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, 2003
Commission File No. 001-13499
EQUITY ONE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant 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
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange). Yes [X] No [ ]
Applicable only to Corporate Issuers:
As of the close of business on August 6, 2003, 64,085,942 shares of the
Company's common stock, par value $0.01 per share, were issued and outstanding.
EQUITY ONE, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements Page
------
Condensed Consolidated Balance Sheets-
As of June 30, 2003 and December 31, 2002 (unaudited) ............ 1
Condensed Consolidated Statements of Operations-
For the three-month and six-month periods ended June 30, 2003 and
2002 (unaudited) ................................................. 3
Condensed Consolidated Statements of Comprehensive Income-
For the three-month and six-month periods ended June 30, 2003 and
2002 (unaudited) ................................................. 5
Condensed Consolidated Statement of Stockholders' Equity-
For the six-month period ended June 30, 2003 (unaudited) ......... 6
Condensed Consolidated Statements of Cash Flows-
For the six-month periods ended June 30, 2003 and 2002
(unaudited)....................................................... 7
Notes to the Condensed Consolidated Financial
Statements (unaudited) ........................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 29
Item 4. Controls and Procedures.......................................... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 30
Item 2. Changes in Securities and Use of Proceeds ....................... 31
Item 3. Defaults upon Senior Securities ................................. 31
Item 4. Submission of Matters to a Vote of Security Holders ............. 31
Item 5. Other Information ............................................... 31
Item 6. Exhibits and Reports on Form 8-K ................................ 31
Signatures ............................................................... 32
Certificate of Chief Executive Officer.................................... 33
Certificate of Chief Financial Officer ................................... 34
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
----------- -----------
ASSETS
PROPERTIES:
Income producing ........................................................... $ 1,414,908 $ 682,941
Less: accumulated depreciation ............................................. (52,059) (40,433)
----------- -----------
1,362,849 642,508
Construction in progress and land held for development ..................... 42,104 35,923
Properties held for sale ................................................... 1,210 --
----------- -----------
Properties, net ......................................................... 1,406,163 678,431
CASH AND CASH EQUIVALENTS ..................................................... 2,119 2,944
CASH HELD IN ESCROW ........................................................... 3,381 5,933
ACCOUNTS AND OTHER RECEIVABLES, NET .......................................... 11,964 7,053
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES ................................. 8,503 10,021
GOODWILL ...................................................................... 22,535 2,276
OTHER ASSETS .................................................................. 27,841 23,411
----------- -----------
TOTAL ......................................................................... $ 1,482,506 $ 730,069
=========== ===========
(continued)
1
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE
Mortgage notes payable .......................................................$ 420,265 $ 332,143
Revolving credit facilities .................................................. 98,931 23,000
Unsecured senior notes payable ............................................... 150,000 --
----------- -----------
669,196 355,143
Unamortized premium on notes payable ............................................ 20,945 --
----------- -----------
Total notes payable ....................................................... 690,141 355,143
OTHER LIABILITIES
Accounts payable and accrued expenses ........................................ 25,416 14,760
Tenant security deposits ..................................................... 6,678 4,342
Other liabilities ............................................................ 2,895 1,724
----------- -----------
Total liabilities ......................................................... 725,130 375,969
----------- -----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES .................................. 15,763 3,869
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - 10,000 shares authorized but unissued ..... -- --
Common stock, $0.01 par value - 100,000 shares authorized, 63,517 and
34,540 shares issued and outstanding for 2003 and 2002, respectively ...... 635 345
Additional paid-in capital ................................................... 749,327 355,450
Retained earnings ............................................................ 1,451 5,969
Accumulated other comprehensive gain (loss) .................................. 1 (46)
Unamortized restricted stock compensation .................................... (6,194) (4,375)
Notes receivable from issuance of common stock ............................... (3,607) (7,112)
----------- -----------
Total stockholders' equity ................................................ 741,613 350,231
----------- -----------
TOTAL ...........................................................................$ 1,482,506 $ 730,069
=========== ===========
See accompanying notes to the condensed consolidated financial statements. (Concluded)
2
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
RENTAL INCOME:
Minimum rental .................................. $ 37,671 $ 17,983 $ 66,602 $ 35,388
Expense recoveries ............................... 10,590 5,140 18,599 11,218
Termination fees ................................. 438 111 497 234
Percentage rent payments ......................... 463 274 1,476 1,215
-------- -------- -------- --------
Total rental revenue ........................... 49,162 23,508 87,174 48,055
INVESTMENT INCOME .................................... 343 392 874 805
OTHER INCOME ......................................... 27 37 90 135
-------- -------- -------- --------
Total revenues ................................. 49,532 23,937 88,138 48,995
-------- -------- -------- --------
COSTS AND EXPENSES:
Property operating expenses ....................... 13,328 6,708 24,360 14,216
Interest expense .................................. 10,588 5,384 18,307 11,396
Amortization of deferred financing fees ........... 309 217 595 413
Rental property depreciation and amortization ..... 7,086 3,266 12,099 6,476
General and administrative expenses ............... 3,279 1,574 5,520 3,570
-------- -------- -------- --------
Total costs and expenses ...................... 34,590 17,149 60,881 36,071
-------- -------- -------- --------
INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURES, LOSS
ON EXTINGUISHMENT OF DEBT, AND MINORITY INTEREST IN
CONSOLIDATED SUBSIDIARIES ......................... 14,942 6,788 27,257 12,924
EQUITY IN INCOME OF JOINT VENTURES ................... 149 146 260 293
LOSS ON EXTINGUISHMENT OF DEBT ....................... -- -- (623) --
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST IN EARNINGS OF
CONSOLIDATED SUBSIDIARIES ......................... 15,091 6,934 26,894 13,217
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ....... (238) (26) (379) (51)
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS .................... 14,853 6,908 26,515 13,166
-------- -------- -------- --------
DISCONTINUED OPERATIONS
Income from operations of sold properties ......... 128 549 307 1,436
Gain on disposal of income producing properties ... 1,371 981 1,874 7,103
-------- -------- -------- --------
Total income from discontinued operations ....... 1,499 1,530 2,181 8,539
-------- -------- -------- --------
NET INCOME ........................................... $ 16,352 $ 8,438 $ 28,696 $ 21,705
======== ======== ======== ========
(Continued)
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE
Income from continuing operations ... $ 0.25 $ 0.21 $ 0.49 $ 0.42
Income from discontinued operations.. 0.02 0.04 0.04 0.27
---------- ---------- ---------- ----------
Total basic earnings per share .... $ 0.27 $ 0.25 $ 0.53 $ 0.69
========== ========== ========== ==========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE ............ 60,920 33,255 54,080 31,316
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Income from continuing operations ... $ 0.24 $ 0.21 $ 0.48 $ 0.41
Income from discontinued operations.. 0.02 0.04 0.04 0.27
---------- ---------- ---------- ----------
Total diluted earnings per share... $ 0.26 $ 0.25 $ 0.52 $ 0.68
========== ========== ========== ==========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE .......... 62,824 33,967 55,671 31,999
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements. (Concluded)
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
NET INCOME ........................................... $16,352 $ 8,438 $28,696 $21,705
OTHER COMPREHENSIVE INCOME:
Net unrealized holding gain on securities available
for sale .......................................... 48 21 47 28
------- ------- ------- -------
COMPREHENSIVE INCOME ................................. $16,400 $ 8,459 $28,743 $21,733
======= ======= ======= =======
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Accumulated Notes
Other Unamortized Receivable
Additional Comprehensive Restricted from the Total
Common Paid-In Retained (Loss)/ Stock Issuance of Stockholder'
Stock Capital Earnings Income Compensation Common Stock Equity
