UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
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 1-13089
U.S. RESTAURANT PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
Maryland 75-2687420
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5310 Harvest Hill Rd., Ste. 270, LB 168, Dallas, Texas 75230
------------------------------------------------------------
(Address principal executive offices, including zip code)
972 / 387-1487
----------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of May 7, 1999, there were 14,338,627 shares of Common Stock $.001 par value
outstanding.
Page 1 of 21
U.S. RESTAURANT PROPERTIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998............................ 3
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 (Unaudited)............. 4
Condensed Consolidated Statements of Other Comprehensive
Income for the Three Months Ended March 31, 1999 and
1998 (Unaudited)............................................. 5
Condensed Consolidated Statement of Stockholders' Equity
for the Three Months Ended March 31, 1999 (Unaudited)........ 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (Unaudited)....... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................20
Item 2. Changes in Securities..........................................20
Item 3. Defaults upon Senior Securities................................20
Item 4. Submission of Matters to Vote of Security Holders..............20
Item 5. Other Information..............................................20
Item 6. Exhibits and Reports on Form 8-K...............................20
Page 2 of 21
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
---------------- ----------------
(Unaudited)
ASSETS
Property, net
Land $ 195,657 $ 172,155
Building and leasehold improvements 389,376 342,686
Machinery and equipment 11,624 8,057
---------------- ----------------
596,657 522,898
Less: Accumulated depreciation (32,795) (27,938)
---------------- ----------------
563,862 494,960
Construction in progress 19,943 30,713
Cash and cash equivalents 206 1,857
Restricted cash 700 700
Rent and other receivables, net
(includes $2,274 and $1,962 from related parties) 10,098 10,817
Prepaid expenses and purchase deposits 2,184 10,091
Investments 3,809 3,057
Notes receivable
(includes $2,300 from related parties) 18,233 8,225
Mortgage loan receivable 23,949 23,275
Net investment in direct financing leases 9,151 9,678
Intangibles and other assets, net 10,515 10,796
---------------- ----------------
TOTAL ASSETS $ 662,650 $ 604,169
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 11,456 $ 11,492
Accrued dividends and distributions 8,635 8,456
Unearned contingent rent 1,928 2,148
Deferred gain on sale of property 556 556
Lines of credit 164,000 136,000
Notes payable 240,050 205,050
Mortgage note payable 1,056 1,062
Capitalized lease obligations 46 63
---------------- ----------------
TOTAL LIABILITIES 427,727 364,827
Minority interest in operating partnership 31,656 29,567
Stockholders' Equity
Preferred stock, $.001 par value per share;
50,000 shares authorized, Series A - 3,680
shares issued and outstanding as of March 31,
1999 and December 31, 1998 (aggregate
liquidation value $92,000) 4 4
Common stock, $.001 par value per share;
100,000 shares authorized, 14,339 and 14,372
shares issued and outstanding as of March 31,
1999 and December 31, 1998, respectively 14 14
Additional paid in capital 261,320 262,024
Excess stock, $.001 par value per share, 15,000
shares authorized, no shares issued
Accumulated other comprehensive loss (1,001) (797)
Distributions in excess of net income (57,070) (51,470)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 203,267 209,775
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 662,650 $ 604,169
================ ================
See Notes to Consolidated Financial Statements
Page 3 of 21
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
------------------------------------
1999 1998
----------------- ----------------
Revenues:
Rental income $ 16,744 $ 11,633
Interest income and other 1,737 596
Amortization of unearned income
on direct financing leases 261 317
----------------- ----------------
Total revenues 18,742 12,546
Expenses:
Rent 115 67
Depreciation and amortization 5,474 3,370
General and administrative 1,312 1,020
Interest expense 6,739 3,261
Termination of management contract 2,550 --
Equity in net loss of affiliates 61 --
----------------- ----------------
Total expenses 16,251 7,718
----------------- ----------------
Income before gain on sale of property,
minority interest in operating partnership
and extraordinary item 2,491 4,828
Gain on sale of property 72 --
----------------- ----------------
Income before minority interest in operating
partnership and extraordinary item 2,563 4,828
Minority interest in operating partnership (53) (234)
----------------- ----------------
Income before extraordinary item 2,510 4,594
Loss on early extinguishment of debt -- (190)
----------------- ----------------
Net income 2,510 4,404
Dividends on Preferred Stock (1,776) (1,776)
----------------- ----------------
Net income allocable to Common Stockholders $ 734 $ 2,628
================= ================
Net income per share
Basic $ 0.05 $ 0.20
Diluted $ 0.05 $ 0.20
Weighted average shares outstanding
Basic 14,352 12,852
Diluted 15,300 13,017
See Note 1 for Pro Forma effect of change in Accounting Principle
See Notes to Consolidated Financial Statements
Page 4 of 21
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
------------------------------------
1999 1998
----------------- ----------------
Net income $ 2,510 $ 4,404
Other comprehensive loss - unrealized
loss on investments (204) --
----------------- ----------------
Comprehensive income $ 2,306 $ 4,404
================= ================
See Notes to Consolidated Financial Statements
Page 5 of 21
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(In thousands)
Accumulated
Preferred Stock Common Stock Distributions Other
-------------------- ---------------------- Additional Paid in Excess of Comprehensive
Shares Par Value Shares Par Value In Capital Net Income Loss Total
-------- ----------- --------- ------------ ---------------- ------------- ------------- ------------
Balance January 1, 1999 3,680 $ 4 14,372 $ 14 $ 262,024 $ (51,470) $ (797) $ 209,775
