UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number 1-12803
URSTADT BIDDLE PROPERTIES INC.
(Exact Name of Registrant in its Charter)
MARYLAND 04-2458042
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
321 Railroad Avenue, Greenwich, CT 06830
(Address of principal executive offices) (ZipCode)
Registrant's telephone number, including area code: (203) 863-8200
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___
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and non-accelerated filer in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer __ Accelerated Filer X Non-Accelerated Filer ___
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
As of February 28, 2006, the number of shares of the Registrant's classes of
Common Stock and Class A Common Stock was: 7,603,317 Common Shares, par value
$.01 per share and 18,788,424 Class A Common Shares, par value $.01 per share
THE FORM 10-Q FILED HEREWITH, CONTAINS 26 PAGES, NUMBERED CONSECUTIVELY
FROM 1 TO 26 INCLUSIVE, OF WHICH THIS PAGE IS IS 1.
1
INDEX
URSTADT BIDDLE PROPERTIES INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - January 31, 2006 and October 31, 2005.
Consolidated Statements of Income -Three months ended January 31, 2006
and 2005.
Consolidated Statements of Cash Flows - Three months ended January 31,
2006 and 2005.
Consolidated Statements of Stockholders' Equity - Three months ended
January 31, 2006.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
2
URSTADT BIDDLE PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
January 31, October 31,
2006 2005
------- ----
ASSETS (Unaudited)
Real Estate Investments:
Core properties - at cost $468,567 $468,444
Non-core properties - at cost 6,283 6,383
-------- --------
474,850 474,827
Less: accumulated depreciation (67,643) (65,253)
-------- --------
407,207 409,574
Mortgage notes receivable 1,400 2,024
-------- --------
408,607 411,598
Land held for sale 100 -
Cash and cash equivalents 24,268 26,494
Restricted cash 1,204 1,200
Marketable securities 2,678 2,453
Tenant receivables, net of allowances of $1,439 and $1,409, respectively 16,024 14,442
Prepaid expenses and other assets 6,603 4,526
Deferred charges, net of accumulated amortization 3,375 3,726
-------- --------
Total Assets $462,859 $464,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $111,148 $111,786
Accounts payable and accrued expenses 3,698 3,991
Deferred compensation - officers 1,106 1,051
Other liabilities 4,864 4,699
-------- --------
Total Liabilities 120,816 121,527
-------- --------
Minority interests 5,318 5,318
-------- --------
Redeemable Preferred Stock, par value $.01 per share; 20,000,000 shares authorized;
8.99% Series B Senior Cumulative Preferred Stock (liquidation preference of
$100 per share); 150,000 shares issued and outstanding 14,341 14,341
8.50% Series C Senior Cumulative Preferred Stock (liquidation preference of $100
per share); 400,000 shares issued and outstanding 38,406 38,406
-------- --------
Total Preferred Stock 52,747 52,747
-------- --------
Commitments and Contingencies
Stockholders' Equity:
7.5% Series D Senior Cumulative Preferred Stock (liquidation preference of $25 per share);
2,450,000 shares issued and outstanding 61,250 61,250
Excess stock, par value $.01 per share; 10,000,000 shares authorized;
none issued and outstanding - -
Common stock, par value $.01 per share; 30,000,000 shares authorized;
7,603,317 and 7,429,331 shares issued and outstanding 76 74
Class A Common stock, par value $.01 per share; 40,000,000 shares authorized;
18,788,424 and 18,705,800 shares issued and outstanding 187 187
Additional paid in capital 259,804 267,365
Cumulative distributions in excess of net income (36,638) (35,007)
Accumulated other comprehensive income 599 499
Unamortized restricted stock compensation - (8,221)
Officer note receivable (1,300) (1,300)
-------- --------
Total Stockholders' Equity 283,978 284,847
-------- --------
Total Liabilities and Stockholders Equity $462,859 $464,439
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
URSTADT BIDDLE PROPERTIES INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended
January 31
------------------------
2006 2005
---- ----
Revenues:
Base rents $13,941 $12,241
Recoveries from tenants 4,540 4,103
Interest and other 457 212
------- -------
18,938 16,556
Operating Expenses:
Property operating 3,224 2,566
Property taxes 2,472 2,145
Interest 2,129 2,053
Depreciation and amortization 3,183 2,892
General and administrative expenses 1,321 1,117
Directors' fees and expenses 92 68
------- -------
12,421 10,841
------- -------
Operating Income before Minority Interests and Discontinued Operations 6,517 5,715
Minority Interests (47) (92)
------- -------
Income from Continuing Operations before Discontinued Operations 6,470 5,623
Discontinued Operations:
Income from discontinued operations - 224
Gains on sales of properties - 5,626
------- -------
Income from Discontinued Operations - 5,850
------- -------
Net Income 6,470 11,473
Preferred Stock Dividends (2,336) (1,187)
------- -------
Net Income Applicable to Common and Class A Common Stockholders $4,134 $10,286
======== =======
Basic Earnings per Share:
Per Common Share:
Income from continuing operations $.15 $.17
Income from discontinued operations $ - $.22
--- ----
Net Income Applicable to Common Stockholders $.15 $.39
==== ====
Per Class A Common Share:
Income from continuing operations $.17 $.18
Income from discontinued operations $ - $.24
--- ----
Net Income Applicable to Class A Common Stockholders $.17 $.42
==== ====
Diluted Earnings Per Share:
Per Common Share:
Income from continuing operations $.15 $.16
Income from discontinued operations $ - $.21
--- ----
Net Income Applicable to Common Stockholders $.15 $.37
==== ====
Per Class A Common Share:
Income from continuing operations $.17 $.18
Income from discontinued operations $ - $.23
--- ----
Net Income Applicable to Class A Common Stockholders $.17 $.41
==== ====
Dividends per share:
Common $.2025 $.20
====== ====
Class A Common $.2250 $.22
====== ====
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
URSTADT BIDDLE PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
January 31
---------------------------
2006 2005
Cash Flows from Operating Activities: ---- ----
Net income $6,470 $11,473
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization from discontinued operations - 139
Depreciation and amortization from continuing operations 3,183 2,892
Amortization of compensation expense 472 365
Increase in value of deferred compensation arrangement 11 -
Gains on sales of properties - (5,626)
Gain on repayment of mortgage note receivable (102) -
Minority interests 47 92
Increase in restricted cash (4) (3)
Increase in tenant receivables (1,582) (1,207)
(Decrease) increase in accounts payable and accrued expenses (292) 1,100
Increase in other assets and other liabilities, net (1,869) (1,204)
-------- --------
Net Cash Flow Provided by Operating Activities 6,334 8,021
-------- --------
Cash Flows from Investing Activities:
Acquisition of real estate investments - (51,000)
Net proceeds from sale of property - 9,406
(Purchases) sales of marketable securities (125) 98
Improvements to properties and deferred charges (565) (246)
Distributions to limited partners of consolidated joint ventures (47) (92)
Payments received on mortgage notes receivable 726 20
Deposit on acquisition of property - (100)
-------- --------
Net Cash Flow Used in Investing Activities (11) (41,914)
-------- --------
Cash Flows from Financing Activities:
Proceeds from credit line borrowings - 19,500
Dividends paid -- Common and Class A Common Stock (5,765) (5,591)
Dividends paid -- Preferred Stock (2,336) (1,187)
Payments on mortgage notes payable (638) (546)
Sales of additional Common and Class A Common Stock 190 414
-------- --------
Net Cash Flow (Used in) Provided by Financing Activities (8,549) 12,590
-------- --------
Net Decrease In Cash and Cash Equivalents (2,226) (21,303)
Cash and Cash Equivalents at Beginning of Period 26,494 25,940
-------- --------
Cash and Cash Equivalents at End of Period $24,268 $4,637
======== ========
Supplemental Cash Flow Disclosures:
Interest Paid $2,129 $ 2,053
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
7.5% Series D
Preferred Stock Common Stock Class A Common Stock Additional
--------------- ------------ --------------- Paid In
Issued Amount Issued Amount Issued Amount Capital
------ ------ ------ ------ ------ ------ -------
Balances - October 31, 2005 2,450,000 $61,250 7,429,331 $74 18,705,800 $187 $267,365
Reversal of unamortized stock compensation upon
adoption of SFAS No. 123R - - - - - - (8,221)
