1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
- ----- 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
- ----- OF 1934
For the transition period from to
------------- --------------
Commission file number 1-10093
RAMCO-GERSHENSON PROPERTIES TRUST
-------------------------------------
(Exact name of registrant as specified in its charter)
MARYLAND 13-6908486
- -------- ----------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
27600 Northwestern Highway, Suite 200, Southfield, Michigan 48034
- ----------------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
248-350-9900
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of common shares of beneficial interest ($.01 par value) of the
Registrant outstanding as of June 30, 1998: 7,123,388
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Index
Part I. Financial Information Page No.
-------
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997.................. 3
Consolidated Statements of Operations (unaudited) - Three Months and Six Months Ended
June 30, 1998 and 1997.................................................................... 4
Consolidated Statement of Shareholders' Equity (unaudited) - Six Months Ended
June 30, 1998............................................................................. 5
Consolidated Statements of Cash Flows (unaudited)- Six Months Ended
June 30, 1998 and 1997.................................................................... 6
Notes to Consolidated Financial Statements (unaudited)......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................................................... 18
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 30, December 31,
1998 1997
--------- -----------
(unaudited)
ASSETS
Investment in real estate - net (Note 2) ........................... $ 465,032 $ 458,294
Accounts receivable - net .......................................... 7,220 6,035
Equity investments in and advances to unconsolidated entities ...... 6,031 6,421
Cash and cash equivalents .......................................... 5,056 5,033
Other assets - net (Note 3) ........................................ 10,531 8,899
--------- ---------
Total Assets .................................................... $ 493,870 $ 484,682
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgages and notes payable (Note 4) ............................... $ 308,439 $ 295,618
Distributions payable .............................................. 4,521 4,348
Accounts payable and accrued expenses .............................. 12,870 13,145
Due to related entities ............................................ 1,346 1,325
--------- ---------
Total Liabilities ................................................ 327,176 314,436
Minority Interest .................................................... 41,519 42,282
Commitments and Contingencies (Note 7)
SHAREHOLDERS' EQUITY
Series A convertible preferred shares, par value $.01,
10,000 shares authorized; 467 issued and outstanding,
$11,666 liquidation value ....................................... 11,147 11,147
Common Shares of Beneficial Interest, par value $.01, 30,000
shares authorized; 7,123 issued and outstanding ................. 71 71
Additional paid-in capital ......................................... 150,188 150,513
Cumulative distributions in excess of net income ................... (36,231) (33,767)
--------- ---------
Total Shareholders' Equity ........................................... 125,175 127,964
--------- ---------
Total Liabilities and Shareholders' Equity ..................... $ 493,870 $ 484,682
========= =========
See notes to consolidated financial statements.
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RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES
Minimum rents ......................... $ 13,146 $ 9,032 $ 26,441 $ 17,916
Percentage rents ...................... 354 416 752 782
Recoveries from tenants ............... 4,620 4,202 9,263 8,596
Interest and other income ............. 141 281 249 456
-------- -------- -------- --------
Total Revenues ................... 18,261 13,931 36,705 27,750
-------- -------- -------- --------
EXPENSES
Real estate taxes ..................... 1,700 1,512 3,447 3,009
Recoverable operating expenses ........ 3,001 2,635 5,967 5,474
Depreciation and amortization ......... 2,940 1,892 5,876 3,693
Other operating ....................... 179 287 415 543
General and administrative ............ 1,312 1,297 2,949 2,475
Interest expense ...................... 6,195 3,142 12,244 6,112
-------- -------- -------- --------
Total Expenses ................... 15,327 10,765 30,898 21,306
-------- -------- -------- --------
Operating income .......................... 2,934 3,166 5,807 6,444
Loss from unconsolidated entities ......... 84 67 163 155
-------- -------- -------- --------
Income before minority interest ........... 2,850 3,099 5,644 6,289
Minority interest ......................... 771 848 1,562 1,694
-------- -------- -------- --------
Net income ................................ 2,079 2,251 4,082 4,595
Preferred dividends ....................... (283) (563)
-------- -------- -------- --------
Net income available to
common shareholders ..................... $ 1,796 $ 2,251 $ 3,519 $ 4,595
======== ======== ======== ========
Basic earnings per share .................. $ 0.25 $ 0.32 $ 0.49 $ 0.65
======== ======== ======== ========
Diluted earnings per share ................ $ 0.25 $ 0.32 $ 0.49 $ 0.64
======== ======== ======== ========
Weighted average shares outstanding:
Basic ................................. 7,123 7,123 7,123 7,123
======== ======== ======== ========
Diluted ............................... 7,172 7,138 7,171 7,139
======== ======== ======== ========
See notes to consolidated financial statements.