Common stock repurchased
and retired (33) (704) (704)
Other comprehensive loss (204) (204)
Net income 2,510 2,510
Distributions on preferred
stock (1,776) (1,776)
Distributions on common
stock and distributions
declared (6,334) (6,334)
-------- ----------- --------- ------------ ---------------- ------------- ------------- ------------
Balance March 31, 1999 3,680 $ 4 14,339 $ 14 $ 261,320 $ (57,070) $ (1,001) $ 203,267
======== =========== ========= ============ ================ ============= ============= ============
See Notes to Consolidated Financial Statements
Page 6 of 21
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months ended
March 31,
----------------------------------
1999 1998
---------------- ---------------
Cash flows from operating activities:
Net Income $ 2,510 $ 4,404
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 5,474 3,370
Amortization of deferred financing costs 236 141
Non-cash interest income (136) --
Unrealized gain on trading securities (409) --
Gain on sale of property (72) --
Termination of management contract 2,550 --
Distributions received on investments 100 --
Minority interest in operating partnership 53 234
Equity in loss of affiliates 61 --
Loss on early extinguishment of debt -- 190
Increase in restricted cash -- (700)
Decrease (increase) in rent and other
receivables, net 628 (743)
Increase in prepaid expenses (616) (357)
Reduction in net investment in direct
financing leases 527 583
Increase (decrease) in accounts payable
and accrued liabilities (36) 64
Decrease in unearned contingent rent (220) --
---------------- ---------------
8,140 2,782
---------------- ---------------
Cash provided by operating activities 10,650 7,186
Cash flows used in investing activities:
Proceeds from sale of properties 5,934 --
Purchase of property (45,418) (43,547)
Purchase of machines and equipment (2,028) (736)
Construction payments (6,733) --
Decrease in purchase deposits 8,523 236
Purchase of investments (573) (92)
Increase in mortgage loan receivable (1,200) --
Reduction of mortgage loan receivable
principal 526 42
Increase in notes receivable (10,074) (6,731)
Reduction of notes receivable principal 66 46
---------------- ---------------
Cash used in investing activities (50,977) (50,782)
continued on next page
Page 7 of 21
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
(In thousands)
Three Months ended
March 31,
----------------------------------
1999 1998
---------------- ---------------
Cash flows from financing activities:
Proceeds from line of credit 40,000 139,786
Payments on line of credit (12,006) (78,782)
Proceeds from notes payable 20,000 --
Proceeds from sale of common stock -- 3,099
Preferred stock dividends paid (1,776) (2,348)
Distributions to stockholders (6,169) (4,809)
Distributions to minority interest (500) (425)
Financing costs and other intangibles (140) (985)
Payments on capitalized lease obligations (29) (26)
Repurchase and retirement of stock (704) --
---------------- ---------------
Cash flows provided by financing activities 38,676 55,510
---------------- ---------------
Increase (decrease) in cash and cash equivalents (1,651) 11,914
Cash and cash equivalents at beginning of period 1,857 1,104
---------------- ---------------
Cash and cash equivalents at end of period $ 206 $ 13,018
================ ===============
Supplemental disclosure:
Interest paid during the period $ 4,116 $ 2,572
Non-cash investing activities:
Fair value of stock issued for ownership
interest in another entity $ -- $ 621
Property acquired under capital lease $ 12 $ --
Deferred rent on sale of property $ 91 $ --
Note payable in exchange for property $ 15,000 $ --
Unrealized loss on investments $ 204 $ --
Net transfers from construction in
progress to property $ 17,503 $ --
Non-cash financing activities:
Common stock dividends declared $ 165 $ --
Distributions to minority interest declared $ 14 $ --
See Notes to Consolidated Financial Statements
Page 8 of 21
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
U.S. Restaurant Properties, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT"), as defined under the
Internal Revenue Code of 1986, as amended. As noted in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998, the Company became the
successor entity to U.S. Restaurant Properties Master L.P. (collectively with
its subsidiaries, "USRP"). The business and operations of the Company are
conducted primarily through U.S. Restaurant Properties Operating L.P. ("OP"). At
March 31, 1999, the Company owns 92.57% of and controls the OP. As of March 31,
1999, the Company owned 892 core business properties in 49 states.
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998, which was filed with the Securities and Exchange Commission ("SEC").
The results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on Form 10-Q
pursuant to the Rules and Regulations of the SEC. In the opinion of management,
the disclosures contained in this report are adequate to make the information
presented not misleading.
The accompanying condensed consolidated balance sheet as of March 31, 1999 and
the other condensed consolidated financial information for the three months
ended March 31, 1999 and 1998, are unaudited, but management of the Company
believes that all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the Company's condensed consolidated
financial statements for the periods presented have been included therein.
The Company derives its revenues primarily from the leasing of its properties to
operators (primarily restaurants) on a "triple net" basis. Triple net leases
typically require the tenants to be responsible for property operating costs,
including property taxes, insurance, maintenance and in most cases the ground
rents where applicable. Accordingly, the accompany financial statements do not
include costs for property taxes and insurance which are the responsibility of
the tenants. Additionally, those amounts associated with ground rent expense
where the tenant is responsible for the ground rents have been recorded as a
reduction to rent revenues with no impact on net income. For the three months
ended March 31, 1999 and 1998, the Company has recorded rent expense of $777,000
and $675,000, respectively as a reduction to rent revenues.
Amounts in previous periods have been reclassified to conform to current period
presentation.