Comprehensive Income:
Net income applicable to Common
and Class A common stockholders - - - - - - -
Change in unrealized gains in marketable securities - - - - - - -
Total comprehensive income - - - - - - -
Cash dividends paid :
Common stock ($.2025 per share) - - - - - - -
Class A Common stock ($.225 per share) - - - - - - -
Issuance of shares under dividend reinvestment plan - - 8,186 - 3,574 - 190
Shares issued under restricted stock plan - - 165,800 2 79,050 - (2)
Amortization of restricted stock compensation - - - - - - 472
------- ------- ------- --- ------ ---- ----
Balances - January 31, 2006 2,450,000 $61,250 7,603,317 $76 18,788,424 $187 $259,804
========= ======= ========= === ========== ==== ========
Unamortized
Cumulative Accumulated Restricted Stock
Distributions In Other Compensation Total
Excess of Comprehensive And Notes Stockholders'
Net Income Income Receivable Equity
---------- ------ ---------- ------
Balances - October 31, 2005 $(35,007) $499 $(9,521) $284,847
Reversal of unamortized stock compensation upon
adoption of SFAS No. 123R - - 8,221 -
Comprehensive Income:
Net income applicable to Common
and Class A common stockholders 4,134 - - 4,134
Change in unrealized gains in marketable securities - 100 - 100
----
Total comprehensive income - - - 4,234
Cash dividends paid :
Common stock ($.2025 per share) (1,538) - - (1,538)
Class A Common stock ($.225 per share) (4,227) - - (4,227)
Issuance of shares under dividend reinvestment plan - - - 190
Shares issued under restricted stock plan - - - -
Amortization of restricted stock compensation - - - 472
------- ---- ------- -------
Balances - January 31, 2006 $(36,638) $599 $(1,300) $283,978
========= ==== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Business
Urstadt Biddle Properties Inc. ("Company"), a real estate investment trust
(REIT), is engaged in the acquisition, ownership and management of commercial
real estate, primarily neighborhood and community shopping centers in the
northeastern part of the United States. Non-core assets include a retail
building and industrial properties. The Company's major tenants include
supermarket chains and other retailers who sell basic necessities. At
January 31, 2006, the Company owned or had interests in 34 properties containing
a total of 3.7 million square feet of leasable area.
Principles of Consolidation and Use of Estimates
The accompanying unaudited consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, and joint ventures in
which the Company has the ability to control the affairs of the venture. The
Company believes it has the ability to control the affairs of its consolidated
joint ventures because as the sole general partner, the Company has the
exclusive right to exercise all management powers over the business and affairs
of the respective joint ventures. In addition, the limited partners have no
important rights as defined in the AICPA's Statement of Position ("SOP") 78-9
"Accounting for Investments in Real Estate Ventures". The joint ventures are
consolidated into the consolidated financial statements of the Company. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the three month period ended January 31, 2006, are not
necessarily indicative of the results that may be expected for the year ending
October 31, 2006. It is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended October 31, 2005.
The preparation of financial statements requires management to make use of
estimates and assumptions that affect amounts reported in the financial
statements as well as certain disclosures. Actual results could differ from
those estimates. The balance sheet at October 31, 2005 has been derived from
audited financial statements at that date.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year presentation.
Federal Income Taxes
The Company has elected to be treated as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code (Code). Under those sections, a
REIT, that among other things, distributes at least 90% of real estate trust
taxable income and meets certain other qualifications prescribed by the Code
will not be taxed on that portion of its taxable income that is distributed. The
Company believes it qualifies as a REIT and intends to distribute all of its
taxable income for fiscal 2006 in accordance with the provisions of the code.
Accordingly, no provision has been made for Federal income taxes in the
accompanying consolidated financial statements.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, mortgage notes
receivable and tenant receivables. The Company places its cash and cash
equivalents in excess of insured amounts with high quality financial
institutions. The Company performs ongoing credit evaluations of its tenants and
may require certain tenants to provide security deposits or letters of credit.
Though these security deposits and letters of credit are insufficient to meet
the terminal value of a tenant's lease obligation, they are a measure of good
faith and a source of funds to offset the economic costs associated with lost
rent and the costs associated with retenanting the space. There is no dependence
upon any single tenant.
Marketable Securities
Marketable securities consist of short-term investments and marketable equity
securities. Short-term investments (consisting of investments with original
maturities of greater than three months when purchased) and marketable equity
securities are carried at fair value. The Company has classified marketable
securities as available for sale. Unrealized gains and losses on available for
sale securities are recorded as other comprehensive income in Stockholders'
Equity. At January 31, 2006, accumulated other comprehensive income consists of
net unrealized gains of $599,000. Unrealized gains included in accumulated other
comprehensive income will be reclassified into earnings as gains are realized.
For the three month periods ended January 31, 2006 and 2005, there were no gains
or losses of sales of marketable securities.
7
Earnings Per Share
The Company calculates basic and diluted earnings per share in accordance with
SFAS No. 128, "Earnings Per Share." Basic earnings per share ("EPS") excludes
the impact of dilutive shares and is computed by dividing net income applicable
to Common and Class A Common stockholders by the weighted number of Common
shares and Class A Common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue Common shares or Class A Common shares were exercised or
converted into Common shares or Class A Common shares and then shared in the
earnings of the Company. Since the cash dividends declared on the Company's
Class A Common stock are higher than the dividends declared on the Common Stock,
basic and diluted EPS have been calculated using the "two-class" method. The
two-class method is an earnings allocation formula that determines earnings per
share for each class of common stock according to the weighted average of the
dividends declared, outstanding shares per class and participation rights in
undistributed earnings.
The following table sets forth the reconciliation between basic and diluted EPS
(in thousands):
Three Months Ended
January 31
------------------
2006 2005
---- ----
Numerator
Net income applicable to common stockholders - basic $1,018 $2,526
Effect of dilutive securities:
Operating partnership units 54 91
------ ------
Net income applicable to common stockholders - diluted $1,072 $2,617
====== ======
Denominator
Denominator for basic EPS weighted average common shares 6,645 6,547
Effect of dilutive securities:
Stock options and awards 450 402
Operating partnership units 55 55
-- --
Denominator for diluted EPS - weighted average common equivalent shares 7,150 7,004
===== =====
Numerator
Net income applicable to Class A common stockholders-basic 3,116 $7,760
Effect of dilutive securities:
Operating partnership units (8) 1
--- ---
Net income applicable to Class A common stockholders - diluted $3,108 $7,761
====== ======
Denominator
Denominator for basic EPS - weighted average Class A common shares 18,304 18,289
Effect of dilutive securities:
Stock options and awards 286 290
Operating partnership units 55 310
-- ---
Denominator for diluted EPS - weighted average Class A common equivalent shares 18,645 18,889
====== ======
Segment Reporting
The Company operates in one industry segment, ownership of commercial real
estate properties which are located principally in the northeastern United
States. The Company does not distinguish its property operations for purposes of
measuring performance. Accordingly, the Company believes it has a single
reportable segment for disclosure purposes.