--------- --------- --------- ----------- ------------ ------------ ------------
BALANCE,
JANUARY 1, 2003....... $ 345 $ 355,450 $ 5,969 $ (46) $ (4,375) $ (7,112) $ 350,231
Issuance of common
stock:
IRT transaction... 175 231,562 - - - - 231,737
Other issuances... 115 163,491 - - (1,819) 3,505 165,292
Stock issuance costs - (1,176) - - - - (1,176)
Net income........... - - 28,696 - - - 28,696
Dividends paid....... - - (33,214) - - - (33,214)
Net unrealized holding
gain on securities
available for sale - - - 47 - - 47
--------- --------- --------- ----------- ----------- ------------ ------------
BALANCE,
JUNE 30, 2003......... $ 635 $ 749,327 $ 1,451 $ 1 $ (6,194) $ $(3,607) $ 741,613
========= ========= ========= =========== =========== ============ ============
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------------
2003 2002
------------- -------------
OPERATING ACTIVITIES:
Net income............................................................ $ 28,696 $ 21,705
Adjustments to reconcile net income to net cash provided by
operating activities:
Straight line rent adjustment.................................... (810) (65)
Provision for losses on accounts receivable...................... 399 249
Amortization of premium on notes payable......................... (1,366) -
Amortization of deferred financing fees.......................... 595 413
Rental property depreciation and amortization.................... 12,099 6,476
Depreciation and amortization included in discontinued operations 33 323
Amortization of restricted stock................................. 1,089 681
Equity in income of joint ventures............................... (260) (293)
Loss on extinguishment of debt................................... 623 -
Gain on securities available for sale............................ (8) -
Minority interest in earnings of consolidated subsidiaries....... 379 51
Gain on disposal of real estate.................................. (1,874) (7,103)
Changes in assets and liabilities:
Accounts and other receivables.................................. 405 1,874
Other assets.................................................... (1,733) (2,121)
Accounts payable and accrued expenses........................... (1,055) 2,076
Tenants security deposits....................................... 127 72
Other liabilities............................................... 718 (622)
------------- -------------
Net cash provided by operating activities............................. 38,057 23,716
------------- -------------
INVESTING ACTIVITIES:
Additions to and purchase of properties............................ (21,441) (56,869)
Proceeds from disposal of properties and joint venture interest.... 11,547 11,148
Decrease (increase) in cash held in escrow......................... 9,516 (596)
Distributions received from joint ventures......................... 535 312
Proceeds from repayments of notes receivable....................... 2,788 155
Increase in deferred leasing costs................................. (1,164) (617)
Sale of securities available for sale.............................. 564 -
Cash used in the purchase of IRT................................... (189,382) -
Cash acquired in the IRT acquisition............................... 1,756 -
------------- -------------
Net cash used in investing activities................................. (185,281) (46,467)
------------- -------------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable............................... (48,055) (32,129)
Net borrowings under revolving credit facilities................... 67,931 8,484
Increase in deferred financing costs............................... (820) (536)
Proceeds from stock subscription and issuance of common stock...... 158,676 65,409
Stock issuance costs............................................... (1,176) (1,209)
Repayment of notes receivable from issuance of common stock........ 3,505 -
Cash dividends paid to stockholders................................ (33,214) (17,134)
Distributions to minority interest................................. (448) (51)
------------- -------------
Net cash provided by financing activities............................. 146,399 22,834
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................. (825) 83
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 2,944 906
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................. $ 2,119 $ 989
============= =============
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------------
2003 2002
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized......................... $ 12,773 $ 11,728
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized holding (loss) gain on securities available for sale... $ 47 $ 28
============= =============
Issuance of restricted stock................................................ $ 3,265 $ 3,183
============= =============
Receivable from sale of joint venture interest.............................. $ 2,229
=============
Common stock issued for note receivable..................................... $ 1,534
=============
Note receivable from sale of property....................................... $ 1,425
=============
The Company acquired all of the outstanding common stock of IRT for
$763,047, including transaction costs:
Fair value of assets acquired, including goodwill........................... $ 763,047
Fair value of liabilities assumed........................................... (341,928)
Common stock issued......................................................... (231,737)
-------------
Cash paid for IRT acquisition, including transaction costs............. $ 189,382
=============
See accompanying notes to the condensed consolidated financial statements. (Concluded)
8
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
(In thousands, except per share amounts)
1. Organization
------------
Equity One, Inc. operates as a self-managed real estate investment trust
("REIT") that principally acquires, renovates, develops and manages community
and neighborhood shopping centers located predominately in high growth markets
in the southern United States. These shopping centers are primarily anchored by
supermarkets or other necessity-oriented retailers such as drug stores or
discount retail stores.
The condensed consolidated financial statements include the accounts of
Equity One, Inc. and its wholly-owned subsidiaries and those partnerships of
which the Company has financial and operating control. Equity One, Inc. and
subsidiaries are hereinafter referred to as "the consolidated companies" or "the
Company." The Company has a 50% investment in two joint ventures and a 50.1%
interest in one joint venture of which it does not have financial or operating
control and, accordingly, uses the equity method of accounting for these joint
ventures.
As of June 30, 2003, the Company's portfolio of neighborhood shopping
centers anchored by national and regional supermarket chains and other necessity
oriented retailers such as drug stores or discount stores are located in twelve
states in the southern United States and consists of 178 properties,
encompassing 122 supermarket-anchored shopping centers, nine drug store-anchored
shopping centers, 40 other retail-anchored shopping centers, one self-storage
facility, one industrial property, and five retail developments, as well as
non-controlling interests in three joint ventures which own and operate
commercial real estate properties.
2. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company's management in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X of the U.S. Securities and Exchange Commission (the "SEC").
Accordingly, these unaudited condensed consolidated financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. The results of operations for the
three and six-month periods ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the full year. These unaudited condensed
consolidated financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in this Form 10-Q and with the Company's Management's
Discussion and Analysis of Financial Condition and Results of Operations and
audited financial statements and related footnotes, included in the Company's
2002 Annual Report on Form 10-K for the year ended December 31, 2002, filed with
the SEC.
The preparation of condensed consolidated 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
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
All significant intercompany transactions and balances have been eliminated
in consolidation.
Certain amounts as previously reported have been reclassified to conform to
the current period's presentation.
3. IRT Merger
----------
On February 12, 2003, the Company completed a statutory merger with IRT
Property Company ("IRT"). As a result of the merger, the Company acquired 93
properties that comprise an aggregate of approximately 10,041
9
square feet of
gross leasable area. The aggregate purchase price for the acquisition was
$763,047 (including transaction costs and assumed debt), consisting of the
payment of $189,382 in cash, the issuance of 17,490 shares of the Company's
common stock valued at $231,737 and the assumption of $341,928 of outstanding
debt, premium on notes payable, and other liabilities. The Company has recorded
$20,259 of goodwill as a result of the acquisition. The acquisition of IRT was
accounted for using the purchase method and the results of IRT are included in
the Company's financial statements from the date of its acquisition. The fair
values assigned to the identifiable tangible and intangible assets and
liabilities are preliminary as the Company is evaluating the fair values and
allocation of costs. Management does not believe that any adjustment would have
a material effect on the Company's financial position or results of operations.
