FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For Quarter Ended January 31, 1997 Commission File Number 1-6309
HRE PROPERTIES, INC.
(Exact Name of Registrant as Specified in Charter)
MARYLAND 04-2458042 *
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
321 Railroad Avenue, Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 863-8200
The number of shares of Registrant's common shares outstanding as of the
close of period covered by this report: 5,092,028
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
THE SEC FORM 10-Q, FILED HEREWITH, CONTAINS 11 PAGES, NUMBERED
CONSECUTIVELY FROM 1 TO 11 INCLUSIVE, OF WHICH THIS PAGE IS 1.
* I.R.S. Employer Identification Number of HRE Properties, the predecessor of
the Registrant prior to the Reorganization described in Registration statement
No. 333-19113-01.
INDEX
HRE PROPERTIES
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Consolidated Statements of Income--Three months ended January 31, 1997
and 1996.
Consolidated Balance Sheets--January 31, 1997 and October 31, 1996.
Consolidated Statements of Cash Flows--Three months ended
January 31, 1997 and 1996.
Consolidated Statements of Shareholders' Equity--Three months ended
January 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
SIGNATURES
Page 2 of 11
HRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
January 31,October 31,
1997 1996
ASSETS
Real Estate Investments:
Properties owned - at cost, net of accumulated
depreciation $88,216 $ 88,280
Properties available for sale - at cost,
net of accumulated depreciation
and recoveries 20,164 32,986
Investment in unconsolidated joint venture 8,611 -
Mortgage notes receivable 3,687 3,706
120,678 124,972
Cash and cash equivalents 4,683 1,819
Interest and rent receivable 2,772 2,795
Deferred charges, net of accumulated amortization 2,191 1,592
Other assets 969 982
$131,293 $ 132,160
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $39,653 $39,798
Accounts payable and accrued expenses 1,269 774
Deferred trustees' fees 478 470
Other liabilities 1,323 1,152
42,723 42,194
Shareholders' Equity:
Preferred shares, without par value;
2,000,000 shares authorized; none issued - -
Common shares, without par value;
unlimited shares authorized;
5,584,803 and 5,565,129 issued on January 31,
1997 and October 31, 1996, respectively 124,252 124,126
Less 492,775 and 219,048 common shares held
in treasury, at cost (7,802) (3,492)
Distributions in excess of accumulated net income(27,880) (30,668)
88,570 89,966
$131,293 $132,160
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
Page 3 of 11
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended January 31,
1997 1996
Revenues:
Operating leases $8,260 $5,747
Financing leases 119 200
Interest 159 207
Equity in income of unconsolidated
joint venture 18 -
8,556 6,154
Operating Expenses:
Property expenses 1,833 2,243
Interest 831 1,329
Depreciation and amortization 984 1,258
General and administrative expenses 491 503
Trustees' fees and expenses 53 44
4,192 5,377
Operating Income 4,364 777
Gains on Sales of Properties - 6,252
Net Income $ 4,364 $ 7,029
Net Income Per Common Share $ .86 $ 1.31
Weighted Average Number of Common Shares
Outstanding 5,076 5,367
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Page 4 of 11
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended January 31,
1997 1996
Operating Activities:
Net income $4,364 $7,029
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 984 1,258
Recovery of investment in properties owned
subject to financing leases 242 257
Equity in income of unconsolidated joint venture (18) -
Gain on sale of properties - (6,252)
Decrease (Increase) in interest and rent receivable 23 (271)
Increase (Decrease) in accounts payable and accrued expenses 495 (56)
(Increase) Decrease in other assets and other liabilities,net 192 219
Net Cash Provided by Operating Activities 6,282 2,184
Investing Activities:
Acquisitions of properties (293) -
Improvements to existing properties owned
and deferred charges (1,213) (2,118)
Investment in unconsolidated joint venture (84) -
Payments received on mortgage notes receivable 19 21
Miscellaneous (237) 75
Net Cash (Used in) Investing Activities (1,808) (2,022)
Financing Activities:
Proceeds from bank loan - 5,250
Proceeds from mortgage notes - 6,000
Dividends paid (1,576) (1,556)
Proceeds from sales of common shares 126 66
Purchases of common shares for treasury (15)
Payments on mortgage notes payable (145)(12,387)
Net Cash (Used in) Financing Activities (1,610) (2,627)
Net Increase (Decrease) In Cash and Cash Equivalents 2,864 (2,465)
Cash and Cash Equivalents at Beginning of Period 1,819 7,097
Cash and Cash Equivalents at End of Period $4,683 $ 4,632
The accompanying notes to consolidated financial statements are an integral
part of these statements.
