1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11690
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-1723097
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34555 Chagrin Boulevard Moreland Hills, Ohio 44022
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Address of principal executive offices - zip code)
(440) 247-4700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicated by check [X] 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
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common shares as of the latest practicable date.
57,234,616 shares outstanding as of August 6, 1998
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended June 30, 1998 and 1997.
Condensed Consolidated Statement of Operations for the Six Month Periods ended
June 30, 1998 and 1997.
Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended
June 30, 1998 and 1997.
Notes to Condensed Consolidated Financial Statements.
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
ASSETS 1998 1997
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Real estate rental property:
Land $ 216,137 $ 183,809
Land under development 32,013 23,668
Construction in progress 45,964 28,130
Buildings 1,216,996 1,071,717
Fixtures and tenant improvements 21,092 18,418
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1,532,202 1,325,742
Less accumulated depreciation (190,903) (171,737)
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Real estate, net 1,341,299 1,154,005
Other real estate investments - 72,149
Cash and cash equivalents 1,882 18
Investments in and advances to joint ventures 185,148 136,267
Other assets 39,227 29,479
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$ 1,567,556 $ 1,391,918
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 492,075 $ 392,254
Revolving credit facilities 139,000 139,700
Subordinated convertible debentures 41,277 46,891
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672,352 578,845
Mortgage indebtedness 152,276 89,676
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Total indebtedness 824,628 668,521
Accounts payable and accrued expenses 31,556 28,601
Other liabilities 9,917 9,100
Minority equity interests - 16,293
Operating partnership minority interests 6,978 353
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873,079 722,868
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Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 421,500 shares
issued and outstanding at June 30, 1998 and December 31, 1997 105,375 105,375
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 177,500 shares
issued and outstanding at June 30, 1998 and December 31, 1997 44,375 44,375
Common shares, without par value, $.10 stated value; 100,000,000 and
50,000,000 shares authorized; 57,222,514 and 27,687,576 shares issued
and outstanding at June 30, 1998 and December 31, 1997, respectively (Note 5) 5,722 2,769
Paid-in-capital 610,716 580,509
Accumulated dividends in excess of net income (71,250) (63,517)
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694,938 669,511
Less: Unearned compensation - restricted stock (461) (461)
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694,477 669,050
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$ 1,567,556 $ 1,391,918
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1998 1997
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Revenues from operations:
Minimum rents $ 39,713 $ 29,637
Percentage and overage rents 824 550
Recoveries from tenants 9,790 7,545
Management fee income 808 792
Other 1,845 2,342
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52,980 40,866
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Rental operation expenses:
Operating and maintenance 4,210 3,450
Real estate taxes 6,536 4,933
General and administrative 3,071 2,667
Interest expense 13,314 8,431
Depreciation and amortization 10,084 7,800
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37,215 27,281
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Income before equity in net income
of joint ventures and allocation to
minority interest 15,765 13,585
Equity in net income of joint ventures 3,473 2,617
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Income before allocation to minority interests 19,238 16,202
Income allocated to minority equity interests (101) (261)
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Net income $ 19,137 $ 15,941
============== ===============
Net income applicable to common shareholders $ 15,587 $ 12,391
============== ===============
Per share data:
Earnings per common share - basic $ 0.27 $ 0.25
============== ===============
Earnings per common share - diluted $ 0.27 $ 0.24
============== ===============
Dividends declared $ 0.3275 $ 0.315
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1998 1997
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Revenues from operations:
Minimum rents $ 75,846 $ 57,204
Percentage and overage rents 1,927 1,607
Recoveries from tenants 18,827 14,770
Management fee income 1,564 1,515
Other 4,315 3,224
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102,479 78,320
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Rental operation expenses:
Operating and maintenance 8,264 7,124
Real estate taxes 12,494 9,325
General and administrative 6,003 5,026
Interest expense 24,767 16,478
Depreciation and amortization 19,220 15,206
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70,748 53,159
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Income before equity in net income
of joint ventures, gain on sales of real
estate, allocation to minority interest
and extraordinary item 31,731 25,161
Equity in net income of joint ventures 5,712 5,334
Gain on sales of real estate - 3,526
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Income before allocation to minority interests
and extraordinary item 37,443 34,021
Income allocated to minority equity interests (291) (526)
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Income before extraordinary item 37,152 33,495
Extraordinary item - extinguishment of
debt - deferred finance costs written-off (882) -
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Net income $ 36,270 $ 33,495
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Net income applicable to common shareholders $ 29,170 $ 26,395
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Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.54 $ 0.53
Extraordinary item (.02) -
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Net income $ 0.52 $ 0.53
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Earnings per common share - diluted:
Income before extraordinary item $ 0.52 $ 0.52
Extraordinary item (0.02) -
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Net income $ 0.50 $ 0.52
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Dividends declared $ 0.655 $ 0.63
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1998 1997
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Net cash flow provided by operating activities $ 53,972 $ 44,416
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Cash flow provided by (used for) investing activities:
Real estate developed or acquired (123,340) (148,082)
Investments in and advances to joint ventures, net (27,001) (12,879)
Issuance of notes receivable (11,414) -
Proceeds from transfer of joint venture interests 41,526 -
Proceeds from sales of real estate - 5,452
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Net cash flow used for investing activities (120,229) (155,509)
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Cash flow provided by (used for) financing activities:
Repayment of revolving credit facilities, net (700) (75,500)
Proceeds from issuance of Medium Term Notes, net of
underwriting commissions and $220 of offering expenses
paid in 1998 98,897 -
Principal payments on rental property debt (13,127) (1,142)
Proceeds from issuance of Fixed Rate Senior Notes, net of
underwriting commissions and discounts and $500 of
offering expenses paid - 75,577
Payment of deferred finance costs (bank borrowings) (521) -
Proceeds from issuance of common shares, net of
underwriting commissions and $26 and $735 of
offering expenses paid in 1998 and 1997, respectively 25,234 165,113
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan,
restricted stock plan and dividend reinvestment plan 2,341 820
Dividends paid (44,003) (38,677)
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Net cash flow provided by financing activities 68,121 126,191
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Increase in cash and cash equivalents 1,864 15,098
Cash and cash equivalents, beginning of period 18 13
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Cash and cash equivalents, end of period $ 1,882 $ 15,111
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Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisition of certain shopping centers, the Company
assumed mortgage debt, liabilities and recorded a minority equity interest
aggregating approximately $84.5 million during the six month period ended June
30, 1998. The Company also had approximately $5.6 million of debentures
converted into common shares of the Company. The Company also issued
approximately 29 million common shares pursuant to the Company's two-for-one
stock split, resulting in the reclassification of approximately $2.9 million
from paid-in-capital to common shares. In addition, included in accounts
payable was approximately $0.2 million relating to construction in progress.
The foregoing transactions did not provide for or require the use of cash.
In conjunction with the acquisitions of certain shopping centers, the Company
assumed liabilities and recorded a minority interest aggregating approximately
$17.8 million during the six month period ended June 30, 1997. In addition,
included in accounts payable was approximately $0.4 million relating to
construction in progress. The foregoing transactions did not require the use of
cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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DEVELOPERS DIVERSIFIED REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
The Company is a self-administered and self-managed real estate
investment trust and is engaged in the business of acquiring, expanding, owning,
developing, managing and operating neighborhood and community shopping centers,
enclosed malls and business centers.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The
accompanying unaudited condensed consolidated balance sheet as of June 30,
1998, and the related unaudited condensed consolidated statements of
operations and of cash flows for the six months ended June 30, 1998 and 1997
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the
opinion of management, the interim condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of the periods
presented. The results of the operations for the six month period ended
June 30, 1998 and 1997 are not necessarily indicative of the results that may
be expected for the full year. These financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Developers Diversified Realty Corporation Annual Report on Form
10-K for the year ended December 31, 1997.
