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 July 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, CT 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: 5,161,123
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 13 PAGES, NUMBERED
CONSECUTIVELY FROM 1 TO 13 INCLUSIVE, OF WHICH THIS PAGE IS 1.
INDEX
HRE PROPERTIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income--Three months ended July 31, 1997
and 1996, Nine months ended July 31, 1997 and 1996.
Consolidated Balance Sheets--July 31, 1997 and October 31,1996.
Consolidated Statements of Cash Flows--Nine months ended
July 31, 1997 and 1996.
Consolidated Statements of Stockholders' Equity--Nine months
ended July 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 13
HRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
July 31, October 31,
1997 1996
(Unaudited)
ASSETS
Real Estate Investments:
Properties owned - at cost, net of accumulated
depreciation $ 87,155 $ 88,280
Properties available for sale - at cost, net of
accumulated depreciation and recoveries 20,167 32,986
Investment in unconsolidated joint venture 8,854 -
Mortgage notes receivable 3,630 3,706
119,806 124,972
Cash and cash equivalents 4,234 1,819
Interest and rent receivable 2,837 2,795
Deferred charges, net of accumulated amortization 2,714 1,592
Other assets 1,123 982
$ 130,714 $ 132,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 38,857 $ 39,798
Accounts payable and accrued expenses 1,397 774
Deferred directors' fees 496 470
Other liabilities 1,280 1,152
42,030 42,194
Stockholders' Equity:
Preferred stock, par value $.01 per share; 20,000,000
shares authorized;none issued and outstanding - -
Excess stock, par value $.01 per share; 10,000,000 shares
authorized;none issued and outstanding - -
Common stock, par value $.01 per share; 70,000,000 shares
authorized;5,161,123 and 5,346,081 outstanding on
July 31, 1997 and October 31, 1996, respectively 51 53
Additional paid in capital 117,652 120,581
Distributions in excess of accumulated net income (27,984) (30,668)
Notes receivable from officer stockholders and
Unearned Compensation - Restricted Stock (1,035) -
88,684 89,966
$ 130,714 $132,160
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
Page 3 of 13
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Nine months Ended Three Months Ended
July 31 July 31
1997 1996 1997 1996
Revenues:
Operating leases $ 18,404 $16,971 $ 5,452 $5,611
Financing leases 347 478 110 136
Interest and other 848 737 202 209
Equity in income of unconsolidated
joint venture 77 - 41 -
19,676 18,186 5,805 5,956
Operating Expenses:
Property expenses 5,515 6,562 1,743 2,029
Interest 2,500 3,783 841 1,178
Depreciation and amortization 3,029 3,802 1,050 1,278
General and administrative expenses 986 1,159 308 370
Directors' fees and expenses 135 133 42 47
12,165 15,439 3,984 4,902
Operating Income 7,511 2,747 1,821 1,054
Gains on Sales of Properties - 6,641 - 389
Net Income $ 7,511 $ 9,388 $ 1,821 $1,443
Net Income Per Common Share $ 1.46 $ 1.74 $ .35 $ .26
Weighted Average Number of Common Shares
Outstanding 5,140 5,371 5,158 5,374
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Page 4 of 13
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months Ended July 31,
1997 1996
Operating Activities:
Net income $ 7,511 $ 9,388
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,029 3,802
Recovery of investment in properties owned
subject to financing leases 745 715
Equity in income of unconsolidated joint venture (77) -
Gains on sales of properties - (6,641)
Decrease (increase) in interest and rent receivable (158) (96)
Increase in accounts payable and accrued expenses 649 65
(Increase) decrease in other assets and other
liabilities, net (48) (196)
Net Cash Provided by Operating Activities 11,651 7,037
Investing Activities:
Acquisition of property (293) (881)
Improvements to properties and deferred charges, net (3,224) (5,447)
Proceeds from sale of mortgage note receivable - 143
Proceeds from sales of properties - 10,567
Investment in unconsolidated joint venture (553) -
Payments received on mortgage notes receivable 76 65
Net Cash (Used in) Investing Activities (3,994) 4,447
Financing Activities:
Proceeds from bank loan - 5,250
Proceeds from mortgage note - 6,000
Dividends paid (4,827) (4,884)
Proceeds from sales of additional common shares 541 210
Purchases of common shares (15) (541)
Payments on mortgage notes payable (941) (19,532)
Net Cash Provided by (Used in) Financing Activities (5,242) (13,497)
Net Increase (Decrease) In Cash and Cash Equivalents 2,415 (2,013)
Cash and Cash Equivalents at Beginning of Period 1,819 7,097
Cash and Cash Equivalents at End of Period $ 4,234 $ 5,084
The accompanying notes to consolidated financial statements
are an integral part of these statements.
