UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission File No. 001-13499
EQUITY ONE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
1696 N.E. MIAMI GARDENS DRIVE
N. MIAMI BEACH, FLORIDA 33179
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(305) 947-1664
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
MARYLAND 52-1794271
- --------------------------------------------------------------------------------
(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 November 19, 2001, 28,862,500 shares of the
Company's common stock, par value $0.01 per share, were issued and outstanding.
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................................................... 3
Condensed Consolidated Balance Sheets-
As of September 30, 2001 and December 31, 2000 (unaudited)....................................... 3
Condensed Consolidated Statements of Operations-
For the three-month and nine-month periods ended September 30, 2001 and 2000 (unaudited)......... 5
Condensed Consolidated Statements of Comprehensive Income-
For the three-month and nine-month periods ended September 30, 2001 and 2000 (unaudited)......... 7
Condensed Consolidated Statements of Stockholders' Equity-
For the nine-month periods ended September 30, 2001 and 2000 (unaudited)......................... 8
Condensed Consolidated Statements of Cash Flows-
For the nine-month periods ended September 30, 2001 and 2000 (unaudited)......................... 9
Notes to the Condensed Consolidated Financial Statements (unaudited)............................. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risks...................................... 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................ 20
Item 2. Changes in Securities and Use of Proceeds........................................................ 20
Item 3. Defaults Upon Senior Securities.................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 21
Item 5. Other Information................................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................................. 21
Signatures....................................................................................... 21
2
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
ASSETS
Rental Properties and Developments:
Land, building and equipment................................. $ 599,668 $ 468,957
Building improvements........................................ 18,298 10,901
Land held for development.................................... 12,169 13,468
Construction in progress..................................... 8,755 8,202
-------------- --------------
Subtotal.................................................. 638,890 501,528
less: accumulated depreciation............................... (25,113) (17,829)
-------------- --------------
Rental properties and developments, net........................ 613,777 483,699
Cash and cash equivalents...................................... 4,237 2,347
Restricted cash................................................ 9,836 4,273
Securities available for sale.................................. 1,604 1,403
Accounts and other receivables, net............................ 16,716 18,081
Due from related parties....................................... 25 9,361
Deposits....................................................... 7,818 822
Prepaid and other assets....................................... 2,221 7,392
Deferred expenses, net......................................... 3,384 1,404
Investments in unconsolidated entities.......................... 9,090 11,707
Goodwill, net................................................... 1,299 1,352
Deferred income tax assets...................................... 0 976
-------------- --------------
Total assets...................................................... $ 670,007 $ 542,817
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable....................................... $ 331,622 $ 280,396
Credit agreements............................................ 34,042 4,243
Accounts payable and accrued expenses........................ 15,676 14,650
Tenants' security deposits................................... 4,011 1,476
Deferred rental income....................................... 124 662
Due to related parties....................................... 0 15,965
Minority interest in equity of consolidated subsidiary....... 3,869 3,875
-------------- --------------
Total liabilities.............................................. 389,344 321,267
Minority interest............................................... 0 33,887
(Continued)
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value................................ $ 288 $ 128
Additional paid-in capital................................... 283,704 105,368
Equity related to step acquisition........................... 0 82,123
Retained earnings............................................ 4,484 1,709
Accumulated other comprehensive income....................... (111) (311)
Unamortized restricted stock compensation.................... (2,124) (809)
Note receivable from issuance of common stock................ (5,578) (545)
-------------- --------------
Total stockholders' equity..................................... 280,663 187,663
-------------- --------------
Total liabilities and stockholders' equity........................ $ 670,007 $ 542,817