New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 130 - Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the changes in equity of a business during a
period from transactions and other events and circumstances from nonowner
sources. The new standard becomes effective for the Company for the year ending
December 31, 1998, and requires that comparative information from earlier years
be restated to conform to the requirements of this standard. Effective March
31, 1998, the Company implemented SFAS No. 130 - Reporting Comprehensive
Income. For the periods ended June 30, 1998 and 1997, the Company had no items
of other comprehensive income requiring additional disclosure.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131 - Disclosure about Segments
of an Enterprise and Related Information. SFAS No. 131 establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The statement supersedes SFAS No. 14 - Financial Reporting
for Segments of a Business Enterprise. The new standard becomes effective for
the Company for the year ending December 31, 1998, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard.
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities. This statement requires fair value
accounting for all derivatives, including recognizing all such instruments on
the balance sheet with an offsetting amount recorded in the income statement or
as part of comprehensive income. The new standard becomes effective for the
Company for the year ending December 31, 2000. The Company does not expect this
pronouncement to have a material impact on the Company's financial position or
cash flows.
2. OFFERINGS
Equity:
In April 1998, the Company sold 669,639 common shares (pre-split) in
an underwritten offering at $37.7223 per share.
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Debt:
In January 1998, the Company issued $100 million of Unsecured Fixed
Rate Senior Notes pursuant to its Medium Term Note program. These notes have a
term of ten years and a coupon interest rate of 6.625%. The aggregate net
proceeds received of approximately $99.1 million were primarily used to retire
variable rate indebtedness on the Company's revolving credit facilities.
3. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at June 30, 1998
were comprised of (i) a 50% joint venture interest in four community center
joint ventures, formed in November 1995, which own and operate ten shopping
center properties, located in nine different states, aggregating approximately
4.0 million square feet; (ii) a 50% joint venture interest, formed in September
1996, with The Ohio State Teachers Retirement Systems (OSTRS) which owns and
operates two shopping centers aggregating approximately 0.5 million square feet;
(iii) a 50% joint venture interest, formed in October 1996, in conjunction with
the development of shopping center in Merriam, Kansas, aggregating approximately
0.4 million square feet; (iv) a 35% joint venture interest in a limited
partnership, formed in January 1997, that owns a 0.3 million square foot
shopping center located in San Antonio, Texas; (v) a 50% joint venture interest
in a limited partnership, that owns a 0.4 million square foot shopping center
located in Martinsville, Virginia which was formed in January 1993; (vi) a 50%
interest in seven individual joint ventures which are currently developing seven
shopping centers; (vii) a 50% joint venture interest acquired in March 1998,
which owns a shopping center aggregating 0.3 million square feet, in Columbus,
Ohio (viii) a 79.45% joint venture interest acquired in March 1998, which owns a
shopping center aggregating 0.3 million square feet, in Columbus, Ohio (ix) an
80% joint venture interest acquired in April 1998, which owns a shopping center
aggregating 0.3 million square feet in Columbus, Ohio; (x) a 50% joint venture
interest acquired in April 1998, which owns a shopping center aggregating 0.2
million square feet in Dayton, Ohio; and (xi) a 25% joint venture interest in
the Retail Value Fund, formed with Prudential Real Estate Investors in February
1998, which acquired 33 retail sites, formerly occupied by Best Products,
located in 13 different states.
Summarized combined financial information of the Company's joint venture
investments is as follows (in thousands):
June 30, December 31,
Combined Balance Sheets 1998 1997
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Land $ 165,732 $ 147,466
Buildings 552,065 482,153
Fixtures and tenant improvements 1,704 1,315
Construction in progress 97,664 19,172
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817,165 650,106
Less accumulated depreciation (47,554) (26,113)
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Real estate, net 769,611 623,993
Other assets 54,093 25,817
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$ 823,704 $ 649,810
========= =========
Mortgage debt $ 482,069 $ 389,160
Amounts payable to DDRC 41,022 32,667
Other liabilities 20,368 9,549
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543,459 431,376
Accumulated equity 280,245 218,434
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$ 823,704 $ 649,810
========= =========
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Three Month Period Six Month Period
Ended June 30, Ended June 30,
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Combined Statements of Operations 1998 1997 1998 1997
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Revenues from operations $ 24,436 $ 20,648 $ 44,946 $ 39,952
---------- ---------- ---------- ----------
Rental operation expenses 5,740 5,067 10,529 9,726
Depreciation and amortization expenses 3,492 2,962 6,537 5,666
Interest expense 9,515 7,291 17,642 13,719
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18,747 15,320 34,708 29,111
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Income before gain on sale of real estate 5,689 5,328 10,238 10,841
Gain on sale of real estate 2,812 - 2,812 -
---------- ---------- ---------- ----------
Net income $ 8,501 $ 5,328 $ 13,050 $ 10,841
========== ========== ========== ==========
The amount of advances to and investments in joint ventures is reduced
by a deferred gain of approximately $5.8 million related to the contribution of
the real estate property and mortgage debt to the OSTRS Joint Venture.
Included in management fee income for the six month periods ended June
30, 1998 and 1997, is approximately $1.4 million of management fees earned by
the Company for services rendered to the joint ventures. Similarly, other income
for the six month periods ended June 30, 1998 and 1997, includes $1.2 million
and $0.3 million, respectively, of development fee income and commissions for
services rendered to the joint ventures.
4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION
During the six month period ended June 30, 1998, the Company completed
the acquisition of, or investment in, fifteen shopping centers with an aggregate
of approximately 2.7 million Company owned gross leasable square feet (GLA) at
an initial aggregate investment of approximately $243 million. These properties
are summarized as follows:
YEAR EFFECTIVE DATE OF COMPANY
LOCATION BUILT ACQUISITION GLA
-------- ----- ----------------- --------
Country Club Mall - Idaho Falls, Idaho 1976 February 25, 1998 148,593
Bel Air Centre - Detroit, Michigan 1989 March 10, 1998 343,502
Perimeter Shopping Center - Dublin, Ohio 1996 March 23, 1998 137,610
OfficeMax - Barboursville, West Virginia 1985 March 23, 1998 70,900
Big Bear - Bellefontaine, Ohio 1995 March 28, 1998 54,780
Roundy's - Hamilton, Ohio 1986 March 23, 1998 30,110
Hoggies Center- Gahanna, Ohio 1995 March 23, 1998 39,285
Roundy's/Rite Aid - Pataskala, Ohio 1980 March 23, 1998 33,270
Shoppes at Turnberry - Pickerington, Ohio 1990 March 23, 1998 59,495
Derby Square Shopping Center - Grove City, Ohio 1992 March 23, 1998 128,050
Lennox Town Center - Columbus, Ohio (1) 1997 March 23, 1998 336,044
Sun Center - Columbus, Ohio (2) 1995 March 23, 1998 317,581
Washington Park Plaza - Dayton, Ohio (1) 1990 April 28, 1998 169,816
Dublin Village Center - Columbus, Ohio (3) 1987 April 28, 1998 327,264
Easton Market - Columbus, Ohio (4) 1998 April 28, 1998 508,334
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(1) Property acquired through a joint venture in which the Company owns
a 50% interest.