8
(2) CORE PROPERTIES
In June 2005, the Company acquired Staples Plaza ("Staples Plaza"), a 200,000
square foot shopping center located in Yorktown, New York for $28.5 million
(including the assumption of a first mortgage loan at its estimated fair value
of $8.5 million) and closing costs of approximately $113,000.
Upon the acquisition of real estate properties, the fair value of the real
estate purchased is allocated to the acquired tangible assets (consisting of
land, buildings and building improvements), and identified intangible assets and
liabilities, (consisting of above-market and below-market leases and in-place
leases), in accordance with SFAS No. 141 "Business Combinations". The Company
utilizes methods similar to those used by independent appraisers in estimating
the fair value of acquired assets and liabilities. The fair value of the
tangible assets of an acquired property considers the value of the property
"as-if-vacant". The fair value reflects the depreciated replacement cost of the
asset. In allocating purchase price to identified intangible assets and
liabilities of an acquired property, the value of above-market and below-market
leases are estimated based on the differences between (i) contractual rentals
and the estimated market rents over the applicable lease term discounted back to
the date of acquisition utilizing a discount rate adjusted for the credit risk
associated with the respective tenants and (ii) the estimated cost of acquiring
such leases giving effect to the Company's history of providing tenant
improvements and paying leasing commissions, offset by a vacancy period during
which such space would be leased. The aggregate value of in-place leases, is
measured by the excess of (i) the purchase price paid for a property after
adjusting existing in-place leases to market rental rates over (ii) the
estimated fair value of the property "as-if-vacant," determined as set forth
above.
The Company is currently in the process of analyzing the fair value of in-place
leases for Staples Plaza and consequently, no value has yet been assigned to the
leases. Accordingly, the purchase price allocation is preliminary and may be
subject to change.
The Company is the general partner in a consolidated limited partnership which
owns a shopping center. The limited partnership has a defined termination date
of December 31, 2097. Upon liquidation of the partnership, proceeds from the
sale of partnership assets are to be distributed in accordance with the
respective partner interest. If termination of the partnership occurred on
January 31, 2006 the amount payable to the limited partners is estimated to be
$3,200,000. The Company has retained an affiliate of one of the limited partners
to provide management and leasing services to the property at an annual fee of
$125,000 through June 2007. For the three months ended January 31, 2006 and 2005
the affiliate received payments of $31,250 for such services rendered.
(3) DISCONTINUED OPERATIONS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144). SFAS No. 144 requires, among other things, that the
assets and liabilities and the results of operations of the Company's properties
which have been sold or otherwise qualify as held for sale be classified as
discontinued operations and presented separately in the Company's consolidated
financial statements.
During fiscal 2005, the Company sold, in separate transactions, two properties
for an aggregate sales price of approximately $19 million, resulting in gains on
sales of properties of approximately $7.0 million, of which $5.6 million was
recognized in the first quarter of fiscal 2005.
The operating results for the two properties sold in fiscal 2005 have been
reclassified as discontinued operations in the accompanying 2005 consolidated
statement of income. Revenues from discontinued operations were $710,000 in the
three month period ended January 31, 2005.
(4) BANK LINES OF CREDIT
At January 31, 2006, the Company had a secured revolving credit facility with a
commercial bank (the "Secured Credit Facility") which provides for borrowing of
up to $30 million. The Secured Credit Facility expires in April 2008 and is
collateralized by first mortgage liens on two of the Company's properties.
Interest on outstanding borrowings is at prime + 1/2% or LIBOR + 1.5%. The
Secured Credit Facility requires the Company to maintain certain debt service
coverage ratios during its term. The Company pays an annual fee of 0.25% on the
unused portion of the Secured Credit Facility. The Secured Credit Facility is
available to fund acquisitions, capital expenditures, mortgage repayments,
working capital and other general corporate purposes.
The Company also has a $30 million unsecured line of credit ("Unsecured credit
line") arrangement with the same bank. During the first quarter of fiscal 2006
the Company extended the Unsecured credit line for a one year period. The
Unsecured credit line expires in January 2007 and is available to finance the
acquisition of real estate, refinance outstanding indebtedness and for working
9
capital needs. The Unsecured credit line is an uncommitted bank arrangement and
extensions of credit are at the bank's discretion and subject to the bank's
satisfaction of certain conditions that must be met by the Company. Outstanding
borrowings bear interest at the Prime + 1/2% or LIBOR + 2.5%. The Company pays
an annual fee of 0.25% on unused amounts.
(5) STOCKHOLDERS' EQUITY
At January 31, 2006, the Company has two stock-based employee compensation
plans which are described more fully below. Prior to November 1, 2005, the
Company accounted for those plans under the recognition and measurement
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB No.25") and related Interpretations, as permitted by FASB Statement
No. 123, "Accounting for Stock-Based Compensation." Effective November 1,
2005, the Company adopted the fair value recognition provisions of FASB
Statement No.123(R), "Share-Based Payment," ("SFAS No.123R") using the
modified-prospective-transition method. Under that transition method,
compensation expense recognized in fiscal 2006, for all share-based payments
granted subsequent to November 1, 2005, is based on the grant-date fair
value of the stock grants less estimated forfeitures in accordance with the
provisions of SFAS No. 123(R). Results for prior periods have not been
restated.
Restricted Stock Plan
The Company has a restricted stock plan for key employees and directors of
the Company. The restricted stock plan ("Plan"), as amended, provides for
the grant of up to 1,650,000 of the Company's common equity consisting of
350,000 Common shares, 350,000 Class A Common shares and 950,000 shares,
which at the discretion of the Company's compensation committee, may be
awarded in any combination of Class A Common shares or Common shares. In
January 2006, the Company awarded 165,800 shares of Common Stock and
79,050 shares of Class A Common Stock to participants in the plan. The grant
date fair value of restricted stock grants awarded to participants in January
2006 was $3.9 million.
Prior to November 1, 2005, the grant date fair value of restricted stock
awards was expensed over the respective vesting periods. Such awards also
provided for continued vesting after retirement. Upon adoption of SFAS No.
123R, the Company changed its policy for recognizing compensation expense for
restricted stock awards to the earlier of the vesting period of the grant
or the date a participant first becomes eligible for retirement, as defined.
For restricted stock awards granted prior to the adoption of SFAS No.123R,
the Company will continue to recognize compensation expense over the
vesting periods and accelerate any remaining unrecognized compensation
cost when a participant actually retires. Had compensation expense for
restricted stock awards issued prior to November 1, 2005 been determined based
on the date a participant first becomes eligible for retirement, the
Company's net income in the three month periods ended January 31, 2006 and 2005
would have increased by $138,000 and decreased by $1,156,000, respectively.
Consistent with the provisions of APB No.25, the Company recorded the fair
value of restricted stock grants and an offsetting deferred compensation
amount within stockholders equity for unearned stock compensation cost.