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RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
Preferred Stock Common Stock Additional Cumulative Total
-------------------- ------------------- Paid-In Earnings/ Shareholders'
Shares Amount Shares Amount Capital Distribution Equity
-------- -------- -------- -------- ------- ------------ ------
Balance at January 1, 1998 ...... 467 $ 11,147 7,123 $ 71 $150,513 $(33,767) $127,964
Cash distributions declared ..... (6,546) (6,546)
Adjustment of net proceeds from
Preferred Shares issuance ..... (330) (330)
Exercise of stock options ....... 5 5
Net income for the six months
ended June 30, 1998 ........... 4,082 4,082
-------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 ........ 467 $ 11,147 7,123 $ 71 $150,188 $(36,231) $125,175
======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
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RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Six Months
Ended June 30
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................. $ 4,082 $ 4,595
Adjustments to reconcile net income to net cash flows
Provided by operating activities:
Depreciation and amortization .............................. 5,876 3,693
Amortization of deferred financing costs ................... 528 76
Loss from unconsolidated entities .......................... 163 155
Minority interest .......................................... 1,562 1,694
Changes in assets and liabilities that provided (used) cash:
Accounts receivable ................................... (1,185) (643)
Other assets .......................................... (2,694) (2,148)
Accounts payable and accrued expenses ................. (269) 1,861
-------- --------
Total adjustments .......................................... 3,981 4,688
-------- --------
Cash Flows Provided by Operating Activities .................. 8,063 9,283
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Real estate acquired ....................................... (12,176) (12,894)
Advances from (to) unconsolidated entities ................. 227 (467)
-------- --------
Cash Flows Used In Investing Activities ...................... (11,949) (13,361)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to shareholders ......................... (6,546) (5,984)
Cash distributions to operating partnership unit holders ... (2,158) (2,232)
Purchase of operating partnership units .................... (1,416)
Repayment of Credit Facility ............................... (3,000) (2,431)
Principal repayments on mortgages payable .................. (3,279) (926)
Adjustment of net proceeds from Preferred Shares issuance .. (330)
Payment of deferred financing costs ........................ (154) (55)
Borrowings on Credit Facility .............................. 19,100 16,400
Net advances from related entities ......................... 21 147
Net proceeds from exercise of stock options ................ 5
Refund of deferred financing costs ......................... 250
-------- --------
Cash Flows Used in Financing Activities ...................... 3,909 3,503
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ......... 23 (575)
Cash and Cash Equivalents, Beginning of Period ............... 5,033 3,541
-------- --------
Cash and Cash Equivalents, End of Period ..................... $ 5,056 $ 2,966
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest during the period ................ $ 11,628 $ 5,608
======== ========
See notes to consolidated financial statements.
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RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying interim financial statements and
related notes of the Company are unaudited; however, they have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting, the instructions to Form 10-Q and the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared under
generally accepted accounting principles have been condensed or omitted pursuant
to such rules. The unaudited interim financial statements should be read in
conjunction with the audited financial statements and related notes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
statements for the interim periods have been made. The results for interim
periods are not necessarily indicative of the results for a full year.
Impact of Recent Accounting Pronouncements - In May 1998, the Financial
Accounting Standards Board's Emerging Issues Task Force (Task Force) issued
consensus No. 98-9, "Accounting for Contingent Rent in Interim Financial
Periods". This statement establishes standards for when the lessor can recognize
contingent rental income that is based on future specified targets within the
lessor's fiscal year. The Task Force reached a consensus that contingent rental
income in interim periods should be deferred until the specified target that
results in contingent rental income is achieved. This statement, which is
effective immediately, did not have a material effect on the Company's interim
financial statements for the three months and six months ended June 30,1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Readers are referred to the "Impact of Recent Accounting
Pronouncements" section of the Company's 1997 Annual Report to Shareholders for
further discussion.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management has not
determined the impact of the Statement on the Company's financial statements.
This Statement is effective for fiscal year beginning after June 15, 1999, with
earlier adoption encouraged. The Company will adopt this accounting standard as
required by January 1, 2000.
Reclassifications - Certain reclassifications have been made to the 1997
financial statements in order to conform with the 1998 presentation.
