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 June 30, 2001
Commission File No. 001-13499
EQUITY ONE, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
1696 N.E. MIAMI GARDENS DRIVE
N. MIAMI BEACH, FLORIDA 33179
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(Address of Principal Executive Offices)
(305) 947-1664
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(Issuer's Telephone Number, Including Area Code)
MARYLAND 52-1794271
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of the close of business on August 9, 2001, 13,011,901 shares of the
Company's common stock, par value $0.01 per share, were issued and outstanding.
EQUITY ONE, INC.
TABLE OF CONTENTS TO FORM 10-Q
THREE MONTHS ENDED JUNE 30, 2001
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................................................... 3
Condensed Consolidated Balance Sheets-
As of June 30, 2001 and December 31, 2000 (unaudited)......................................... 3
Condensed Consolidated Statements of Operations-
For the three-month and six-month periods ended June 30, 2001 and 2000 (unaudited)............ 4
Condensed Consolidated Statements of Comprehensive Income-
For the three-month and six-month periods ended June 30, 2001 and 2000 (unaudited)............ 5
Condensed Consolidated Statements of Stockholders' Equity-
For the six-month periods ended June 30, 2001 and 2000 (unaudited)............................ 6
Condensed Consolidated Statements of Cash Flows-
For the six-month periods ended June 30, 2001 and 2000 (unaudited)............................ 7
Notes to the Condensed Consolidated Financial Statements...................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risks................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 16
Item 2. Changes in Securities and Use of Proceeds..................................................... 17
Item 3. Defaults Upon Senior Securities............................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................... 17
Item 5. Other Information............................................................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
Signatures.................................................................................... 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, 2001 AND DECEMBER 31, 2000 (UNAUDITED)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(UNAUDITED) (UNAUDITED)
ASSETS
Rental Properties:
Land, building and equipment................................... $ 220,767 $ 216,698
Building improvements.......................................... 9,426 8,228
Land held for development...................................... 10,893 11,008
Construction in progress....................................... 7,450 7,128
-------------- --------------
248,536 243,062
Accumulated depreciation....................................... (18,219) (15,836)
-------------- --------------
Rental properties, net....................................... 230,317 227,226
Cash and cash equivalents......................................... 499 322
Restricted cash................................................... 4,781 4,273
Securities available for sale..................................... 1,639 1,403
Accounts and other receivables, net............................... 1,526 2,234
Due from related parties.......................................... 15 47
Deposits.......................................................... 2,023 822
Prepaid and other assets.......................................... 1,651 667
Deferred expenses, net............................................ 1,349 1,404
Goodwill, net..................................................... 619 644
-------------- --------------
Total assets............................................... $ 244,419 $ 239,042
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable......................................... $ 124,690 $ 121,675
Credit agreement............................................... 5,572 4,243
Accounts payable and accrued expenses.......................... 3,892 2,857
Tenants' security deposits..................................... 1,721 1,476
Deferred rental income......................................... 647 662
Minority interest in equity of consolidated subsidiary......... 3,869 3,875
-------------- --------------
Total liabilities.......................................... 140,391 134,788
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock................................................... 129 128
Additional paid-in capital..................................... 106,663 105,368
Retained earnings.............................................. --- 423
Accumulated other comprehensive income.......................... (76) (311)
Unamortized restricted stock compensation and notes receivable. (2,688) (1,354)
-------------- --------------
Total stockholders' equity................................. 104,028 104,254
-------------- --------------
Total liabilities and stockholders' equity........................ $ 244,419 $ 239,042
============== ==============
See accompanying notes to the condensed consolidated financial statements.
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
2001 2000 2001 2000
------------ -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Rental income.................................. $ 9,175 $ 7,848 $ 18,340 $ 15,882
Management fees................................. 590 84 1,116 115
Investment revenue.............................. 167 59 303 98
------------ -------------- -------------- --------------
Total revenues................................ 9,932 7,991 19,759 16,095
------------ -------------- -------------- --------------
COSTS AND EXPENSES:
Operating expenses.............................. 2,677 2,061 5,410 4,239
Depreciation and amortization................... 1,188 1,006 2,408 1,986
Interest........................................ 2,199 1,630 4,281 3,356
General and administrative expenses............. 652 482 1,370 1,055
------------ -------------- -------------- --------------
Total costs and expenses...................... 6,716 5,179 13,469 10,636
------------ -------------- -------------- --------------
Income before minority interest
in earnings of consolidated subsidiary........ 3,216 2,812 6,290 5,459
Minority interest in earnings of
consolidated subsidiary....................... 49 25 49 49
------------ -------------- -------------- --------------
Net Income..................................... $ 3,167 $ 2,787 $ 6,241 $ 5,410
============ ============== ============== ==============
EARNINGS PER SHARE:
Basic earnings per share.......................... $ 0.25 $ 0.24 $ 0.49 $ 0.47
============ ============== ============== ==============
Number of shares used in computing basic
earnings per share.............................. 12,707 11,480 12,707 11,390
============ ============== ============== ==============
Diluted earnings per share........................ $ 0.24 $ 0.24 $ 0.48 $ 0.47
============ ============== ============== ==============
Number of shares used in computing
diluted earnings per share...................... 13,448 11,684 13,326 11,581
============ ============== ============== ==============
See accompanying notes to the condensed consolidated financial statements.