Under SFAS No.123R an equity instrument is not considered to be issued until
the instrument vests. Accordingly, the Company reversed $8,221,000 of
unamortized restricted stock compensation included in stockholders equity as
of November 1, 2005 representing the unvested portions of restricted stock
grants awarded prior to the effective date of SFAS No.123R. As of January
31, 2006, there was $11.7 million of unamortized restricted stock compensation
related to nonvested restricted stock grants awarded under the Plan. The
remaining unamortized expense is expected to be recognized over a weighted
average period of 8 years. For the three months ended January 31, 2006 and 2005
amounts charged to compensation expense totaled $472,000 and $365,000,
respectively.
A summary of the status of the Company's non vested Common and Class A Common
shares as of January 31, 2006, and changes during the quarter ended January 31,
2006 are presented below:
Common Shares Class A Common Shares
--------------- --------------------------
Weighted-Average Weighted-Average
Grant-Date Grant-Date
Non vested Shares Shares Fair Value Shares Fair Value
----------------- ------ ---------- ------- ----------
Non vested at November 1, 2005 823,175 $12.19 435,925 $11.16
Granted 165,800 $15.90 79,050 $16.42
Vested (48,500) $7.06 (48,500) $7.25
Forfeited - - - -
------- -------
Non vested at January 31, 2006 940,475 $13.10 466,475 $12.46
======= =======
Stock Option Plan
The Company also has a stock option plan whereby shares were reserved for
issuance to key employees and Directors of the Company. Options are granted at
fair market value on the date of the grant, have a duration of ten years from
the date of grant, and vest over a maximum period of four years from the date of
grant. There were no grants of stock options in fiscal 2006 or 2005. At
January 31, 2006, there were outstanding stock options to purchase 17,398 shares
of Common Stock and 12,359 shares of Class A Common Stock.
The last grant of stock options occurred in fiscal 2000 and all outstanding
stock options at January 31, 2006 were fully vested during fiscal 2006 and 2005.
The Company has a Dividend Reinvestment and Share Purchase Plan, as amended,
which permits shareholders to acquire additional shares of Common Stock and
Class A Common Stock by automatically reinvesting dividends. During the three
months ended January 31, 2006, the Company issued 8,186 shares of Common Stock
and 3,574 shares of Class A Common Stock through the Plan. As of January 31,
2006, there remained 232,331 shares of Common Stock and 505,887 shares of Class
A Common Stock available for issuance under the Plan.
In fiscal 2005, the Board of Directors of the Company approved a stock
repurchase program for the repurchase of up to 500,000 shares of Common Stock
and Class A common stock in the aggregate. As of January 31, 2006, the Company
had repurchased 3,600 shares of Common Stock and 41,400 shares of Class A Common
Stock at an aggregate repurchase cost of $686,000. There were no repurchases
during the first quarter of fiscal 2006.
In fiscal 2005, the Company sold 2,450,000 shares of a new 7.5% Series D Senior
Cumulative Preferred Stock issue ("Series D Preferred Stock") in a public
offering. The Series D Preferred Stock has no maturity and is not convertible
into any other security of the Company. The Series D Preferred Stock is
redeemable at the Company's option on or after April 12, 2010 at a price of
$25.00 per share plus accrued and unpaid dividends. Underwriting commissions and
costs incurred in connection with the sale of the Series D Preferred Stock are
reflected as a reduction of additional paid in capital.
(6) MORTGAGE NOTES RECEIVABLE
In January 2006, a mortgage note receivable with a net carrying amount of
$605,000 was fully paid by the borrower. The mortgage note was recorded at a
discounted amount which reflected the market rates at the time of acceptance of
the note. In connection with the loan repayment, the Company recorded a gain on
the repayment of $102,000, which amount is included in other income in the
accompanying consolidated statement of income for the three months ended January
31, 2006.
(7) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma financial information set forth below is based upon the
Company's historical consolidated statements of income for the three months
ended January 31, 2005 adjusted to give effect to the acquisitions of two
properties in fiscal 2005 totaling $79.6 million and the issuance of 2,450,000
shares of Series D Preferred Stock as though these transactions were completed
on November 1, 2004.
11
The pro forma financial information is presented for informational purposes
only and may not be indicative of what the actual results of operations would
have been had the transactions occurred as of the beginning of the period nor
does it purport to represent the results of future operations. (Amounts in
thousands, except per share figures).
Three Months Ended
January 31, 2005
Pro forma revenues $18,323
=======
Pro forma income from continuing operations $6,449
======
Pro forma income from continuing operations applicable to
Common and Class A Common stockholders $4,643
======
Pro forma basic shares outstanding:
Common and Common Equivalent 6,547
=====
Class A Common and Class A Common Equivalent 18,289
======
Pro forma diluted shares outstanding:
Common and Common Equivalent 7,004
=====
Class A Common and Class A Common Equivalent 18,889
======
Pro forma earnings per share from continuing operations:
Basic:
Common $.17
====
Class A Common $.19
====
Diluted:
Common $.17
====
Class A Common $.18
====
(8) REDEEMABLE PREFERRED STOCK
The 8.99% Series B Senior Cumulative Preferred Stock ("Series B Preferred
Stock") and 8.50% Series C Senior Cumulative Preferred Stock ("Series C
Preferred Stock") have no stated maturity, are not subject to any sinking fund
or mandatory redemption and are not convertible into other securities or
property of the Company. Commencing May 2008 (Series B Preferred Stock) and May
2010 (Series C Preferred Stock), the Company, at its option, may redeem the
preferred stock issues, in whole or in part, at a redemption price of $100 per
share, plus all accrued dividends. Upon a change in control of the Company (as
defined), each holder of Series B Preferred Stock and Series C Preferred Stock
has the right, at such holder's option, to require the Company to repurchase all
or any part of such holder's stock for cash at a repurchase price of $100 per
share, plus all accrued and unpaid dividends.
The Series B Preferred Stock and Series C Preferred Stock contain covenants,
which require the Company to maintain certain financial coverages relating to
fixed charge and capitalization ratios. Shares of both Preferred Stock series
are non-voting; however, under certain circumstances (relating to non-payment of
dividends or failure to comply with the financial covenants) the preferred
stockholders will be entitled to elect two directors. The Company was in
compliance with such covenants at January 31, 2006 and 2005.
As the holders of the Series B Preferred Stock and Series C Preferred Stock only
have a contingent right to require the Company to repurchase all or part of such
holders shares upon a change of control of the Company (as defined), the Series
B Preferred Stock and Series C Preferred Stock are classified as redeemable
equity instruments as a change in control is not certain to occur.
12
(9) COMMITMENTS AND CONTINGENCIES
In January 2006, the Company entered into a contract to sell unimproved land
that it owns in Tempe, Arizona for $2,250,000 in cash. The contract is subject
to certain contingencies and therefore there can be no assurance as to when or
if the transaction will be completed.
In the normal course of business, from time to time, the Company is involved in
legal actions relating to the ownership and operations of its properties. In
management's opinion, the liabilities, if any that may ultimately result from
such legal actions are not expected to have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
At January 31, 2006, the Company had commitments of approximately $500,000 for
tenant related obligations.
(10) SUBSEQUENT EVENTS
On March 9, 2006, the Board of Directors of the Company declared cash dividends
of $.2025 for each share of Common Stock and $.2250 for each share of Class A
Common Stock. The dividends are payable on April 21, 2006.