2. REAL ESTATE
The Company's real estate consists of the following:
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
Land $ 60,638 $ 57,075
Buildings and Improvements 423,755 414,115
Construction-in-progress 995 2,023
--------- ---------
$ 485,388 $ 473,213
Less: accumulated depreciation (20,356) (14,919)
--------- ---------
Investment in real estate - net $ 465,032 $ 458,294
========= =========
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3. OTHER ASSETS
Other assets are as follows:
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
Leasing costs and other $ 8,065 $ 5,845
Deferred financing costs 2,710 2,806
Proposed development and acquisition costs 1,688 1,214
-------- --------
$ 12,463 $ 9,865
Less: accumulated amortization (1,932) (966)
-------- --------
Other assets - net $ 10,531 $ 8,899
======== ========
4. MORTGAGES AND NOTES PAYABLE
Mortgages and notes payable consist of the following:
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
Fixed rate mortgages with interest rates ranging
from 6.83% to 8.50% at June 30, 1998 and
6.83% to 8.75% at December 31, 1997, due at
various dates through 2007 .................... $158,751 $162,030
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 June 30, 1998 was 7.38% and
at December 31, 1997 was 7.33% ................ 7,000 7,000
Unsecured term loan, with an interest rate at
LIBOR plus 275 basis points, due May 1, 1999
The effective rate at June 30, 1998 and
December 31, 1997 was 8.44% and
8.75% respectively ............................ 45,000 45,000
Credit Facility, with an interest rate at LIBOR
plus 162.5 basis points at June 30, 1998 and
December 31, 1997 due May 1999, maximum
available borrowings of $110,000. The
effective rate at June 30, 1998 and December
31, 1997 was 7.36% and 7.66%, respectively .... 97,688 81,588
-------- --------
$308,439 $295,618
======== ========
The mortgage notes are secured by mortgages on properties that have an
approximate net book value of $275,533 and $276,619 as of June 30, 1998 and
December 31, 1997, respectively. The Credit Facility is secured by mortgages on
various properties that have an approximate net book value of $180,579 and
$172,970 as of June 30, 1998 and December 31, 1997, respectively.
At June 30, 1998, outstanding letters of credit issued under the Credit
Facility, not reflected in the accompanying consolidated balance sheet, total
approximately $836.
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The following table presents scheduled principal payments on mortgages and notes
payable as of June 30, 1998:
Year ended December 31,
1998 (July 1 - December 31) $ 1,437
1999 145,718
2000 8,178
2001 3,072
2002 3,255
Thereafter 146,779
--------
Total $308,439
========
On June 26, 1998, the Company filed a $200,000 shelf registration statement with
the Securities and Exchange Commission, which allows for the issuance of
preferred shares, common shares or warrants exercisable for preferred or common
shares.
5. LEASES
The Company is engaged in the operation of shopping center and retail properties
and leases space to tenants and certain anchors pursuant to lease agreements.
The lease agreements provide for initial terms ranging from 3 to 30 years and,
in some cases, for annual rentals which are subject to upward adjustment based
on operating expense levels and sales volume.
Approximate future minimum rentals under noncancelable operating leases in
effect at June 30, 1998, assuming no new or renegotiated leases nor option
extensions on lease agreements, are as follows:
Year ended December 31,
1998 (July 1 - December 31) $ 25,200
1999 46,575
2000 42,039
2001 37,225
2002 33,454
Thereafter 223,418
--------
Total $407,911
========
6. PRO FORMA FINANCIAL INFORMATION
During 1997, the Company acquired properties with an aggregate cost of
approximately $147,700. The acquisitions were accounted for as purchases and,
accordingly, results of operations were included in the consolidated financial
statements since the various dates of acquisitions.
The following pro forma financial data have been presented as if the
acquisitions had occurred on January 1, 1997:
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------- -------------
Revenues ..................... $18,414 $36,811
======= =======
Net Income ................... $2,278 $4,679
====== ======
Basic Earnings per Share ..... $0.32 $0.66
===== =====
Diluted Earnings per Share.... $0.32 $0.66
===== =====
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7. COMMITMENTS AND CONTINGENCIES
Substantially all of the properties have been subjected to Phase I environmental
audits. Such audits have not revealed nor is management aware of any
environmental liability that management believes would have a material adverse
impact on the Company's financial position or results of operations. Management
is unaware of any instances in which it would incur significant environmental
costs if any or all of the properties were sold, disposed of or abandoned.
During the third quarter of 1994, the Company held more than 25% of the value of
its gross assets in overnight Treasury Bill reverse repurchase transactions
which the United States Internal Revenue Service (the "IRS") may view as
non-qualifying assets for the purposes of satisfying an asset qualification test
applicable to REITs, based on a Revenue Ruling published in 1977 (the "Asset
Issue"). The Company has requested that the IRS enter into a closing agreement
with the Company that the Asset Issue will not impact the Company's status as a
REIT. The IRS has deferred any action relating to the Asset Issue pending the
further examination of the Company's 1991-1995 tax returns (the "Tax Audit").
Based on developments in the law which occurred since 1977, the Company's Tax
Counsel, Battle Fowler LLP, has rendered an opinion that the Company's
investment in Treasury Bill repurchase obligations would not adversely affect
its REIT status. However, such opinion is not binding upon the IRS.