Page 5 of 13
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except shares and per share data)
Notes Receivable/
(Distributions Unearned
Outstanding Additional Treasury In Excess Compensation
Number of Par Paid in Shares of Accumulated Restricted-
Common Shares Value Capital at Cost Net Income) Stock Total
Balances - October 31, 1995 5,367,226 $123,844 $(2,861) $(34,401) $ - $86,582
Net Income - - - 9,388 9,388
Cash dividends paid ($.91 per share) - - - (4,884) (4,884)
Sale of additional common shares under
dividend reinvestment plan 14,761 210 - - 210
Purchases of common shares (34,700) - (541) - (541)
Balances - July 31, 1996 5,347,287 $124,054 $(3,402) $(29,897) $ - $90,755
Balances - October 31,1996 5,346,081 $53 $124,073 $(3,492) $(30,668) $89,966
Net income - 7,511 7,511
Cash dividends paid ($.94 per share) - (4,827) (4,827)
Sale of additional common shares under
dividend reinvestment plan 12,437 220 - - 220
Common shares issued upon exercise
of stock options 27,332 - 321 - - 321
Common shares issued under Restricted
Stock Plan 49,000 - 838 - - 838
Purchases and retirement of
common shares (1,000) - - (15) - (15)
Reduction in Treasury Shares - - (3,507) 3,507 - -
Deemed purchase of common shares
in connection with organization
of unconsolidated joint venture (272,727) (2) (4,293) - - (4,295)
Unamortized restricted stock
compensation and notes
receivable from officers from
sales of common stock - - - - - $(1,035) ($1,035)
Balances - July 31,1997 5,161,123 $51 $117,652 - $(27,984) $(1,035) $88,684
The accompanying notes to consolidated financial statements are an
integral part of these statements.
Page 6 of 13
HRE PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Business
HRE Properties, Inc., a real estate investment trust, 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. Other assets include
office and retail buildings and industrial properties. The
Corporation's major tenants include supermarket chains and other
retailers who sell basic necessities.
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.
This change resulted in the transfer of $3,507,000 from the
treasury shares account to the common stock account at the time
of the Merger. 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. Pursuant to
the Merger, all properties, assets, liabilities and obligations
of the Trust became the properties, assets, liabilities and
obligations of the Corporation.
Basis of Presentation
The accompanying unaudited consolidated financial statements
include the accounts of the Corporation, its wholly-owned
subsidiary, and a joint venture in which the Corporation has the
ability to control the affairs of the venture. All significant
intercompany transactions and balances have been eliminated. The
Corporation'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 and nine-
month periods ended July 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 Corporation's annual report for the
fiscal year ended October 31, 1996.
Page 7 of 13
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 Corporation adopted the Statement during
the first quarter of 1997. Based on the provisions of the
Statement, the Corporation 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
Corporation'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.
Operating Lease Income
In November 1996, the Corporation 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 Corporation. The one-time settlement,
has been recorded as additional operating lease income in the
accompanying consolidated statements of income for the nine-
months ended July 31, 1997.
Mortgage Notes Payable
In February 1997, the Corporation obtained a non recourse first
mortgage loan in the principal amount of $2 million. The
mortgage loan bears interest at 7.99% per annum, is due in 2002
and is secured by a retail property having a net 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.
Investment In Unconsolidated Joint Venture
In November 1996, the Corporation formed a joint venture with
certain stockholders of the Corporation. 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 Corporation. The Corporation, 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
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time), and the limited partners, including Kimco Realty Corp. who
manages the property, contributed 600,000 common shares of the
Corporation 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 Corporation 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 Corporation 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 Corporation held by the
joint venture in an amount equal to the shortfall amount, or
contribute such shortfall amount to the joint venture.
The Corporation has accounted for its proportionate interest in
the common shares of the Corporation owned by the joint venture
as a deemed purchase and retirement of 272,727 common shares. In
this connection, the Corporation reduced its investment in joint
venture and stockholders' equity by $4,295,000. Additionally,
the Corporation'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 Corporation. The
contribution of the property into the joint venture and the
deemed purchase of common shares by the Corporation represent
noncash investing and financing activities and therefore are not
included in the accompanying 1997 consolidated statement of cash flows.