On March 9, 2006, the Company's stockholders approved an amendment to the
Company's Restricted Stock Award Plan ("Plan") increasing the maximum number of
shares of restricted stock available for issuance under the Plan from 1,650,000
shares to 2,000,000 shares (consisting of 350,000 shares each of Class A Common
Stock and Common Stock and 1,300,000 shares which, at the discretion of the
compensation committee may be awarded in any combination of Class A Common
and Common Stock).
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion is based on our consolidated financial statements as of
January 31, 2006 and 2005 and for the three month periods then ended. This
information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
report.
Forward Looking Statements
This Item 2 includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
in this Item 2 that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as future capital expenditures, dividends and acquisitions (including
the amount and nature thereof), business strategies, expansion and growth of the
Company's operations and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes
are appropriate. Such statements are subject to a number of assumptions, risks
and uncertainties, including general economic and business conditions, the
business opportunities that may be presented to and pursued by the Company,
changes in laws or regulations and other factors, many of which are beyond the
control of the Company. For a discussion of some of these factors, see the risk
factors set forth in "Item 1A Risk Factors" of the Company's Form 10-K for the
year ended October 31, 2005. Any such statements are not guarantees of future
performance and actual results or developments may differ materially from those
anticipated in the forward-looking statements.
Executive Summary
The Company, a REIT, is a fully integrated, self-administered real estate
company, engaged in the acquisition, ownership and management of commercial real
estate, primarily neighborhood and community shopping centers in the
northeastern part of the United States. Non core assets include office
and retail buildings and industrial properties. The Company's major tenants
include supermarket chains and other retailers who sell basic necessities. At
January 31, 2006, the Company owned or had controlling interests in 34
properties containing a total of 3.7 million square feet of gross leasable area
("GLA") of which approximately 97% was leased.
The Company derives substantially all of its revenues from rents and operating
expense reimbursements received pursuant to long-term leases and focuses its
investment activities on community and neighborhood shopping centers, anchored
principally by regional supermarket chains. The Company believes, because of the
need of consumers to purchase food and other staple goods and services generally
available at supermarket-anchored shopping centers, that the nature of its
investments provide for relatively stable revenue flows even during difficult
economic times.
The Company focuses on increasing cash flow, and consequently the value of its
properties, and seeks continued growth through strategic re-leasing, renovations
and expansion of its existing properties and selective acquisition of income
producing properties, primarily neighborhood and community shopping centers in
the northeastern part of the United States.
Key elements of the Company's growth strategies and operating policies are to:
|X| Acquire neighborhood and community shopping centers in the
northeastern part of the United States with a concentration in
Fairfield County, Connecticut, and Westchester and Putnam
Counties, New York
|X| Hold core properties for long-term investment and enhance their
value through regular maintenance, periodic renovation and capital
improvement
|X| Selectively dispose of non-core assets and re-deploy the proceeds
into properties located in the Company's preferred region
|X| Increase property values by aggressively marketing available GLA
and renewing existing leases
|X| Renovate, reconfigure or expand existing properties to meet the
needs of existing or new tenants
|X| Negotiate and sign leases which provide for regular or fixed
contractual increases to minimum rents |X| Control property
operating and administrative costs
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of the Company's financial condition and results of operations and
require management's most difficult, complex or subjective judgments. Set forth
below is a summary of the accounting policies that management believes are
14
critical to the preparation of the consolidated financial statements. This
summary should be read in conjunction with the more complete discussion of the
Company's accounting policies included in Note 1 to the consolidated financial
statements of the Company for the year ended October 31, 2005.
Revenue Recognition
Revenues from operating leases include revenues from core properties and
non-core properties. Rental income is generally recognized based on the terms of
leases entered into with tenants. In those instances in which the Company funds
tenant improvements and the improvements are deemed to be owned by the Company,
revenue recognition will commence when the improvements are substantially
completed and possession or control of the space is turned over to the tenant.
When the Company determines that the tenant allowances are lease incentives, the
Company commences revenue recognition when possession or control of the space is
turned over to the tenant for tenant work to begin.
The Company records base rents on a straight-line basis over the term of each
lease. The excess of rents recognized over amounts contractually due pursuant to
the underlying leases is included in tenant receivables on the accompanying
balance sheets. Most leases contain provisions that require tenants to reimburse
a pro-rata share of real estate taxes and certain common area expenses.
Adjustments are also made throughout the year to tenant receivables and the
related cost recovery income based upon the Company's best estimate of the final
amounts to be billed and collected.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is established based on a quarterly analysis
of the risk of loss on specific accounts. The analysis places particular
emphasis on past-due accounts and considers information such as the nature and
age of the receivables, the payment history of the tenants or other debtors, the
financial condition of the tenants and any guarantors and management's
assessment of their ability to meet their lease obligations, the basis for any
disputes and the status of related negotiations, among other things.
Management's estimates of the required allowance is subject to revision as these
factors change and is sensitive to the effects of economic and market conditions
on tenants, particularly those at retail centers. Estimates are used to
establish reimbursements from tenants for common area maintenance, real estate
tax and insurance costs. The Company analyzes the balance of its estimated
accounts receivable for real estate taxes, common area maintenance and insurance
for each of its properties by comparing actual recoveries versus actual expenses
and any actual write-offs. Based on its analysis, the Company may record an
additional amount in its allowance for doubtful accounts related to these items.
It is also the Company's policy to maintain an allowance of approximately 10% of
the deferred straight-line rents receivable balance for future tenant credit
losses.
Real Estate
Land, buildings, property improvements, furniture/fixtures and tenant
improvements are recorded at cost. Expenditures for maintenance and repairs are
charged to operations as incurred. Renovations and/or replacements, which
improve or extend the life of the asset, are capitalized and depreciated over
their estimated useful lives.
The amounts to be capitalized as a result of an acquisition and the periods over
which the assets are depreciated or amortized are determined based on estimates
as to fair value and the allocation of various costs to the individual assets.
The Company allocates the cost of an acquisition based upon the estimated fair
value of the net assets acquired. The Company also estimates the fair value of
intangibles related to its acquisitions. The valuation of the fair value of
intangibles involves estimates related to market conditions, probability of
lease renewals and the current market value of in-place leases. This market
value is determined by considering factors such as the tenant's industry,
location within the property and competition in the specific region in which the
property operates. Differences in the amount attributed to the intangible assets
can be significant based upon the assumptions made in calculating these
estimates.
The Company is required to make subjective assessments as to the useful life of
its properties for purposes of determining the amount of depreciation. These
assessments have a direct impact on the Company's net income.
Properties are depreciated using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are as follows:
Buildings 30-40 years
Property Improvements 10-20 years
Furniture/Fixtures 3-10 years
Tenant Improvements Shorter of lease term or their useful life
15
Asset Impairment
On a periodic basis, management assesses whether there are any indicators that
the value of the real estate properties and mortgage notes receivable may be
impaired. A property value is considered impaired when management's estimate of
current and projected operating cash flows (undiscounted and without interest)
of the property over its remaining useful life is less than the net carrying
value of the property. Such cash flow projections consider factors such as
expected future operating income, trends and prospects, as well as the effects
of demand, competition and other factors. To the extent impairment has occurred,
the loss is measured as the excess of the net carrying amount of the property
over the fair value of the asset. Changes in estimated future cash flows due to
changes in the Company's plans or market and economic conditions could result in
recognition of impairment losses which could be substantial. Management does not
believe that the value of any of its rental properties or mortgage notes
receivable is impaired at January 31, 2006.
