individual in any calendar year.
1997 Non-Employee Trustee Stock Option Plan -- On June 10, 1997, we adopted
the 1997 Non-Employee Trustee Stock Option Plan (the "Trustees' Plan") which
permits us to grant non-qualified options to purchase up to 100,000 common
shares of beneficial interest in the Company at the fair market value at the
date of grant. Each Non-Employee Trustee will be granted an option to purchase
2,000 shares annually on our annual meeting date, beginning June 10, 1997. Stock
options granted to participants vest and become exercisable in installments on
each of the first two anniversaries of the date of grant and expire ten years
after the date of grant.
34
Information relating to the 1996 Share Option Plan and the 1997 Non-Employee
Trustee Stock Option Plan (the "Plans") from December 31, 1998 through December
31, 2001 is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
Outstanding at December 31, 1998............. 511,103 $ 16.74
Granted...................................... 24,000 16.38
Cancelled or expired......................... (15,779) 17.23
--------- -------
Outstanding at December 31, 1999............. 519,324 $ 16.71
Granted...................................... 162,000 14.11
Cancelled or expired......................... (13,695) 18.60
--------- -------
Outstanding at December 31, 2000............. 667,629 $ 16.04
Granted...................................... 12,000 17.33
Cancelled or expired......................... (19,191) 19.02
Exercised.................................... (6,833) 16.42
--------- -------
Outstanding at December 31, 2001............. 653,605 $ 15.97
========= =======
Shares exercisable at December 31, 1999...... 318,119 $ 16.58
========= =======
Shares exercisable at December 31, 2000...... 424,954 $ 16.70
========= =======
Shares exercisable at December 31, 2001...... 532,269 $ 16.31
========= =======
At December 31, 2001, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $14.06 -- $21.63, and 6.3
years.
The fair value of options granted during 2001, 2000 and 1999 was estimated
to be immaterial on the date of grant. All options granted were non-qualified
share options. This was determined using the Black-Scholes option pricing model
with the following weighted average assumptions used:
2001 2000 1999
------- ------- ------
Risk-free interest rate........... 4.8% 6.5% 5.7%
Dividend yield.................... 9.7% 11.9% 11.2%
Volatility........................ 19.5% 19.0% 17.3%
Weighted average expected life.... 5.0 5.0 5.0
We account for the Plans in accordance with Accounting Principles Board
Opinion No. 25 under which no compensation cost has been recognized for stock
option awards. There would be no material difference if compensation cost had
been calculated consistent with the provisions of Statement of Financial
Standards No. 123, "Accounting for Stock Based Compensation."
401(K) PLAN
We sponsor a 401(k) defined contribution plan covering substantially all
officers and employees of the Company which allows participants to defer up to a
maximum of 17.5% of their compensation. We contribute up to a maximum of 50% of
the employee's contribution for 2001 and 2000 and 25% for 1999, up to a maximum
of 5% of an employee's annual compensation. During 2001, 2000 and 1999, our
matching cash contributions were $154, $157 and $57, respectively.
16. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value of all financial instruments. The carrying values of cash and
cash equivalents, receivables, accounts payable and accrued expenses are
reasonable estimates of their fair values because of the short maturity of these
financial instruments. As of December 31, 2001 and 2000 the mortgages and notes
payable amounts are also a reasonable estimate of their fair value because their
interest rates approximate the current borrowing rates available to us.