============== ==============
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2001 2000 2001 2000
--------------- -------------- ------------- --------------
REVENUES:
Income from rental property
Minimum rental................................ $ 14,941 $ 9,655 $ 42,636 $ 22,135
Expense recoveries............................ 4,226 2,683 12,501 5,808
Percentage rent payments...................... 150 193 928 471
--------------- -------------- ------------- --------------
Total rental income.............................. 19,317 12,531 56,065 28,414
Management fee income........................... 243 87 799 201
Gain on sale of securities...................... 0 0 33 0
Dividend and interest income.................... 475 338 1,410 436
--------------- -------------- ------------- --------------
Total revenues..................................... 20,035 12,956 58,307 29,051
--------------- -------------- ------------- --------------
COSTS AND EXPENSES:
Operating expenses.............................. 6,086 3,579 17,171 7,818
Depreciation and amortization................... 2,680 1,747 7,837 3,733
Interest expense and fee amortization........... 5,416 3,638 16,331 6,994
General and administrative...................... 912 601 2,454 1,656
--------------- -------------- ------------- --------------
Total costs and expenses........................... 15,094 9,565 43,793 20,201
--------------- -------------- ------------- --------------
Income before gain/(loss) on sale of real estate, equity
in income/(loss) of unconsolidated entities, minority
interest in earnings of consolidated subsidiary, income
taxes and minority interest...................... 4,941 3,391 14,514 8,850
Gain/(loss) on sale of real estate............... (609) 0 (609) 0
Equity in income/(loss) of unconsolidated entities.. 155 (24) 454 (24)
Minority interest in earnings of consolidated subsidiary (25) (24) (74) (73)
Income tax credit/(expense)
Current....................................... 407 (1) 593 (1)
Deferred...................................... 1,853 (222) 374 (222)
--------------- -------------- ------------- --------------
Net income before minority interest................ 6,722 3,120 15,252 8,530
Minority interest............................... (896) (117) (1,627) (117)
--------------- -------------- ------------- --------------
Net income......................................... $ 5,826 $ 3,003 $ 13,625 $ 8,413
=============== ============= ============= ==============
(Continued)
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ---------------------------------
2001 2000 2001 2000
------------- ------------- ------------- ---------------
EARNINGS PER SHARE:
Basic earnings per share......................... $0.27 $0.20 $0.67 $0.67
Diluted earnings per share....................... $0.27 $0.20 $0.66 $0.66
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................ 21,304 15,005 20,343 12,604
Diluted.......................................... 21,948 15,214 20,941 12,801
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net income $ 5,826 $ 3,003 $ 13,625 $ 8,413
Other comprehensive income:
Net unrealized gain/(loss) on
securities available for sale................ (35) 72 200 210
---------- ---------- ---------- ----------
Comprehensive income................ $ 5,791 $ 3,075 $ 13,825 $ 8,623
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NOTES
RECEIVABLE
EQUITY ACCUMULATED UNAMORTIZED FROM THE
ADDITIONAL RELATED OTHER RESTRICTED ISSUANCE TOTAL
COMMON PAID-IN TO STEP RETAINED COMPREHENSIVE STOCK OF COMMON STOCKHOLDERS'
STOCK CAPITAL ACQUISITION EARNINGS INCOME COMPENSATION STOCK EQUITY
-------- ---------- ----------- -------- ------------- ------------ ---------- --------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Balance, January 1, 2001....... $ 128 $105,368 $ 82,123 $ 1,709 $ (311) $ (809) (545) $ 187,663
Issuance of common stock
For CEFUS acquisition..... 105 120,540 (82,123) 38,522
For UIRT acquisition...... 29 31,449 31,478
Alony Hetz................ 20 21,187 21,207
Other issuances........... 6 6,391 (1,315) (5,033) 49
Stock issuance costs........ (1,231) (1,231)
Net income.................. 13,625 13,625
Net unrealized holding gain
on securities available
for sale.................. 200 200
Dividends paid.............. (10,850) (10,850)
-------- -------- -------- ------- ------- --------- -------- ---------
Balance, September 30, 2001.... $ 288 $283,704 $ 0 $ 4,484 $ (111) $ (2,124) (5,578) $280,663
======== ======== ======== ======= ======= ========= ======== =========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Balance, January 1, 2000....... $ 113 $ 89,990 $ $ 2,390 $ (519) $ $ (545) $ 91,429
Issuance of common stock.... 5 4,643 (1,160) 3,488
Equity related to step
acquisition............... 82,123 82,123
Stock issuance costs........ (139) (139)
Net income.................. 8,413 8,413
Net unrealized holding gain
on securities available
for sale.................. 210 210
Dividends paid.............. (9,067) (9,067)
-------- -------- -------- ------- ------- --------- -------- ---------
Balance, September 30, 2000.... $ 118 $ 94,494 $ 82,123 $ 1,736 $ (309) $ (1,160) $ (545) $176,457
======== ======== ======== ======= ======= ========= ======== =========
See accompanying notes to the condensed consolidated financial statements.