Liquidity and Capital Resources
At January 31, 2006, the Company had unrestricted cash and cash equivalents of
$24.3 million compared to $26.5 million at October 31, 2005. The Company's
sources of liquidity and capital resources include its cash and cash
equivalents, proceeds from bank borrowings and long-term mortgage debt, capital
financings and sales of real estate investments. Payments of expenses related to
real estate operations, debt service, management and professional fees, and
dividend requirements place demands on the Company's short-term liquidity.
Cash Flows
The Company expects to meet its short-term liquidity requirements primarily by
generating net cash from the operations of its properties. The Company believes
that its net cash provided by operations will be sufficient to fund its
short-term liquidity requirements for fiscal 2006 and to meet its dividend
requirements necessary to maintain its REIT status. The Company expects to
continue paying regular dividends to its stockholders. These dividends will be
paid from operating cash flows which are expected to increase principally from
property acquisitions and growth in operating income in the existing portfolio.
The Company derives substantially all of its revenues from tenants under
existing leases at its properties. The Company's operating cash flow therefore
depends on the rents that it is able to charge to its tenants, and the ability
of its tenants to make rental payments. The Company believes that the nature of
the properties in which it typically invests - primarily grocery-anchored
neighborhood and community shopping centers - provides a more stable revenue
flow in uncertain economic times, in that consumers still need to purchase basic
staples and convenience items. However, even in the geographic areas in which
the Company owns properties, general economic downturns may adversely impact the
ability of the Company's tenants to make lease payments and the Company's
ability to re-lease space as leases expire. In either of these cases, the
Company's cash flow could be adversely affected.
Net Cash Flows
Operating Activities
Net cash flows provided by operating activities amounted to $6.3 million in the
first quarter of fiscal 2006, compared to $8.0 million in the comparable period
of fiscal 2005. The changes in operating cash flows reflect the net operating
results generated from the Company's core properties, operating cash flows from
new properties acquired during fiscal 2005 and a net decrease in accounts
payable and accrued expenses in the first quarter of fiscal 2006.
16
Investing Activities
Net cash flows used in investing activities were $11,000 in the first quarter of
fiscal 2006 compared to $41.9 million in the same period in fiscal 2005. The net
cash flows in fiscal 2005 reflect the acquisition of a retail property for
approximately $51 million and the sale of a retail property for net proceeds of
$9.4 million. Sale proceeds were used in connection with the purchase of retail
properties in fiscal 2005. There were no purchases or sales of properties in the
first quarter of 2006. The Company received cash proceeds of $707,000 in respect
of a mortgage note receivable that was repaid during fiscal 2006.
Financing Activities
Net cash flows used in financing activities amounted to $8.5 million in the
first of quarter 2006 and net cash flows provided by financing activities
amounted to $12.6 million in 2005. In fiscal 2005, the Company borrowed $19.5
million under its bank lines of credit, which amounts were fully repaid during
the year. Quarterly distributions paid to shareholders totaled $8.1 million in
2006 compared to $6.8 million in 2005. The increase in distributions reflects
dividends paid on a new issue of preferred stock sold in the second and third
quarters of fiscal 2005.
Capital Resources
The Company expects to fund its long-term liquidity requirements such as
property acquisitions, repayment of indebtedness and capital expenditures
through other long-term indebtedness (including indebtedness assumed in
acquisitions), proceeds from sales of properties and/or the issuance of equity
securities. The Company believes that these sources of capital will continue to
be available to it in the future to fund its long-term capital needs; however,
there are certain factors that may have a material adverse effect on its access
to capital sources. The Company's ability to incur additional debt is dependent
upon its existing leverage, the value of its unencumbered assets and borrowing
limitations imposed by existing lenders. The Company's ability to raise funds
through sales of equity securities is dependent on, among other things, general
market conditions for REITs, market perceptions about the Company and its stock
price in the market. The Company's ability to sell properties in the future to
raise cash will be dependent upon market conditions at the time of sale.
Financings and Debt
In fiscal 2005 the Company publicly announced that its Board of Directors
approved a share repurchase program of up to 500,000 shares, in the aggregate,
of the Company's Common and Class A Common Stock. The program does not have a
specific expiration date and may be discontinued at any time. There is no
assurance that the Company will repurchase the full amount of shares authorized.
There were no repurchases of shares under this program during the first quarter
of fiscal 2006. As of January 31, 2006, the Company had repurchased a total of
3,600 shares of common stock and 41,400 shares of Class A Common Stock at an
aggregate cost of $686,000.
In fiscal 2005, the Company sold 2,450,000 shares of 7.5% Series D Senior
Cumulative Preferred Stock ("Series D Preferred Stock") in a public offering for
net proceeds of approximately $59.4 million. The Series D Preferred Stock has no
stated maturity and is not convertible into other securities of the Company. On
or after April 12, 2010, the Series D Preferred Stock may be redeemed by the
Company, at its option, at a redemption price of $25 per share plus accrued and
unpaid dividends.
The Company utilized a portion of the net proceeds from the preferred stock
sales to repay all of its then outstanding secured and unsecured revolving
credit line indebtedness of $19.5 million. The Company also used approximately
$20 million of the net proceeds to fund the cash portion of the purchase price
of a property acquired in June 2005. The balance of the net proceeds is expected
to be used to acquire other income producing properties and to fund renovations
on, or capital improvements to, existing properties, including tenant
improvements and for working capital.
The Company is exposed to interest rate risk primarily through its borrowing
activities. There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. The extent of this risk is not quantifiable
or predictable because of the variability of future interest rates and the
Company's future financing requirements. At January 31, 2006, the Company did
not have any variable rate debt outstanding.
Mortgage notes payable of $111.1 million consist of fixed rate mortgage loan
indebtedness with a weighted average interest rate of 7.34% at January 31, 2006.
The mortgage loans are secured by seventeen properties with a net book value of
$191.6 million and have fixed rates of interest ranging from 5.75% to 8.125%.
The Company expects to refinance most of its mortgage loans, at or prior to
scheduled maturity, through replacement mortgage loans. The ability to do so,
however, is dependent upon various factors, including the income level of the
properties, interest rates and credit conditions within the commercial real
estate market. Accordingly, there can be no assurance that such refinancings can
be achieved.
17
The Company has a secured revolving credit facility with a commercial bank which
provides for borrowings of up to $30 million for a three year period ending in
fiscal 2008. The secured revolving credit facility is collateralized by two
properties having a net book value of $27.6 million at January 31, 2006. There
were no borrowings outstanding on the secured revolving credit facility at
January 31, 2006. The Company also has an unsecured revolving line of credit
with the same bank for $30 million. In January 2006, the Company renewed the
unsecured credit line for a one year period. The unsecured credit line expires
in January 2007. At January 31, 2006, there were no borrowings outstanding on
this line of credit. Extensions of credit under the unsecured credit line are at
the bank's discretion and subject to the bank's satisfaction of certain
conditions which must be met by the Company.
Both credit lines are available to finance the acquisition, management and/or
development of commercial real estate, refinance indebtedness and for working
capital purposes.
Contractual Obligations
The Company's contractual payment obligations as of January 31, 2006, were as
follows (amounts in thousands):
Payments Due by Period
-------------------------------------------------------------------------------------
Total 2006 2007 2008 2009 2010 Thereafter
----- ---- ---- ---- ---- ---- ----------
Mortgage notes payable $111,148 $6,837 $11,638 $61,252 $17,760 $5,499 $8,162
Tenant obligations* 523 523 - - - - -
--- --- --- --- --- --- ---
Total Contractual Obligations $111,671 $7,360 $11,638 $61,252 $17,760 $5,499 $8,162
======== ====== ======= ======= ======= ====== ======
*Committed tenant-related obligations based on executed leases as of January 31,
2006.