The Company had 14,338,627 and 14,372,027 shares of Common Stock outstanding as
of March 31,1999 and December 31, 1998 respectively.
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF 98-9, "Accounting for Contingent Rent in Interim Financial
Periods," (EITF 98-9), which provides guidance on recognition of rental income
during interim periods for leases which provide for contingent rents (commonly
referred to as "percentage rents"). In accordance with the initial consensus
reached in EITF 98-9, the Company revised its method of accounting for
contingent rent on a prospective basis effective May 21, 1998. Using the
historical basis of accounting, net income before extraordinary item, net income
and basic and diluted net income per share amounts would have been $2,290,000,
$2,290,000, $0.04 and $0.03, respectively, for the three month period ended
March 31, 1999.
Page 9 of 21
The pro forma information below was prepared based on management's estimate for
the effects of EITF 98-9 since it is impracticable to calculate the actual
amount on a retroactive basis precisely. Management of the Company believes that
the estimate is not materially different from what actual results would have
been under EITF 98-9. Following is the pro forma information for the three
months ended March 31, 1999 and 1998 as if the EITF 98-9 were in effect as of
January 1, 1998:
Three months ended
March 31,
----------------------------------
(In thousands, except per share amounts) 1999 1998
-------------- --------------
Income before extraordinary item as reported $ 2,510 $ 4,594
Add: Adjustment for change in accounting policy
on recognition of contingent lease rent 622 76
-------------- --------------
Income before extraordinary item as adjusted $ 3,132 $ 4,670
============== ==============
Net income as adjusted $ 3,132 $ 4,480
============== ==============
Net income available to common stockholders
as adjusted $ 1,356 $ 2,704
============== ==============
Income per share - Basic:
Before extraordinary item, less dividends
on Preferred Stock as reported $ 0.05 $ 0.22
Adjustment for effect of change in
accounting policy 0.04 0.01
-------------- --------------
Income before extraordinary item, less
dividends on Preferred Stock as adjusted $ 0.09 $ 0.23
============== ==============
Net income available to common
stockholders as reported $ 0.05 $ 0.20
Adjustment for effect of change in
accounting policy 0.04 0.01
-------------- --------------
Net income available to common stockholders
as adjusted $ 0.09 $ 0.21
============== ==============
Income per share - Diluted:
Before extraordinary item, less dividends
on Preferred Stock as reported $ 0.05 $ 0.22
Adjustment for effect of change in
accounting policy 0.04 0.01
-------------- --------------
Income before extraordinary item, less
dividends on Preferred Stock as adjusted $ 0.09 $ 0.23
============== ==============
Net income available to common
stockholders as reported $ 0.05 $ 0.20
Adjustment for effect of change in
accounting policy 0.04 0.01
-------------- --------------
Net income available to common stockholders
as adjusted $ 0.09 $ 0.21
============== ==============
2. NET INCOME PER SHARE OF COMMON STOCK
Basic earnings per share are computed based upon the weighted average number of
common shares outstanding. Diluted earnings per share reflects the dilutive
effect of stock options, contingent shares and stock on which the price is
guaranteed ("Guaranteed Stock"). In addition, convertible preferred stock was
antidilutive in the three months ended March 31, 1999 and 1998.
A reconciliation of net income per share and the weighted average shares
outstanding for calculating basic and diluted net income per share for the
periods ended March 31, 1999 and 1998 is as follows:
Three Months Ended
March 31,
--------------------------------------
(In thousands, except per share amounts) 1999 1998
----------------- ----------------
Net income before extraordinary item $ 2,510 $ 4,594
Loss on early extinguishment of debt -- (190)
----------------- ----------------
Net income 2,510 4,404
Dividends on preferred stock (1,776) (1,776)
----------------- ----------------
Net income allocable to shareholders $ 734 $ 2,628
================= ================
Page 10 of 21
Net income per share - Basic
Before extraordinary item less preferred
stock dividends $ 0.05 $ 0.22
Extraordinary loss on extinguishment of debt -- (0.02)
----------------- ----------------
Net income allocable to common stockholders $ 0.05 $ 0.20
================= ================
Net income per share - Diluted
Before extraordinary item, less preferred
stock dividends $ 0.05 $ 0.22
Extraordinary loss on extinguishment of debt -- (0.02)
----------------- ----------------
Net income allocable to common stockholders $ 0.05 $ 0.20
================= ================
Weighted average shares outstanding (a)
Basic 14,352 12,852
Dilutive effect of outstanding options 55 165
Dilutive effect of contingent OP units 756 --
Dilutive effect of guaranteed stock 137 --
----------------- ----------------
Diluted 15,300 13,017
================= ================
(a) March 31, 1999, excludes 3,679,938 shares of convertible preferred
stock, 622,000 stock options and 1,162,672 OP units which are
anti-dilutive. March 31, 1998, excludes 3,680,000 shares of
convertible preferred stock, 913,563 shares of guaranteed stock
and 1,148,418 OP units, which are anti-dilutive.
3. PROPERTY ACQUISITIONS AND DISPOSITIONS
During the three months ended March 31, 1999, the Company completed the purchase
of 51 properties for an aggregate purchase price of $62,396,000. In addition,
the Company transferred completed construction on previously acquired properties
of approximately $17,503,000 from construction in progress to land, building and
equipment. In addition, 12 properties were sold for net cash proceeds of
$5,934,000.