(2) Property acquired through a joint venture in which the Company owns
a 79.45% interest.
(3) Property acquired through a joint venture in which the Company owns
an 80% interest.
(4) Portion of this property is under construction and will be acquired
in phases throughout 1998.
The operating results of the acquired shopping centers are included in
the results of operations of the Company from the effective date of acquisition.
The following unaudited supplemental pro forma operating data is
presented for the six months ended June 30, 1998 as if each of the following
transactions had occurred on January 1, 1998; (i) the acquisition of all
properties acquired, or interests therein, by the Company in 1998, (ii) the
completion of the sale by the Company of 669,639 common shares (pre-split) in
April 1998, (iii) the completion of the sale by the Company of $100 million of
Medium Term Notes in January 1998 and (iv) the purchase by the Company of the
minority interest of a shopping center in Cleveland, Ohio in March 1998.
The following unaudited supplemental pro forma operating data is
presented for the six months ended June 30, 1997 as if each of the following
transactions had occurred on January 1, 1997: (i) the acquisition of all
properties acquired, or interests therein, by the Company in 1997 and 1998, (ii)
the completion of the sale by the Company of 669,639 common shares (pre-split)
in April 1998, (iii) the completion of the sale by the Company of $102 million
and $100 million of Medium Term Notes in 1997 and 1998, respectively, (iv) the
completion of the sale by the Company of 3,350,000 common shares (pre-split)
in January 1997, (v) the completion of the sale by the Company of the $75
million 7.125% Pass through Asset Trust Securities in March 1997, (vi) the
completion of the sale by the Company of 1,300,000 common shares (pre-split)
in June 1997, (vii) the completion of the sale by the Company of 507,960
common shares (pre-split) in September 1997, (viii) the completion of the sale
by the Company of 316,800 common shares (pre-split) in December 1997 and
(ix) the purchase by the Company of the minority interest of a shopping center
in Cleveland, Ohio in March 1998.
Six Month Period Ended June 30,
--------------------------------
(in thousands, except per share)
1998 1997
---------- ----------
Pro forma revenues $ 104,842 $ 86,345
========== ==========
Pro forma income before extraordinary item $ 37,640 $ 33,784
========== ==========
Pro forma net income applicable
to common shareholders $ 29,658 $ 26,684
========== ==========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.54 $ 0.53
Extraordinary item (0.02) -
---------- ----------
Net income $ 0.52 $ 0.53
========== ==========
Earnings per common share - diluted:
Income before extraordinary item $ 0.52 $ 0.52
Extraordinary item (0.02) -
---------- ----------
Net income $ 0.50 $ 0.52
========== ==========
The 1998 and 1997 pro forma information above does not include revenues
and expenses for two of the 16 properties acquired by the Company in 1998 and
the 1997 pro forma information does not include revenues and expenses for four
of the seven properties acquired by the Company in 1997 prior to their
respective acquisition dates because these shopping centers were either under
development or in the lease-up phase and, accordingly, the related operating
information for such centers either does not exist or would not be meaningful.
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5. SHAREHOLDERS' EQUITY AND OPERATING PARTNERSHIP UNITS:
The following table summarizes the changes in shareholders' equity
since December 31, 1997 (in thousands):
Class A 9.5% Class B 9.44%
Cumulative Cumulative
Redeemable Redeemable
Preferred Preferred Common Accumulated Unearned
Shares ($250 Shares ($250 Shares Dividends in Compensation
Stated Stated ($.10 stated) Paid-in Excess of Restricted
Value) Value) Value) Capital Net Income Stock Total
------------ ------------ ------------- -------- ------------ ------------ ---------
Balance December 31, 1997 $ 105,375 $ 44,375 $ 2,769 580,509 $ (63,517) $ (461) $ 669,050
Net income 36,270 36,270
Dividends declared -
Common Shares (36,903) (36,903)
Dividends declared -
Preferred Shares (7,100) (7,100)
Issuance of Common Shares 67 25,167 25,234
Stated value of shares issued in
connection with a two-for-one
stock split 2,861 (2,861) -
Conversion of Debentures 17 5,568 5,585
Issuance of common shares
related to exercise of stock
options, employee 401(k) plan
and dividend reinvestment plan 8 2,333 2,341
------------ ------------ ------------- -------- ------------ ------------ ---------
Balance June 30, 1998 $ 105,375 $ 44,375 $ 5,722 $610,716 $ (71,250) $ (461) $ 694,477
============ ============ ============= ======== ============ ============ =========
In July 1998, the Company announced that the Board of Directors
approved a two-for-one stock split to shareholders of record on July 27, 1998.
On August 3, 1998, each such shareholder received one share of common stock for
each share of common stock held. This stock split was effected in the form of a
stock dividend. Accordingly, retroactive to June 30, 1998, $2.9 million was
transferred from additional paid in capital to common stock, representing the
stated value of additional shares issued. All share and per share data included
in these condensed consolidated financial statements reflects this split.
For the period ended June 30, 1998, in conjunction with the
acquisition of nine shopping centers, the Company formed several limited
partnerships which issued limited partnership units which are exchangeable, at
the option of the Company, into 335,174 shares of the Company's common shares
or for cash.
In 1997, in conjunction with the acquisition of two shopping centers
the Company formed limited partnerships which issued limited partnership units
which are exchangeable, at the option of the Company, into 17,884 shares of the
Company's common shares or for cash.
6. REVOLVING CREDIT FACILITIES:
In February 1998, the Company and a syndicate of financial institutions
agreed to amend and restate the Company's primary revolving credit facility (the
"Unsecured Credit Facility") to increase the facility to $250 million from $150
million. The new agreement also provides for a reduction in pricing and an
extension of the term for an additional year through April 2001. The amended and
restated facility also continues to provide for a competitive bid option for up
to 50% of the facility amount. During the first quarter of 1998, the Company
recognized a non-cash extraordinary charge of
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approximately $0.9 million ($0.02 per share), relating to the write-off of
unamortized deferred finance costs associated with the former revolving credit
facility. The Company's borrowings under this facility bear interest at variable
rates based on the prime rate or LIBOR plus a specified spread (currently
0.85%), depending on the Company's long term senior unsecured debt rating from
Standard and Poor's and Moody's Investors Service. In June 1998, the Company
increased the amount of this unsecured revolving credit facility to $300 million
from $250 million. The Unsecured Credit Facility is used to finance the
acquisition of properties, to provide working capital and for general corporate
purposes. At June 30, 1998, $139.0 million was outstanding under this facility.
In addition, the Company maintains a $20 million unsecured revolving
credit facility with National City Bank. Borrowings under this facility bear
interest at variable rates based on the prime rate or LIBOR plus a specified
spread (currently at 0.85%) depending on the Company's long term senior
unsecured debt rating from Standard and Poor's and Moody's Investors Service.
The Company increased the amount of this unsecured revolving credit facility to
$20 million from $10 million. At June 30, 1998 there was no indebtedness
outstanding under this facility.