Page 5 of 11
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except shares and per share data)
Common Shares
(Distributions
Treasury In Excess of
Outstanding Issued Shares, Accumulated
Number Amount at Cost Net Income) Total
Balances - October 31, 1995 5,367,226 $123,844 $(2,861) $(34,401) $86,582
Net income - - - 7,029 7,029
Cash dividends paid ($.29 per share) - - - (1,556) (1,556)
Sale of additional common shares under
dividend reinvestment plan 4,847 66 - - 66
Balances - January 31, 1996 5,372,073 $123,910 $(2,861) $(28,928) $92,121
Balances - October 31, 1996 5,346,081 $124,126 $(3,492) $(30,668) $89,966
Net income - - - 4,364 4,364
Cash dividends paid ($.31 per share) - - - (1,576) (1,576)
Sale of additional common shares under
dividend reinvestment plan 4,008 72 - - 72
Common shares issued upon exercise
of stock options 15,666 54 - - 54
Deemed purchase of common shares in
connection with organization of
unconsolidated joint venture (272,727) - (4,295) - (4,295)
Purchases of common shares held
in treasury (1,000) - (15) - (15)
Balances - January 31, 1997 5,092,028 $124,252 $(7,802) $(27,880) $88,570
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 6 of 11
HRE PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Reorganization and Merger
This Quarterly Report on Form 10-Q is filed by and on behalf of HRE
Properties, Inc., a Maryland corporation (the "Corporation"), as the
successor by merger (the"Merger") to HRE Properties, a Massachusetts
business trust (the "Trust"). On March 12, 1997, the Trust was
merged with and into the Corporation, the separate existence of the Trust
ceased, the Corporation was the surviving entity in the Merger and each
issued and outstanding common share of beneficial interest of the Trust was
converted into one share of Common Stock, par value $.01 per share,
of the Corporation. Prior to the Merger, the Corporation had no assets
or liabilities and conducted no operations other than those incident to its
organization and the Merger. Unless otherwise noted herein, the
financial information contained herein relates solely to the Trust
as of, or for the period ended, January 31, 1997. All subsequent periodic
and other reports to be filed under the Securities Exchange Act of 1934 and all
financial information to be contained therein will relate to the Corporation.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of HRE Properties ("the Trust"), its wholly-owned subsidiary,
and a joint venture in which the Trust has the ability to control the
affairs of the venture. All significant intercompany transactions
and balances have been eliminated. The Trust's investment in an
unconsolidated joint venture in which it does not exercise control
is accounted for by the equity method of accounting. 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, 1997 are
not necessarily indicative of the results that may be expected for the year
ending October 31,1997. It is suggested that these financial
statements be read in conjunction with the financial statements and
notes thereto included in the Trust's annual report for the fiscal year ended
October 31, 1996.
Mortgage Notes Payable
In February 1997, the Trust obtained a non recourse first mortgage loan in the
principal amount of $2 million. The mortgage loan which bears interest
at 7.99% per annum, is due in 2002 and is secured by a retail property having
a book value of approximately $3.1 million. The proceeds from this financing
and available cash were used to repay a mortgage loan in the unpaid
principal amount of approximately $2.4 million secured by the property
which matured in February 1997.