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ---------------------------
2001 2000 2001 2000
------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net income....................................... $ 3,167 $ 2,787 $ 6,241 $ 5,410
Other comprehensive income:
Net unrealized holding gain on
securities available for sale............... 74 82 235 138
------------- ------------- ----------- -----------
Comprehensive income............................. $ 3,241 $ 2,869 $ 6,476 $ 5,548
============= ============= =========== ===========
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
UNAMORTIZED
RESTRICTED
ACCUMULATED STOCK
ADDITIONAL OTHER COMPENSATION TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE AND NOTE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME RECEIVABLES EQUITY
---------- ---------- ---------- ------------- ------------ -------------
SIX MONTHS ENDED JUNE 30, 2001
Balance, January 1, 2001............ $ 128 $ 105,368 $ 423 $ (311) $ (1,354) $ 104,254
Issuance of common stock......... 1 1,345 (1,334) 12
Stock issuance costs............. (14) (14)
Net income....................... 6,241 6,241
Net unrealized holding gain on
securities available for sale.. 235 235
Dividends paid................... (36) (6,664) (6,700)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2001 (Unaudited).. $ 129 $ 106,663 $ -- $ (76) $ (2,688) $ 104,028
========== ========== ========== ========== ========== ==========
SIX MONTHS ENDED JUNE 30, 2000
Balance, January 1, 2000............ $ 113 $ 89,990 $ 2,390 $ (519) $ (545) $ 91,429
Issuance of common stock......... 5 4,587 (1,123) 3,469
Stock Issuance costs........... (133) (133)
Net income....................... 5,410 5,410
Net unrealized holding gain on
securities available for sale.. 138 138
Dividends paid................... (6,028) (6,028)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 (Unaudited).. $ 118 $ 94,444 $ 1,772 $ (381) $ (1,668) $ 94,285
========== ========== ========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
6
8
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------------------
2001 2000
-------------- --------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income....................................................... $ 6,241 $ 5,410
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.................................. 2,514 2,118
Provision for losses on accounts receivable.................... (91) (48)
Minority interest in earnings of consolidated subsidiary....... 49 49
Changes in assets and liabilities:
Restricted cash.............................................. (508) ---
Accounts and other receivables............................... 799 876
Deposits..................................................... (1,201) (1,143)
Prepaid and other assets..................................... (1,048) (268)
Accounts payable and accrued expenses........................ 1,035 2,033
Tenants' security deposits................................... 245 126
Deferred rental income....................................... (15) (84)
Due from related parties..................................... 32 (90)
-------------- --------------
Net cash provided by operating activities.................... 8,052 8,979
-------------- --------------
INVESTING ACTIVITIES:
Additions to rental properties................................... (5,474) (9,151)
Purchases of available for sale securities....................... (1) (24)
-------------- --------------
Net cash used in investing activities........................ (5,475) (9,175)
-------------- --------------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable............................. (1,685) (3,880)
Borrowings under mortgage notes payable.......................... 4,700 6,500
Borrowings under credit agreement................................ 1,329 356
Cash dividends paid to stockholders.............................. (6,700) (6,028)
Stock subscription and issuance.................................. 12 3,469
Stock issuance costs............................................. (14) (133)
Deferred financing expenses, net................................. 13 (177)
Change in minority interest...................................... (55) (49)
-------------- --------------
Net cash (used in) provided by financing activities.......... (2,400) 58
-------------- --------------
Net (decrease) increase in Cash and Cash Equivalents................ 177 (138)
Cash and Cash Equivalents, Beginning of Period...................... 322 427
-------------- --------------
Cash and Cash Equivalents, End of Period............................ $ 499 $ 289
============== ==============
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2001 2000
------------ -------------
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of amount capitalized................ $ 4,100 $ 3,302
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized holding gain on securities available for sale $ 235 $ 138
============ ============
Issuance of restricted stock..................................... $ 1,346 $ 1,123
============ ============
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
8
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed financial data of Equity One, Inc.
and subsidiaries (collectively the "Company") are unaudited; however, in the
opinion of management, the interim data include all adjustments necessary for a
fair presentation of the results for the interim periods. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
The results of operations for the three-month and six-month periods
ended June 30, 2001 are not necessarily indicative of the results to be expected
for the year ending December 31, 2001. The December 31, 2000 condensed
consolidated balance sheet was derived from the audited consolidated financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
The interim unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2000 appearing in the Company's
Form 10-K/A No. 3 for the year ended December 31, 2000 (the "Form 10-K") filed
with the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the preparation of the
condensed consolidated financial statements are identical to those applied in
the preparation of the most recent annual consolidated financial statements.