7. RELATED PARTY TRANSACTIONS
In February 1998, the Company acquired a shopping center located in
Idaho Falls, Idaho from a limited partnership in which the Company's Chairman
Emeritus, The Chairman of the Board, and the Vice-Chairman of the Board owned,
in the aggregate, through a separate partnership, a 1% general partnership
interest. The shopping center aggregates approximately 0.2 million square feet
of Company GLA. The initial purchase price of the property was approximately
$6.5 million. In accordance with the purchase agreement, the Company may be
required to pay the seller an additional $0.8 million upon the leasing of vacant
space in the center.
In June 1998, the Company acquired, from a partnership owned by the
Company's Chairman Emeritus and an officer of the Company, approximately 18
acres of land adjacent to a shopping center owned through one of the Company's
joint ventures at a purchase price of approximately $4.4 million.
In addition, the Company paid to a partnership owned by the Chairman
Emeritus approximately $0.1 million for leasing/sales commissions associated
with leasing or sale of certain shopping center outlots. Also, the Company paid
approximately $0.6 million to a company owned by the brother-in-law of The
Chairman of the Board relating to fees and commissions on the acquisition of
several shopping centers in 1998.
8. EARNINGS AND DIVIDENDS PER SHARE
Earnings per Share (EPS) have been computed pursuant to the provisions
of Statement of Financial Accounting Standards No. 128 which became effective
for all financial statements issued after December 15, 1997. All periods prior
thereto have been restated to conform with the provisions of this Statement.
Further, all per share amounts and average shares outstanding have been restated
to reflect the stock split described in Note 5.
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The following table provides a reconciliation of both income before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilized the weighted average number of common shares
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares.
Three Month Period Six Month Period
Ended June 30, Ended June 30
------------------- -------------------
(in thousands, except per share amounts)
1998 1997 1998 1997
-------- -------- -------- --------
Income before extraordinary item $ 19,137 $ 15,941 $ 36,270 $ 33,495
Less: Preferred stock dividend (3,550) (3,550) (7,100) (7,100)
-------- -------- -------- --------
Basic - Income before
extraordinary item applicable to
common shareholders 15,587 12,391 29,170 26,395
Effect of dilutive securities:
Joint venture partnership (184) - (499) -
-------- -------- -------- --------
Diluted - Income before
extraordinary item applicable to
common shareholders plus
assumed conversions $ 15,403 $ 12,391 $ 28,671 $ 26,395
======== ======== ======== ========
Number of Shares:
Basic - average shares outstanding 56,703 50,328 56,105 49,682
Effect of dilutive securities:
Joint venture partnership 326 - 326 -
Stock options 967 891 956 856
Restricted stock 7 7 7 7
-------- -------- -------- --------
Diluted - average shares outstanding 58,003 51,226 57,394 50,545
======== ======== ======== ========
PER SHARE AMOUNT:
Income before extraordinary item
Basic $ 0.27 $ 0.25 $ 0.54 $ 0.53
======== ======== ======== ========
Diluted $ 0.27 $ 0.24 $ 0.52 $ 0.52
======== ======== ======== ========
9. CONVERTIBLE SUBORDINATED DEBENTURES
During the six month period ended June 30, 1998, debentures in the
principal amount of $5.6 million were converted into approximately 336,000
common shares (adjusted for the stock split described in Note 5). The related
accrued but unpaid interest was forfeited by the holders. In addition, upon
conversion of the debentures, approximately $29,000 of unamortized debenture
issue costs were charged to additional paid-in-capital.
10. SUBSEQUENT EVENTS
In July 1998, the Company acquired from Hermes Associates of Salt Lake
City ,Utah, nine shopping centers and eight additional expansion, development or
redevelopment projects. The nine shopping centers total 2.8 million square feet
of total gross leasable area. The total consideration for this portfolio was
approximately $310 million, comprised of $30.6 million of debt assumed, the
issuance of operating partnership units, which are exchangeable, at the option
of the Company, into 3,630,668 shares of the Company's common shares or cash,
initially valued at $73.0 million and $194.2 million of cash and $12.2 million
of other liabilities assumed.
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In July 1998, the Company completed the sale of 4,000,000 Class C
Cumulative Redeemable Preferred Shares. The net proceeds of approximately $96.5
million were issued to repay variable rate borrowings on the Company's unsecured
revolving credit facilities.
In July 1998, the Company also acquired the Phase II development of a
156,000 square foot shopping center in Tanasbourne, Oregon, adjacent to its
existing shopping center, at an aggregate cost of approximately $21.9 million.
In July 1998, the Company issued, pursuant to its Medium Term Note
program, $100 million senior unsecured fixed rate notes with a 20 year maturity
and a 7.5% coupon rate. The proceeds were used to repay variable rate borrowings
on the Company's revolving credit facilities.
The Company acquired 13 shopping centers aggregating approximately 1.6
million square feet of GLA in the St. Louis area from the Sansone Company in
July 1998. The Company also acquired a 50% equity investment in the Sansone
Group's operating company and development company. The total purchase price
aggregated approximately $167 million comprised of $27.6 million of debt assumed
and $134.9 million of cash and $4.5 million of other liabilities assumed.
In July 1998, the Company announced that the board of directors
approved a two-for-one stock split to shareholder of record on July 27, 1998. On
August 3, 1998 each shareholder received one additional share of common stock
for each share of common stock held. This stock split was effected in the form
of a stock dividend. (See Note 5).
On August 4, 1998 the Company, in a joint release with American
Industrial Properties REIT [NYSE:IND] ("AIP"), announced the execution of a
definitive agreement providing for the strategic investment in AIP by the
Company. Under the terms of the Share Purchase Agreement dated to be effective
as of July 30, 1998, the Company purchased 949,147 newly issued common shares of
beneficial interest at $15.50 per share for approximately $14.7 million. Under
the terms of a separate agreement, also dated to be effective as of July 30,
1998, the Company, in exchange for five industrial properties owned by the
Company and valued at approximately $19.5 million, acquired approximately 1.3
million additional newly issued AIP shares of beneficial interest. Combined, the
acquired shares represent 19.9% of AIP's outstanding shares prior to the
Company's purchase. A second purchase by the Company of approximately 5.2
million newly issued shares of AIP for approximately $81.0 million is subject to
shareholder approval at a Special Meeting of AIP Shareholders to be held before
the end of 1998. Concurrent with entering into the Agreement, AIP increased its
Board of Trust Managers by four positions and appointed the Company's designees
Scott A. Wolstein, Albert T. Adams, Robert H. Gidel and James A. Schoff to the
Board. Mr. Wolstein has been named AIP's Chairman of the Board. Pursuant to the
Agreement, AIP may, under certain circumstances and subject to certain
limitations, following the closing of the second purchase of AIP's common
shares, put additional common or preferred shares of AIP to the Company, at a
price not to exceed $15.50 and $14.00 per share respectively. The put of these
additional shares would be for the sole purpose of financing property
acquisitions approved by AIP's Board of Trust Managers.
In August 1998, the Company has sold 2,000,000 Class D Cumulative
Redeemable Preferred Shares, subject to customary closing on August 20, 1998.
The proceeds will be used to repay variable rate borrowings on the Company's
unsecured revolving credit facilities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and the notes
thereto.
The Company considers portions of this information be forward-looking
statements within the meaning of Section 27A of the Securities Exchange Act of
1933 and Section 21E of The Securities Exchange Act of 1934, both as amended,
with respect to the Company's expectations for future periods. Although the
Company believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believed," "anticipates," "plans," "seeks," "estimates," and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements,
including, among other factors, local conditions such as an oversupply of space
or a reduction in demand for real estate in the area, competition from other
available space, dependence on rental income from real property or the loss of a
major tenant.