8
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------ ------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net income....................................................... $ 13,625 $ 8,413
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 8,122 3,945
Provision for losses on accounts receivable.................... 160 (32)
Equity loss/(income) from investments in joint ventures........ (454) 24
Minority interest in earnings of consolidated subsidiary....... 74 73
Minority interest.............................................. 1,627 117
Deferred income taxes.......................................... (374) 222
Loss on sale of real estate.................................... 609 0
Changes in assets and liabilities:
Restricted cash................................................ (3,797) 0
Accounts and other receivables................................. (1,915) 463
Deposits....................................................... (1,414) (8,553)
Due from related parties....................................... 22 (92)
Prepaid and other assets....................................... (2,106) (204)
Accounts payable and accrued expenses.......................... (752) 2,530
Tenants' security deposits..................................... 279 180
Deferred rental income......................................... (540) (45)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................... $ 13,166 $ 7,041
============ ============
INVESTING ACTIVITIES:
Additions to rental properties................................. (10,389) (16,325)
Sales of rental properties..................................... 20,695 0
Purchases of available for sale securities..................... (1) (34)
Distributions from joint ventures.............................. 55 0
Cash acquired in acquisitions.................................. 51 1,995
Due from/to affiliated entities................................ 1,614 55
Cash used for the purchase of UIRT............................. (32,876) 0
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES........................ $ (20,851) $ (14,309)
============ ============
FINANCING ACTIVITIES:
Repayments of mortgage notes payable........................... (17,904) (4,686)
Borrowings under mortgage notes payable........................ 4,700 26,366
Borrowings/(repayments) under credit agreement................. 15,844 (6,269)
Cash dividends paid to stockholders............................ (10,850) (9,067)
Due to affiliates.............................................. (2,111) (483)
Stock subscription and issuance................................ 21,207 3,488
Stock issuance costs........................................... (1,231) (139)
Deferred financing expenses, net............................... 0 (148)
Change in minority interest.................................... (80) (73)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................... $ 9,575 $ 8,989
============ ============
Cash and Cash Equivalents, Beginning of Period................... 2,347 427
Net Increase in Cash and Cash Equivalents........................ 1,890 1,721
------------ -----------
Cash and Cash Equivalents, End of Period......................... $ 4,237 $ 2,148
============ ===========
(Continued)
9
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2001 2000
------------ ------------
Supplemental Disclosure:
Cash paid for interest, net of amount capitalized.............. $ 15,102 $ 6,790
============ ============
Supplemental Schedule of Non-cash Investing and Financing Activities:
Change in unrealized holding gain (loss) on securities available
for sale....................................................... $ 200 $ 210
============ ============
Issuance of restricted stock................................... $ 1,346 $ 1,160
============ ============
Common stock issued for notes receivables...................... $ 5,033
============
The Company acquired 68.07% of the capital stock of CEFUS for $82,123:
Fair value of assets acquired............................... $ 0 $ 315,195
Cash paid for capital stock................................. 0 0
Liabilities assumed......................................... 0 198,480
Minority interest........................................... $ 0 $ 34,592
============ ============
The Company acquired all of the capital stock of UIRT for $67,824:
Fair value of assets acquired............................... $ 147,691 $ 0
Cash paid for capital stock................................. 32,876 0
Liabilities assumed......................................... $ 79,867 $ 0
============ ============
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
10
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 nine-month periods ended
September 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. 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.
On September 20, 2001, the Company completed the acquisition of Centrefund
Realty (U.S.) Corporation ("CEFUS") from First Capital Realty Inc., formerly
known as Centrefund Realty Corporation, for approximately $280,000 (including
assumed debt). As provided for in the stock exchange agreement, the Company
issued 10,500 shares of its common stock to subsidiaries of First Capital Realty
Inc. and assumed $149,021 of CEFUS's outstanding debt. The acquisition of CEFUS
was partially accounted for on a "push-down" basis and partially in a manner
similar to a pooling of interests, due to the acquisition by Gazit Globe (1982)
Ltd., the Company's majority shareholder, of a 68.07% controlling interest in
Centrefund Realty Corporation on August 18, 2000.
To reflect the events of August 18, 2000, the Company has recorded "equity
related to step acquisition" in the condensed consolidated financial statements
equivalent to 68.07% of the value of the consideration paid to subsidiaries of
First Capital Realty (the "Equity Related to Step Acquisition"). In addition,
the Company has recorded a minority interest equivalent to 31.93% of the value
of the net assets acquired on August 18, 2000 (the "31.93% Minority Interest").