35
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth the quarterly results of continuing
operations for the years ended December 31, 2001 and 2000 (in thousands, except
per share amounts):
EARNINGS PER SHARE FROM EARNINGS PER SHARE FROM
REVENUES INCOME CONTINUING OPERATIONS DISCONTINUED OPERATIONS
FROM FROM ------------------------ ------------------------
CONTINUING CONTINUING BASIC DILUTED BASIC DILUTED
OPERATIONS OPERATIONS
------------ ----------- ----------- ---------- ----------- ----------
2001
Quarter ended:
March 31 $ 23,184 $ 6,156 $ 0.75 $ 0.67 $ 0.02 $ 0.02
June 30 21,101 2,455 0.23 0.23 0.02 0.02
September 30 22,283 2,492 0.23 0.23 0.03 0.03
December 31 22,934 2,035 0.19 0.19 0.03 0.03
2000(1)
Quarter ended:
March 31 $ 21,505 $ 3,055 $ 0.31 $ 0.31 $ 0.02 $ 0.02
June 30 20,812 4,797 0.55 0.52 0.02 0.02
September 30 21,287 2,520 0.23 0.23 0.03 0.03
December 31 23,527 1,943 0.15 0.15 0.03 0.03
- -------------
(1) As of April 1, 2000, we changed our method of accounting for percentage
rents, as required under the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
The newly adopted method requires us to recognize contingent percentage
rental income only when the specified target that triggers this type of
income is achieved. The cumulative effect of adopting this change in
accounting is a reduction in percentage rental income as of January 1, 2000.
Earnings per share amounts for each quarter are required to be computed
independently, and therefore, may not equal the amount computed for the
year.
For the quarters ended during 2000, net income and basic and diluted
earnings per share are before the cumulative effect of the change in
accounting principle.
18. TRANSACTIONS WITH RELATED PARTIES
In January 2001, we sold White Lake MarketPlace to Pontiac Mall Limited
Partnership for cash of $20,200, resulting in a gain on sale of approximately
$5,300. Various executive officers/trustees of the Company are partners in that
partnership. The property was offered for sale, utilizing the services of a
national real estate brokerage firm, and we accepted the highest offer from an
unrelated party. Subsequently the buyer cancelled the agreement. Pontiac Mall
Limited Partnership presented a comparable offer, which resulted in more
favorable economic benefits to us. The sale of the property to Pontiac Mall
Limited Partnership was entered into upon the unanimous approval of the
independent members of our Board of Trustees.
Under terms of an agreement with Pontiac Mall Limited Partnership, we
continue to manage the property and receive management fees. In 2001, we
received $70 in management fees from the partnership.
At December 31, 2001, Ramco/Shenandoah LLC had a $12,469 unsecured note
payable, due February 2002. We unconditionally guaranteed this debt and
therefore we were contingently liable for this amount. Subsequent to December
31, 2001, Ramco/Shenandoah LLC obtained a mortgage note payable in the amount of
$13,000 and used part of the proceeds to pay off the original note. We did not
guarantee the subsequent financing.
At December 31, 2001, we had a receivable from Rossford Development LLC in
the amount of $369, due June 2002, with interest at 15%.
36
We have management agreements with various partnerships and perform certain
administrative functions on behalf of entities owned in part by certain trustees
and/or officers of the Company. The following revenue was earned during the
three years ended December 31, 2001 from these related parties:
2001 2000 1999
------ ------ ------
Management fees..................... $ 322 $ 391 $ 787
Leasing fee income.................. --- 77 231
Acquisition fee..................... 163 --- ---
Brokerage commission and other...... 57 8 2
Payroll reimbursement............... 88 88 97
------ ------ --------
Total.......................... $ 630 $ 564 $ 1,117
====== ====== ========
We had receivables from related entities in the amount of $355 at December
31, 2001 and $337 at December 31, 2000.
19. SUBSEQUENT EVENTS
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). This statement requires that we account for shopping centers
that have been disposed of, or that have been classified as property held for
sale, as discontinued operations for all years presented in the Consolidated
Statements of Income. On April 11, 2002, we sold Hickory Corners shopping center
for cash of approximately $10,272, and the sale resulted in a gain of
approximately $2,164, net of minority interest. Hickory Corners' results of
operations have been included in income from discontinued operations in the
Consolidated Statements of Income for the three years ended December 31, 2001,
2000 and 1999.