In connection with the spin-off of Atlantic, Atlantic has assumed all liability
arising out of the Tax Audit and the Asset Issue, including liabilities for
interest and penalties and attorney fees relating thereto. In connection with
the assumption of such potential liabilities, Atlantic and the Company have
entered into a tax agreement which provides that the Company (under the
direction of its Continuing Trustees), and not Atlantic, will control, conduct
and effect the settlement of any tax claims against the Company relating to the
Tax Audit and the Asset Issue. Accordingly, Atlantic will not have any control
as to the timing of the resolution or disposition of any such claims. The
Company and Atlantic also received an opinion from Special Tax Counsel, Wolf,
Block, Schorr and Solis-Cohen LLP, that, to the extent there is a deficiency in
the Company's taxable income arising out of the IRS examination and provided the
Company timely makes a deficiency dividend (i.e., declares and pays a
distribution which is permitted to relate back to the year for which each
deficiency was determined to satisfy the requirement that the REIT distribute 95
percent of its taxable income), the classification of the Company as a REIT for
the taxable years under examination would not be affected. Under the tax
agreement referred to above, Atlantic has agreed to reimburse the Company for
the amount of any deficiency dividend so made. If notwithstanding the
above-described opinions of legal counsel, the IRS successfully challenged the
status of the Company as a REIT, its status could be adversely affected. If the
Company lost its status as a REIT, the Company believes that it will be able to
re-elect REIT status for the taxable year beginning January 1, 1999.
Although the IRS agent conducting the examination has not issued his final
examination report with respect to the tax issues raised in the Tax Audit,
including the Asset Issue (collectively, the "Tax Issues"), the Company has
received a preliminary draft of the examining agent's report. The draft sets
forth a number of positions which the examining agent has taken with respect to
the Company's taxes for the years that are subject to the Tax Audit, which the
Company believes are not consistent with applicable law and regulations of the
IRS. If the final report were issued in its current form, the liability of
Atlantic to indemnify the Company may be substantial. The Continuing Trustees of
the Company are engaged in ongoing discussions with the examining agent and his
supervisors with regard to the positions set forth in the draft report. There
can be no assurance that, after conclusion of discussions with such agent and
his supervisors regarding the draft report, the examining agent will not issue
the proposed report in the form previously delivered to the Company (or another
form). Issuance of the revenue agent's report constitutes only the first step in
the IRS administrative process for determining whether there is any deficiency
in the Company's tax liability for the years at issue and any adverse
determination by the examining agent is subject to administrative appeal within
the IRS and, thereafter, to judicial review. As noted above, pursuant to the tax
agreement between Atlantic and the Company, Atlantic has assumed all liability
arising out of the Tax Audit and the Tax Issues. Based on the amount of
Atlantic's assets, as disclosed in its Annual Report on Form 10-K for the year
ended December 31, 1997, the Company does not believe that the ultimate
resolution of the Tax Issues will have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
During July 1997 Montgomery Ward ("Wards") a tenant at three of the Company's
properties, (Tel-Twelve Mall, Clinton Valley Mall and Shoppes of Lakeland),
filed for protection under Chapter 11 of the Bankruptcy Code. In October 1997,
Wards issued a list of anticipated store closings which included the stores at
the Company's Clinton Valley Mall. This location consists of a 101,200 square
foot department store and a 7,480 square foot TBA store (Tires, Batteries and
Automotive). The Company was notified in March 1998 that Wards rejected the
lease. The Company is pursuing replacement tenants to lease the space. On an
annual basis, Wards paid, in the aggregate, approximately $1,000 in base rent
and operating and real estate tax expense reimbursements for the Clinton Valley
Mall.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in Thousands, except per Share and per Unit amounts)
The following discussion and analysis of the financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of the Company, including the respective notes thereto which are
included in this Form 10-Q.
CAPITAL RESOURCES AND LIQUIDITY
The Company's mortgages and notes payable amounted to $308,439 at June 30, 1998,
with a weighted average interest rate of 7.72%. The debt consists of eight loans
secured by various properties, one unsecured term loan, and the Credit Facility
which is secured by various properties. Seven of the mortgage loans amounting to
$158,751 have maturities ranging from 2000 to 2007, monthly payments which
include regularly scheduled amortization, and have fixed interest rates ranging
between 6.83% to 8.50%. One of the mortgage loans, evidenced by tax free bonds,
amounting to $7,000 secured by Oak Brook Square Shopping Center is
non-amortizing, 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
(7.38% at June 30, 1998). Another mortgage loan with an interest rate of 8.75%,
matured in June 1998.
Variable rate debt accounted for $149,688 of outstanding debt with a weighted
average interest rate of 7.68%. Variable rate debt accounted for approximately
48.5% of the Company's total debt and 29.4% of its total capitalization. The
Company has an interest rate protection agreement in place relative to $75,000
of floating rate debt as discussed below. After taking into account the impact
of converting the variable rate debt into fixed rate debt by use of the rate
protection agreement, the Company's variable rate debt would account for
approximately 24.2% of the Company's total debt and 14.6% of its total
capitalization.