The Company's results for the quarter and nine months ended September 30,
2000 have been restated to incorporate the results of CEFUS for the period of
August 18, 2000 to September 30, 2000. The Company's results for the quarter and
nine months ended September 30, 2001 have been adjusted to incorporate the
results of CEFUS for the period of January 1, 2001 to September 19, 2001. The
restatement consolidates the operations of Equity One and CEFUS between August
18, 2000 and September 19, 2001, subject to a 31.93% minority interest in CEFUS
(the "CEFUS Accounting Treatment"). During the period August 18, 2000 to
September 19, 2001, CEFUS operated under the control of First Capital Realty as
a C-corporation and recorded current and deferred income taxes in connection
with its operations. These taxes are reflected on the Company's financial
statements by way of the CEFUS Accounting Treatment. Effective September 20,
2001, the Company will no longer record any provision for income taxes
consistent with its acquisition of 100% of CEFUS, and its intent to operate
CEFUS as a qualified REIT subsidiary. In addition, with the Company's September
21, 2001 acquisition of 100% of CEFUS, the Company eliminated the equity from
step acquisition and the 31.93% Minority Interest, and has recorded in their
place the issuance of 10,500 shares of its common stock.
11
The effect of the CEFUS Accounting Treatment on the 2001 and 2000
financial statements is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
------- ------- ------- -------
REVENUES:
Equity One (includes CEFUS since September 20,
2001 and UIRT since September 21, 2001) .... $11,928 $ 8,415 $31,687 $24,510
CEFUS ........................................ 8,107 4,541 26,620 4,541
------- ------- ------- -------
Total Revenues ................................. 20,035 $12,956 $58,307 $29,051
======= ======= ======= =======
NET INCOME:
Equity One (includes CEFUS since September 20,
2001 and UIRT since September 21, 2001) ... $ 3,916 $ 2,753 $10,158 $ 8,163
CEFUS ........................................ 1,910 250 3,467 250
------- ------- ------- -------
Total Net Income ............................... 5,826 $ 3,003 $13,625 $ 8,413
======= ======= ======= =======
On September 21, 2001, the Company completed the acquisition of United
Investors Realty Trust ("UIRT"), a Texas-based REIT, for approximately $147,000
(including assumed debt). As a result of the transaction with UIRT, the Company
issued 2,896 shares of its common stock and paid approximately $32,876 in cash
consideration to former UIRT shareholders, and assumed approximately $79,400 of
UIRT's outstanding debt. Contemporaneously with the completion of the UIRT
transaction, the Company obtained a $30,000 revolving line of credit from a bank
at a rate of LIBOR plus 125 basis points, and borrowed the full amount of the
line of credit in September 2001. The acquisition of UIRT was accounted for
using the purchase method.
Pursuant to these acquisitions, the Company now owns a total of 84
properties, primarily located in metropolitan areas of Florida and Texas,
encompassing 56 supermarket-anchored shopping centers, 5 drug store-anchored
shopping centers, 17 other retail-anchored shopping centers, 5 commercial
properties and 1 development site, as well as interests in 3 real estate joint
ventures.
2. 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. Basic and
diluted earnings per share have been adjusted so that the weighted average
number of shares used in those calculations include the effect of the assumed
issuance on August 18, 2000 of 68.07% of the 10,500 shares which were issued in
connection with the CEFUS acquisition on September 20, 2001. This adjustment is
in accordance with the CEFUS Accounting Treatment described above in Note 1.
3. 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
12
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 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.
For the period from August 18, 2000 until the closing of the acquisition of
CEFUS on September 20, 2001, the Company has recorded a minority interest in the
assets of CEFUS equal to the 31.93% of CEFUS that Gazit-Globe (1982) Ltd., the
Company's majority shareholder, did not own in Centrefund Realty Corporation,
the then 100% owner of CEFUS. On September 20, 2001, this minority interest was
eliminated by virtue of the Company's acquisition of 100% of CEFUS.
4. 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, 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 September 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.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes, but does not replace, SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", as
well as other earlier related pronouncements, either in whole or in part. SFAS
No. 144 is effective for
13
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years, though earlier application is
encouraged. The adoption of this statement is not expected to have a material
effect on the Company's financial position, results of operations or cash flows.
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. In particular, reference is given to Note 1 of the condensed
consolidated financial statements contained herein for information regarding the
CEFUS Accounting Treatment and its impact on the reported results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Total revenues increased by $7,079, or 54.6%, to $20,035 for the three
months ended September 30, 2001 from $12,956 for the comparable period of 2000.