In the normal course of business, the Company may sign purchase agreements and
deposit earnest money to acquire restaurant properties. Such agreements become
binding obligations upon the completion of a due diligence period ranging
usually from 15 - 30 days.
On March 31, 1999, earnest money purchase deposits amounting to $306,000 were on
deposit for the purchase of properties. These amounts will be included in the
allocation of the purchase price of the respective properties once acquired or
reduced once the deposit is returned. Non-refundable deposits are expensed once
it becomes unlikely that the property will be acquired.
4. INVESTMENTS
The aggregate cost basis and net unrealized loss for investments classified as
available for sale under SFAS 115 at March 31, 1999 were $4,072,000 and
$(1,001,000), respectively. The net unrealized loss is recorded as a separate
component of stockholders' equity of which $(204,000) was recorded during the
three months ended March 31, 1999. In addition, during the three months ended
March 31, 1999, the Company exercised stock options for 87,500 shares of ICH
Corporation common stock and has classified the common stock as a trading
investment. At March 31, 1999, the fair value of the trading investment was
$738,000 and the unrealized gain on this trading investment amounted to $409,000
and is included in interest income and other in the condensed consolidated
financial statements.
5. REVOLVING CREDIT FACILITIES
In January 1998, the OP entered into a credit agreement with a syndicate of
banks for an unsecured revolving credit line of $175 million. As of March 31,
1999, the Company has approximately $11 million available under this credit
agreement. The Company may request advances under this credit agreement to
finance the acquisition of properties, to repair and update properties and for
working capital. The banks will also issue standby letters of credit for the
account of the Company under this line of credit. This credit agreement expires
on January 15, 2001 and provides that borrowings thereunder bear interest at the
then current LIBOR plus a margin spread of either 1.05%, 1.20% or 1.35%,
Page 11 of 21
dependent on a leverage ratio formula. As of March 31, 1999, the margin spread
was 1.35% resulting in an effective rate of 6.14%. There is an unused line of
credit fee of 0.25% per annum on the unused portion of the credit agreement. The
line of credit requires the Company to maintain a minimum equity value of $200
million, total adjusted outstanding indebtedness not to exceed 60% of
capitalization value, secured indebtedness not to exceed 15% of capitalization
value, debt yield of not less than 16% and maintain certain other financial
covenants as defined in the line of credit agreement. On February 23, 1999, the
OP entered into an Assignment and Acceptance agreement that became effective on
April 12, 1999 upon execution of the credit agreement with Credit Lyonnais (see
Note 6). Under the terms of the Assignment and Acceptance the OP became a party
to the revolving credit agreement, and accepted the assignment of $10 million of
the available credit line. This agreement effectively reduced the maximum
availability under the revolving credit agreement by $10 million.
6. NOTES PAYABLE
On December 15, 1998, the Company entered into a secured note agreement ("PAC
Note") for $20 million. On January 9, 1999 the Company obtained $20 million
under the PAC Note which matures on December 15, 1999 and bears interest rate of
LIBOR plus 3.00% per annum (7.97% at March 31, 1999). The note is secured by 35
properties.
On March 10, 1999, the OP financed part of a property acquisition with the
seller in the amount of $15 million. The note bears interest at the rate of
7.25% per annum. The note was repaid with funds from a new note on April 12,
1999.
On April 12, 1999, the OP entered into an unsecured credit agreement with Credit
Lyonnais ("CLNY Agreement") under which the OP may borrow up to a maximum of $50
million. On July 9, 1999, no further borrowings can be made and the total amount
borrowed becomes the principal balance of a note payable which will mature on
April 11, 2002. This note provides that borrowings thereunder bear interest at
the then current LIBOR plus a margin spread ranging from 2.00% to 2.75%,
dependent on a leverage ratio formula. A total of $25 million was drawn under
this CLNY Agreement in April 1999.
The Company is in compliance with all covenants associated with its debt and
credit facilities as of March 31, 1999.
7. RELATED PARTY TRANSACTIONS
The Managing General Partner of Arkansas Restaurants #10 L.P. (ARK #10) is owned
by an officer of the Company who receives no compensation for this role. As of
March 31, 1999 and December 31, 1998, notes receivable of $454,000 were due from
ARK #10. The notes receivable are due on September 1, 1999 ($394,000) and
November 2, 1999 ($60,000) and have an interest rate of 9.0% per annum. At March
31, 1999 and December 31, 1998, tenant and other receivables from ARK #10 were
$657,000 and $678,000, respectively.
The Managing General Partner of Southeast Fast Food Partners, L.P. (SFF) is
owned by another officer of the Company. As of March 31, 1999 and December 31,
1998, notes receivable of $1,070,000 were due from SFF. The notes receivable are
due on July 1, 1999 and have an interest rate of 9.0% per annum. At March 31,
1999 and December 31, 1998 a note receivable of $136,000 is due from the owners
of SFF. This note is due on July 1, 1999, and has an interest rate of 9.0% per
annum. As of March 31, 1999 and December 31, 1998, tenant and other receivables
from SFF were $1,218,000 and $979,000, respectively.
During the three months ended March 31, 1999, the Company recorded reserves for
bad debts of $689,000 which has been recorded as a reduction to rental revenues
in the accompanying financial statements.
The Company is currently in negotiations with ARK #10 and SFF to modify their
current lease and note agreements with the Company.
In April 1998, two affiliates of the Company, U.S. Restaurant Lending GP, Inc.