3. EARNINGS PER SHARE
Basic earnings per share are computed by dividing earnings attributable
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
shares of common stock that then shared in the earnings of the Company.
4. MINORITY INTEREST
On January 1, 1999, a wholly-owned subsidiary of the Company, Equity
One (Walden Woods) Inc. (the "Walden Woods General Partner"), entered into a
limited partnership as a general partner. An income producing shopping center
was contributed by its owners (the "Walden Woods Minority Partners"), and the
Walden Woods General Partner contributed 93,656 shares of Company common stock
to the limited partnership at an agreed-upon price of $10.30 per share. Based on
this per share price and the net asset value of the property contributed by the
Walden Woods Minority Partners, each of the partners received 93,656 limited
partnership units. The Company and the Walden Woods Minority Partners have
entered into an agreement (the "Redemption Agreement") whereby the Walden Woods
Minority Partners can request that the Company purchase either their limited
partnership units or any shares of Company common stock which they have received
in exchange for their limited partnership units at a price of $10.30 per unit or
per share no earlier than two years nor later than fifteen years after the
exchange date of January 1, 1999. As a result of the Redemption Agreement, the
minority interest has been presented as a liability. In addition, under the
terms of the limited partnership agreement, the Walden Woods Minority Partners
do not have an interest in the common stock of the Company except to the extent
of dividends declared on such common stock. Accordingly, a preference in
earnings has been allocated to the Walden Woods Minority Partners to the extent
of the dividends declared. The 93,656 shares of common stock of the
9
Company held by the consolidated limited partnership are not considered
outstanding in the condensed consolidated financial statements.
On December 5, 2000, a wholly-owned subsidiary of the Company, Equity
One (North Port), Inc., entered into a limited partnership (the "Shoppes of
North Port, Ltd.") as a general partner. An income producing shopping center
("Shoppes of North Port") was contributed by its owners (the "North Port
Minority Partners") and the Company contributed an income producing property to
a limited liability company wholly-owned by the Shoppes of North Port, Ltd. Both
the North Port Minority Partners and the general partner were issued operating
partnership units ("OPUs") based on the net value of the properties contributed.
The North Port Minority Partners received 261,850 OPUs which can be redeemed for
the Company's common stock on a one-for-one basis or cash at an agreed upon
price of $11.00 per share no earlier than December 10, 2001, nor later than
three and one half years thereafter. Accordingly, the minority interest has been
presented as a liability in the accompanying condensed consolidated balance
sheets. The North Port Minority Partners receive a preferred quarterly
distribution equal to a 9.0% annual return on their initial capital
contribution. This amount is reflected as interest expense in the condensed
consolidated financial statements.
5. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
effective date of this statement, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - An Amendment of FASB Statement No. 133, is for
fiscal years beginning after June 15, 2000. SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, a change in the fair value of
the derivative will either be offset against the change in the fair value of the
hedged asset, liability or firm commitment through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No. 133
had no effect on the Company's results of operations or financial position.
In June 2001,the FASB approved the issuance of SFAS No. 141, BUSINESS
COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
standards, which were issued in July 2001, established accounting and reporting
for business combinations. SFAS No. 141 requires all business combinations
entered into subsequent to June 30, 2001 to be accounted for using the purchase
method of accounting. SFAS No. 142 provides that goodwill and other intangible
assets with indefinite lives will not be amortized, but will be tested for
impairment on an annual basis. These standards are effective for fiscal years
beginning after December 15, 2001; however, early adoption is permitted. The
Company does not expect the adoption of these statements to have a material
effect on its financial statements or disclosures.
6. COMMITMENTS
The Company has entered into agreements, subject to various closing
conditions, to acquire Centrefund Realty (U.S.) Corporation ("CEFUS"), the U.S.
subsidiary of Centrefund Realty Corporation, for approximately 10,500,000 shares
of Company common stock plus the assumption of CEFUS' outstanding debt in the
aggregate principal amount of approximately $157 million, and also to acquire
United Investors Realty Trust ("UIRT"), a Texas-based REIT, for a combination of
stock and cash totaling approximately $66 million plus the assumption of UIRT's
outstanding debt in the aggregate principal amount of approximately $82 million.