37
20. REAL ESTATE ASSETS
Net Investment in Real Estate Assets at December 31, 2001
INITIAL COST
TO COMPANY
------------------
BUILDING &
YEAR YEAR YEAR IMPROVEMENTS
PROPERTY LOCATION CONSTRUCTED(A) ACQUIRED RENOVATED LAND (F)
--------------------- ---------------- -------------- -------- --------- ------ -------
ALABAMA
Cox Creek Plaza....... Florence, AL 1997 2000 589 5,336
FLORIDA
Crestview Corners..... Crestview, FL 1997 400 3,602
Lantana Plaza......... Lantana, FL 1993 2,590 2,600
Naples Towne Center... Naples, FL 1983 1996 218 1,964
Pelican Plaza......... Sarasota, FL 1997 710 6,404
Shoppes of Lakeland... Lakeland, FL 1996 1,279 11,543
Southbay Fashion Center Osprey, FL 1998 597 5,355
Sunshine Plaza........ Tamarac, FL 1991 1998 1,748 7,452
Village Lakes......... Land O' Lakes, FL 1997 862 7,768
GEORGIA
Conyers Crossing...... Conyers, GA 1998 729 6,562
Holcomb Center........ Alpharetta, GA 1996 658 5,953
Indian Hills.......... Calhoun, GA 1997 706 6,355
Mays Crossing......... Stockbridge, GA 1997 725 6,532
MARYLAND
Crofton Plaza......... Crofton, MD 1991 3,201 6,499
GROSS COST AT
END OF PERIOD(B)
---------------------
SUBSEQUENT
CAPITALIZED BUILDING & ACCUMULATED
PROPERTY COSTS LAND IMPROVEMENTS TOTAL DEPRECIATION(C) ENCUMBRANCES
---------------------- ----------- ---- ------------ ----- -------------- ------------
ALABAMA
Cox Creek Plaza....... 1,408 932 6,401 7,333 715 (d)
FLORIDA
Crestview Corners..... 21 400 3,623 4,023 378 (d)
Lantana Plaza......... 1,658 2,590 4,258 6,848 796 (d)
Naples Towne Center... 277 218 2,241 2,459 364 (d)
Pelican Plaza......... 155 710 6,559 7,269 818 (d)
Shoppes of Lakeland... 273 1,279 11,816 13,095 1,548 (d)
Southbay Fashion Center 89 597 5,444 6,041 510 (d)
Sunshine Plaza........ 10,784 1,748 18,236 19,984 2,451 (d)
Village Lakes......... 44 862 7,812 8,674 786 (d)
GEORGIA
Conyers Crossing...... 617 729 7,179 7,908 600 (d)
Holcomb Center........ 582 658 6,535 7,193 875 (d)
Indian Hills.......... 88 707 6,442 7,149 676 (d)
Mays Crossing......... 45 725 6,577 7,302 697 (d)
MARYLAND
Crofton Plaza......... 1,462 3,201 7,961 11,162 1,989 (d)
INITIAL COST
TO COMPANY
----------------
BUILDING &
YEAR YEAR YEAR IMPROVEMENTS
PROPERTY LOCATION CONSTRUCTED(A) ACQUIRED RENOVATED LAND (F)
---------------------------- --------------------- -------------- -------- --------- ---- ---------
MICHIGAN
Auburn Mile................. Auburn Hills, MI 2000 1999 15,704 0
Clinton Valley Mall......... Sterling Heights, MI 1979 1996 1999 1,101 9,910
Clinton Valley Shopping Center Sterling Heights, MI 1979 1996 399 3,588
Eastridge Commons........... Flint, MI 1990 1996 1997 1,086 9,775
Edgewood Towne Center....... Lansing, MI 1990 1996 1992 665 5,981
Ferndale Plaza.............. Ferndale, MI 1984 1996 265 2,388
Fraser Shopping Center...... Fraser, MI 1996 363 3,263
Jackson Crossing............ Jackson, MI 1996 2000 2,249 20,237
Jackson West................ Jackson, MI 1996 1996 1999 2,806 6,270
Lake Orion Plaza............ Lake Orion, MI 1977 1996 470 4,234
Madison Center.............. Madison Heights, MI 1997 2000 817 7,366
New Towne Plaza............. Canton, MI 1976 1996 1998 817 7,354
Oak Brook Square............ Flint, MI 1996 955 8,591
Roseville Plaza............. Roseville, MI 1996 2001 1,403 13,195