RESULTS OF OPERATIONS
Revenues from Operations
Total revenues increased $12.1 million, or 29.6%, to $53.0 million for
the three month period ended June 30, 1998 from $40.9 million for the same
period in 1997. Total revenues increased $24.2 million, or 30.8%, to $102.5
million for the six month period ended June 30, 1998 from $78.3 million for the
same period in 1997. Base and percentage rents for the three month period ended
June 30, 1998 increased $10.3 million, or 34.3%, to $40.5 million as compared to
$30.2 million for the same period in 1997. Base and percentage rents increased
$19.0 million, or 32.2%, to $77.8 million for the six month period ended June
30, 1998 from $58.8 million for the same period in 1997. Approximately $3.3
million of the increase in base and percentage rental income, for the six month
period ended June 30, 1998 is the result of new leasing, re-tenanting and
expansion of the Core Portfolio Properties (shopping center properties owned as
of January 1, 1997), an increase of 6.3% over 1997 revenues from Core Portfolio
Properties. The 19 shopping centers acquired by the Company in 1998 and 1997
contributed $13.8 million of additional base and percentage rental revenue and
the six new shopping center developments contributed $2.2 million. These
increases were offset by a decrease of $0.3 million relating to the sale of one
shopping center in December 1997.
At June 30, 1998 the in-place occupancy rate of the Company's portfolio
was at 95.9% as compared to 94.7% at June 30, 1997. The average annualized base
rent per leased square foot, including those properties owned through joint
ventures, was $8.54 at June 30, 1998 as compared to $8.24 at June 30, 1997. Same
store sales, for those tenants required to report such information, representing
approximately 15.9 million square feet, increased 3.3% to $229 per square foot
as compared to $222 per square foot for the prior twelve month period.
The increase in recoveries from tenants of $4.1 million is directly
related to the increase in operating and maintenance expenses and real estate
taxes primarily associated with the 1998 and 1997 shopping center acquisitions
and developments. Recoveries were approximately 90.7% of operating
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expenses and real estate taxes for the six month period ended June 30, 1998 as
compared to 89.8% for the same period in 1997. Management fee income and other
income increased by approximately $1.1 million which generally relates to an
increase in interest income and development fees.
Other income was comprised of the following (in thousands):
Three Month Period Six Month Period
Ended June 30, Ended June 30,
1998 1997 1998 1997
-------- ------- -------- ---------
Interest $ 790 $ 481 $ 1,702 $ 874
Temporary tenant
rentals (Kiosks) 113 127 226 248
Lease termination fees 73 1,288 898 1,434
Development fees 394 259 757 415
Other 475 187 732 253
-------- ------- -------- ---------
$ 1,845 $ 2,342 $ 4,315 $ 3,224
======== ======= ======== =========
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended June 30, 1998 increased $0.7 million, or 22.0% to $4.2 million as compared
to $3.5 million for the same period in 1997. Rental operating and maintenance
expenses increased $1.2 million, or 16.0%, to $8.3 million for the six month
period ended June 30, 1998 from $7.1 million for the same period in 1997. The
increase is attributable to the 22 shopping centers acquired and developed in
1997 and 1998.
Real estate taxes increased $1.6 million, or 32.5%, to $6.5 million for
the three month period ended June 30, 1998 as compared to $4.9 million for the
same period in 1997. Real estate taxes increased $3.2 million, or 34.0%, to
$12.5 million for the six month period ended June 30, 1998 from $9.3 million for
the same period in 1997. An increase of $2.3 million is related to the 22
shopping centers acquired and developed in 1997 and 1998 and $0.9 million in the
Core Portfolio Properties.
General and administrative expenses increased $0.4 million, or 15.2%,
to $3.1 million for the three month period ended June 30, 1998 as compared to
$2.7 million in 1997. General and administrative expenses increased $1.0
million, or 19.4%, to $6.0 million for the six month period ended June 30, 1998
from $5.0 million for the same period in 1997. The increase is attributable to
the growth of the Company primarily related to acquisitions, expansions and
developments. The Company continues to maintain a conservative policy with
regard to the expensing of all internal leasing salaries, legal salaries and
related expenses associated with the leasing and re-leasing of existing space.
In addition, the Company has expensed all internal costs associated with
acquisitions. Total general and administrative expenses were approximately 4.1%
and 4.3% of total revenues, including total revenues of joint ventures, for the
six month periods ended June 30, 1998 and 1997, respectively.
Depreciation and amortization expense increased $2.3 million, or 29.3%,
to $10.1 million for the three month period ended June 30, 1998 as compared to
$7.8 million for the same period in 1997. Depreciation and amortization
increased $4.0 million, or 26.4%, to $19.2 million for the six month period
ended June 30, 1998 from $15.2 million for the same period in 1997. An increase
of $3.3 million is related to the 22 shopping centers acquired and developed in
1998 and 1997 and $0.7 million relating to Core Portfolio Properties.
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Interest expense increased $4.9 million, or 57.9%, to $13.3 million for
the three month period ended June 30, 1998, as compared to $8.4 million for the
same period in 1997. Interest expense increased $8.3 million, or 50.3%, to $24.8
million for the six month period ended June 30, 1998 from $16.5 million for the
same period in 1997. The overall increase to interest expense for the three and
six month periods ended June 30, 1998 as compared to the same periods in 1997 is
primarily related to the acquisition of shopping centers during 1998 and 1997.
The weighted average debt outstanding during the six month period ended June
30, 1998 and related weighted average interest rate was $750.7 million and
7.5%, respectively, compared to $456.1 million and 7.8%, respectively, for the
same period in 1997. Interest costs capitalized, in conjunction with
development and expansion projects, were $1.5 million and $3.2 million for the
three and six month periods ended June 30, 1998, as compared to $1.0 million
and $1.8 million, for the same period in 1997.
Equity in net income of joint ventures increased $0.9 million, or
32.7%, to $3.5 million for the three month period ended June 30, 1998 as
compared to $2.6 million for the same period in 1997. Equity in net income of
joint ventures increased $0.4 million, or 7.1%, to $5.7 million for the six
month period ended June 30, 1998 from $5.3 million for the same period in 1997.
This increase is primarily attributable to approximately $1.1 million of income
from the Company's 25% interest in the Prudential Retail Value Fund and the four
joint venture interests acquired during 1998. This increase was offset by a
decrease in income from the Community Center Joint Ventures of approximately
$0.7 million, primarily associated with an increase in interest costs relating
to the refinancing of the variable rate bridge financings to long term fixed
rate financing in May 1997.
The minority equity interest expense decreased $0.2 million,or 61.3%,
to $0.1 million for the three month period ended June 30, 1998, as compared to
$0.3 million for the same period in 1997. The minority equity interest expense
decreased $0.2 million, or 44.8%, to $0.3 million for the six month period ended
June 30, 1998, as compared to $0.5 million for the same period in 1997. The
decrease relates to the Company's purchase, in March 1998, of the minority
interest in one shopping center located in Cleveland, Ohio, for approximately
$16.3 million. The minority equity interest expense represents the priority
distribution associated with such interests.