Following the anticipated closing of both transactions, the Company
will own a total of 86 properties, primarily located in metropolitan areas of
Florida and Texas, encompassing 54 supermarket-anchored shopping centers, 6 drug
store-anchored shopping centers, 18 other retail-anchored shopping centers, 6
commercial properties and 2 development sites, as well as interests in 6 real
estate joint ventures.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following should be read in conjunction with the Company's
Condensed Consolidated Financial Statements, including the notes thereto, which
are included elsewhere herein and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in the Form 10-K. The
results of operations for an interim period may not give a true indication of
results for the year.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Total revenues increased by approximately $1.9 million, or 24.3%, to
$9.9 million for the three months ended June 30, 2001 from $8.0 million for the
comparable period of 2000. The increase in revenue was primarily the result of
the acquisition of properties and the completion of development projects. The
acquisition of Mariners Crossing (September 2000), Shoppes of North Port
(December 2000) and Pompano Beach (January 2001) contributed approximately
$591,000 in revenue growth. The completion of phase one of Forest Village (April
2000), phase two of the Shops at Skylake (July 2000) and several smaller
development projects at Lake Mary, Pointe Royale and Losco Corners increased
revenues by approximately $729,000. Additional sources of increased revenues
were increased third party management fees and commissions of approximately
$506,000 attributable primarily to the management of properties owned by CEFUS,
and increased interest and dividend income of $75,000.
Operating expenses increased by approximately $616,000, or 29.9%, to
$2.7 million for the three months ended June 30, 2001 from $2.1 million for the
comparable period of 2000. Included in this increase are the management
company's operating expenses which increased by $439,000 primarily due to the
management of a larger in-house portfolio; the assumption of the property
management of eleven third-party owned shopping centers and the asset management
of seventeen third-party owned shopping centers; and the acquisition of new
properties and completion of development projects described above.
Depreciation and amortization expense increased by approximately
$182,000, or 18.1%, to $1.2 million for the three months ended June 30, 2001,
from $1.0 million for the comparable period of 2000. The increase resulted
primarily from the acquisition of new properties and the completion of
development projects, described above.
Interest expense increased by approximately $569,000, or 34.9%, to $2.2
million for the three months ended June 30, 2001 from $1.6 million for the
comparable period of 2000. The increase in interest expense was primarily due to
the following factors: (i) a net increase in mortgage interest of $518,000
primarily due to the assumption of two loans and the closing of one new loan
totaling $24.2 million offset by the payoff of one loan of $2.5 million, (ii)
other interest of $64,800 related to distributions to the North Port Minority
Partners, (iii) a $37,000 reduction in interest on the Lake Mary loan due to a
$1.4 million pay down, (iv) a reduction of Credit Agreement (as defined below)
interest by $278,000 due to decreased borrowing under that facility, and (v) a
decrease in capitalized interest of $349,000, to $346,000, for the three months
ended June 30, 2001 from $695,000 for the comparable period of 2000.
General and administrative expenses increased by $170,000, or 35.3%, to
$652,000 for the three months ended June 30, 2001 from $482,000 for the
comparable period of 2000. The increase was primarily the result of managing the
Company's growth, as compensation costs increased $116,000, directors' fees
increased $41,000 and all other costs increased $13,000. During the three months
ended June 30, 2001, direct costs (primarily payroll) of the development
department totaling $145,000 were capitalized, compared to $217,000 for the same
period in 2000.
As a result of the foregoing, net income increased by approximately
$380,000, or 13.6%, to $3.2 million for the three months ended June 30, 2001,
compared to $2.8 million for the comparable period of 2000.
11
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Total revenues increased by approximately $3.7 million, or 22.8%, to
$19.8 million for the six months ended June 30, 2001 from $16.1 million for the
comparable period of 2000. The increase in revenue was primarily the result of
the acquisition of properties and the completion of development projects. The
acquisition of Mariners Crossing (September 2000), Shoppes of North Port
(December 2000) and Pompano Beach (January 2001) contributed approximately $1.1
million in revenue growth. The completion of phase one of Forest Village (April
2000), phase two of the Shops at Skylake (July 2000) and several smaller
development projects at Lake Mary, Pointe Royale and Losco Corners increased
revenues by approximately $1.1 million. Additional sources of increased revenues
were increased third party management fees and commissions of approximately $1.0
million attributable primarily to the management of properties owned by CEFUS,
increased termination fees of approximately $293,000, and increased interest and
dividend income of approximately $172,000.
Operating expenses increased by approximately $1.2 million, or 27.6%,
to $5.4 million for the six months ended June 30, 2001 from $4.2 million for the
comparable period of 2000. Included in this increase are the management
company's operating expenses which increased by $850,000 primarily due to the
management of a larger in-house portfolio; the assumption of the property
management of eleven third-party owned shopping centers and the asset management
of seventeen third-party owned shopping centers; and the acquisition of new
properties and completion of development projects, described above.