The following unaudited supplemental pro forma information is presented to
reflect the effects of the IRT acquisition and related transactions, and the
impact on the Company's results, as if the transactions had occurred on January
1, 2002. The pro forma information includes the acquisition of IRT, the issuance
of common stock related to the IRT transaction, the private placement of common
stock and the borrowing under the revolving credit facility. The pro forma
financial information is presented for informational purposes only and may not
be indicative of what the actual results of operations would have been had the
acquisition occurred as indicated, nor does it purport to represent the results
of the operations for future periods:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Pro forma revenues.................................. $ 49,532 $ 46,488 $ 98,623 $ 93,597
========== =========== =========== ===========
Pro forma income from continuing operations......... $ 14,853 $ 13,435 $ 28,855 $ 25,830
========== =========== =========== ===========
Pro forma net income................................ $ 16,352 $ 15,329 $ 31,056 $ 35,084
========== =========== =========== ===========
Pro forma earnings per share:
Basic earnings per share:
Income from continuing operations............... $ 0.25 $ 0.23 $ 0.48 $ 0.46
Income from discontinued operations............. 0.02 0.04 0.04 0.17
---------- ----------- ----------- -----------
Total basic earnings per share.............. $ 0.27 $ 0.27 $ 0.52 $ 0.63
========== =========== =========== ===========
Diluted earnings per share:
Income from continuing operations.............. $ 0.24 $ 0.23 $ 0.47 $ 0.46
Income from discontinued operations............ 0.02 0.03 0.04 0.16
---------- ----------- ----------- -----------
Total diluted earnings per share............ $ 0.26 $ 0.26 $ 0.51 $ 0.62
========== =========== =========== ===========
4. Rental Property
---------------
Income producing property is stated at cost and includes all costs related
to acquisition, development and construction, including tenant improvements,
interest incurred during development, costs of pre-development and certain
direct and indirect costs of development. Costs incurred during the
predevelopment stage are capitalized once management has identified a site,
determined that the project is feasible and it is probable that the Company is
able to proceed with the project. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Significant renovations
and improvements, which improve or extend the useful life of assets, are
capitalized.
Income producing properties are individually evaluated for impairment when
various conditions exist that may indicate that it is probable that the sum of
expected future cash flows (on an undiscounted basis) from a property is less
than its historical net cost basis. Upon determination that a permanent
impairment has occurred, the Company records an impairment charge equal to the
excess of historical cost basis over fair value. In addition, the Company writes
off costs related to predevelopment projects when it determines that it will no
longer pursue the project.
10
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
Land improvements 40 years
Buildings 30-40 years
Building improvements 5-40 years
Tenant improvements Over the terms of the related lease
Equipment 5-7 years
Total interest expense capitalized to land held for development and
construction in progress was $583 and $667 for the three months ended June 30,
2003 and 2002, respectively, and $1,267 and $1,179 for the six months ended June
30, 2003 and 2002, respectively.
5. Property Held for Sale
----------------------
As of June 30, 2003, one out parcel was classified as property held for
sale.
6. Investments in and Advances to Joint Ventures
---------------------------------------------
A summary of the Company's investments in and advances to joint ventures at
June 30, 2003 and December 31, 2002 is as follows (all investments in
unconsolidated entities are accounted for under the equity method):
June 30, December 31,
Entity Location Ownership 2003 2002
- ---------------------------- -------------------------- ------------- ---------- ------------
PG Partners................. Palm Beach Gardens, FL 50.0% $ 2,753 $ 2,823
Parcel F, LLC............... Palm Beach Gardens, FL 50.0% 228 228
Oak Square JV*.............. Gainesville, FL - - 1,243
CDG (Park Place) LLC........ Plano, TX 50.1% 5,522 5,727
---------- ------------
Total investments in and advances to joint ventures...................... $ 8,503 $ 10,021
========== ============
* In June 2003, the Company sold its joint venture interest in this entity.
A summary of unaudited financial information for all joint ventures being
reported on the equity method of accounting is as follows:
As of As of
June 30, 2003 December 31, 2002
--------------- -------------------
Assets:
Rental properties, net................ $ 32,671 $ 47,309
Cash and cash equivalents............. 780 690
Other assets.......................... 534 1,170
--------------- -----------------
Total assets.......................... $ 33,985 $ 49,169
=============== =================
Liabilities and Ventures' Equity:
Mortgage notes........................ $ 27,927 $ 44,625
Other liabilities..................... 391 651
Ventures' equity...................... 5,667 3,893
--------------- -----------------
Total ................................ $ 33,985 $ 49,169
=============== =================
The Company's investments in joint ventures, as reported on the condensed
consolidated balance sheets, differ from its proportionate share of the joint
ventures' underlying net assets due to basis differentials and advances. The
basis differential of approximately $3,000 is being depreciated over the useful
lives of the related assets.
11
As of June 30, 2003, the Company has guaranteed a mortgage note payable of
$15,000 for one of its joint ventures.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------------
2003 2002 2003 2002
-------- ------- ------- --------
Revenues:
Rental revenues .................... $ 2,011 $ 1,751 $ 3,788 $ 3,583
Other revenues ..................... 1 19 3 34
------- ------- ------- --------
Total revenues ................... 2,012 1,770 3,791 3,617
------- ------- ------- --------
Expenses:
Operating expenses ................. 414 407 927 825
Interest expense ................... 701 723 1,400 1,473
Depreciation ....................... 262 279 569 628
Other expense ...................... 84 43 122 71
------- ------- ------- --------
Total expenses ................... 1,461 $ 1,452 3,018 2,997
------- ------- ------- --------
Net income ............................. $ 551 $ 318 $ 773 $ 620
======= ======= ======= ========
The Company's equity in income
of joint ventures reported in:
Continuing operations ............ $ 149 $ 146 $ 260 $ 293
======= ======= ======= ========
Discontinued operations .......... $ 127 $ 13 $ 127 $ 17
======= ======= ======= ========
Significant accounting policies used by the unconsolidated joint ventures
are similar to those used by the Company.
7. Borrowings
----------
Each of the existing mortgage loans is secured by a mortgage on one or more
of certain of the Company's properties. Certain of the mortgage loans involving
an aggregate principal balance of approximately $209,000 contain prohibitions on
transfers of ownership which may have been violated by the Company's previous
issuances of common stock or in connection with past acquisitions and may be
violated by transactions involving the Company's capital stock in the future. If
a violation were established, it could serve as a basis for a lender to
accelerate amounts due under the affected mortgage. To date, no lender has
notified the Company that it intends to accelerate its mortgage. Based on
discussions with various lenders, current credit market conditions and other
factors, the Company believes that the mortgages will not be accelerated.
Accordingly, the Company believes that the violations of these prohibitions will
not have a material adverse impact on the Company's results of operations or
financial condition.
On February 7, 2003, the Company entered into a $340,000 unsecured
revolving credit facility with a syndicate of banks for which Wells Fargo Bank,
National Association is the sole lead arranger and administrative agent. This
facility bears interest at the Company's option at (i) LIBOR plus 0.65% to
1.35%, depending on the credit ratings of the Company's senior unsecured long
term notes or (ii) at the greater of (x) Wells Fargo's prime rate and (y) the
Federal Funds Rate plus 0.5%. The facility also includes a competitive bid
option which allows the Company to conduct auctions among the participating
banks for borrowings in an amount not to exceed $150,000, a $25,000 swing line
facility for short term borrowings, a $20,000 letter of credit commitment and
may, at the request of the Company, be increased up to a total commitment of
$400,000. The facility expires February 12, 2006 with a one year extension
option. In addition, the facility contains customary covenants, including
financial covenants regarding debt levels, total liabilities, interest coverage,
EBITDA levels, unencumbered properties, permitted investments and others. The
facility also prohibits stockholder distributions in excess of 95% of funds from
operations calculated at the end of each fiscal quarter for the four fiscal
quarters then ending. Notwithstanding this limitation, the Company can make
stockholder distributions to avoid income taxes on asset sales. If a default
under the facility exists, the Company's ability to pay dividends would be
limited to the amount necessary to maintain the Company's status as a REIT
unless the default is a payment default or bankruptcy event in which case the
Company
12
would be prohibited from paying any dividends. The facility is guaranteed by
several of the Company's wholly-owned subsidiaries. As of June 30, 2003, the
Company had $98,000 outstanding on this credit facility. The weighted average
interest rate as June 30, 2003 was 1.99%.