(the "General Partner") and U.S. Restaurant Lending LP, Inc. (the "Limited
Partner") entered into joint venture and limited partnership agreements with MLQ
Investors, L.P., an affiliate of Goldman, Sachs & Co., to form two limited
partnerships. The two limited partnerships engage in lending activities to
owners and operators of quick service franchise and gas station/convenience
store outlets. The Company has indirect ownership interests (through the General
Partner and Limited Partner interests it owns) of 71.25% and 47.5%,
respectively, in these two partnerships.
Page 12 of 21
As of March 31, 1999 and December 31, 1998, the Company had other receivables
from the two lending partnerships of $399,000 and $306,000 respectively. In
addition, at March 31, 1999 and December 31, 1998 a note receivable of $640,000
is due from the General Partner and Limited Partner. Officers of the Company own
95% of the voting stock of the General Partner and the Limited Partner. The
joint venture and limited partnerships are currently in the process of selling
all current loans maintained by the partnerships and initiating a new partner
and partnership to replace MLQ Investors, L.P. This process is expected to be
completed in 1999.
The Company has entered into lease agreements under which the tenant operations
are either owned or a majority interest is held by members of the board of
directors of the Company. As of March 31, 1999 and December 31, 1998, no
balances were outstanding on these properties.
8. STOCKHOLDERS' EQUITY AND MINORITY INTEREST
DISTRIBUTIONS TO COMMON AND PREFERRED STOCKHOLDERS
During the three months ended March 31, 1999, the Company paid distributions of
$6,669,000 to its Common Stockholders and the minority interests (or $0.43 per
share of Common Stock) and $1,776,000 to its Preferred Stockholders (or $0.4825
per share of Preferred Stock) which were declared and accrued in 1998. As of
March 31, 1999, $8,635,000 in dividends have been declared to be paid on
Preferred and Common Stock outstanding to stockholders and minority interests OP
unitholders of record on June 1, 1999.
COMMON STOCK
During the three months ended March 31, 1999, the Company repurchased and
retired 33,400 shares of Common Stock for $704,000. As a March 31, 1999, the
Company has repurchased and retired a total of 67,100 shares under the Company's
repurchase program. The repurchase program will continue until the Company
acquires 500,000 shares, as authorized by the Board of Directors, or until such
time as the Board of Directors terminates the program.
MINORITY INTEREST
As reported in the Company's Annual Report on Form 10-K as of December 31, 1998,
OP units represent a minority interest in the OP of the REIT. Each OP unit
participates in any income (loss) of the OP based on the percent ownership in
the OP and receives a cash dividend in an amount equivalent to a share of Common
Stock. Each OP unit may be exchanged by the holder thereof for one share of
Common Stock of the Company. With each exchange of outstanding OP units for
Common Stock, the Company's percentage ownership interest in the OP, directly or
indirectly, will increase. In addition, under a terminated management contract
in 1997 the original sole minority interest holder QSV Properties, Inc. ("QSV")
is entitled to an additional 825,000 shares of Common Stock of the Company or
its equivalent in OP units if certain earnings targets are met by the year 2000.
These earnings targets are based upon what QSV would have received under the
management contract that was terminated. For the three month period ended March
31, 1999, the Company accrued $2,550,000 representing an increase of 260,307
contingent shares earned under the earnings target formula. These additional
accrued contingent shares have increased the total accrued contingent shares to
755,816 with an accrued value of approximately $14,597,000 (based on the market
value of a share of the Company's Common Stock at March 31, 1999). The 755,816
contingent shares have not been issued and will not participate in any income
(loss) or receive any distributions from the OP until such units are issued. As
of March 31, 1999 there are 1,162,672 OP units outstanding.
Minority interest in the OP consists of the following at March 31, 1999 (in
thousands):
Balance December 31, 1998 $ 29,567
Market value of contingent shares
earned for the period 2,550
Distributions paid and accrued in the
period (514)
Income allocated to minority interest 53
--------------------
Balance at March 31, 1999 $ 31,656
====================
Page 13 of 21
SHELF REGISTRATION
On August 22, 1997, the Company filed a shelf registration statement to register
shares of Common or Preferred Stock for sale in the amount of $150,000,000. The
amount of securities available for sale under this shelf registration statement
at March 31, 1999 is $25,025,000.
On October 30, 1998, the Company filed a shelf registration for $175,000,000 to
register shares of Common and Preferred Stock for sale. This registration
statement has not been declared effective as of the date of this Form 10-Q.
9. PRO FORMA
The following pro forma information was prepared by adjusting the actual
consolidated results of the Company for the three month periods ended March 31,
1999 and 1998 for the effects of:
a. the purchase of 51 properties on various dates from January 1,
1999 through March 31, 1999 for an aggregate purchase price of
$62,396,000; and the sale of 12 properties for net cash
proceeds of $5,934,000; and the transfer of $17,503,000 from
construction in progress and related financing transactions;
and
b. the purchase of 286 properties on various dates during 1998
for an aggregate purchase price of $214,909,000 including the
value of 24,768 shares of Common Stock and 14,254 OP units
issued to sellers; and the sale of 12 properties for
$8,174,000 and other related financing transactions including
the sale of 1,359,063 shares of Common Stock for $32,407,000.
These pro forma operating results are not necessarily indicative of what the
actual results of operations of the Company would have been assuming all of the
properties were acquired as of January 1, 1998 and do not purport to represent
the results of operations for future periods.