The increase in revenue was primarily the result of the following: (i) increased
same property revenues of $671, (ii) increased revenues of $673 relating to five
property acquisitions, (iii) increased revenues of $5,007 related to the
inclusion of CEFUS' operations for a full three months in 2001 as compared to
the period beginning on August 18, 2000 in the comparable period of 2000, and
(iv) additional revenues of $581 related to the September 21, 2001 acquisition
of UIRT.
Operating expenses increased by $2,507 or 70.0% to $6,086 for the three
months ended September 30, 2001 from $3,579 million for the comparable period of
2000. The increase in operating expenses was primarily the result of the
following: (i) increased same property operating expense of $100, (ii) increased
operating expenses of $156 related to five property acquisitions, (iii)
increased operating expenses of $1,867 related to the acquisition of CEFUS, (iv)
additional operating expenses of $122 related to the acquisition of UIRT, and
(v) increased property management expenses of $503 attributable to managing a
larger portfolio.
Depreciation and amortization expense increased by $933, or 53.4% to $2,680
for the three months ended September 30, 2001, from $1,747 for the comparable
period of 2000. The increase resulted primarily from: (i) $148 related to the
Company's acquisition of new properties and completion of new development
projects, (ii) $712 related to the acquisition of CEFUS, and (iii) $73 related
to the acquisition of UIRT.
Interest expense increased by $1,778, or 48.9%, to $5,416 for the three
months ended September 30, 2001 from $3,638 for the comparable period of 2000.
The increase in interest expense was primarily due to the following factors: (i)
increased mortgage interest of $209 primarily due to the assumption of two loans
related to the five property acquisitions and the closing of one new loan
totaling $12,600, (ii) other interest of $64 related to distributions to the
North Port Minority Partners (see Note 3), (iii) reduced interest of $177 due to
decreased borrowing under the CNB Credit Agreement (as defined below), (iv)
decreased capitalized interest of $157, (v) increased interest of $1,448 related
to the acquisition of CEFUS, and (vi) additional interest of $136 related to the
acquisition of UIRT.
General and administrative expenses increased by $311, or 51.7%, to $912
for the three months ended September 30, 2001 from $601 for the comparable
period of 2000. The increase was primarily the result of managing the Company's
growth,
14
as compensation costs increased $225, directors' fees increased $41, and
all other costs increased $45.
There was a net increase in all other income items of $1,273 to $885 for
the three months ended September 30, 2001, from a deficit of $388 for the
comparable period in 2000. The increase resulted primarily from the acquisition
of CEFUS, which created a $609 loss on the sale of real estate, a $2,483
increase in income tax credits, and a $179 increase in equity income of
unconsolidated entities, offset by a $780 increase in the minority interest
share of net income.
As a result of the foregoing, net income increased by $2,823, or 94.0%, to
$5,826 for the three months ended September 30, 2001, compared to $3,003 for the
comparable period of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Total revenues increased by $29,256, or 100.7%, to $58,307 for the nine
months ended September 30, 2001 from $29,051 for the comparable period of 2000.
The increase in revenue was primarily the result of the following: (i) increased
same property revenues of $1,583, (ii) increased revenues of $2,222 related to
five property acquisitions, (iii) increased management fees of $598, (iv)
increased investment revenue of $974, (v) increased revenues of $23,520 related
to the inclusion of CEFUS' operations for a full nine months in 2001 as compared
to the period beginning on August 18, 2000 in the comparable period of 2000, and
(vi) additional revenues of $581 related to the September 21, 2001 acquisition
of UIRT.
Operating expenses increased by $9,353, or 119.6% to $17,171 for the nine
months ended September 30, 2001 from $7,818 for the comparable period of 2000.
The increase in operating expenses was primarily the result of the following:
(i) increased same property operating expenses of $272, (ii) increased operating
expenses related to five property acquisitions of $459, (iii) increased
operating expenses of $7,542 related to CEFUS, (iv) additional operating
expenses of $122 related to the acquisition of UIRT totaling, and (v) increased
property management expense of $1,300.
Depreciation and amortization expense increased by $4,104, or 109.9% to
$7,837 for the nine months ended September 30, 2001, from $3,733 for the
comparable period of 2000. The increase resulted primarily from: (i) the
Company's acquisition of new properties and completion of new development
projects of $570, (ii) the acquisition of CEFUS of $3,461, and (iii)
the acquisition of UIRT of $73.