As a result of the Company's merger with IRT, the Company assumed IRT's
obligations relating to $150,000 principal amount of senior notes, bearing
interest at fixed annual interest rates ranging from 7.25% to 7.84% and maturing
between 2006 and 2012. The interest rate of one series of these senior notes is
subject to a 50 basis point increase if the Company does not maintain its senior
unsecured debt rating. These notes have also been guaranteed by the Company's
wholly-owned subsidiaries. Also, as part of the Company's merger with IRT, the
Company assumed $135,397 of mortgage notes payable.
As of June 30, 2003, the Company had a $5,000 unsecured credit facility
with City National Bank of Florida and had $931 outstanding on this credit
facility. This facility also secures $1,378 in outstanding letters of credit.
8. Consolidating Financial Information
-----------------------------------
As of June 30, 2003, substantially all of the Company's subsidiaries,
including IRT Partners L.P., have guaranteed the Company's indebtedness under
the unsecured senior debt. The guarantees are joint and several and full and
unconditional.
Guarantors
---------------------------
Condensed Balance Sheet IRT
Equity Combined Partners, Eliminating Consolidated
One, Inc. Subsidiaries LP Entries Equity One
----------- ------------ ---------- ----------- -------------
As of June 30, 2003
ASSETS
Properties, net.................. $ 517,420 $ 704,447 $ 184,296 $ - $ 1,406,163
Investment in affiliates......... 435,752 - - (435,752) -
Other assets..................... 34,455 39,015 2,873 - 76,343
---------- ---------- --------- ---------- -----------
Total assets................... $ 987,627 $ 743,462 $ 187,169 $ (435,752) $ 1,482,506
========== ========== ========= ========== ===========
LIABILITIES
Mortgage notes payable........... $ 86,978 $ 298,582 $ 34,705 $ - $ 420,265
Revolving credit facilities...... 98,931 - - - 98,931
Senior notes, net................ 150,000 - - - 150,000
Unamortized premium on notes
payable........................ 20,945 - - - 20,945
Other liabilities.................. 12,929 19,399 2,661 - 34,989
---------- ---------- --------- ---------- -----------
Total liabilities................ 369,783 317,981 37,366 - 725,130
MINORITY INTEREST.................. - - - 15,763 15,763
STOCKHOLDER'S EQUITY
Total stockholders' equity....... 617,844 425,481 149,803 (451,515) 741,613
---------- ---------- --------- ---------- -----------
Total liabilities and
shareholders' equity............. $ 987,627 $ 743,462 $ 187,169 $ (435,752) $ 1,482,506
========== ========== ========= ========== ===========
13
Guarantors
----------------------------
Condensed Statement of Operations IRT
Equity Combined Partners, Consolidated
One, Inc. Subsidiaries LP Equity One
----------- ------------ ------------- ------------
For the Three Months Ended June 30, 2003
RENTAL INCOME:
Minimal rental................................ $ 12,800 $ 20,194 $ 4,677 $ 37,671
Expense recoveries............................ 3,140 6,145 1,305 10,590
Termination fees.............................. 12 422 4 438
Percentage rent payments...................... 104 272 87 463
----------- ----------- ------------ ------------
Total revenues............................. 16,056 27,033 6,073 49,162
INVESTMENT INCOME............................... 140 193 10 343
OTHER INCOME (LOSS)............................. 65 (38) - 27
----------- ----------- ------------ ------------
Total revenues............................. 16,261 27,188 6,083 49,532
----------- ----------- ------------ ------------
COSTS AND EXPENSES:
Property operating expenses.................. 4,357 7,228 1,743 13,328
Interest expense............................. 4,096 5,748 744 10,588
Amortization of deferred financing fees...... 195 114 - 309
Rental property depreciation and amortization 2,409 4,080 597 7,086
General and administrative expenses.......... 3,279 - - 3,279
----------- ----------- ------------ ------------
Total costs and expenses................... 14,336 17,170 3,084 34,590
----------- ----------- ------------ ------------
INCOME BEFORE EQUITY IN INCOME OR JOINT VENTURES,
LOSS ON EXTINGUISHMENT OF DEBT, AND MINORITY
INTEREST IN CONSOLIDATED SUBSIDIARIES........ 1,925 10,018 2,999 14,942
EQUITY IN INCOME OF JOINT VENTURES.............. - 149 - 149
----------- ----------- ------------- -------------
INCOME BEFORE MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES.................................. 1,925 10,167 2,999 15,091
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.. (34) (25) (179) (238)
----------- ----------- ------------ ------------
INCOME FROM CONTINUING OPERATIONS................ 1,891 10,142 2,820 14,853
----------- ----------- ------------ ------------
DISCONTINUED OPERATIONS
Income from operations of sold properties.... - 128 - 128
Gain on disposal of income producing
properties................................... - 1,371 - 1,371
----------- ----------- ------------ ------------
Total income from discontinued operations........ - 1,499 - 1,499
----------- ----------- ------------ ------------
NET INCOME...................................... $ 1,891 $ 11,641 $ 2,820 $ 16,352
=========== =========== ============ ============
14
Guarantors
-----------------------------
Condensed Statement of Operations Equity Combined IRT Consolidated
One, Inc. Subsidiaries Partners, LP Equity One
----------- ------------ ------------- ------------
For the Six Months Ended June 30, 2003
RENTAL INCOME:
Minimal rental................................ $ 20,118 $ 39,347 $ 7,137 $ 66,602
Expense recoveries............................ 4,641 12,004 1,954 18,599
Termination fees.............................. 64 428 5 497
Percentage rent payments...................... 279 917 280 1,476
----------- ----------- ------------- -----------
Total revenues............................. 25,102 52,696 9,376 87,174
INVESTMENT INCOME............................... 401 402 71 874
OTHER INCOME.................................... 65 25 - 90
----------- ----------- ------------- -----------
Total revenues............................. 25,568 53,123 9,447 88,138
----------- ----------- ------------- -----------
COSTS AND EXPENSES:
Property operating expenses.................. 6,841 14,837 2,682 24,360
Interest expense............................. 5,641 11,494 1,172 18,307
Amortization of deferred financing fees...... 309 284 2 595
Rental property depreciation and amortization 3,354 7,595 1,150 12,099
General and administrative expenses.......... 5,520 - - 5,520
----------- ----------- ------------- -----------
Total costs and expenses................... 21,665 34,210 5,006 60,881
----------- ------------ -------------- -----------
INCOME BEFORE EQUITY IN INCOME OR JOINT VENTURES,
LOSS ON EXTINGUISHMENT OF DEBT, AND MINORITY
INTEREST IN CONSOLIDATED SUBSIDIARIES........ 3,903 18,913 4,441 27,257
EQUITY IN INCOME OF JOINT VENTURES.............. - 260 - 260
LOSS ON EXTINGUISHMENT OF DEBT.................. - (623) - (623)
----------- ----------- ------------- ------------
INCOME BEFORE MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES.................................. 3,903 18,550 4,441 26,894
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.. (89) (42) (248) (379)
----------- ---------- ------------ -----------
INCOME FROM CONTINUING OPERATIONS................ 3,814 18,508 4,193 26,515
----------- ---------- ------------ -----------
DISCONTINUED OPERATIONS
Income from operations of sold properties.... - 307 - 307
Gain on disposal of income producing
properties................................. - 1,874 - 1,874
----------- ---------- ------------ -----------
Total income from discontinued operations........ - 2,181 - 2,181
----------- ---------- ------------ -----------
NET INCOME...................................... $ 3,814 $ 20,689 $ 4,193 $ 28,696
=========== ========== ============ ===========
15
9. Stockholders' Equity and Earnings Per Share
-------------------------------------------
The following table reflects the change in number of shares of common stock
outstanding for the six months ended June 30, 2003:
Common Options
Stock Exercised Total
----------- ----------- ----------
Board of Directors/Corporate Secretary...... 22* - 22*
Officers..................................... 167* 211 378*
Employees and other......................... 27* 363 390*
IRT acquisition.............................. 17,490 - 17,490
Private placement............................ 6,911 - 6,911
Security offerings........................... 3,000 - 3,000
Dividend Reinvestment and Stock Purchase Plan 785 - 785
----------- ----------- ----------
Total.................................. 28,402 574 28,976
=========== =========== ==========
* Reflects shares of "restricted stock' which are subject to forfeiture and
vest over a period of two to five years.