Three Months Ended March 31,
--------------------------------------
(In thousands, except per share amounts) 1999 1998
----------------- ------------------
Total Revenues $ 19,887 $ 19,536
================= ==================
Net Income $ 2,766 $ 4,823
Dividends on Preferred Stock (1,776) (1,776)
----------------- ------------------
Net income allocable to Common Shareholders $ 990 $ 3,047
================= ==================
Net income per share
Basic $ 0.07 $ 0.21
Diluted $ 0.06 $ 0.21
Weighted average shares outstanding
Basic 14,352 14,255
Diluted 15,300 14,419
Page 14 of 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS.
The Company derives its revenue primarily from the leasing of its Properties
(primarily restaurant) to operators on a "triple net" basis. Triple net leases
typically require the tenants to be responsible for property operating costs,
including property taxes, insurance, maintenance and in most cases the ground
rents where applicable. A majority of the Company's leases provide for a base
rent plus a percentage of the sales in excess of a threshold amount. As a
result, a portion of the Company's revenues is a function of the number of
properties in operation and their level of sales. Sales at individual properties
are influenced by local market conditions, by the efforts of specific operators,
by marketing, by new product programs, support by the franchisor and by the
general state of the economy.
The following discussion considers the specific impact of such factors on the
results of operations of the Company for the following periods.
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998
The Company owned 591 properties prior to January 1, 1998. The Company acquired
286 properties (275 core business properties) and sold 12 properties from
January 1, 1998 to December 31, 1998 and the Company acquired 51 properties (50
core business properties) and sold 12 properties from January 1, 1999 to March
31, 1999, the rent from which are included in the periods presented from their
respective dates of acquisition.
Revenues, including income earned on direct financing leases, in the three
months ended March 31, 1999 totaled $18,742,000 up 49% from the $12,546,000
recorded for the three months ended March 31, 1998. The increase in revenues is
primarily due to increases in the number of properties owned during the period
as compared to the same period in 1998. Through March 31, 1999, approximately 8%
of the Company's rental revenues resulted from percentage rents (rents
determined as a percentage of tenant sales), down from 12% for the three months
ended March 31, 1998. Percentage rents for the three months ended March 31, 1999
would have been approximately 7% of the Company's rental revenues before
adjustment for the impact of EITF 98-9. As a result, the impact of restaurant
sales continues to have a diminishing impact on total rental revenues.
Also included in revenues is interest income relating to secured notes and
mortgage receivable from tenants and related parties. Interest income and other
was $1,737,000 for the three months ended March 31, 1999 compared with $596,000
for the three months ended March 31, 1998, an increase of 191% when compared to
the three months ended March 31, 1998. The increase resulted primarily from the
increase in mortgage loan receivables and notes receivable when compared to
March 31, 1998. In addition, the Company recorded an unrealized gain on trading
securities of $409,000 during the three months ended March 31, 1999.
Rent expense for the three months ended March 31, 1999 totaled $115,000 an
increase of 72% when compared to the three months ended March 31, 1998.
Depreciation and amortization expenses in the three months ended March 31, 1999
totaled $5,474,000, an increase of 62% when compared to the three months ended
March 31, 1998. The increase in rent expense and depreciation and amortization
expenses directly relate to the property acquisitions.
General and administrative expenses for the three months ended March 31, 1999
totaled $1,312,000 an increase of 29% when compared to the three months ended
March 31, 1998. The increase was a result of the costs of the increased
infrastructure, including additional employees, required by the Company to
manage and maintain the Company's rate of growth.
Interest expense for the three months ended March 31, 1999 totaled $6,739,000,
an increase of 107%, when compared to the three months ended March 31, 1998. The
increase in interest expense directly relates to the additional debt associated
with the acquisitions and the higher interest rate associated with the
additional debt.
A non-cash accounting charge of $2,550,000 relating to the termination of the
management contract with QSV was recorded for the three months ended March 31,
1999. This charge represents the market value, based on the market value of a
share of Common Stock at March 31, 1999, of 755,816 contingent OP units (less
amounts previously recorded on 495,509 units as of December 31, 1998) which
would be earned by QSV at March 31, 1999
Page 15 of 21
under the terms of the terminated management contract. A maximum total of
825,000 shares may be issued to QSV if certain earnings targets are met by the
year 2000. These OP units have not been issued, and will not participate in any
income (loss) or receive any distributions from the OP until they have been
earned and issued.
Equity in net loss of affiliates of $61,000 for the three months ended March 31,
1999 relates to the Company's share of net losses from its investments in other
entities in which the Company holds a minority interest.
Minority interest in net income of the OP of $53,000 for the three months ended
March 31, 1999 relates to OP units held by QSV and other minority interest
holders.
Gain on sale of properties of $72,000 for the three months ended March 31, 1999
related to the sale of 12 properties for cash of $5,934,000 net of closing
costs. The loss on extinguishment of debt of $190,000 for the three months ended
March 31, 1998 related to the termination of the Company's previous line of
credit.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's principal source of cash to meet its short term cash requirements
is rental revenues generated by the Company's properties. Cash generated by the
portfolio in excess of operating needs is used to reduce amounts outstanding
under the Company's credit agreements. As of March 31, 1999, the Company has
non-binding contracts for acquisitions of approximately $8 million. The terms of
the Company's leases ("triple net leases") generally require that the tenant is
responsible for maintenance and improvements to the property. Thus the Company
is generally not required to expend funds for remodels and renovations. However,
the Company expects to spend approximately $1 million a year to renovate and
remodel currently owned properties. As of March 31, 1999 approximately $274,000
has been funded for remodels and the Company had 23 properties in various stages
of development. As of March 31, 1999 the Company had commitments of
approximately $8 million representing construction contract costs not yet
incurred.