Southfield Plaza............ Southfield, MI 1996 1999 1,121 10,090
38
Taylor Plaza................ Taylor, MI 1996 400 1,930
Tel-Twelve Center........... Southfield, MI 1968 1996 1997 3,819 43,181
West Oaks I................. Novi, MI 1981 1996 1997-98 0 6,304
West Oaks II................ Novi, MI 1987 1996 2000 1,391 12,519
White Lake Marketplace...... White Lake Township, MI 1999 1998 2,965 0
39
GROSS COST AT
END OF PERIOD(B)
----------------
SUBSEQUENT
CAPITALIZED BUILDING & ACCUMULATED
PROPERTY COSTS LAND IMPROVEMENTS TOTAL DEPRECIATION(C) ENCUMBRANCES
---------------------------- ----------- ------ -------------- ----- --------------- ------------
MICHIGAN
Auburn Mile................. 12,104 24,945 2,863 27,808 99 21,000
Clinton Valley Mall......... 4,256 1,101 14,166 15,267 1,600 (e)
Clinton Valley Shopping Center 329 399 3,917 4,316 612 (d)
Eastridge Commons........... 2,061 1,086 11,836 12,922 1,904 (e)
Edgewood Towne Center....... 4 645 6,005 6,650 858 (d)
Ferndale Plaza.............. 47 265 2,435 2,700 352 (d)
Fraser Shopping Center...... 162 363 3,425 3,788 567 (e)
Jackson Crossing............ 7,687 2,249 27,924 30,173 3,851 (e)
Jackson West................ 6,216 2,806 12,486 15,292 1,771 7,636
Lake Orion Plaza............ 91 471 4,324 4,795 624 (e)
Madison Center.............. 2,794 817 10,160 10,977 1,145 10,294
New Towne Plaza............. 1,503 817 8,857 9,674 1,218 (e)
Oak Brook Square............ 299 955 8,890 9,845 1,376 6,560
Roseville Plaza............. 2,265 1,403 15,460 16,863 2,208 (e)
Southfield Plaza............ 1,300 1,121 11,390 12,511 1,613 (e)
Taylor Plaza................ 15 400 1,945 2,345 269 (d)
Tel-Twelve Center........... 10,980 3,819 54,161 57,980 7,143 (e)
West Oaks I................. 2,837 0 9,141 9,141 1,208 4,000
West Oaks II................ 5,728 1,391 18,247 19,638 2,154 6,244
White Lake Marketplace...... (2,771) 194 0 194 0
40
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INITIAL COST
TO COMPANY
-------------------
BUILDING &
YEAR YEAR YEAR IMPROVEMENTS
PROPERTY LOCATION CONSTRUCTED(A) ACQUIRED RENOVATED LAND (F)
--------------------------- ---------------- -------------- -------- --------- ---- ---------
NORTH CAROLINA
Hickory Corners........... Hickory, NC 1997 1999 798 7,192
Holly Springs Plaza....... Franklin, NC 1997 829 7,470
Ridgeview Crossing........ Elkin, NC 1997 1,054 9,494
OHIO
Office Max Center......... Toledo, OH 1994 1996 227 2,042
Spring Meadows Place...... Holland, OH 1987 1996 1997 1,662 14,959
Troy Towne Center......... Troy, OH 1990 1996 1996 930 8,372
SOUTH CAROLINA
Edgewood Square........... North Augusta, SC 1997 1,358 12,229
Taylors Square............ Greenville, SC 1997 1,581 14,237
TENNESSEE
Cumberland Gallery........ New Tazewell, TN 1997 327 2,944
Highland Square........... Crossville, TN 1997 913 8,189
Northwest Crossing........ Knoxville, TN 1997 1,284 11,566
Northwest Crossing II..... Knoxville, TN 1999 1999 570 0
Stonegate Plaza........... Kingsport, TN 1997 606 5,454
Tellico Plaza............. Lenoir City, TN 1997 611 5,510
VIRGINIA
Aquia Towne Center........ Stafford, VA 1998 2,187 19,776
WISCONSIN
West Allis Towne Centre... West Allis, WI 1987 1996 1,866 16,789
------- --------
Totals $70,611 $406,324