The Company has an unsecured term loan amounting to $45,000, maturing May 1999,
which may under certain circumstances be extended to October 2000 at the
election of Ramco-Gershenson Properties, L.P. (the "Operating Partnership").
This term loan bears interest between 250 and 275 basis points over LIBOR,
depending on certain debt ratios (8.44% at June 30, 1998).
The Company currently has a $110,000 Credit Facility, of which $97,688 was
outstanding as of June 30, 1998. This credit facility bears interest between
137.5 and 162.5 basis points over LIBOR depending on certain debt ratios
(weighted average 7.36% interest rate at June 30, 1998) and matures May 1999,
and the maturity date may under certain circumstances be extended to October
2000 at the election of the Operating Partnership. The credit facility is
secured by mortgages on various properties and contains financial covenants
relating to debt-to-market capitalization, minimum operating coverage ratios and
a minimum equity value. As of June 30, 1998 the Company was in compliance with
the covenant terms. At June 30, 1998, outstanding letters of credit issued under
the credit facility total $836.
The Company used proceeds from the borrowings under the Credit Facility to pay
for the acquisition of Southbay Fashion Center, the purchase of land for the
White Lake MarketPlace development, the repayment of one of the mortgage loans
and for other capital expenditures. During May 1998, the Company acquired the
Southbay Fashion Center, in Sarasota Florida, an approximately 96,700 square
foot community center for approximately $6,000. During June 1998, the Company
acquired 37 acres of land in White Lake Township Michigan for approximately
$3,000.
In July 1997, the Company executed an interest rate protection agreement to
limit the Company's exposure to increases in interest rates on its floating rate
debt. The notional amount of the agreement was $75,000. Based on rates currently
in effect under the Company's Credit Facility, the agreement caps the Company's
interest rate on $75,000 of floating rate debt to 8.375%, with a floor of
7.125%, through May 1, 1999. The Company is exposed to credit loss in the event
of non-performance by the other parties to the interest rate swap agreement.
However, the Company does not anticipate non-performance by the counter party.
In December 1997, the Company executed another interest rate protection
agreement to limit the Company's exposure to increases in interest rates on its
floating rate debt. The notional amount of the agreement was $50,000. Based on
rates currently in effect under the Company's Credit Facility, the agreement
caps the Company's interest rate on $50,000 of floating rate debt to 8.375%,
with a floor of 7.225% for the period May 1999 to October 2000. The Company is
exposed to credit loss in the event of non-performance by the other parties to
the interest rate swap agreement. However, the Company does not anticipate
non-performance by the counter party.
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Based on the debt and the market value of equity, the Company's debt to total
market capitalization (debt plus market value equity) ratio was 60.6% at June
30, 1998. On a pro forma basis, if the full MSAM/Kimco equity investment were
infused, the debt to total market capitalization would be 55.8% at June 30,
1998.
The two properties in which the Operating Partnership owns an interest and are
accounted for on the equity method of accounting are subject to non-recourse
mortgage indebtedness. At June 30, 1998, the pro rata share of non-recourse
mortgage debt on the unconsolidated properties (accounted for on the equity
method) was $6,234 with a weighted average interest rate of 9.14%.
The Company's current capital structure includes property specific mortgages,
the unsecured term loan, the Credit Facility, Series A Preferred Shares, Common
Shares and a minority interest in the Operating Partnership. Minority interest
increased to 28.0% effective January 1, 1998 from 26.5% at December 31, 1997.
The increase to minority interest resulted from the earnout calculation for the
Jackson Crossing shopping center. The minority interest computation assumes the
issuance of an additional 200,000 OP Units to the Ramco Group relative to
increases in net operating income at the Jackson Crossing shopping center. The
computation is subject to due diligence procedures and to Board of Director
approval. Currently, the minority interest in the Operating Partnership
represents the 28.0% ownership in the Operating Partnership held by the Ramco
Group which may, under certain conditions, be exchanged for approximately
2,768,143 Common Shares.
The Units owned by the Ramco Principals are subject to lock-up agreements which
provide that the Units cannot be transferred, except under certain conditions
until November 1998. In addition, the Units issued to the Ramco Group are
exchangeable for Common Shares of the Company on a one-for-one basis. The
Company, as sole general partner of the Operating Partnership, has the option to
exchange such Units for cash based on the current trading price of the Common
Shares. Assuming the exchange of all limited partnership interests in the
Operating Partnership, there would be outstanding approximately 9,891,531 Common
Shares with a market value of approximately $187,939 at June 30, 1998 (based on
the closing price of $19.00 per share on June 30, 1998).
In July 1998, the Company commenced the construction of its newest development,
White Lake MarketPlace, a 350,000 square foot community shopping center, located
in the metro Detroit area. Management anticipates this $13,500 development will
be funded utilizing the Credit Facility and/or the remaining $23,333 MSAM/Kimco
equity commitment for Series A Preferred Shares.