The Company has various standing or renewable service contracts with vendors
related to its property management. In addition, the Company also has certain
other utility contracts entered into in the ordinary course of business which
may extend beyond one year, which vary based on usage. These contracts include
terms that provide for cancellation with insignificant or no cancellation
penalties. Contract terms are generally one year or less.
Off-Balance Sheet Arrangements
During the quarter ended January 31, 2006 the Company did not have any material
off-balance sheet arrangements.
Capital Expenditures
The Company invests in its existing properties and regularly incurs capital
expenditures in the ordinary course of business to maintain its properties. The
Company believes that such expenditures enhance the competitiveness of its
properties. During the quarter ended January 31, 2006, the Company incurred
approximately $565,000 for capital expenditures for property improvements,
tenant improvements and leasing commissions. The amounts of these expenditures
can vary significantly depending on tenant negotiations, market conditions and
rental rates. The Company expects to incur approximately $2 million for
anticipated capital improvements and leasing costs during the balance of fiscal
2006. These expenditures are expected to be funded from operating cash flows or
borrowings.
Acquisitions
The Company seeks to acquire properties which are primarily shopping centers
located in the northeastern part of the United States with a concentration in
Fairfield County, Connecticut and Westchester and Putnam Counties, New York.
There have been no purchases of properties in the first quarter of fiscal 2006.
Sales
In the first quarter of fiscal 2005, the Company sold its Farmingdale, New York
property for a sale price of $9.75 million and recorded a gain on the sale of
approximately $5.6 million. The proceeds were used to complete the acquisition
of a property in January 2005.
18
Non-Core Assets
In a prior year, the Company's Board of Directors expanded and refined the
strategic objectives of the Company to refocus its real estate portfolio into
one of self-managed retail properties located in the northeast and authorized
the sale of the Company's non-core properties in the normal course of business
over a period of several years. The non-core properties consist of two
distribution service facilities and one retail property (all of which are
located outside of the northeast region of the United States). The Company
intends to sell its non-core properties as opportunities become available. The
Company's ability to generate cash from asset sales is dependent upon market
conditions and will necessarily be limited if market conditions make such sales
unattractive. There were no sales of non-core assets during the quarter ended
January 31, 2006. The Company has entered into a contract for the sale of a
portion of land on the non-core retail property for $2.25 million. At January
31, 2006, the three remaining non-core properties have a net book value of
approximately $3.0 million.
19
Funds from Operations
The Company reports Funds from Operations ("FFO") in addition to its net income
applicable to common stockholders and net cash provided by operating activities.
The Company considers Funds from Operations to be an additional measure of an
equity REIT's operating performance. Management has adopted the definition
suggested by The National Association of Real Estate Investment Trusts
("NAREIT") and defines FFO to mean net income (computed in accordance with
generally accepted accounting principles ("GAAP") excluding gains (or losses)
from sales of property, plus real estate related depreciation and amortization
and after adjustments for unconsolidated joint ventures.
Management considers FFO a meaningful, additional measure of operating
performance because it primarily excludes the assumption that the value of its
real estate assets diminishes predictably over time and industry analysts have
accepted it as a performance measure. FFO is presented to assist investors in
analyzing the performance of the Company. It is helpful as it excludes various
items included in net income that are not indicative of the Company's operating
performance, such as gains (or losses) from sales of property and deprecation
and amortization. However, FFO:
|X| does not represent cash flows from operating activities in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events in the determination of net income); and
|X| should not be considered an alternative to net income as an indication
of the Company's performance.
FFO, as defined by us, may not be comparable to similarly titled items reported
by other real estate investment trusts due to possible differences in the
application of the NAREIT definition used by such REITs. The table below
provides a reconciliation of net income applicable to Common and Class A Common
Stockholders in accordance with GAAP to FFO for the three months ended January
31, 2006 and 2005 (amounts in thousands).
Three Months Ended January 31,
2006 2005
---- ----
Net Income Applicable to Common and Class A Common Stockholders $4,134 $ 10,286
Plus: Real property depreciation 2,475 2,103
Amortization of tenant improvements and allowances 512 609
Amortization of deferred leasing costs 173 180
Depreciation and amortization on discontinued operations - 139
Less: Gains on sales of properties - (5,626)
------ -------
Funds from Operations Applicable to Common and Class A Common Stockholders $7,294 $7,691
====== ======
Net Cash Provided by (Used in):
Operating Activities $6,334 $8,021
====== ======
Investing Activities $(11) $(41,914)
===== =========
Financing Activities $(8,549) $12,590
======== =======
FFO amounted to $7.3 million in fiscal 2006 compared to $7.7 million in fiscal
2005. The change in FFO is attributable to an increase in same property and new
property operating income in the first quarter of fiscal 2006. Such increases
were offset by higher general and administrative expenses and the effect of low
yielding returns on the temporary investment of approximately $20 million in
proceeds remaining from the sales of the Company's new issue of Series D
Preferred Stock in fiscal 2005. See discussion which follows.
20
Results of Operations
Comparison of the three month period ended January 31, 2006 to the three month
period ended January 31, 2005
Revenues
Rental revenues from base rents increased to $13.9 million in the first quarter
of fiscal 2006, as compared to $12.2 million in the comparable quarter of fiscal
2005.
The net change in rentals resulted primary from: (i) the additional base rents
from properties acquired during 2005 which increased base rents incrementally by
$1.4 million during the quarter ended January 31, 2006 and (ii) rents from
properties owned during both periods which increased $341,000 principally from
recent lease renewals at generally higher base rental rates compared to the
expiring rental rates. For the first three months of fiscal 2006 the Company
leased or renewed approximately 39,000 square feet of space. At January 31,
2006, the Company's core properties were 97% leased, a decrease of 1% from the
end of fiscal 2005. The Company has leases totaling approximately 6% of its core
property GLA scheduled to expire during the remainder of fiscal 2006.
Recoveries from tenants (which represent reimbursements from tenants for
property operating expenses and property taxes) increased 10.7% to $4.5 million
in the first quarter 2006 compared to $4.1 million in the first quarter of 2005.
The increase in recoveries from tenants is attributable to new properties
acquired in fiscal 2005 (which increased this component of revenue by
approximately $600,000). Recoveries from tenants from properties owned in both
periods decreased approximately $131,000 due to lower occupancy levels during
the first quarter of 2006.
Interest and other income increased by $143,000 from higher interest earned on
short-term cash investments and a gain of $102,000 from the repayment of a
mortgage note receivable in the first quarter of fiscal 2006.
Expenses
Property operating expenses increased 25.6% to $3.2 million in the first quarter
of fiscal 2006 compared to $2.6 million in the comparable quarter of fiscal
2005. The increase in operating expenses in fiscal 2006 reflects the incremental
expense from recent property acquisitions which added additional operating
expenses of $331,000 in fiscal 2006. Operating expenses for properties owned in
both periods increased by $326,000 principally due to higher snow removal and
utility costs during the three months ended January 31, 2006.
Property taxes increased 15.2% to $2.5 million in the first quarter of fiscal
2006 compared to $2.1 million in the comparable quarter of fiscal 2005. Property
taxes from recently acquired properties increased this component of expenses by
$275,000 in the first quarter of fiscal 2005. Property taxes for properties
owned in 2006 and 2005 were generally unchanged.