Depreciation and amortization expense increased by approximately
$422,000, or 21.2%, to $2.4 million for the six months ended June 30, 2001, from
$2.0 million for the comparable period of 2000. The increase resulted primarily
from the acquisition of new properties and the completion of development
projects, described above.
Interest expense increased by approximately $925,000, or 27.6%, to $4.3
million for the six months ended June 30, 2001 from $3.4 million for the
comparable period of 2000. The increase in interest expense was primarily due to
the following factors: (i) a net increase in mortgage interest of $870,000
primarily due to the assumption of two loans and the closing of one new loan
totaling $24.2 million offset by the payoff of one loan of $2.5 million, (ii)
other interest of $130,000 related to distributions to the North Port Minority
Partners, (iii) a $74,000 reduction in interest on the Lake Mary loan due to a
$1.4 million pay down, (iv) a reduction of Credit Agreement interest by $507,000
due to decreased borrowing under that facility, and (v) a decrease in
capitalized interest of $537,000, to $649,000 for the six months ended June 30,
2001 from $1.2 million for the comparable period of 2000.
General and administrative expenses increased by $315,000, or 29.9%, to
$1.4 million for the six months ended June 30, 2001 from $1.1 million for the
comparable period of 2000. The increase was primarily the result of managing the
Company's growth, as compensation costs increased $239,000, directors' fees
increased $83,000 and all other costs remained about the same. During the six
months ended June 30, 2001, direct costs (primarily payroll) of the development
department totaling $289,000 were capitalized, compared to $453,000 for the same
period in 2000.
As a result of the foregoing, net income increased by approximately
$831,000 or 15.4%, to $6.2 million for the six months ended June 30, 2001,
compared to $5.4 million for the comparable period of 2000.
FUNDS FROM OPERATIONS
The Company defines funds from operations ("FFO") consistent with the
NAREIT definition as net income before gains (losses) on the sale of real
estate, extraordinary items and minority interest, plus real estate depreciation
and amortization of capitalized leasing costs. Management believes that FFO
should be considered along with, but not as an alternative to, net income as
defined by accounting principles generally accepted in the United States of
America as a measure of the Company's operating performance. FFO does not
represent cash generated from operating activities in accordance with GAAP and
is not necessarily indicative of funds available to fund the Company's cash
needs. The Company's calculation of FFO may not be comparable to similarly
titled measures reported by other companies.
The following table illustrates the calculation of FFO for the
three-month and six-month periods ended June 30, 2001 and 2000 (in thousands
except per share data):
12
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------------
2001 2000 2001 2000
--------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Net income............................................. $ 3,167 $ 2,787 $ 6,241 $ 5,410
Depreciation of real estate assets..................... 1,165 987 2,360 1,948
Amortization of leasing costs.......................... 65 30 87 56
Interest on convertible partnership 66 --- 130 ---
units...............................................
Minority interest...................................... 49 25 49 49
--------- ------------ ------------ ------------
FUNDS FROM OPERATIONS.................................. $ 4,512 $ 3,829 $ 8,867 $ 7,463
========= ============ ============ ============
FFO increased by approximately $683,000, or 17.8%, to $4.5 million for
the three months ended June 30, 2001, from $3.8 million for the comparable
period of 2000. FFO increased by approximately $1.4 million or 18.8%, to $8.9
million for the six months ended June 30, 2001, from $7.5 million for the
comparable period of 2000. The increase is primarily the result of the
acquisition of additional properties, completion of development projects, and
the difference between the increases in same property revenues and expenses, as
noted above.
CASH FLOW
The net cash provided by operations of approximately $8.1 million for
the six months ended June 30, 2001 included: (i) net income of $6.2 million,
(ii) adjustment for non-cash items which increased cash flow by $2.5 million,
and (iii) a net decrease in operating assets and liabilities of $661,000,
compared to net cash provided by operations of approximately $9.0 million for
the six months ended June 30, 2000, which included (i) net income of $5.4
million, (ii) adjustment for non-cash items which increased cash flow by $2.1
million, and (iii) a net increase in operating assets and liabilities of $1.4
million.
Net cash used in investing activities of approximately $5.5 million for
the six months ended June 30, 2001 included: (i) the acquisition of the Pompano
Beach property for $2.9 million, (ii) construction and development costs of $2.1
million of which $1.3 million is attributable to Skylake, and (iii) other
capital improvements of $445,000, compared to net cash used in investing
activities of approximately $9.2 million for the six months ended June 30, 2000
which included: (i) the purchase of one building and lease for $312,000, and
(ii) improvements to rental properties and construction expenditures relating to
development projects totaling $8.9 million.