The following table sets forth the computation of basic and diluted shares
used in computing earnings per share for the three and six-month periods ended
June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2003 2002 2003 2002
------ ------ ------ ------
Denominator for basic earnings per share -
weighted average shares ................. 60,920 33,255 54,080 31,316
------ ------ ------ ------
Walden Woods Village, Ltd. ................. 94 94 94 94
Unvested restricted stock .................. 451 235 383 205
Convertible partnership units .............. 966 262 821 262
Stock options (using treasury method) ...... 393 121 293 122
------ ------ ------ ------
Subtotal ................................ 1,904 712 1,591 683
------ ------ ------ ------
Denominator for diluted earnings per share -
weighted average shares ................. 62,824 33,967 55,671 31,999
====== ====== ====== ======
10. Accounting for Stock Options
----------------------------
The Company applies the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in measuring stock-based compensation, including
options. Accordingly, no compensation expense has been recognized for options
granted under the Company's compensation plan as no grants were made at less
than market value. Had compensation expense been determined based upon the fair
value at the grant date for awards under the Plan consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share on a pro forma basis would have been:
16
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- -------------
Net Income As reported.............. $ 16,352 $ 8,438 $28,696 $ 21,705
Stock based employee
compensation expense
included in reported
net income............. - - - -
Total stock based
employee compensation
expense determined
under fair value
based method for all
awards................. 169 69 336 138
------------- -------------- ------------- -------------
Pro forma................. $ 16,183 $ 8,369 $ 28,360 $ 21,567
============= ============== ============= =============
Basic earnings
per share As reported............... $ 0.27 $ 0.25 $ 0.53 $ 0.69
============= ============== ============= =============
Pro forma................. $ 0.27 $ 0.25 $ 0.52 $ 0.69
============= ============== ============= =============
Diluted earnings
per share As reported.............. $ 0.26 $ 0.25 $ 0.52 $ 0.68
============= ============== ============= =============
Pro forma................ $ 0.26 $ 0.25 $ 0.52 $ 0.68
============= ============== ============= =============
11. Loans to Executives
-------------------
As a result of certain provisions of the Sarbanes-Oxley Act of 2002, the
Company is generally prohibited from making loans to directors and executive
officers. Prior to the adoption of the Sarbanes-Oxley Act of 2002, the Company
had loaned $7,112 to various executives in connection with their exercise of
options to purchase shares of the Company's common stock of which $3,505 was
repaid during the second quarter of 2003. The notes bear interest at a rate of
5%. Interest only is payable quarterly and the principal is due between 2006 and
2009. In accordance with the provisions of the Sarbanes-Oxley Act of 2002, there
has been no material modifications to any of the terms of the loans granted to
our executives.
12. 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 in the accompanying condensed consolidated
balance sheet. 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 calculation of basic earnings
per share.
17
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 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 261.850 operating partnership units ("OPUs")
based on the net value of the properties contributed. The North Port Minority
Partners had the right to redeem their OPUs for the Company's common stock on a
one-for-one basis or for 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 in the
accompanying condensed consolidated balance sheets. The North Port Minority
Partners received a preferred quarterly distribution equal to a 9% annual return
on their initial capital contribution through December 31, 2002. On January 1,
2003, the preferred distribution was reduced to a 3% annual return on their
initial capital contribution. This amount is reflected as interest expense in
the condensed consolidated financial statements. During July 2003, North Port
Minority Partners redeemed their OPUs in exchange for 261.850 shares of the
Company's common stock.
The Company is the general partner of IRT Partners L.P. ("LP") and
maintains an indirect partnership interest through its wholly-owned subsidiary,
IRT Management Company. LP was formed by IRT in order to enhance its acquisition
opportunities through a downREIT structure. This structure offers potential
sellers of properties the ability to make a tax-deferred sale of their real
estate properties in exchange for limited partnership units ("OP Units") of LP.
As of June 30, 2003, there were 734.267 OP Units outstanding held by partners
not affiliated with the Company. LP is obligated to redeem each OP Unit held by
a person other than the Company, at the request of the holder, for cash equal to
the fair market value of a share of the Company's common stock at the time of
such redemption, provided that the Company may elect to acquire any such OP Unit
presented for redemption for one common share of stock. Such limited partnership
interest of 5.59% of LP are held by persons unaffiliated with the Company and
are reflected as a minority interest in the consolidated subsidiaries in the
accompanying condensed consolidated balance sheets.
The Company also records a minority interest for the limited partners'
share of equity in two separate partnerships in which it controls. The two
partnerships in which the Company has a general partner interest are Venice
Plaza (75% interest) and North Village Center (49% interest). The minority
interest has been presented in the accompanying condensed consolidated balance
sheet.
13. Dispositions
------------
The Company has adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective January 1, 2002, and has included the
operations of properties sold and held for sale, as well as the gain on sale of
sold properties, as discontinued operations for all periods presented. The
Company expects to reclassify historical operating results whenever necessary in
order to comply with the requirements of SFAS No. 144.
The following table reflects the properties being reported in discontinued
operations for the three and six-month periods ended June 30, 2003 and 2002:
Square Feet/ Gross Sales Gain On
Property Location Date Sold Acres Price Sale
- --------------------------- --------------------- ----------- ------------- ----------- ----------
2003 Dispositions
- ---------------------------
Eckerd..................... Leesburg, FL February 12,739 $ 4,050 $ 326
Eckerd..................... Melbourne, FL February 10,908 2,715 177
---------- ----------
First quarter 2003............................................................... 6,765 503
---------- ----------
Pompano.................... Pompano Beach, FL April 80,697 3,400 470
Huntcrest-Outparcels....... Pompano Beach, FL April 2.94 acres 3,400 470
Oak Square Joint Venture... Gainesville, FL June - 2,230 901
---------- ----------
Second quarter 2003.............................................................. 7,316 1,371
---------- ----------
Total ........................................................................ $ 14,081 $1,874
========== ==========
18
Square Feet/ Gross Sales Gain On
Property Location Date Sold Acres Price Sale
- -------------------------- -------------------- ------------ -------------- ------------ ----------
2002 Dispositions
- --------------------------
Equity One Office.......... Miami Beach, FL February 28,780 $ 6,050 $ 4,396
Olive land................. Miami, FL February 6.79 acres 1,900 694
Benbrook................... Fort Worth, TX February 247,422 2,590 1,032
Montclair apartments....... Miami Beach, FL June 9,375 2,450 981
Shoppes of Westburry....... Miami, FL July 33,706 5,220 167
Forest Edge................ Orlando, FL July 68,631 3,475 561
Northwest Crossing......... Dallas, TX September 33,366 2,350 363
McMinn Plaza............... Athens, TN November 107,200 6,200 951
Woodforest................. Houston, TX December 12,741 1,850 119
---------- ---------
Total............................................................................. $ 32,085 $ 9,264
========== =========
The Company classified the results of operations from the properties sold
during 2002 and 2003 as income from discontinued operations in the accompanying
condensed consolidated statements of operations. The effect of the adoption of
SFAS No. 144 on the condensed consolidated statements of operations is shown
below.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Rental income...................................... $ (4) $ 1,034 $ 234 $ 2,527
-------- -------- -------- --------
Operating expenses................................. (5) 195 21 562
Interest expense................................... - 107 - 215
Amortization of deferred financing fees............ - 4 - 8
Depreciation....................................... - 192 33 323
-------- -------- -------- --------
Total expenses..................................... (5) 498 54 1,108
-------- -------- -------- --------
Equity in income of joint ventures................. 127 13 127 17
-------- -------- -------- --------
Income from discontinued operations................ $ 128 $ 549 $ 307 $ 1,436
======== ======== ======== ========
14. Debt Extinguishment
-------------------
For the six months ended June 30, 2003, the Company prepaid various
mortgage notes payable and incurred prepayment fees of $623. The Company has
adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections, and is reporting the loss
on extinguishment of debt as part of ordinary income as it no longer meets the
criteria for extraordinary gain (loss) accounting treatment.