Interest expense increased by $9,337, or 133.5%, to $16,331 for the nine
months ended September 30, 2001 from $6,994 for the comparable period of 2000.
The increase in interest expense was primarily due to the following factors: (i)
increased mortgage interest of $1,193 primarily due to the assumption of two
loans and the closing of two new loans totaling $29,000, (ii) increase in other
interest of $194 related to distributions to the North Port Minority Partners
(see Note 3), (iii) reduced interest of $685 due to decreased borrowing under
the CNB Credit Agreement (as defined below), (iv) decreased capitalized interest
of $695, (v) increased interest of $8,082 related to the acquisition of CEFUS,
and (vi) additional interest of $136 relating to the acquisition of UIRT.
General and administrative expenses increased by $798, or 48.2%, to $2,454
for the nine months ended September 30, 2001 from $1,656 for the comparable
period of 2000. The increase was primarily the result of managing the Company's
growth, as compensation costs increased $449, directors' fees increased $125,
and all other costs increased $224.
There was a net increase in all other expense items of $452 to $889 for the
nine months ended September 30, 2001, from $437 for the comparable period in
2000. The increase resulted primarily from the acquisition of CEFUS, which
created a loss on sale of real estate, an increase in income tax credits, a $478
increase in equity income of unconsolidated entities, and a $1,511 increase in
the minority interest share of net income.
15
As a result of the foregoing, net income increased by $5,212, or 62.0%, to
$13,625 for the nine months ended September 30, 2001, compared to $8,413 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. In addition, FFO data presented
below has been adjusted to add back any deferred income tax expense or subtract
any deferred income tax credit attributable to the CEFUS Accounting Treatment.
The Company 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 ("GAAP") 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 (in thousands)
for the three-month and nine-month periods ended September 30, 2001 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- --------- --------- ---------
Net income............................................. $ 5,826 $ 3,003 $ 13,625 $ 8,413
Depreciation of real estate assets.................. 2,658 1,718 7,757 3,665
Amortization of capitalized leasing fees............ 60 61 147 118
Loss on sale of real estate......................... 609 0 609 0
Interest on convertible partnership units........... 64 0 194 0
Minority interest in earnings of consolidated
subsidiary ......................................... 25 24 74 73
Deferred income taxes............................... (1,853) 222 (374) 222
Depreciation in unconsolidated entities............. 18 9 74 9
Minority interest share of FFO adjustments.......... (4) (289) (1,369) (289)
-------- --------- --------- ---------
FUNDS FROM OPERATIONS.................................. $ 7,403 $ 4,748 $ 20,737 $ 12,211
======== ========= ========= =========
FFO increased by $2,655, or 55.9%, to $7,403 for the three months ended
September 30, 2001, from $4,748 for the comparable period of 2000. FFO increased
by $8,526, or 69.8%, to $20,737 for the nine months ended September 30, 2001,
from $12,211 for the comparable period of 2000. The increase is primarily the
result of the inclusion of CEFUS' results for a full three and nine months in
2001, respectivly, as compared to the period beginning on August 18, 2000 in the
comparable periods of 2000; the closing of the UIRT transaction on September 21,
2001; the acquisition of additional properties; completion of development
projects; and the increases in same property revenues and expenses, as noted
above.
16
The impact of the CEFUS Accounting Treatment on the calculation of
FFO is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------
2001 2000 2001 2000
---------- -------- --------- ---------
FUNDS FROM OPERATIONS:
Equity One......................... $ 5,485 $ 3,880 $ 14,352 $ 11,343
CEFUS.............................. 1,918 868 6,385 868
---------- -------- --------- ---------
Total funds for operations........... $ 7,403 $ 4,748 $ 20,737 $ 12,211
========== ======== ========= =========
CASH FLOW
The net cash provided by operations of $13,166 for the nine months ended
September 30, 2001 included: (i) net income of $13,625, (ii) adjustment for
non-cash items which increased cash flow by $9,764, and (iii) a net decrease in
operating assets and liabilities of $10,223, compared to net cash provided by
operations of approximately $7,041 for the nine months ended September 30, 2000,
which included (i) net income of $8,413, (ii) adjustment for non-cash items
which increased cash flow by $4,349, and (iii) a net decrease in operating
assets and liabilities of $5,721.