Operating Lease Income
In November 1996, the Trust settled a dispute with one of its tenants to
recover, among other things, unpaid additional percentage rents
totalling $3.25 million. In accordance with the terms of its lease,
the tenant was required to aggregate the sales of all its stores in a
specified radius when computing percentage rent due the Trust. The one-time
settlement, has been recorded as additional operating lease income in
the accompanying consolidated statement of income for the three-months ended
January 31, 1997.
Page 7 of 11
Investment In Unconsolidated Joint Venture
In November 1996, the Trust formed a joint venture with certain shareholders
of the Trust. The purpose of the joint venture is to own, manage and
redevelop the Countryside Square shopping center in Clearwater, Florida,
a property owned by the Trust. The Trust, as the general partner,
contributed the shopping center at its net carrying amount of $12.6 million,
(which amount approximated its fair value at that time), and the
limited partners, including Kimco Realty Corp. who manages the property,
contributed 600,000 common shares of the Trust to the joint venture.
The partnership agreement provides for the limited partners to
receive an annual cash preference from available cash of the joint venture,
and upon liquidation, proceeds from sale of the joint venture assets
are to be distributed to the partners as follows: first, $12 million to the
limited partners, next, $25 million to the Trust and the
balance to the partners in proportion to the respective joint venture
interests. The property may be sold at any time after the third year
of operation and the Trust has a right of first refusal on the sale of the
property.
The partners are not obligated to make any additional capital contributions,
however, to the extent that there is a shortfall in cash available for
distributions, the general partner may elect to sell the common shares
of the Trust held by the joint venture in an amount equal to
the shortfall amount, or contribute such shortfall amount to the joint venture.
The Trust has accounted for its proportionate interest in the common shares of
the Trust owned by the joint venture as a deemed purchase
of 272,727 common shares for treasury. In this connection, the Trust reduced
its investment in joint venture and shareholders' equity by $4,295,000.
Additionally, the Trust's equity in earnings of the joint venture is reflected
after eliminating its proportionate share of dividend income recorded by the
joint venture in connection with its interest in the common shares of the
Trust. The contribution of the property into the joint venture and
the deemed purchase of common shares by the Trust represent noncash
investing and financing activities and therefore are not included in the
accompanying 1997 consolidated statement of cash flows.
Recently Issued Accounting Standard
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (the "Statement") on accounting for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related
to assets to be held and used. The Statement also establishes accounting
standards for long-lived assets and certain identifiable intangibles to be
disposed of. The Statement requires, among other things, that assets to be
disposed of be carried at the lower of cost or fair value less costs to
dispose. The Trust adopted the Statement during the first quarter of 1997.
Based on the provisions of the Statement, the Trust determined
that no impairment provision of the carrying amount of its real estate assets
or other long-lived assets was necessary.
With respect to Properties Available for Sale, it is the Trust's policy to
reclassify such properties as assets to be disposed of pursuant to the
Statement upon determination that such properties will be sold within one year.
Page 8 of 11
PART I - FINANCIAL INFORMATION (continued)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Trust's liquidity and capital resources include its cash and cash
equivalents, funds available from bank borrowings and long-term
mortgage debt and sales of real estate investments. The Trust meets
its liquidity requirements primarily by generating cash from
the operations of its properties and collection of principal and interest on
its mortgage notes receivable. Payments of expenses related to
real estate operations, capital improvement programs, debt service,
management and professional fees, and dividend requirements place
demands on the Trust's liquidity.
The Trust believes that the financial resources currently available to it
are sufficient to meet all of its known obligations and commitments
and to make additional real estate investments when
appropriate opportunities arise. At January 31, 1997, the Trust had cash
and cash equivalents of $4.7 million compared to $1.8 million at October 31,
1996. The Trust also has $15 million in unsecured lines of credit with
two major commercial banks. Extensions of credit under one of the lines of
credit in the amount of $10 million is subject to the bank's
satisfaction of certain conditions including the intended use of proceeds.
The credit lines are available to finance the acquisition, management or
development of commercial real estate and for working capital purposes.