Gain on sales of real estate aggregated $3.5 million for the six month
period ended June 30, 1997. In March 1997, the Company sold two business centers
in Highland Heights, Ohio aggregating approximately 113,000 square feet for
approximately $5.7 million. The two business centers had been vacant for
approximately 18 months.
The extraordinary item, which aggregated $0.9 million for the six month
period ended June 30, 1998, relates to the write-off of unamortized deferred
finance costs associated with the amended and restated $300 million revolving
credit agreement. (See Financing Activities).
Net Income
Net income increased $3.2 million, or 20.1%, to $19.1 million for the
three month period ended June 30, 1998, as compared to net income of $15.9
million for the same period in 1997. Net income increased $2.8 million, or 8.3%,
to $36.3 million for the six month period ended June 30, 1998, as compared to
$33.5 million for the same period in 1997. The increase in net income of $2.8
million is primarily attributable to increases in net operating revenues (total
revenues less operating and maintenance, real estate taxes and general and
administrative expense) aggregating $18.9 million, resulting from new leasing,
retenanting and expansion of Core Portfolio Properties, and the 22 shopping
centers acquired and developed in 1997 and 1998, an increase of $0.4 million
relating to equity income from joint ventures and an increase of $0.2 million
relates to a decrease in minority equity expense. The
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increase in net operating revenues, equity income from joint ventures and
decrease in minority equity expense was offset by increases in depreciation,
interest expense, extraordinary item and a reduction of gain on sales of real
estate of $4.0 million, $8.3 million, $0.9 million and $3.5 million,
respectively.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") provides an
additional indicator of the financial performance of a Real Estate Investment
Trust. FFO is defined generally as net income applicable to common shareholders
excluding gains (losses) on sale of property, nonrecurring and extraordinary
items, adjusted for certain non-cash items, principally real property
depreciation and equity income (loss) from its joint ventures and adding the
Company's proportionate share of FFO of its unconsolidated joint ventures,
determined on a consistent basis. The Company calculates FFO in accordance with
the foregoing definition, which is substantially the same as the definition
currently used by the National Association of Real Estate Investment Trusts
("NAREIT"). Certain other real estate companies may calculate funds from
operations in a different manner. For the three month period ended June 30,
1998, FFO increased $5.3 million, or 24.6%, to $26.9 million as compared to
$21.6 million for the same period in 1997. For the six month period ended June
30, 1998, FFO increased $11.2 million, or 27.4%, to $51.9 million as compared to
$40.7 million for the same period in 1997. The increase is attributable to
increases in revenues from Core Portfolio Properties, acquisitions and
developments. The Company's calculation of FFO is as follows (in thousands):
Three Month Period Six Month Period
Ended March 31, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net income applicable to
common shareholders (1) $ 15,587 $ 12,391 $ 29,170 $ 26,395
Depreciation of real property 9,933 7,711 18,969 15,032
Equity in net income of joint ventures (3,473) (2,617) (5,712) (5,334)
Minority interest expense (OP Units) 101 -- 111 --
Joint Ventures' FFO (2) 4,706 4,072 8,437 8,123
Gain on sales of real estate -- -- -- (3,526)
Extraordinary item -- -- 882 --
-------- -------- -------- --------
$ 26,854 $ 21,557 $ 51,857 $ 40,690
======== ======== ======== ========
(1) Includes straight line rental revenues of approximately $0.8 million and
$0.5 million for the three month periods ended June 30, 1998 and 1997,
respectively and approximately $1.5 million and $0.8 million for the six
month periods ended June 30, 1998 and 1997, respectively, primarily related
to recent acquisitions and new developments.
(2) Joint Venture Funds From Operations are summarized as follows:
Net income (a) $ 8,501 $ 5,328 $ 13,050 $ 10,841
Gain on sales of real estate (2,812) -- (2,812) --
Depreciation of real property 3,492 2,962 6,537 5,666
-------- -------- -------- --------
$ 9,181 $ 8,290 $ 16,775 $ 16,507
======== ======== ======== ========
DDRC Ownership interests (b) $ 4,706 $ 4,072 $ 8,437 $ 8,123
======== ======== ======== ========
18
19
(a) Revenues for the three month periods ended June 30, 1998 and 1997
include approximately $0.7 million and $0.8 million, respectively,
resulting from the recognition of straight line rents of which the
Company's proportionate share is $0.3 million and $0.4 million,
respectively. Revenue for the six month period ended June 30, 1998 and
1997 include approximately $1.3 million, and $1.4 million,
respectively, resulting from the recognition of straight line rents of
which the Company's proportionate share is $0.6 million and $0.7
million, respectively.
(b) At June 30, 1998 the Company owned a 50% joint venture interest
relating to 15 operating shopping center properties, an 80% joint
venture interest in two operating shopping center properties, a 35%
joint venture interest in one operating shopping center property and a
25% interest in the Prudential Retail Value Fund. At June 30, 1997 the
Company owned a 50% joint venture interest in 13 operating shopping
center properties and a 35% joint venture interest in one operating
shopping center.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities will
continue to provide adequate capital for all principal payments, recurring
tenant improvements, as well as dividend payments in accordance with REIT
requirements and that cash on hand, borrowings available under its existing
revolving credit facilities, as well as other debt and equity alternatives will
provide the necessary capital to achieve continued growth. Cash flow from
operating activities for the six month period ended June 30, 1998 increased to
$54.0 million as compared to $44.4 million for the same period in 1997. The
increase is attributable to the 22 shopping center acquisitions and developments
completed in 1998 and 1997, new leasing, expansion and re-tenanting of the core
portfolio properties and the equity offerings completed in 1998 and 1997.
An increase in the 1998 quarterly dividend per common share to $.3275
from $.315 was approved in December 1997 by the Company's Board of Directors.
The Company's common share dividend payout ratio for the first two quarters of
1998 approximated 71.2% of the actual Funds From Operations as compared to 77.6%
for the same period in 1997. It is anticipated that the current dividend level
will result in a more conservative payout ratio as compared to prior years. A
lower payout ratio will enable the Company to retain more capital which will be
utilized for attractive investment opportunities in the development, acquisition
and expansion of portfolio properties.
During the six month period ended June 30, 1998, the Company and its
joint ventures invested $223.5 million, net, to acquire, develop, expand,
improve and re-tenant its properties. The Company's expansion acquisition and
development activity is summarized below:
Expansions:
The Company is currently expanding/redeveloping ten of its shopping
centers aggregating approximately 750,000 square feet of Company owned GLA and
will continue to pursue additional expansion opportunities. The Company is also
scheduled to commence expansion/redevelopment projects during 1998 at seven
additional shopping centers.
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20
ACQUISITIONS:
During the first six months of 1998, the Company completed the
acquisition of, or investment in 12 shopping centers. The Company purchased
Belair Centre, located in Detroit, Michigan, aggregating approximately 450,000
square feet for approximately $33.7 million. The Company also acquired Country
Club Mall, located in Idaho Falls, Idaho, aggregating approximately 150,000
square feet for approximately $6.5 million.
In March 1998, in a single transaction with Continental Real Estate
Companies ("Continental") of Columbus, Ohio, the Company completed the
acquisition of 10 shopping centers, two of which were acquired through joint
ventures. The 10 shopping centers total 1.2 million gross square feet of
Company-owned retail space. The aggregate cost of these centers was $91.9
million. The Company's net investment was initially funded through its revolving
credit facilities, cash and liabilities assumed of approximately $31.6 million,
mortgages assumed of approximately $57.5 million (including $29.3 million of
joint venture mortgage debt) and the issuance of Operating Partnership
Units valued at approximately $2.8 million. In certain circumstances and at the
option of the Company, these units are convertible into 139,872 shares of the
Company's common stock.