Interest expense increased $76,000 principally from the addition of an $8.5
million mortgage note assumed in connection with the purchase of Staples Plaza
which was acquired in the third quarter of fiscal 2005.
Depreciation and amortization expense increased by $291,000 in the first quarter
of fiscal 2006. The increase is principally from the additional depreciation on
property acquisitions completed in fiscal 2005.
General and administrative expenses increased by $204,000 due to higher
compensation costs from an increase in the number of employees of the Company
and restricted stock compensation expense.
Adoption of a New Accounting Pronouncement
At January 31, 2006, the Company has two stock-based employee compensation
plans. Prior to November 1, 2005, the Company accounted for those plans under
the recognition and measurement provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), and related Interpretations, as
permitted by FASB Statement No. 123, "Accounting for Stock-Based Compensation."
Effective November 1, 2005, the Company adopted the fair value recognition
provisions of FASB Statement No.123(R), "Share-Based Payment," ("SFAS No.123R"),
using the modified-prospective-transition method. Under that transition method,
compensation cost recognized in fiscal 2006, for all share-based payments
granted subsequent to November 1, 2005, is based on the grant-date fair value of
the stock grants estimated in accordance with the provisions of SFAS No. 123(R).
21
Prior to November 1, 2005, the grant date fair value of restricted stock
awards was expensed over the respective vesting periods. Such awards also
provided for continued vesting after retirement. Upon adoption of SFAS No.
123R, the Company changed its policy for recognizing compensation expense for
restricted stock awards to the earlier of the vesting period of the grant
or the date a participant first becomes eligible for retirement, as defined.
For restricted stock awards granted prior to the adoption of SFAS No.123R,
the Company will continue to recognize compensation expense over the
vesting periods and accelerate any remaining unrecognized compensation
cost when a participant actually retires. Had compensation expense for
restricted stock awards issued prior to November 1, 2005 been determined based
on the date a participant first becomes eligible for retirement, the
Company's net income in the three month periods ended January 31, 2006 and 2005
would have increased by $138,000 and decreased by $1,156,000, respectively.
Consistent with the provisions of APB No.25, the Company recorded the fair
value of restricted stock grants and an offsetting deferred compensation
amount within stockholders equity for unearned stock compensation cost.
Under SFAS No.123R an equity instrument is not considered to be issued until
the instrument vests. Accordingly, the Company reversed $8,221,000 of
unamortized restricted stock compensation included in stockholders equity as
of November 1, 2005 representing the unvested portions of restricted stock
grants awarded prior to the effective date of SFAS No.123R. As of January
31, 2006, there was $11.7 million of unamortized restricted stock compensation
related to nonvested restricted stock grants awarded under the Plan. The
remaining unamortized expense is expected to be recognized over a weighted
average period of 8 years. For the three months ended January 31, 2006 and 2005
amounts charged to compensation expense totaled $472,000 and $365,000,
respectively.
Discontinued Operations
During fiscal 2005, the Company sold a shopping center in Farmingdale, New York
for $9.75 million and an office building in Southfield, Michigan for $9.175
million. Accordingly, the 2005 operating results of the two properties have been
reclassified as discontinued operations for the three months ended January 31,
2005. Revenues for those properties totaled $710,000 in the first quarter of
fiscal 2005.
Inflation
The Company's long-term leases contain provisions to mitigate the adverse impact
of inflation on its operating results. Such provisions include clauses entitling
the Company to receive (a) scheduled base rent increases and (b) percentage
rents based upon tenants' gross sales, which generally increase as prices rise.
In addition, many of the Company's non-anchor leases are for terms of less than
ten years, which permits the Company to seek increases in rents upon renewal at
then current market rates if rents provided in the expiring leases are below
then existing market rates. Most of the Company's leases require tenants to pay
a 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.
Environmental Matters
Based upon management's ongoing review of its properties, management is not
aware of any environmental condition with respect to any of the Company's
properties that would be reasonably likely to have a material adverse effect on
the Company. There can be no assurance, however, that (a) the discovery of
environmental conditions, which were previously unknown, (b) changes in law, (c)
the conduct of tenants or (d) activities relating to properties in the vicinity
of the Company's properties, will not expose the Company to material liability
in the future. Changes in laws increasing the potential liability for
environmental conditions existing on properties or increasing the restrictions
on discharges or other conditions may result in significant unanticipated
expenditures or may otherwise adversely affect the operations of the Company's
tenants, which would adversely affect the Company's financial condition and
results of operations.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risk to which we are exposed is interest rate risk, which is sensitive to
many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors that are
beyond the Company's control.
Interest Rate Risk
The Company is exposed to interest rate risk primarily through its borrowing
activities. There is inherent rollover risk for borrowings as they mature and
are renewed at current market rates. The extent of this risk is not quantifiable
or predictable because of the variability of future interest rates and the
Company's future financing requirements.
As of January 31, 2006, the Company had no outstanding variable rate debt. The
Company does not enter into any derivative financial instrument transactions for
speculative or trading purposes. The Company believes that its weighted average
interest rate of 7.3% on its fixed rate debt is not materially different from
current fair market interest rates for debt instruments with similar risks and
maturities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rules 13 a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective.
23
Changes in Internal Controls
During the quarter ended January 31, 2006, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not involved in any litigation, nor to its
knowledge is any litigation threatened against the Company or
its subsidiaries, that in management's opinion, would result
in a material adverse effect on the Company's ownership,
management or operation of its properties, or which is not
covered by the Company's liability insurance.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In October 2005, the Company's Board of Directors approved a
share repurchase program ("Program") of up to 500,000 shares,
in the aggregate, of the Company's Common and Class A Common
Stock. The Program does not have a specific expiration date
and may be discontinued at any time. There were no purchases
of either Common or Class A Common Stock under the Program
during any month in the quarter ended January 31, 2006 and
there is no assurance that the Company will repurchase the
full amount of shares authorized. Any combination of either
Common Stock or Class A Common Stock not exceeding 455,000
shares, in the aggregate, may yet be purchased under the
Program.
Item 6. Exhibits
Exhibits
31.1 Certification of the Chief Executive Officer of
Urstadt Biddle Properties Inc. pursuant to Rule 13a-14
(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer of
Urstadt Biddle Properties Inc. pursuant to Rule 13a-14
(a) of the Securities Exchange Act of 1934, as amended.
32 Certification of the Chief Executive Officer and
Chief Financial Officer of Urstadt Biddle Properties
Inc. pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
24
S I G N A T U R E S
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.
URSTADT BIDDLE PROPERTIES INC.
(Registrant)
By /s/ Charles J. Urstadt
-------------------------
Charles J. Urstadt
Chairman and
Chief Executive Officer
By /s/ James R. Moore
-------------------------
James R. Moore
Executive Vice President/
Chief Financial Officer
(Principal Financial Officer
Dated: March 10 , 2006 and Principal Accounting Officer)
25
EXHIBIT INDEX
Exhibit No.
31.1 Certification of the Chief Executive Officer of Urstadt Biddle
Properties Inc. pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer of Urstadt Biddle
Properties Inc. pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
32 Certification of the Chief Executive Officer and Chief Financial
Officer of Urstadt Biddle Properties Inc.
pursuant to Section 906 of Sarbanes-Oxley Act of 2002
26