Restricted Stock Plan and Notes Receivable from Stock Sales
In March, 1997, the stockholders of the Corporation approved a
Restricted Stock Plan (Plan) providing for the grant of
restricted stock awards to key employees of the Corporation. The
Plan allows for restricted stock awards up to an aggregate of
250,000 common shares of the Corporation. During the second
quarter of fiscal 1997, the Corporation awarded 49,000 restricted
shares to certain key employees as an incentive for future
services. The shares vest over five years. The market value of
shares awarded has been recorded as unearned compensation -
restricted stock and is shown as a separate component of
stockholders equity. Unearned compensation is being amortized to
expense over the five year vesting period.
During fiscal 1997 certain officers exercised stock options for
notes. The notes, in the amount of $267,000, are full recourse
promissory notes bearing interest at the prime rate plus 1/2% and are
collateralized by the stock issued upon exercise of the stock
options. Interest is payable semi-annually and the principal is
due in 2002.
Page 9 of 13
PART I - FINANCIAL INFORMATION (continued)
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The Corporation'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 Corporation 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 Corporation's liquidity.
The Corporation 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 July 31,
1997, the Corporation had cash and cash equivalents of $4.2
million compared to $1.8 million at October 31, 1996. The
Corporation 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
were renewed during the third quarter of fiscal 1997 and expire
in 1998. Outstanding borrowings, if any, may be repaid from
proceeds of debt refinancings or sales of properties. At July
31, 1997, there were no outstanding borrowings under either line
of credit. Long-term debt consists of mortgage notes payable
totalling $38.8 million, of which $10.5 million in principal
payments are due in the next twelve months. The Corporation
intends to refinance a $9.1 million mortgage which matures in
November, 1997 with a new mortgage or repay such indebtedness
from available cash sources.
In February, 1997, the Corporation repaid an 8 1/2% mortgage note
payable in the outstanding principal amount of $2,450,000, from
proceeds of new $2,000,000 mortgage note and available cash. The
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 Corporation 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 Corporation 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 nine-month period ended July 31, 1997, funds
from operations increased 8.6% to $7,570,000 from $6,970,000 in
the year ago period. The improvement is principally the result
of additional leasing of space at certain of the Corporation's
core properties last year, the effect of which is reflected this
year, and lower interest expense.
Page 10 of 13
Results of Operations
Revenues
Operating lease revenues increased to $18,404,000 in the first
nine months of fiscal 1997 from $16,971,000 a year ago. For the
nine-months ended July 31, 1997, operating lease income includes
$3,250,000 of additional percentage rent received in the first
quarter of fiscal 1997 in settlement of a dispute with one of the
Corporation'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 Corporation.
Operating lease income for properties owned in both fiscal years
1997 and 1996 increased by 7% in the nine-month period of fiscal
1997, compared to the same period last year. For the three-
months ended July 31, 1997, operating lease income was unchanged
compared to the same period in 1996. The improvement in the
nine-month period is principally the result of new leasing of
space at certain of the Corporation's core properties last year,
the effect of which is reflected this year. Operating lease
income in fiscal 1997 reflects the effect of the sales of three
properties during fiscal 1996, which properties contributed
approximately $1,926,000 and $463,000 of operating rents during
the nine-month and three-month periods of fiscal 1996,
respectively.
In November 1996, the Corporation 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 nine-month and three-month periods ended July
31, 1997 excludes the revenues and expenses of the property.
Operating lease income for the property in the nine-month and
three-month periods ended July 31, 1996 amounted to $1,472,000
and $442,000, respectively.
Expenses
Total expenses amounted to $12,165,000 in the Corporation's first
nine-months of fiscal 1997 compared to $15,439,000 for the same
period last year. The largest expense category is property
expenses of the Corporation's real estate operating properties.
Property expenses totalled $5,515,000 for the first nine months
of fiscal 1997, compared to $6,562,000 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, the
absence of the expenses of the Countryside Square property
referred to above, lower utility and maintenance costs this year.
Interest expense decreased by $1,283,000 and $337,000 for the
nine-month and three-month periods ended July 31, 1997
respectively, 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 half
of fiscal 1997 principally from the absence of depreciation and
expense for operating properties sold during fiscal 1996.
Page 11 of 13
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
No reports of Form 8-K were filed by the Registrant
during the three-month period ended July 31, 1997.
Page 12 of 13
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, INC.
(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: September 12, 1997
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