Net cash used in financing activities of approximately $2.4 million for
the six months ended June 30, 2001 included: (i) principal payments on mortgage
notes of $1.7 million, (ii) borrowings under new mortgage notes of $4.7 million,
(iii) borrowings on the Credit Agreement of $1.3 million, (iv) cash dividends
paid to common stockholders of $6.7 million, and (v) other miscellaneous uses of
$44,000, compared to net cash provided by financing activities of approximately
$58,000 for the six months ended June 30, 2000 which included: (i) a mortgage
note payoff of $2.5 million and principal payments on mortgage notes of $1.4
million, (ii) borrowings under a new mortgage note of $6.5 million, (iii) net
borrowings on the Credit Agreement and other floating rate facilities of
$356,000, (iv) cash dividends paid to common stock shareholders of $6.0 million,
(v) proceeds from the issuance of stock under the Company's Dividend
Reinvestment and Stock Purchase Plan of $3.5 million, and (vi) other
miscellaneous expenditures of $358,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the principal sources of funding for the Company's
operations, including the renovation, expansion, development and acquisition of
the rental properties have been operating cash flows, the issuance of equity
securities, the placement of mortgage loans and periodic borrowings under the
Company's Credit Agreement. The Company's principal demands for liquidity are
maintenance expenditures, repairs, property taxes and tenant improvements
relating to rental properties, acquisitions and development activities, debt
service and repayment obligations, and distributions to its stockholders.
13
The Company has a $35.0 million credit agreement with City National
Bank of Florida (the "Credit Agreement"). The Credit Agreement accrues interest
at 2.25% over the thirty-day LIBOR rate, payable monthly, adjusted every six
months, and matures February 4, 2002. Advances under the Credit Agreement are
used to fund property acquisitions, development activities and other Company
activities. On June 30, 2001, the limitation on advances under the Credit
Agreement was approximately $20.6 million, with future increases conditioned on
the posting of additional collateral. The Credit Agreement is currently secured
by mortgages on a portion of the Shops at Skylake, and on East Bay Plaza,
Beauclerc Village, Mandarin Landing, Mandarin Mini-storage, Equity One Office
Building and Montclair Apartments.
The terms of the Credit Agreement allow the lender to cease funding
and/or accelerate the maturity date if neither Mr. Katzman nor Mr. Valero
remains in control of the operations of the Company. The Credit Agreement also
limits the amount that can be borrowed for the purchase of vacant land and
contains other customary conditions and covenants, including, among other
things, the payment of commitment fees and the required delivery of various
title, insurance, zoning and environmental assurances on the secured properties,
and a prohibition on secondary financing on any of the secured properties.
As of June 30, 2001, the Company had total mortgage indebtedness of
$124.7 million, all of which was fixed rate mortgage indebtedness bearing
interest at a weighted average annualized rate of 7.47% and collateralized by 21
of the rental properties, as well as $5.6 million outstanding under the Credit
Agreement in accordance with the terms described above.
As of June 30, 2001, the percentage of the total real estate cost of
the Company's rental properties that was encumbered by debt was 50.3%. None of
the existing mortgages is subject to cross default in the event of a default on
mortgages on other properties nor is any cross-collateralized.
During the six months ended June 30, 2001, the Company paid cash
dividends of $0.26 per outstanding share of common stock on each of March 30 and
June 29, 2001, respectively, totaling $3.3 million and $3.4 million,
respectively.
As of August 1, 2001, the outstanding balance under the Credit
Agreement had been reduced to $5.1 million. In addition to the outstanding
balance, the Credit Agreement has also been used to provide a $1.0 million
letter of credit in connection with the Pine Island/Ridge Plaza financing, a
$100,000 letter of credit in connection with the Forest Village financing and to
support $440,000 in escrows for property taxes on the properties comprising the
collateral.
Presently, there are pending transactions to acquire CEFUS, a
wholly-owned subsidiary of Centrefund Realty Corporation which is a publicly
traded Canadian real estate company, and UIRT, a publicly traded real estate
investment trust. The acquisition of CEFUS, valued at approximately $280
million, will include the assumption by Equity One of approximately $157 million
of existing CEFUS debt, the issuance of approximately 10.5 million shares of
Equity One common stock in exchange for all of CEFUS's outstanding shares of
stock and the incurrence of approximately $3.0 million in transaction costs. The
acquisition of UIRT, valued at approximately $153 million, will include the
assumption by Equity One of approximately $82 million of existing UIRT debt, and
the payment to UIRT's shareholders, at their election, of an aggregate of
approximately $66 million of cash and shares of the Company's common stock
(provided that the Company is not required to pay more than half of the
consideration in cash), and the incurrence of approximately $5.3 million in
transaction costs. It is anticipated that these transactions will close in
September 2001. Equity One expects to fund the cash requirements of these
transactions as follows: (i) the anticipated issuance of a total of 1.3 million
shares of common stock on August 17, 2001 to Alony Hetz Properties &
Investments, Ltd. under the terms of an existing commitment, that will provide
approximately $14.1 million, (ii) the use of approximately $3.8 million of cash
presently designated as restricted, (iii) additional borrowings under the Credit
Agreement, and (iv) other borrowings currently under negotiation to be secured
by real estate.