15. New Accounting Pronouncements and Changes
-----------------------------------------
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
which rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also
rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor
Carriers, and amends FASB Statement No. 13, Accounting for Leases. Finally SFAS
No. 145 amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions related to the rescission of FASB Statement
No. 4 and its amendment Statement No. 64 is effective for fiscal years beginning
after May 15, 2002. The Company adopted SFAS No. 145 as of July 2002 and has
reflected gains (losses) from extinguishment of debt as part of ordinary income.
19
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee's of Indebtedness of Other's (an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34). FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies. It requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee regardless of whether or not the guarantor receives separate
identifiable consideration (i.e., a premium). The Company adopted the new
disclosure requirements, which are effective beginning with 2002 calendar
year-end financials. FIN 45's provisions for initial recognition and measurement
are effective on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material impact on the
Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirement of SFAS No. 123, Accounting for Stock-Based Compensation, to require
prominent disclosure in both annual and interim financial statements about the
effect of the method used on reported results. SFAS No. 148 is effective for
financial statements issued for fiscal years ending after December 15, 2002 and,
as it relates to Opinion No. 28, Interim Financial Reporting, the interim
periods beginning after December 15, 2002, although earlier application is
encouraged. The Company applies the intrinsic value method as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in measuring stock-based compensation.
The Company has adopted the disclosure requirements of SFAS No. 148 in its
financial statements.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ABR 51. FIN 46
provides guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"), and
how to determine when and which business enterprises should consolidate the VIE.
In addition, FIN 46 requires both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE to make additional
disclosures. The transitional disclosure requirements will take effect almost
immediately and are required for all financial statements issued after January
31, 2003. The consolidated provisions of FIN 46 are effective immediately for
variable interests in VIEs created after January 31, 2003. For variable
interests in VIEs created before February 1, 2003, the provisions of FIN 46 are
effective for the first interim period beginning after June 15, 2003. The
Company is evaluating the effect of FIN 46 on the financial statements.
16. Commitments and Contingencies
-----------------------------
As of June 30, 2003, the Company has pledged letters of credit totaling
$1,433 as additional security for certain financings and other activities.
The Company is subject to litigation in the normal course of business, none
of which in the opinion of management will have a material adverse effect on the
financial condition or results of operations of the Company.
Following the execution of the merger agreement with IRT in October 2002,
three IRT shareholders filed three separate purported class action and
derivative suits in the Superior Court of Cobb County, State of Georgia, against
IRT, IRT's board of directors and Equity One alleging claims of breach of
fiduciary duty by the defendant directors, unjust enrichment and irreparable
harm. The complaints sought declaratory relief, an order enjoining consummation
of the merger, and unspecified damages. Although the Georgia court did not grant
the plaintiffs the equitable relief requested and permitted the completion of
the merger, two of these lawsuits, Greaves v. IRT Property Company, et. al. and
Phillips v. IRT Property Company, et. al., were still pending following the
merger and second amended complaints have been filed in each such suit. The
third lawsuit was voluntarily dismissed. Although we believe that these suits
are without merit and intend to continue to defend them vigorously, there can be
no assurance that the pending litigation will be resolved in our favor.
17. Subsequent Events
-----------------
During July 2003, the Company acquired three properties comprising an
aggregate of 553 square feet for an aggregate purchase price of $87,958. As a
result of these acquisitions, the Company has borrowed an additional $76,000 on
the Wells Fargo credit facility increasing the balance outstanding to $174,000,
as of August 12, 2003.
20
On July 9, 2003, the Company filed a universal shelf registration statement
on Form S-3 which will permit it to offer and sell various types of securities,
including common stock, preferred stock, debt securities, depository shares and
warrants, up to a value of $600,000. Together with the current availability
under the existing shelf registration statement, the Company can issue
securities from time to time with an aggregate value of up to approximately
$755,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Company's
unaudited Condensed Consolidated Financial Statements, including the notes
thereto, which are included elsewhere herein and the Company's audited
Consolidated Financial Statements and notes thereto for the year ended December
31, 2002 and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002. The results of operations for an interim
period may not give a true indication of results for the year.
Unless the context otherwise requires, all references to "we," "our," "us,"
"Equity One," and the "Company" in this report refer collectively to Equity One,
Inc., and its subsidiaries, including joint ventures.
RESULTS OF OPERATIONS
On February 12, 2003, Equity One, Inc. and IRT Property Company completed a
statutory merger. The transaction has been accounted for as a purchase and the
results of Equity One include the activity of IRT for the period February 12,
2003 through June 30, 2003.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Total revenues increased by $25.6 million, or 106.9%, to $49.5 million in
2003 from $23.9 million in 2002. The following factors accounted for this
increase:
o The acquisition of IRT increased revenues by approximately $23.4
million;
o Properties acquired during 2002 increased revenues by approximately
$1.5 million; and
o Other property revenues increased by $700,000 related to increases in
percentage rent and expense recoveries.
Property operating expenses increased by $6.6 million, or 98.7%, to $13.3
million for 2003 from $6.7 million in 2002. The following factors accounted for
this increase:
o The acquisition of IRT increased operating expenses by approximately
$5.8 million;
o Properties acquired during 2002 increased operating expenses by
approximately $500,000; and
o Other property operating expenses increased by $300,000.
Rental property depreciation and amortization increased by $3.8 million, or
117.0%, to $7.1 million for 2003 from $3.3 million in 2002. The following
factors accounted for this increase:
o The acquisition of IRT increased depreciation and amortization by
approximately $3.0 million; and
o Other property depreciation and amortization increased by
approximately $800,000.
21
Interest expense increased by $5.2 million, or 96.7%, to $10.6 million for
2003 from $5.4 million in 2002. This increase was primarily due to:
o An increase in interest expense of $4.4 million as a result of the
assumption of mortgage loans and senior unsecured debt in the
acquisition of IRT;
o Interest incurred on the debt related to the acquisition of properties
made during 2002 of $114,000;
o An increase in line of credit interest expense of $1.1 million
primarily related to the acquisition of IRT; and
o A decrease in capitalized interest of $166,000.
o These increases to interest expense were partially offset by the
payoff of various loans decreasing interest expense by $580,000.