======= ========
GROSS COST AT
END OF PERIOD(B)
--------------------
SUBSEQUENT
CAPITALIZED BUILDING & ACCUMULATED
PROPERTY COSTS LAND IMPROVEMENTS TOTAL DEPRECIATION(C) ENCUMBRANCES
------------------------- ----------- ---- ------------ ----- --------------- ------------
NORTH CAROLINA
Hickory Corners........... 75 798 7,267 8,065 781 (d)
Holly Springs Plaza....... 69 829 7,539 8,368 791 (d)
Ridgeview Crossing........ 78 1,054 9,572 10,626 1,001 (e)
OHIO
Office Max Center......... 0 227 2,042 2,269 289 (d)
Spring Meadows Place...... 1,069 1,662 16,028 17,690 2,526 5,446
Troy Towne Center......... 1,070 930 9,442 10,372 1,387 (e)
SOUTH CAROLINA
Edgewood Square........... 30 1,358 12,259 13,617 1,279 (d)
Taylors Square............ 477 1,721 14,574 16,295 1,570 (e)
TENNESSEE
Cumberland Gallery........ 22 327 2,966 3,293 316 (d)
Highland Square........... 32 913 8,221 9,134 857 2,681
Northwest Crossing........ 49 1,284 11,615 12,899 1,218 (e)
Northwest Crossing II..... 1,623 570 1,623 2,193 86
Stonegate Plaza........... 107 606 5,561 6,167 580 (e)
Tellico Plaza............. 10 611 5,520 6,131 576 (d)
VIRGINIA
Aquia Towne Center........ 249 2,187 20,025 22,212 1,657 14,644
WISCONSIN
West Allis Towne Centre... 44 1,866 16,833 18,699 2,391 (e)
------- ------- -------- --------- --------
$80,414 $77,546 $479,803 $ 557,349 $ 61,080
======= ======= ======== ========= ========
- ----------
(a) If prior to May 1996, constructed by a predecessor of the Company.
(b) The aggregate cost of land and buildings and improvements for federal
income tax purposes is approximately $386 million.
(c) Depreciation for all properties is computed over the useful life
which is generally forty years.
(d) The property is pledged as collateral on the secured line of credit.
41
(e) The property is pledged as collateral on secured mortgages.
(f) Refer to Footnote 2 for a summary of the Company's capitalization
policies.
The changes in real estate assets and accumulated depreciation for the years
ended December 31, 2001 and 2000 are as follows:
REAL ESTATE ASSETS 2001 2000
----------------------------------- ------------ ------------
Balance at beginning of period..... $ 557,995 $ 542,955
Land Development/Acquisitions...... 140 --
Capital Improvements............... 21,587 17,354
Sale of Assets..................... (22,373) (2,314)
----------- -----------
Balance at end of period........... $ 557,349 $ 557,995
=========== ===========
ACCUMULATED DEPRECIATION 2001 2000
---------------------------------- --------- ---------
Balance at beginning of period.... $ 48,366 $ 35,492
Sales/Retirements................. (944) --
Depreciation...................... 13,658 12,874
--------- ---------
Balance at end of period.......... $ 61,080 $ 48,366
========= =========
42
RAMCO-GERSHENSON PROPERTIES TRUST
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
BALANCE AT
BEGINNING CHARGED BALANCE AT
OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
Year ended December 31, 2001--
Allowance for doubtful accounts..... $ 1,283 $ 735 $ 245 $ 1,773
Year ended December 31, 2000--
Allowance for doubtful accounts..... $ 1,490 $ 330 $ 537 $ 1,283
Year ended December 31, 1999--
Allowance for doubtful accounts..... $ 1,298 $ 559 $ 367 $ 1,490
43