Development of a 100,000 square foot supermarket center on the Coral
Way S.E. parcel in Miami-Dade County, Florida is anticipated to commence in 2002
at a cost of $11.0 million including the $1.8 million cost to purchase the site
under the terms of an existing option. Development of the second phase of Forest
Village, totaling approximately 100,000 square feet has not commenced, but is
anticipated to be completed in 2003 at an estimated cost of $7.0 million.
Development of phase three of the Shops at Skylake, totaling approximately
105,000 square feet has not commenced, but is anticipated to be completed in
2003 at an estimated cost of $7.3 million. The Company expects to fund the costs
of
14
these development projects from cash flow from operations, borrowings under the
Credit Agreement and other sources of cash, including obtaining permanent debt
on certain unencumbered rental properties.
It is anticipated that as a result of the acquisition of CEFUS and
UIRT, the Company will assume or incur approximately $280 million in additional
debt and the Company's ratio of total liabilities to total assets will increase
from 57% at June 30, 2001 to approximately 62% on a pro forma basis. These
higher debt levels could subject the Company to the risks normally associated
with higher levels of debt financing, including the risk that its cash flow will
be insufficient to meet required payments of principal and interest, and the
risk that the resulting reduced financial flexibility could inhibit the
Company's ability to develop or improve its rental properties, withstand
downturns in its rental income or take advantage of business opportunities. In
addition, because the Company currently anticipates that only a small portion of
the principal of its indebtedness, including indebtedness to be incurred or
assumed in connection with the pending acquisitions, will be repaid prior to
maturity, it is expected that it will be necessary to refinance the majority of
its debt. Accordingly, there is a risk that such indebtedness will not be able
to be refinanced or that the terms of any refinancing will not be as favorable
as the terms of the current indebtedness.
In anticipation of the February 4, 2002 maturity of the Credit
Agreement, the Company has commenced discussions with a number of financial
institutions regarding a new credit agreement. The Company may, as market
conditions permit, consider the issuance of equity securities during the next 12
months. The Company believes, based on currently proposed plans and assumptions
relating to its operations and replacement credit agreement, that its existing
financial arrangements, together with cash flows from operations, will be
sufficient to satisfy its cash requirements for a period of at least 12 months.
In the event that the Company's plans change, its assumptions change or prove to
be inaccurate or cash flows from operations or amounts available under existing
financing arrangements prove to be insufficient to fund the Company's expansion
and development efforts, the Company would be required to seek additional
sources of financing. There can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all and any equity
financing could be dilutive to existing shareholders. If adequate funds are not
available, the Company's business operations could be materially adversely
affected.
INFLATION
Most of the Company's leases contain provisions designed to partially
mitigate the adverse impact of inflation. Such provisions include clauses
enabling the Company to receive percentage rents based on tenant gross sales
above predetermined levels, which rents generally increase as prices rise, or
escalation clauses which are typically related to increases in the Consumer
Price Index or similar inflation indices. Most of the Company's leases require
the tenant to pay its share of operating expenses, including common area
maintenance, real estate taxes and insurance, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
The Company's financial results are affected by general economic
conditions in the markets in which its properties are located. An economic
recession, or other adverse changes in general or local economic conditions,
could result in the inability of some existing tenants of the Company to meet
their lease obligations and could otherwise adversely affect the Company's
ability to attract or retain tenants. The properties are typically anchored by
supermarkets, drug stores and other consumer necessity and service retailers
which typically offer day-to-day necessities rather than luxury items. These
types of tenants, in the experience of the Company, generally maintain more
consistent sales performance during periods of adverse economic conditions.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements include statements
regarding the Company's intent, belief or current expectations and those of the
Company's management and involve known and unknown risks, uncertainties and
other factors which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the following: maintaining REIT status,
general economic and business conditions, the ability to achieve synergies and
cost savings by combining the Company's operations with CEFUS and UIRT, the
ability to
15
manage properties in areas outside the Company's traditional geographic markets,
the Company's ability to manage a significantly greater number of properties,
which will, among other things, affect the demand for retail rental space,
availability and creditworthiness of prospective tenants, lease rents and the
terms and availability of financing; adverse changes in the real estate markets
including, among other things, competition with other companies; risks of real
estate markets including, development and acquisition; governmental actions and
initiatives; and environment/safety requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The primary market risk to which the Company has exposure is interest
rate risk. Changes in interest rates can affect the Company's net income and
cash flows. As changes in market conditions occur, interest rates can either
increase or decrease, and interest expense from the variable component of the
Company's debt balances will move in the same direction. With respect to its
investment portfolio, changes in interest rates generally do not affect the
Company's interest income as its investments are predominantly in equity
securities. With respect to its mortgage notes payable, changes in interest
rates generally do not affect the Company's interest expense as its mortgage
notes payable are predominantly at a fixed-rate, for extended terms, and would
be unaffected by any sudden change in interest rates. The Company's possible
risk is from increases in long-term real estate mortgage rates that may occur
over a decade or more, as this may decrease the overall value of its real
estate. Because the Company has the intent to hold its existing mortgages to
maturity (or until the sale of the associated property), there is believed to be
no interest rate market risk on the Company's results of operations or its
working capital position. The Company estimates the fair market value of its
long term, fixed rate mortgage loans using discounted cash flow analysis based
on current borrowing rates for similar types of debt. At June 30, 2001, the fair
value of the mortgage loans was estimated to be $123.2 million compared to a
carrying value amount of $124.7 million. If the weighted average interest rate
on the Company's fixed rate debt were 100 basis points higher or lower, the fair
market value would be $111.7 million and $129.8 million, respectively.