Net cash used in investing activities of $20,851 for the nine months ended
September 30, 2001 included: (i) the acquisition of the Pompano Beach property
for $2,905, (ii) construction and development costs of $1,493, (iii) other
capital improvements of $5,991, (iv) proceeds from reduction of affiliated debt
of $1,614, (v) cash used for the acquisition of UIRT of $32,876, (vi) proceeds
from the sale of one property of $20,695, and (vii) other sources of $105,
compared to net cash used in investing activities of $14,309 for the nine months
ended September 30, 2000 which included: (i) the purchase of two properties for
$4,700, (ii) improvements to rental properties and construction expenditures
relating to three major development projects totaling $11,625, (iii) $1,995 of
cash realized in the CEFUS purchase transaction, and (iv) other sources of $21.
Net cash provided in financing activities of $9,575 for the nine months
ended September 30, 2001 included: (i) principal payments on mortgage notes of
$17,904, (ii) borrowings under new mortgage notes of $4,700, (iii) borrowings on
the Credit Agreement of $15,844, (iv) cash dividends paid to common stockholders
of $10,850, (v) reduction of obligations to affiliates of $2,111, (vi) net
proceeds from issuance of common stock of $19,976, and (vi) other miscellaneous
uses of $80, compared to net cash provided by financing activities of $8,989 for
the nine months ended September 30, 2000 which included: (i) a mortgage note
payoff of $2,522 and principal payments on mortgage notes of $2,164, (ii)
borrowings under a new mortgage note of $26,366, (iii) net repayments on the CNB
Credit Agreement and other floating rate facilities of $6,269, (iv) cash
dividends paid to common stock shareholders of $9,067, (v) reduction of
obligations to affiliates of $483, (vi) net proceeds from the issuance of stock
under the Company's Dividend Reinvestment and Stock Purchase Plan of $3,349, and
(vii) other miscellaneous expenditures of $221.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funding for the Company's operations, including
the renovation, expansion, development and acquisition of rental properties are
operating cash flows, the issuance of equity securities, the placement of
mortgage loans and periodic borrowings under the Company's credit facilities.
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.
The Company has a $20,640 credit agreement with City National Bank of
Florida (the "CNB Credit Agreement"). The CNB Credit Agreement accrues interest
at 2.25% over the thirty-day LIBOR rate, payable monthly, adjusted every six
months, and matures February 4, 2002. The CNB 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.
17
On September 10, 2001, the Company secured a $30,000 revolving line of
credit with Bank Leumi Le-Israel B.M. (the "Leumi Credit Agreement"). The Leumi
Credit Agreement accrues interest at 1.25% over the thirty or ninety-day LIBOR
rate (at the option of the Company) and is payable monthly or quarterly
depending on rate selection. The Leumi Credit Agreement matures on September 16,
2002, with an option (at the Company's discretion) to extend it an additional
180 days. Advances under the Leumi Credit Agreement were used to fund a portion
of the cash consideration in the UIRT acquisition. Under the Leumi Credit
Agreement, the Company has agreed not to mortgage or encumber eight properties,
as follows: Albertson's Bissonnet, Albertson's Spring Shadows, Bandera Festival
Shopping Center, Market at First Colony, Mason Park, Hedwig Shopping Center,
McMinn Plaza and the Southwest Walgreens Center.
As of September 30, 2001, $4,042 was outstanding under the CNB Credit
Agreement and $30,000 was outstanding under the Leumi Credit Agreement.
As of September 30, 2001, the Company had total mortgage indebtedness of
$331,622 (excluding the credit agreements described above). $271,976 of the
mortgage indebtedness consists of 48 loans secured by 49 properties bearing
interest at a weighted average fixed rate of 7.91% with an average life of seven
years. $59,646 of the mortgage indebtedness consists of five interim bank loans
collateralized by a total of nine properties bearing interest at various
floating rates (some of which have been fixed for interim periods); $3,614 of
this indebtedness was refinanced in October 2001, while the remaining four loans
mature in 2003 and 2004.
As of September 30, 2001, the percentage of the total real estate cost of
the Company's rental properties that was encumbered by debt was 55.0%. 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 nine months ended September 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, and $0.27 per outstanding share of common stock on
September 28, 2001, totaling $3,366, $3,334 and $4,150, respectively.
On October 24, 2001 the Company refinanced the outstanding balance on the
existing loan secured by Lake Mary Shopping Center with a new, $25,000, 7.2%
fixed rate loan. After payment of certain prepayment costs and transaction
expenses, the Company realized net proceeds of $13,616 which were used for
general corporate purposes.