General and administrative expenses increased by $1.7 million, or 108.3%,
to $3.3 million for 2003 from $1.6 million in 2002. Compensation and employer
related expenses increased by $1.1 million and other general office expenses
increased by $600,000. These expense increases were partially due to the
increased staffing resulting from the IRT acquisition.
Minority interest increased by $212,000 due to minority interests assumed
in the acquisition of IRT.
We sold two properties and a joint venture interest during 2003, the
operating results which are being reflected as discontinued operations for the
three-month period ended June 30, 2003 of $128,000. The sale of these two
properties and the joint venture interest produced a gain of $1.4 million for
2003. The 2002 discontinued operations reflect a reclassification of operations
for properties sold during 2002 and 2003. We recognized a gain of $981,000 in
2002 related to a gain in the disposal of properties sold during 2002.
As a result of the foregoing, net income increased by $8.0 million, or
93.8%, to $16.4 million for 2003 from $8.4 million in 2002.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Total revenues increased by $39.1 million, or 79.9%, to $88.1 million in
2003 from $49.0 million in 2002. The following factors accounted for this
increase:
o The acquisition of IRT increased revenues by approximately $36.1
million;
o Properties acquired during 2002 increased revenues by approximately
$3.4 million; and
o Other property revenues decreased by $400,000 related to a decreases
in percentage rent and for properties under redevelopment.
Property operating expenses increased by $10.1 million, or 71.4%, to $24.4
million for 2003 from $14.2 million in 2002. The following factors accounted for
this increase:
o The acquisition of IRT increased operating expenses by approximately
$8.9 million;
o Properties acquired during 2002 increased operating expenses by
approximately $944,000; and
o Other property operating expenses increased by $256,000.
Rental property depreciation and amortization increased by $5.6 million, or
86.8%, to $12.1 million for 2003 from $6.5 million in 2002. The following
factors accounted for this increase:
o The acquisition of IRT increased depreciation and amortization by
approximately $4.5 million;
22
o Properties acquired during 2002 increased depreciation and
amortization by approximately $436,000; and
o Other property depreciation and amortization increased by
approximately $664,000.
Interest expense increased by $6.9 million, or 60.6%, to $18.3 million for
2003 from $11.4 million in 2002. This increase was primarily due to:
o An increase in interest expense of $7.1 million as a result of the
assumption of mortgage loans and senior unsecured debt in the
acquisition of IRT;
o Interest incurred on the debt related to the acquisition of properties
made during 2002 of $500,000;
o An increase in line of credit interest of $849,000 primarily relating
to the acquisition of IRT; and
o These increases to interest expense were partially offset by the
payoff of various loans decreasing interest expense by $1.5 million,
and an increase in capitalized interest of $88,000 related to
development activity.
General and administrative expenses increased by $1.9 million, or 54.6%, to
$5.5 million for 2003 from $3.6 million in 2002. Compensation and employer
related expenses increased by $1.7 million and other general office expenses
increased by $900,000. These expense increases were partially due to the
increased staffing resulting from the IRT acquisition. There was a decrease of
$588,000 relating to the write off of pre-acquisition costs in 2002.
During 2003, we settled various mortgage notes payable and incurred
prepayment fees of $623,000.
Minority interest increased by $328,000 due to minority interests assumed
in the acquisition of IRT.
We sold four properties and a joint venture interest during 2003, the
operating results which are being reflected as discontinued operations for the
six-month period ended June 30, 2003 of $307,000. The sale of these four
properties and the joint venture interest produced a gain of $1.9 million for
2003. The 2002 discontinued operations reflect a reclassification of the
operations for properties sold during 2002 and 2003. We recognized a gain of
$7.1 million in 2002 related to a gain in disposal of properties.
As a result of the foregoing, net income increased by $7.0 million, or
32.2%, to $28.7 million for 2003 from $21.7 million in 2002.
FUNDS FROM OPERATIONS
We believe Funds From Operations ("FFO"), a widely used and appropriate
supplemental measure of performance for an equity REIT, provides a relevant
basis for comparison among REITs. FFO, as defined by the National Association of
Real Estate Investment Trusts ("NAREIT"), means income (determined in accordance
with accounting principles generally accepted in the United States of America
("GAAP"), excluding gains (losses) from sales of property, adjustments for
extraordinary items and cumulative effects of accounting changes, plus real
estate related depreciation and amortization, minority interest and after
adjustments for unconsolidated partnerships and joint ventures. We present FFO
to assist investors in analyzing our performance. Our method of calculating FFO
may be different from methods used by other REITs and, accordingly, may not be
comparable to such other REITS. FFO (i) does not represent cash flows from
operations as defined by GAAP, (ii) is not indicative of cash available to fund
all cash flow needs and liquidity, including our ability to make distributions
and (iii) should not be considered as an alternative to net income (determined
in accordance with GAAP) for purposes of evaluating our operating performance.
23
The following table illustrates the calculation of FFO for the three
periods ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income .......................................... $ 16,352 $ 8,438 $ 28,696 $ 21,705
Adjustments:
Depreciation and amortization related to rental
properties ................................... 7,086 3,458 12,132 6,799
Gain on disposal of real estate ................. (1,371) (981) (1,874) (7,103)
Minority interest in earnings of consolidated
subsidiaries.................................. 238 26 379 51
Other Items:
Interest on convertible partnership units ....... (22) 65 43 130
Share of joint venture real estate depreciation.. 139 140 300 314
---------- ---------- ---------- ----------
Funds from operations ............................... $ 22,422 $ 11,146 $ 39,676 $ 21,896
========== ========== ========== ==========
FFO increased by $11.3 million, or 101.2%, to $22.4 million for the three
months ended June 30, 2003, from $11.1 million for the comparable period of
2002. FFO increased by $17.8 million, or 81.2%, to $39.7 million for the six
months ended June 30, 2003, from $21.9 million for the comparable period of
2002. The increase is primarily the result of the inclusion of IRT's results for
the current period and 2002 acquisitions, and the increases in income described
above.
The following table reflects the reconciliation of FFO per diluted share to
earnings per diluted share, the most directly comparable GAAP measure, for the
periods presented:
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Earnings per diluted share...................... $ 0.26 $ 0.25 $ 0.52 $ 0.68
Adjustments:
Depreciation and amortization related to
rental properties........................... 0.11 0.10 0.21 0.21
Gain on sale of real estate................... (0.02) (0.03) (0.03) (0.22)
Interest on convertible partnership
units, minority interest in earnings
of consolidated subsidiaries, and
share of real estate depreciation of
joint ventures........................... 0.01 0.01 0.01 0.01
-------- -------- -------- --------
Funds from operations per diluted share...... $ 0.36 $ 0.33 $ 0.71 $ 0.68
======== ======== ======== ========
CASH FLOW
Net cash provided by operations of $38.1 million for the six months ended
June 30, 2003 included: (i) net income of $28.7 million, (ii) adjustments for
non-cash and gain on sale items which increased cash flow by $11.0 million, and
(iii) a net decrease in operating assets and liabilities of $1.6 million,
compared to net cash provided by operations of $23.7 million for the six months
ended June 30, 2002, which included (i) net income of $21.7 million, (ii)
adjustments for non-cash items which increased cash flow by $715,000, and (iii)
a net increase in operating assets and liabilities of $1.3 million.
24
Net cash used in investing activities of $185.3 million for the six months
ended June 30, 2003 included: (i) the acquisition of one parcel of land and a
supermarket for $5.2 million, (ii) construction, development and other capital
improvements of $16.2 million and (iii) the acquisition of IRT for $187.6
million, net of cash received, offset by (a) proceeds from the sale of four
properties and a joint venture interest of $11.6 million, (b) proceeds from
escrowed funds on sale of properties to utilize tax deferred exchange for $9.5
million, and (c) proceeds from payment of notes receivable of $2.8 million.