The principal uses of the Company's liquidity and capital resources are for
acquisitions, development, including expansion and renovation programs, and debt
repayment. To maintain its qualification as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"), the Company is
required to distribute to its shareholders at least 95% of its "Real Estate
Investment Trust Taxable Income" as defined in the Code.
The Company anticipates that the combination of the availability under the
Credit Facility, potential new borrowings relative to the acquired properties
and development properties, construction loans, and the remaining MSAM/Kimco
equity commitment for Series A Preferred Shares, will provide adequate
liquidity for the foreseeable future to fund future acquisitions, developments,
expansions, repositionings, and to continue its currently planned capital
programs and to make distributions to its shareholders in accordance with the
Code's requirements applicable to REIT's. Although the Company believes that
the combination of factors discussed above will provide sufficient liquidity,
no such assurance can be given.
During July 1997 Montgomery Wards, ("Wards") a tenant at three of the Company's
properties, Tel-Twelve Mall, Clinton Valley Mall and Shoppes of Lakeland, filed
for protection under Chapter 11 of the Bankruptcy Code. In October 1997, Wards
issued a list of anticipated store closings which included the stores at the
Company's Clinton Valley Mall. This location consists of a 101,200 square foot
department store and a 7,480 square foot TBA store (Tires, Batteries and
Automotive). The Company was notified in March 1998 that Wards rejected the
lease. The Company is pursuing replacement tenants to lease the space. On an
annual basis, Wards paid, in the aggregate, approximately $1,000 in base rent
and operating and real estate tax expense reimbursement for the Clinton Valley
Mall.
The Company has implemented a Year 2000 compliance program designed to ensure
that its computer hardware, software and process control systems will function
properly beyond 1999. The Company believes that it has allocated adequate
resources for this purpose and expects its Year 2000 data conversion program to
be completed by mid 1999. To date, the amounts incurred and expensed for
developing and carrying out the plan have not had a material effect on the
Company's operations. The total remaining cost for addressing the Year 2000
issue, which is based on management's current estimates, is not expected to be
material to the Company's financial position and results of operations.
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The Company is attempting to contact vendors and others on whom it relies to
assure that their systems will be timely converted. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
Furthermore, no assurance can be given that any or all of the Company's systems
are or will be Year 2000 compliant, or that the ultimate costs required to
address the Year 2000 issue or the impact of any failure to achieve substantial
Year 2000 compliance will not have a material adverse effect on the Company's
financial position and results of operations.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997.
Total revenues for the six months ended June 30, 1998 increased by 32.3%, or
$8,955, to $36,705 as compared to $27,750 for the six months ended June 30,
1997. The increase was a result of a $8,525 increase in minimum rents, a $667
increase in recoveries from tenants, offset by a $30 decrease in percentage
rents and a $207 decrease in interest and other income.
Minimum rents increased 47.6%, or $8,525, to $26,441 for the six months ended
June 30, 1998 as compared to $17,916 for the six months ended June 30, 1997.
Recoveries from tenants increased 7.8%, or $667, to $9,263 as compared to $8,596
for the six months ended June 30, 1997. These increases are primarily
attributable to the acquisition of the Madison, Pelican and Village Lakes
shopping centers effective May, June and December 1997, respectively, and the
acquisition of the Southeast Portfolio on October 30, 1997. The operating
results for the six months ended June 30, 1998 include the impact of these
acquisitions for the full six months in 1998, while the results for the six
months ended June 30, 1997 included the impact of one month for the Madison
acquisition and no impact from the other acquisitions. The recovery ratio for
the six months ended June 30, 1998 decreased to 98.3% as compared to 101.3% for
the six months ended June 30, 1997.
Interest and other income decreased 45.4%, or $207 to $249 as compared to $456
for the six months ended June 30, 1997. This decrease was primarily attributable
to non-recurring tenant lease buyouts in 1997 which amounted to $183 of the $207
decrease.
Total expenses for the six months ended June 30, 1998 increased by 45.0%, or
$9,592, to $30,898 as compared to $21,306 for the six months ended June 30,
1997. The increase was due to a $931 increase in total recoverable expenses,
including real estate taxes and recoverable operating expenses, a $2,183
increase in depreciation and amortization, a $128 decrease in other operating
expenses, a $474 increase in general and administrative expenses, and a $6,132
increase in interest expense.
Total recoverable expenses, including real estate taxes and recoverable
operating expenses, increased by 11.0%, or $931, to $9,414 as compared to $8,483
for the six months ended June 30, 1997, depreciation and amortization increased
by 59.1%, or $2,183, to $5,876 as compared to $3,693 for the six months ended
June 30, 1997, and other operating expenses decreased 23.6%, or $128 to $415 as
compared to $543 for the six months ended June 30, 1998. General and
administrative expenses increased 19.2%, or $474, to $2,949 as compared to
$2,475 for the six months ended June 30, 1997. The increase in recoverable
expenses of $931, depreciation and amortization of $2,183, and interest expense
of $6,132, are due to the acquisition of the Southeast Portfolio and the other
property acquisitions in 1997.