In April 1998, the Company acquired from Continental Real Estate,
interests in three additional shopping centers located in the Columbus, Ohio
area. Combined, these shopping centers will have approximately 1.0 million
square feet of total gross leasable area. The Company's proportionate share of
the investment cost will approximate $93.4 million upon completion of
approximately 345,000 square feet which is currently under construction. The
portion under construction has an estimated cost of approximately $42.4 million
and the Company is scheduled to close on this investment periodically throughout
1998.
In April 1998, the Company acquired the remaining ownership interest in
a 584,000 square foot shopping center in Princeton, New Jersey at a total cost
of approximately $36.4 million for consideration in the form of $27.8 million of
debt assumed and $0.8 million of operating partnership units and cash. The
Company had invested approximately $7.8 million in the shopping center at the
end of December 1997.
In July 1998, the Company acquired from Hermes Associates of Salt Lake
City, Utah, nine shopping centers and one office building and eight additional
expansion, development or redevelopment projects. The nine shopping centers
total 2.8 million square feet of total gross leasable area. The total
consideration for this portfolio was approximately $310 million comprised of
$30.6 million of debt assumed, the issuance of operating partnership units,
which are exchangeable, at the option of the Company, into 3,630,668 shares of
the Company's common shares or cash, initially valued at $73.0 million and
$194.2 million of cash and $12.2 million of other liabilities assumed.
In July 1998, the Company also acquired the Phase II development of a
156,000 square foot shopping center in Tanasbourne, Oregon adjacent to the
Company's existing shopping center at an aggregate cost of approximately $21.9
million.
The Company also acquired 13 shopping centers aggregating approximately
1.6 million square feet of GLA in the St. Louis area from the Sansone Company in
July 1998. In addition, the Company acquired a 50% investment of the Sansone
Group's operating company and development company. The total purchase price
aggregated approximately $167 million comprised of $27.6 million of debt assumed
and $134.9 million of cash and $4.5 million of other liabilities assumed.
20
21
On August 4, 1998 the Company, in a joint release with American
Industrial Properties REIT [NYSE:IND] ("AIP"), announced the execution of a
definitive agreement providing for the strategic investment in AIP by the
Company. Under the terms of the Share Purchase Agreement dated to be effective
as of July 30, 1998, the Company purchased 949,147 newly issued common shares of
beneficial interest at $15.50 per share for approximately $14.7 million. Under
the terms of a separate agreement, also dated to be effective as of July 30,
1998, the Company, in exchange for five industrial properties owned by the
Company and valued at approximately $19.5 million, acquired approximately 1.3
million additional newly issued AIP shares of beneficial interest. Combined, the
acquired shares represent 19.9% of AIP's outstanding shares prior to the
Company's purchase. A second purchase by the Company of approximately 5.2
million newly issued shares of AIP for $81.0 million is subject to shareholder
approval at a Special Meeting of AIP Shareholders to be held before the end of
1998. Concurrent with entering into the Agreement, AIP increased its Board of
Trust Managers by four positions and appointed the Company's designees Scott A.
Wolstein, Albert T. Adams, Robert H. Gidel and James A. Schoff to the Board. Mr.
Wolstein has been named AIP's Chairman of the Board. Pursuant to the Agreement,
AIP may, under certain circumstances and subject to certain limitations,
following the closing of the second purchase of AIP's common shares, put
additional common or preferred shares of AIP to the Company, at a price not
to exceed $15.50 and $14.00 per share respectively. The put of these
additional shares, would be for the sole purpose of financing property
acquisitions approved by AIP's Board of Trust Managers.
DEVELOPMENTS:
The Company has commenced construction on five shopping centers. The
first is a 200,000 square foot Phase II development located adjacent to the
Company's Erie, Pennsylvania center, and is to be anchored by Home Depot (not
owned by the Company), PETsMART and Circuit City. The second is a 445,000 gross
square foot shopping center in Merriam, Kansas which is being developed through
a joint venture formed in October 1996, 50% of which is owned by the Company.
This center will be anchored by Home Depot (not owned by the Company), Cinemark
Theaters, Hen House Supermarket, OfficeMax, Marshalls, Old Navy and PETsMART.
The remaining three shopping centers include: (i) a 240,000 square foot shopping
center in Toledo, Ohio; (ii) a 170,000 square foot shopping center in Solon,
Ohio and (iii) a 230,000 square foot shopping center in Oviedo, Florida (a
suburb of Orlando). All five centers are scheduled for completion during the
fourth quarter of 1998 and first half of 1999.
The Company has entered or intends to enter into agreements for seven
additional projects with various developers throughout the country at a
projected cost aggregating approximately $277 million. The majority of these
projects should commence development in 1998 and are currently scheduled for
completion in 1999 and 2000.
In May 1998, the Company formed DDR OliverMcMillian ("DDROM"), a new
private REIT with OliverMcMillian, LLC, based in San Diego, California to
develop, acquire, operate and manage urban entertainment and retail projects
throughout the United States. DDROM's first investments will be the completion
of eight OliverMcMillian initiated urban entertainment and retail projects
located in Southern California, Reno, Nevada and Tacoma, Washington with a
projected cost of approximately $256 million.
FINANCING ACTIVITIES
The acquisitions, developments and expansions were financed through
cash provided from operating activities, revolving credit facilities, mortgages
assumed and debt and equity offerings. Total debt outstanding at June 30, 1998
was $824.6 million compared to $477.1 million at June 30, 1997.
In January 1998, the Company issued $100 million of senior unsecured
fixed rate notes through its Medium Term Note program with a maturity of ten
years and an interest rate of 6.625%. The
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proceeds were used to repay variable rate borrowings on the Company's
revolving credit facilities primarily associated with 1997 shopping center
acquisitions.
In March 1998, the Company amended and restated its revolving credit
facility and increased the available borrowings to $250 million from $150
million, reduced the pricing to .85% over LIBOR from 1.10% over LIBOR and
extended the term for an additional year through April 2001. The amended and
restated facility also continues to provide for a competitive bid option for up
to 50% of the facility amount. The Company recognized a non cash extraordinary
charge of approximately $0.9 million ($0.02 per share) in the first quarter of
1998 relating to the write-off of unamortized deferred finance costs associated
with the former revolving credit facility. In June 1998, the Company increased
the amount of this unsecured revolving credit facility to $300 million from $250
million. The Company also increased the amount of its other unsecured revolving
credit facility to $20 million from $10 million.
In April 1998, the Company completed a 669,639 common share offering
(pre-split), through a registered unit investment trust, and received net
proceeds of approximately $25.3 million which were primarily used to repay
revolving credit facility borrowings.
In July 1998, the Company completed the sale of 4,000,000 Class C
Cumulative Redeemable Preferred Shares. The net proceeds of approximately $96.5
million were used to repay variable rate borrowings on the Company's unsecured
revolving credit facilities.
In July 1998, the Company issued, pursuant to its Medium Term Note
program, $100 million senior unsecured fixed rate notes with a 20 year maturity
and 7.5% coupon rate. The proceeds were used to repay variable rate borrowings
on the Company's revolving credit facilities.