The credit lines expire at various periods in 1997 and outstanding borrowings,
if any, may be repaid from proceeds of debt refinancings or sales
of properties. At January 31, 1997, there were no outstanding
borrowings under the lines of credit. It is the Trust's intent to renew
these credit lines as they expire in 1997. Long-term debt consists of
mortgage notes payable totalling $39.7 million, of which $679,000
in principal payments are due in fiscal 1997.
In February, 1997, the Trust repaid an 8 1/2 % mortgage note payable in the
outstanding principal amount of $2,450,000, from proceeds of a
$2,000,000 mortgage note and available cash. The new $2,000,000 mortgage loan
bears interest at 7.99% and is due 2002.
Funds from Operations
Funds from Operations is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains
(or losses) from debt restructuring and sales of properties, plus
depreciation and amortization and the elimination of significant non-
recurring charges and credits. The Trust believes the level of Funds from
Operations to be an appropriate supplemental financial measure
of its operating performance.
Funds from Operations does not represent cash flows from operations as defined
by generally accepted accounting principles, is not indicative that
cash flows are adequate to fund all cash needs and is not
considered to be an alternative to net income. The Trust considers
recoveries of investment in properties which are subject to financing leases
to be analogous to amortization for purposes of calculating Funds from
Operations. In the three-month period ended January 31, 1997,
Funds from Operations increased 7.5% to $2,463,000 from $2,292,000 in
the year ago period. The improvement is principally the result of additional
leasing of space at certain of the Trust's core properties and lower
interest expense.
Page 9 of 11
Results of Operations
Revenues
Total revenues increased to $8,556,000 in the first three months of fiscal
1997, from $6,154,000 a year ago. Operating lease income for the three-months
ended January 31, 1997 includes $3,250,000 of additional percentage rent
revenues recovered in a settlement of a dispute for unpaid rent
with one of the Trust's tenants. In accordance with the terms of its
lease, the tenant was required to aggregate the sales of all its stores
within a specified radius when computing percentage rent due the Trust.
Operating lease income for properties owned in both fiscal years 1997
and 1996 increased by $463,000 or 10.5% in the first three-months
of fiscal 1997 compared to the same period last year.
However, in fiscal 1997 operating lease income reflects the effect of
the sales of three properties during fiscal 1996, which properties
contributed $828,000 of gross rents during the first three months of that year.
In November 1996, the Trust contributed the Countryside Square shopping
center to a limited partnership which is accounted for in the accompanying
financial statements as an unconsolidated joint venture. As a result,
the financial statements for the three-months ended January 31, 1997
excludes the revenues and expenses of the property. Operating lease
income for the property in last year's first quarter amounted to $570,000.
Expenses
Total expenses amounted to $4,192,000 in the Trust's first quarter of
fiscal 1997 compared to $5,377,000 for the same period last year. The
largest expense category is property expenses of the Trust's real estate
operating properties. Property expenses totalled $1,833,000 for the first
three months of fiscal 1997, compared to $2,243,000 for the same
period in 1996. The decrease in property expenses in 1997 reflect the
effect of the sales of three properties during fiscal 1996 and lower utility
and maintenance costs this year.
Interest expense decreased by $498,000 for the three months ended
January 31, 1997 from the repayment during fiscal 1996 of $16.6 million
of mortgage notes payable and the refinance of
an $11.25 million mortgage at a lower interest cost.
Depreciation and amortization expense decreased in the first quarter of
fiscal 1997 from the sale of three operating properties in fiscal 1996.
Page 10 of 11
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
The Registrant filed with the Commission a Current Report on Form 8K
dated November 22, 1996. Such report referred under Item 5 to the
organization of a limited partnership in which the Registrant contributed
certain real property as more fully discussed in the Notes to Financial
Statements.
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.
HRE PROPERTIES
(Registrant)
By:/s/______________________________
Charles J. Urstadt
Chairman and
Chief Executive Officer
By:/s/______________________________
James R. Moore
Executive Vice President/
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
Dated : March 13, 1997
Page 11 of 11