The loss from unconsolidated entities increased 5.2%, or $8, to $163 for the six
months ended June 30, 1998 as compared to $155 for the six months ended June 30,
1997.
The minority interest of $1,562 for the six months ended June 30, 1998
represents a 28.0% share of income before minority interest of the operating
partnership compared to a 26.5% share of income before minority interest, or
$1,694 for the six months ended June 30, 1997.
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COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 TO THREE MONTHS ENDED JUNE 30,
1997
Total revenues for the three months ended June 30, 1998 increased 31.1%, or
$4,330 to $18,261 as compared to $13,931 for the three months ended June 30,
1997. The increase was a result of a $4,114 increase in minimum rents, a $418
increase in recoveries from tenants, a $62 decrease in percentage rents and a
$140 decrease in interest and other income.
Minimum rents increased 45.6%, or $4,114 to $13,146 for the three months ended
June 30, 1998 as compared to $9,032 for the three months ended June 30, 1997.
Recoveries from tenants increased 10.0%, or $418, to $4,620 as compared to
$4,202 for the three months ended June 30, 1997. These increases are primarily
attributable to the acquisition of the Madison, Pelican and Village Lakes
shopping centers effective May, June and December 1997, respectively, and the
acquisition of the Southeast Portfolio on October 30, 1997. The operating
results for the three months ended June 30, 1998 included the impact of these
acquisitions for the full three months in 1998, while the results for the three
months ended June 30, 1997 included the impact of one month for Madison and no
impact from the other acquisitions.
Interest and other income decreased 49.8%, or $140 to $141 as compared to $281
for the three months ended June 30, 1997. This decrease was primarily
attributable to non-recurring tenant lease buyouts in 1997.
Total expenses for the three months ended June 30, 1998 increased by 42.4%, or
$4,562, to $15,327 as compared to $10,765 for the three months ended June 30,
1997. The increase was due to a $554 increase in total recoverable expenses,
including real estate taxes and recoverable operating expenses, a $1,048
increase in depreciation and amortization, a $108 decrease in other operating
expenses, a $15 increase in general and administrative expenses, and a $3,053
increase in interest expense.
Total recoverable expenses, including real estate taxes and recoverable
operating expenses, increased by 13.4%, or $554, to $4,701 as compared to $4,147
for the three months ended June 30, 1997, depreciation and amortization
increased 55.4%, or $1,048, to $2,940 as compared to $1,892 for the three months
ended June 30, 1997, and other operating expenses decreased 37.6%, or $108, to
$179 as compared to $287 for the three months ended June 30, 1997. The increase
in recoverable expenses of $554, depreciation and amortization of $1,048, and
interest expense of $3,053, are due to the acquisition of the Southeast
Portfolio and the other property acquisitions in 1997.
The loss from unconsolidated entities increased 25.4%, or $17, to $84 for the
three months ended June 30, 1998 as compared to $67 for the three months ended
June 30, 1997.
The minority interest of $771 for the three months ended June 30, 1998
represents a 28.0% share of income before minority interest of the operating
partnership compared to a 26.5% share of income before minority interest, or
$848 for the three months ended June 30, 1997.
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GENERAL AND ADMINISTRATIVE
Following is a breakdown of the general and administrative expenses shown in the
financial statements:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Management Fees ............................................ $ 320 $ 249 $ 648 $ 514
Leasing, Brokerage and Development Fees .................. 77 130 142 127
Other Revenues ........................................... 183 216 345 312
Leasing/Development Cost Reimbursements .................. 510 223 1,004 595
------ ------ ------ ------
Total Revenues .............................. 1,090 818 2,139 1,548
------ ------ ------ ------
Employee Expenses ........................................ 1,119 1,056 2,474 1,998
Office and Other Expenses ................................ 479 344 797 618
Depreciation and Amortization ............................ 65 63 128 123
------ ------ ------ ------
Total Expenses .............................. 1,663 1,463 3,399 2,739
------ ------ ------ ------
Operating Partnership Cost Reimbursement Expenses .......... 573 645 1,260 1,191
------ ------ ------ ------
Operating Partnership Administrative Expenses .............. 620 520 1,273 1,080
------ ------ ------ ------
Shopping Center Level General and Administrative Expenses... 119 132 416 204
------ ------ ------ ------
Total General and Administrative Expenses .................. $1,312 $1,297 $2,949 $2,475
====== ====== ====== ======
The increase in general and administrative expenses, when compared to the six
months ended June 30, 1997 is primarily due to general salary increases and an
increase in headcount incurred subsequent to the second quarter of 1997.