As of November 15, 2001, there was no outstanding balance under the CNB
Credit Agreement, while the outstanding balance under the Leumi Credit Agreement
was $21,000. The CNB Credit Agreement has been used to provide a $1,000 letter
of credit in connection with the Pine Island/Ridge Plaza financing and to
support $440 in escrows for property taxes on the properties comprising the CNB
Credit Agreement collateral, which reduces its gross availability to $19,200.
The Company expects to commence development in early 2002 of a 100,000
square foot supermarket center on the Coral Way S.E. parcel in Miami-Dade
County, Florida at a cost of $11,000 including the $1,800 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 is anticipated to
commence and be completed in 2003 at an estimated cost of $7,000. Development of
phase three of the Shops at Skylake, totaling approximately 105,000 square feet
is anticipated to commence and be completed in 2003 at an estimated cost of
$7,300. The Company expects to fund the costs of these development projects from
cash flow from operations, borrowings under the CNB and Leumi Credit Agreements
and other sources of cash, including obtaining permanent debt on certain
unencumbered rental properties.
As a result of the acquisition of CEFUS and UIRT, the Company increased its
ratio of total debt to total market capitalization from 45% at June 30, 2001 to
51% on September 30, 2001. This higher debt level 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 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 CNB Credit
Agreement, the Company has commenced discussions with City National Bank of
Florida regarding a replacement or extension of the existing CNB Credit
Agreement, as well as with a number of other 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
18
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
tobe 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, the
ability to achieve synergies and cost savings by combining the Company's
operations with CEFUS and UIRT; the ability to manage properties in areas
outside the Company's traditional geographic markets; the Company's ability to
manage a significantly greater number of properties; general economic and
business conditions, 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 environmental/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
19
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 September 30, 2001, the fair value of the fixed rate mortgage loans was
estimated to be $284,003 compared to the carrying value amount of $271,976. 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 $256,682 and
$283,886, 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 $640, based on the Company's variable rate debt
balance on September 30, 2001 (encompassing credit agreements and variable rate
bank mortgage facilities).
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
one such interest rate swap in place for $18,177 which obligates it to pay a
5.01% fixed rate and receive a floating rate through December 14, 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Company's properties are subject to any
material litigation. The Company and its properties may be subject to 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 16, 2001 one of the Company's directors received compensation in
the form of 1.3 shares of common stock at a market price of $11.63 per share.
On August 17, 2001 Alony Hetz Properties & Investments, Ltd. ("Alony Hetz")
purchased 1,300 shares of common stock at $10.875 per share consisting of 925
shares of common stock under an October 2000 subscription agreement and 375
shares of common stock though the exercise of warrants granted to it in October
2000. The shares purchased are restricted securities subject to future
registration rights. The majority of the proceeds totaling $14,138 were used to
fund a portion of the cash consideration for the acquisition of UIRT.
On September 14, 2001 Alony Hetz exercised its remaining warrants and
purchased 650 shares of common stock at a price of $10.875 per share. The shares
purchased are restricted securities subject to future registration rights. The
majority of the proceeds totaling $7,069 were used to fund a portion of the cash
consideration for the acquisition of UIRT.
On September 18, 2001 Chaim Katzman, Chairman, and Doron Valero, President,
exercised options to purchase 288 and 215 shares of common stock at $10.00 per
share respectively. The shares purchased are restricted securities subject to
future registration rights. The Company received consideration in the form of
notes receivable from Chaim Katzman and Doron Valero in the amount of $2,880 and
$2,153, respectively, which have been booked in the equity section of the
Company's balance sheet.
20
On September 20, 2001, the Company issued 10,500 shares of common stock to
subsidiaries of First Capital Realty Inc., the successor entity to Centrefund
Realty Corporation, for the acquisition of its wholly-owned subsidiary,
Centrefund Realty (U.S.) Corporation, at a price of $11.49 per share. The shares
issued are restricted securities subject to future registration rights.
The foregoing issuances were made pursuant to exemptions under Section 4(2)
of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on September 6, 2001 to
vote on the issuance of 10,500 shares of common stock to First Capital
Corporation in consideration of the acquisition of its wholly-owned subsidiary
CEFUS. The stockholders approved the acquisition as follows:
FOR AGAINST WITHHELD
--- ------- --------
11,260,638 34,834 10,434
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the quarterly period ended September 30, 2001, the Company filed
the following Reports on Form 8-K:
(i) Report on Form 8-K dated September 20, 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: November 19, 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)
21