In July 1998, the Company announced that the Board of Directors
approved a two-for-one stock split to shareholders of record on July 27, 1998.
On August 3, 1998 each shareholder received one share of common stock for each
share of common stock held. The stock split was effected in the form of a stock
dividend.
At June 30, 1998, the Company's capitalization consisted of $824.6
million of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $250.4 million), $149.8 million of preferred stock and
$1,129.9 million of market equity (market equity is defined as common shares and
OP Units outstanding multiplied by the closing price of the common shares on
the New York Stock Exchange at June 30, 1998 of $19.625 as adjusted to reflect
the two-for- one stock split) resulting in a debt total market capitalization
ratio of 0.39 to 1. At June 30, 1998, the Company's total debt consisted of
$683.0 million of fixed rate debt and $141.6 million of variable rate debt.
It is management's intention that the Company have access to the
capital resources necessary to expand and develop its business. Accordingly, the
Company may seek to obtain funds through additional equity offerings or debt
financing in a manner consistent with its intention to operate with a
conservative debt capitalization policy and maintain its investment grade
ratings with Moody's Investor Services and Standard and Poor's. As of June 30,
1998, the Company had $309.4 million available under its shelf registration
statement. In addition, as of June 30, 1998, the Company had cash of $1.9
million and $181.0 million available under its $320 million of unsecured
revolving credit facilities. On June 30, 1998, the Company also had 105
operating properties with $82.0 million, or 75.9%, of the total revenue for the
six month period ended June 30, 1998 which were unencumbered thereby providing a
potential collateral base for future borrowings.
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INFLATION
Substantially all of the Company's long-term leases contain provisions
designed to mitigate the adverse impact of inflation. Such provisions include
clauses enabling the Company to receive percentage rentals based on tenants'
gross sales, which generally increase as prices rise, and/or escalation clauses,
which generally increase rental rates during the terms of the leases. Such
escalation clauses are often related to increases in the consumer price index or
similar inflation indices. In addition, many of the Company's leases are for
terms of less than ten years, which permits the Company to seek increased rents
upon re-rental at market rates. Most of the Company's leases require the tenants
to pay their share of operating expenses, including common area maintenance,
real estate taxes, insurance and utilities, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
At June 30, 1998, approximately 82.8% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 6.2 years and a weighted average interest rate
of approximately 7.3%. The remainder of the Company's debt bears interest at
variable rates, with a weighted average maturity of approximately 3.0 years and
a weighted average interest rate of approximately 6.3%. As of June 30, 1998, the
Company's joint venture indebtedness aggregated $446.4 million of fixed rate
debt, of which the Company's proportionate share was $232.6 million, and $35.6
million of variable rate debt, of which the Company's proportionate share was
$17.8 million. The Company intends to utilize variable rate indebtedness
available under its revolving credit facilities to initially fund future
acquisitions. Thus, to the extent that the Company incurs additional variable
rate indebtedness, its exposure to increases in interest rates in an
inflationary period would increase. The Company believes, however, that
increases in interest expense as a result of inflation would not significantly
impact the Company's distributable cash flow.
The Company intends to continuously monitor and actively manage
interest costs on its variable rate debt portfolio and may enter into swap
positions based on market fluctuations. In addition, the Company believes that
it has the ability to obtain funds through additional equity and/or debt
offerings, including the issuance of medium term notes. Accordingly, the cost of
obtaining such protection agreements in relation to the Company's access to
capital markets will continue to be evaluated.
ECONOMIC CONDITIONS
Historically, real estate has been subject to a wide range of cyclical
economic conditions which affect various real estate sectors and geographic
regions with differing intensities and at different times. Adverse changes in
general or local economic conditions, could result in the inability of some
existing tenants of the Company to meet their lease obligations and could
otherwise adversely affect the Company's ability to attract or retain tenants.
The shopping centers are typically anchored by discount department stores
(usually Wal-Mart, Kmart or J.C. Penney), supermarkets, and drug stores which
usually offer day-to-day necessities, rather than high-priced luxury items.
Since these merchants typically perform better in an economic recession than
those who market high priced luxury items, the percentage rents received by the
Company have remained relatively stable. In addition, the Company seeks to
reduce its operating and leasing risks through ownership of a portfolio of
properties with a diverse geographic and tenant base.
The Company has assessed the Year 2000 Issue and does not believe that
it will have a material affect on future financial results, or cause reported
financial information not to be necessarily indicative of future operating
results or future financial condition. The Company will continue to review, on
an ongoing basis, the need for disclosures concerning this issue.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in
the ordinary course of business, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES
In April 1998, in conjunction with the acquisition of three shopping
centers in Ohio and one in New Jersey, the Company formed limited partnerships
which issued limited partnership units (the "Units") which are redeemable for an
amount equal to the value of approximately 195,302 Company common shares. The
Units are redeemable beginning between December 25, 1998 and February 4, 1999,
subject to the Company's right to purchase such units for cash or for Company
common shares on a one-for-one basis. These transactions were conducted as
private placements in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 1998, the Company held its Annual Meeting of Shareholders.
The matters presented to the shareholders for a vote and the vote on such
matters were as follows:
a) Election of Directors to serve until the next Annual Meeting of
Shareholders:
For Abstain
--- -------
Scott A. Wolstein 22,964,794 45,198
James A. Schoff 22,963,594 46,398
William N. Hulett, III 22,952,663 57,329
Ethan Penner 22,946,669 63,323
Albert T. Adams 22,877,412 132,580
Dean S. Adler 22,945,062 64,930
Barry A. Sholem 22,948,712 61,280
b) Proposal to amend the Company's amended and restate articles of
incorporation to increase the number of authorized shares of the Company from
59,000,000 to 109,000,000:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
21,293,763 1,642,466 73,763 0
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c) Proposal to approve the 1998 Developers Diversified Realty
Corporation Equity-Based Award Plan:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
18,289,543 4,601,556 118,891 0
No other matters were submitted to the shareholders for a vote.
ITEM 5. OTHER INFORMATION
Shareholders who intend to submit proposals to be included in the
Company's proxy materials may do so in compliance with Rule 14a-8
promulgated under the Securities Exchange Act of 1934. As stated in the
Company's proxy statement dated April 10, 1998, the last date any such
proposal will be received by the Company for inclusion in the Company's
proxy materials relating to the 1999 Annual Meeting is December 12,
1998. For those shareholder proposals which are not submitted in
accordance with Rule 14a-8, the Company's designated proxies may
exercise their discretionary voting authority for any proposal received
after February 24, 1999, without any discussion of the proposal in the
Company's proxy materials.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
4.1 First Amendment dated as of June 30, 1998, to Amended and
Restated Revolving Credit Agreement dated as of February 24,
1998, by and among the Company and The First National Bank of
Chicago.
27 (a) Financial Data Schedule
b) Date of Report Items Reported
February 25, 1998 Item 2. Acquisition or Disposition of Assets
Item 5. Other Events
April 28, 1998 Item 5. Other Events
Item 7. Financial Statements Pro Forma
Financial Information and Exhibits
April 28, 1998 Item 5. Other Events
Item 7. Financial Statements Pro Forma
Financial Information and Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
August 14, 1998 /s/ Scott A. Wolstein
- ---------------------------- ------------------------------------
(Date) Scott A. Wolstein, President and
Chief Executive Officer
August 14, 1998 /s/ William H. Schafer
- ---------------------------- ------------------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)