During the three months ended March 31, 1999 the Company paid dividends of $0.43
per share, or an aggregate of $6,669,000 to common stockholders and minority
interests. In addition, the Company paid dividends of $0.4825 per share, or an
aggregate $1,776,000 to preferred stockholders covering the period December 16,
1998 to March 15, 1999. In addition, on February 15, 1999, the Company declared
a dividend of $0.4425 per share to common stockholders and minority interests
and $0.4825 per share to preferred stockholders to be paid on June 15, 1999.
On December 15, 1998, the Company entered into a secured note agreement ("PAC
Note") for $20 million. On January 9, 1999 the Company obtained $20 million
under the PAC Note which matures on December 15, 1999 and bears interest rate of
LIBOR rate plus 3.00% per annum (7.97% at March 31, 1999). The note is secured
by 35 properties.
On March 10, 1999, the OP financed part of a property acquisition with the
seller in the amount of $15 million. The note bears interest at the rate of
7.25% per annum. The note was repaid with funds from a new note on April 12,
1999.
On April 12, 1999, the OP entered into an unsecured credit agreement with Credit
Lyonnais ("CLNY Agreement") under which the OP may borrow up to a maximum of $50
million. On July 9, 1999, no further borrowings can be made and the total amount
borrowed becomes the principal balance of a note payable which will mature on
April 11, 2002. This note provides that borrowings thereunder bear interest at
the then current LIBOR plus a margin spread ranging from 2.00% to 2.75%,
dependent on a leverage ratio formula. A total of $25 million was drawn under
this CLNY Agreement in April 1999.
On January 17, 1998 the OP entered into a credit agreement with a syndicate of
banks for an unsecured revolving credit line of $175 million. This credit
agreement replaced the Company's then existing line of credit. As of March 31,
1999, the Company has approximately $11 million available under the unsecured
line of credit. The Company may request advances under this credit agreement to
finance the acquisition of properties, to repair and update properties and for
working capital. This credit agreement expires on January 15, 2001 and provides
that borrowings thereunder bear interest at LIBOR plus a margin spread which was
1.35% per annum at March 31, 1999. On February 23, 1999, the OP entered into an
Assignment and Acceptance agreement that became effective on April 12, 1999 upon
execution of the credit agreement with Credit Lyonnais.
Page 16 of 21
Under the terms of the Assignment and Acceptance the OP became a party to the
revolving credit agreement, and accepted the assignment of $10 million of the
available credit line. This agreement effectively reduced the maximum
availability under the revolving credit agreement by $10 million.
Management believes that cash from operations and the existing debt facilities,
along with the Company's ability to raise additional equity, including the
issuance of OP units in exchange for properties, will provide the Company with
sufficient liquidity to meet its short-term and long-term capital needs.
However, there can be no assurance that the terms at which existing debt is
refinanced will be as favorable to the Company as under the existing facilities.
FUNDS FROM OPERATIONS (FFO)
The Company believes that it computes FFO in accordance with the standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"), which may differ from the methodology for calculating FFO utilized
by other equity REITs, and, accordingly, may not be comparable to such other
REITs. The Company's FFO is computed as net income (loss) available to common
stockholders (computed in accordance with GAAP), plus real estate related
depreciation and amortization but excluding the effects of direct financing
leases, minority interest, unusual charges and gains (or losses) from debt
restructuring and sales of property, and the effect of EITF 98-9. The Company
believes FFO enhances and is helpful to investors as a measure of the
performance of an equity REIT because, along with the Company's financial
condition, results of operations and cash flows, it provides investors with an
understanding of the ability of the Company to incur and service debt and make
capital expenditures. In evaluating FFO and the trends it depicts, investors
should consider the major factors affecting FFO. Growth in FFO will result from
increases in revenue or decreases in related operating expenses. Conversely, FFO
will decline if revenues decline or related operating expenses increase. FFO
does not represent amounts available for management's discretionary use because
of needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. FFO should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
The following table sets forth, for the three months ended March 31, 1999 and
1998, the calculation of FFO:
(in thousands) Three Months Ended
March 31,
------------------------------------
Funds From Operations 1999 1998
--------------- ---------------
Net income allocable to common stockholders $ 734 $ 2,628
Direct financing lease payments 508 582
Capital lease principal payments (29) (26)
Depreciation and amortization 5,454 3,353
Gain on sale of property (72) --
Termination of management contract (1) 2,550 --
Income allocable to minority interest 53 234
Loss on early extinguishment of debt -- 190
Effect of EITF 98-9 (2) (220) --
--------------- ---------------
Funds from operations (FFO) $ 8,978 $ 6,961
=============== ===============
Total shares applicable to FFO 15,707 14,165
=============== ===============
(1) The charge for the management contract is an unusual non-cash
charge against earnings. The Company has no other management
contracts and the termination of this contract is a one time event
and does not relate to the ongoing business activity of the
Company. The 1999 charge relates to contingent OP Units that would
be earned by QSV at March 31, 1999 under the terms of the
terminated management contract. Since FFO is intended as a
supplementary measure of operating performance, this charge has
been added back to net income in arriving at FFO.
Page 17 of 21
(2) Net income for 1999 reflects the implementation of EITF Issue
98-9, effective May 21, 1998. The adjustment for EITF 98-9
represents an decrease in percentage rent that was previously
deferred for which cash has been previously received. Since FFO is
intended as a supplementary measure of operating performance, the
impact of adoption of EITF Issue 98-9 has been deducted from net
income in arriving at FFO.