FUNDS FROM OPERATIONS
Management generally considers funds from operations ("FFO") to be one measure
of financial performance of an equity REIT. It has been presented to assist
investors in analyzing the performance of the Company and to provide a relevant
basis for comparison to other REITs.
The Company has adopted the most recent National Association of Real Estate
Investment Trusts ("NAREIT") definition of FFO, which was effective on January
1, 1996. Under the NAREIT definition, FFO represents income (loss) before
minority interest (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization (excluding
amortization of financing costs), and after adjustments for unconsolidated
partnerships and joint ventures.
Therefore, FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and should not be
considered an alternative to net income as an indication of the Company's
performance or to cash flows from operating activities as a measure of liquidity
or of the ability to pay distributions. Furthermore, while net income and cash
generated from operating, investing and financing activities determined in
accordance with generally accepted accounting principles consider capital
expenditures which have been and will be incurred in the future, the calculation
of FFO does not.
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The following table illustrates the calculation of FFO for the three months and
six months ended June 30, 1998, and 1997:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net Income ............................................ $ 2,079 $ 2,251 $ 4,082 $ 4,595
Add: Depreciation and amortization .............. 2,947 1,899 5,890 3,707
Add: Minority interest in partnership ........... 771 848 1,562 1,694
-------- -------- -------- --------
Funds from operations - diluted ....................... 5,797 4,998 11,534 9,996
Less: Preferred share dividends ................. (283) -- (563) --
-------- -------- -------- --------
Funds from operations - basic ......................... $ 5,514 $ 4,998 $ 10,971 $ 9,996
======== ======== ======== ========
Weighted average equivalent shares outstanding (1)
Basic ............................................ 9,891 9,691 9,891 9,736
======== ======== ======== ========
Diluted .......................................... 10,607 9,706 10,606 9,752
======== ======== ======== ========
Supplemental disclosure:
Straight-line rental income ...................... $ 330 $ 506 $ 751 $ 1,033
======== ======== ======== ========
Amortization of management contracts and covenants
not to compete .............................. $ 124 $ 124 $ 248 $ 248
======== ======== ======== ========
(1) 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 the six months ended June 30, 1998, the Company spent approximately
$1,673 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 or
repositionings, were approximately $2,081. Revenue neutral capital expenditures,
such as roof and parking lot repairs which are anticipated to be recovered from
tenants, amounted to approximately $1,003.
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IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force (Task Force) issued consensus No. 98-9, "Accounting for Contingent Rent in
Interim Financial Periods". This statement establishes standards for when the
lessor can recognize contingent rental income that is based on future specified
targets within the lessor's fiscal year. The Task Force reached a consensus that
contingent rental income in interim periods should be deferred until the
specified target that results in contingent rental income is achieved. This
statement, which is effective immediately, did not have a material effect on the
Company's interim financial statements for the three months and six months ended
June 30, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Readers are referred to the "Impact of Recent Accounting
Pronouncements" section of the Company's 1997 Annual Report to Shareholders for
further discussion.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. Management has not
determined the impact of the Statement on the Company's financial statements.
This Statement is effective for fiscal year beginning after June 15, 1999, with
earlier adoption encouraged. The Company will adopt this accounting standard as
required by January 1, 2000.
This Form 10-Q contains forward-looking statements with respect to the operation
of certain of the Company's properties. Management of the Company believes 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 general economic conditions, the
strength of key industries in the cities in which the Company's properties are
located, the performance of the Company's tenants at the Company's properties
and elsewhere, and other factors discussed in this report and the Company's
reports filed with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual Meeting of Shareholders of the Company was held on June 10, 1998. At
the Annual Meeting, Joel D. Gershenson, Dennis E. Gershenson and Robert A.
Meister were re-elected as trustees of the Company to serve until the 2001
Annual Meeting of Shareholders or until their successors are elected and
qualified. The following votes were cast for or were withheld from voting with
respect to the election of each of the following persons:
Votes Authority
Name For Withheld
Joel D. Gershenson 5,740,048 84,781
Dennis E. Gershenson 5,752,757 72,072
Robert A. Meister 5,752,510 72,319
There were no broker non-votes or abstentions in connection with the election of
the trustees at the Annual Meeting.
The following votes were cast for, against or withheld regarding the
ratification of Deloitte & Touche LLP as the independent auditors for the
Company for the fiscal year commencing January 1, 1998:
For Against Abstain
5,781,626 17,223 25,980
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the quarter
ending June 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
RAMCO-GERSHENSON PROPERTIES TRUST
Date: August 13, 1998 By: /s/ Dennis E. Gershenson
----------------------------------------
Dennis E. Gershenson
President and Trustee
(Chief Executive Officer)
Date: August 13, 1998 By: /s/ Richard J. Smith
----------------------------------------
Richard J. Smith
Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
27.1 Financial Data Schedule
20