If the weighted average interest rate on the Company's variable rate
debt were 100 basis points higher or lower, annual interest expense would
increase or decrease by approximately $56,000, based on the Company's variable
rate debt balance on June 30, 2001.
The Company's objective in managing its exposure to interest rate
changes is to limit the impact of interest rate changes on earnings and cash
flows. The Company may use a variety of financial instruments to reduce its
interest rate risk, including interest rate swap agreements whereby the Company
exchanges its variable interest costs on a defined amount of principal for
another party's obligation to pay fixed interest on the same amount of
principal, or interest rate caps, which will set a ceiling on the maximum
variable interest rate the Company will incur on the amount of debt subject to
the cap and for the time period specified in the interest rate cap. At the
present time, the Company has not executed or entered into any such financial
instruments and has no material market risk sensitive instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Company's properties are subject to any
material litigation. Further, to the Company's knowledge there is no litigation
threatened against the Company or any of its properties, other than routine
litigation and administrative proceedings arising in the ordinary course of
business, which collectively are not expected to have a material adverse affect
on the business, financial condition, results of operations or cash flows of the
Company.
16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 1, 2001, the Company issued to various employees for
compensation purposes 51,801 shares of unregistered restricted stock that vest
over a two to three year period and stock options to a Company officer to
purchase up to 175,000 shares of Company common stock exercisable at $10.00 per
share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 25, 2001.
(1) The stockholders elected each of the five nominees to the Board of
Directors for:
FOR AGAINST WITHHELD
CLASS I DIRECTOR (TERM TO EXPIRE IN 2002)
Peter Linneman 12,666,153 10,665 0
CLASS II DIRECTOR (TERM TO EXPIRE IN 2003)
Noam Ben-Ozer 12,666,153 10,665 0
CLASS III DIRECTORS (TERM TO EXPIRE IN 2004)
Robert L. Cooney 12,666,153 10,665 0
Nathan Hetz 12,666,153 10,665 0
Dori Segal 12,666,153 10,665 0
The terms of the following directors continued after the meeting:
CLASS I DIRECTORS (TERM TO EXPIRE IN 2002)
Ronald S. Chase
Dr. Shaiy Pilpel
CLASS II DIRECTORS (TERM TO EXPIRE IN 2003)
Chaim Katzman
Doron Valero
(2) The stockholders ratified the appointment of Deloitte & Touche LLP as
independent accountants of the Company:
FOR AGAINST WITHHELD
12,666,050 6,768 4,000
17
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Agreement and Plan of Merger dated May 31, 2001 between
Equity One, Inc. and United Investors Realty Trust
(incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K, dated May 31, 2001, Commission
File No. 001-13499).
10.1 Stock Exchange Agreement dated May 18, 2001 among Equity
One, Inc., Centrefund Realty Corporation and First Capital
America Holding Corp. (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K,
dated May 18, 2001, Commission File No. 001-13499).
(b) Reports on Form 8-K:
During the quarterly period ended June 30, 2001, the Company filed the
following Reports on Form 8-K:
Report on Form 8-K, dated May 11, 2001 disclosing Items 7
and 9 information;
Report on Form 8-K dated May 18, 2001, disclosing Items 7
and 9 information; and
Report on Form 8-K dated May 31, 2001, disclosing Items 5
and 7 information.
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.
Date: August 10, 2001 EQUITY ONE, INC.
/s/ CHAIM KATZMAN
---------------------------------
Chaim Katzman
Chief Executive Officer
(Principal Executive Officer)
/s/ HOWARD M. SIPZNER
---------------------------------
Howard M. Sipzner
Chief Financial Officer
(Principal Accounting Financial Officer)
18