INFLATION
Some of the Company's leases are subject to adjustments for increases in the
Consumer Price Index, which reduces the risk to the Company of the adverse
effects of inflation. Additionally, to the extent inflation increases sales
volume, percentage rents may tend to offset the effects of inflation on the
Company. Because triple net leases also require the property operator to pay for
some or all operating expenses, property taxes, property repair and maintenance
costs and insurance, some or all of the inflationary impact of these expenses
will be borne by the property operator and not by the Company.
Operators of restaurants, in general, possess the ability to adjust menu prices
quickly. However, competitive pressures may limit a restaurant operator's
ability to raise prices in the face of inflation.
SEASONALITY
Fast food restaurant operations historically have been seasonal in nature,
reflecting higher unit sales during the second and third quarters due to warmer
weather and increase leisure travel. This seasonality can be expected to cause
fluctuations in the Company's quarterly revenue to the extent it earns
percentage rent.
YEAR 2000 SYSTEMS CONVERSION
The Company recognizes the need to ensure that its data processing systems and
operations are not adversely affected by the change to the calendar year 2000.
All software currently in use at U. S. Restaurant Properties, Inc. is
represented by the respective manufacturer to be Year 2000 compliant. In
addition, the Information Technology Association of America certifies through
its ITAA*2000 program, that our accounting software and the software used by our
outside payroll processor are Year 2000 compliant. All owned-property
information is maintained in a database that mandates use of 4-digit year input,
thus removing any Year 2000 ambiguity.
Hardware in current use has been tested and found to be Year 2000 compliant or
to support manual rollover. Two older workstations retained for historical data
retrieval from retired systems are not Year 2000 compliant. However, such
non-compliance is not believed to effect retrieval of the data and no upgrade is
planned. All hardware not related to information processing (e.g., copiers,
faxes, phones, etc.) is represented by the respective manufacturer to be Year
2000 compliant with the exception of one fax machine. Ongoing verification of
Company systems will continue throughout 1999.
All major vendors and all tenants were surveyed to determine the extent of their
preparedness to meet Year 2000 challenges and to assess any possible impact on
USRP from a material third-party failure. Vendor responses received do not
identify any major potential problems. Several vendors, have not responded to
our inquiries; however, services provided by these vendors can be easily
obtained from other sources. No problems are anticipated in securing these
services.
Tenant responses to the survey have to date been limited. The Company recently
sent additional surveys to major tenants to try to determine preparedness.
Should adequate assurances that tenants are prepared not be received, a
contingency plan will be formulated to deal with any payment defaults.
In the event of information system failure, the Company would continue to
process transactions manually, assisted by any systems still correctly
functioning. The primary costs associated with such a scenario would be time
delays associated with handling of information and any additional personnel
required to process the data. We believe the costs associated with such
personnel would not exceed $150,000.
The Company has not finalized its contingency plan as of this date. However, a
formal contingency plan will be developed as any risks are identified during
1999.
Page 18 of 21
The Company does not anticipate any material impact on its results from
operations or its financial condition as a result of any Year 2000 compliance
issues. The estimated remaining costs of compliance, consisting primarily of
verification and testing costs, are not expected to exceed $25,000.
The most reasonably likely worst case scenario would involve some or all of the
following elements, none of which pose a serious threat to the operations of
USRP:
1. The operation of some of the properties will be inconvenienced due to the
failure of alarm and safe systems which may temporarily prevent the timely
opening of the restaurant or service station on January 1, 2000. The
operator may be able to bypass the systems involved to overcome these
inconveniences.
2. Isolated utility outages may occur, preventing the operation of some
properties. Since these outages will also affect residential and government
users of these services, they will likely be corrected quickly.
3. Some properties may experience cash shortages due to failure of local banks
to become Year 2000 compliant. This may impede the ability of the operator
to conduct business and/or pay rent timely until the Federal Reserve has
taken steps to overcome the problem. This is also likely to be corrected
quickly to preserve the integrity of the banking system.
4. Some properties may experience delays or lack of food supplies due to
disruption in the distribution system. Such problems may decrease the
volume of business at the property until corrected.
If some or all of the above conditions become severe or sustained for any
individual tenant, that tenant may become unable to pay rents on a timely basis.
Should this affect a number of tenants, USRP could experience a reduction of
cash receipts and could issue default notices to those tenants. A default due to
non-payment of rent arising from non-compliance issues could result in the
termination of a lease. Correcting any non-compliant systems could require
additional capital expenditures on the part of the Company in order to prepare
the property for re-lease. These expenditures, should they be required, are not
expected to be significant. Availability of resources to correct deficiencies
could be limited depending on the extent of failures experienced in the
industry.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q.
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act
of 1934, which are intended to be covered by the safe harbors created thereby.
These statements include the plans and objectives of management for future
operations, including plans and objectives relating to property acquisitions.
The forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes to the information reported in the 1998 Annual
Report on Form 10-K.
Page 19 of 21
Part II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
1) Exhibit 12.1 - Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
2) Exhibit 27.1 - Financial Data Schedule
Page 20 of 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. RESTAURANT PROPERTIES, INC.
Dated: May 14, 1999 By /s/ Robert J. Stetson
-------------------------------------
Robert J. Stetson
President and Chief Executive Officer
By /s/ Michael D. Warren
-------------------------------------
Michael D. Warren
Director of Finance
Page 21 of 21