These amounts should be compared to net cash used in investing activities of
$46.5 million for the six months ended June 30, 2002 which included: (i) the
acquisition of two drugstores, four shopping centers and three parcels of land
for $50.1 million (ii) construction, development and other capital improvements
of $6.8 million, and (iii) increased leasing costs of $617,000, offset by
proceeds from the sale of three properties of $11.1 million.
Net cash provided by financing activities of $146.4 million for the six
months ended June 30, 2003 included: (i) net borrowings on the revolving credit
facilities of $67.9 million, (ii) net proceeds from the issuance of common stock
of $157.5 million, and (iii) proceeds from repayment of notes receivable from
the issuance of common stock of $3.5 million offset by (a) the payoff of six
mortgage notes for $44.1 million and monthly principal payments on mortgage
notes of $4.0 million, (b) cash dividends paid to common stockholders of $33.2
million, and (c) other miscellaneous uses of $1.2 million, compared to net cash
used by financing activities of $22.8 million for the six months ended June 30,
2002 which included: (i) net proceeds from issuance of common stock of $64.2
million, and (ii) net borrowings on the revolving credit facilities of $8.5
million offset by (a) the payoff of six mortgage notes for $29.3 million and
monthly principal payments on mortgage notes of $2.8 million, (b) cash dividends
paid to common stockholders of $17.1 million, and (c) other miscellaneous uses
of $587,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are maintenance expenditures,
repairs, property taxes and tenant improvements relating to rental properties,
leasing costs, acquisition and development activities, debt service and
repayment obligations, and distributions to its stockholders. The principal
sources of funding for the Company's operations are operating cash flows, the
issuance of equity and debt securities, the placement of mortgage loans and
periodic borrowings under the Company's revolving credit facilities.
On February 7, 2003, the Company entered into a $340.0 million unsecured
revolving credit facility with a syndicate of banks for which Wells Fargo Bank,
National Association is the sole lead arranger and administrative agent. This
facility bears interest at the Company's option at (i) LIBOR plus 0.65% to
1.35%, depending on the credit ratings of the Company's senior unsecured long
term notes or (ii) at the greater of (x) Wells Fargo's prime rate and (y) the
Federal Funds Rate plus 0.5%. The facility also includes a competitive bid
option which allows the Company to conduct auctions among the participating
banks for borrowings in an amount not to exceed $150.0 million, a $25.0 million
swing line facility for short term borrowings, a $20.0 million letter of credit
commitment and may, at the request of the Company, be increased up to a total
commitment of $400.0 million. The facility expires February 12, 2006 with a one
year extension option. In addition, the facility contains customary covenants,
including financial covenants regarding debt levels, total liabilities, interest
coverage, EBITDA levels, unencumbered properties, permitted investments and
others. The facility also prohibits stockholder distributions in excess of 95%
of funds from operations calculated at the end of each fiscal quarter for the
four fiscal quarters then ending. Notwithstanding this limitation, the Company
can make stockholder distributions to avoid income taxes on asset sales. If a
default under the facility exists, the Company's ability to pay dividends would
be limited to the amount necessary to maintain the Company's status as a REIT
unless the default is a payment default or bankruptcy event in which case the
Company would be prohibited from paying any dividends. The facility is
guaranteed by several of the Company's wholly-owned subsidiaries. As of June 30,
2003, the Company had $98.0 million outstanding on this credit facility. The
weighted average interest rate as June 30, 2003 was 1.99%.
As of June 30, 2003, the Company had a $5.0 million unsecured credit
facility with City National Bank of Florida and had $931,000 outstanding on this
credit facility. This facility also secures $1.4 million in outstanding letters
of credit.
25
Our revolving credit facility balances as of June 30, 2003 and December 31,
2002 consisted of the following:
June 30, December 31,
2003 2002
--------- ----------
(in thousands)
Revolving Credit Facilities
City National Bank ................. $ 931 $ --
Wells Fargo ........................ 98,000 23,000
-------- --------
Total revolving credit facilities $ 98,931 $ 23,000
======== ========
As of June 30, 2003, the gross availability under the various credit
facilities was approximately $264.4 million, resulting in additional borrowing
capacity of $164 million.
Our mortgage and unsecured senior notes payable balances as of June 30,
2003 and December 31, 2002 consisted of the following:
June 30, December 31,
2003 2002
------------ ------------
(in thousands)
Mortgage and Unsecured Senior Notes Payable
Fixed rate mortgage loans.............................. $ 420,265 $ 307,508
Variable rate mortgage loans........................... - 24,635
Unsecured senior notes payable......................... 150,000 -
Unamortized premium on notes payable................... 20,945 -
--------- ---------
Total mortgage and unsecured senior notes payable... $ 591,210 $ 332,143
========= =========
As a result of the Company's merger with IRT, the Company assumed IRT's
obligations relating to $150.0 million principal amount of senior notes, bearing
interest at fixed annual interest rates ranging from 7.25% to 7.84% and maturing
between 2006 and 2012. The interest rate of one series of these senior notes is
subject to a 50 basis point increase if the Company does not maintain its senior
unsecured debt rating. These notes have also been guaranteed by the Company's
wholly-owned subsidiaries. Also, as part of the Company's merger with IRT, the
Company assumed $135.4 million of mortgage notes payable.
Each of the existing mortgage loans is secured by a mortgage on one or more
of certain of the Company's properties. Certain of the mortgage loans involving
an aggregate principal balance of approximately $209.0 million contain
prohibitions on transfers of ownership which may have been violated by the
Company's previous issuances of common stock or in connection with past
acquisitions and may be violated by transactions involving the Company's capital
stock in the future. If a violation were established, it could serve as a basis
for a lender to accelerate amounts due under the affected mortgage. To date, no
lender has notified the Company that it intends to accelerate its mortgage.
Based on discussions with various lenders, current credit market conditions and
other factors, the Company believes that the mortgages will not be accelerated.
Accordingly, the Company believes that the violations of these prohibitions will
not have a material adverse impact on the Company's results of operations or
financial condition.
As of June 30, 2003, our total debt of $669.2 million less our cash and
cash equivalents, cash held in escrow and securities available for sale, or
$663.3 million, divided by our gross real estate assets of $1.5 billion equals
45.5%.
26
As of June 30, 2003, the balances due at the maturity of our various notes
payable and revolving credit facilities (excluding unamortized premium) are as
follows (in thousands):
Fixed Rate Revolving Total
Mortgage Unsecured Credit Principal Balance
Year Notes Senior Notes Facilities Due at Maturity
------------------ ----------- ------------- ------------ -----------------
2003.............. $ 4,241 $ - $ 931 $ 5,172
2004.............. 8,980 - - 8,980
2005.............. 36,620 - - 36,620
2006.............. 34,444 50,000 98,000 182,444
2007.............. 12,643 75,000 - 87,643
Thereafter........ 323,337 25,000 - 348,337
----------- ------------- ----------- -----------------
Total......... $420,265 $150,000 $ 98,931 $ 669,196
=========== ============= =========== =================
Our debt level could subject us to various risks, including the risk that
our cash flow will be insufficient to meet required payments of principal and
interest, and the risk that the resulting reduced financial flexibility could
inhibit our ability to develop or improve our rental properties, withstand
downturns in our rental income or take advantage of business opportunities. In
addition, because we currently anticipate that only a small portion of the
principal of our indebtedness will be repaid prior to maturity, it is expected
that it will be necessary to refinance the majority of our 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 our
current indebtedness.
We are currently redeveloping a portion of Oakbrook Square shopping center
in Palm Beach Gardens, Florida to accommodate a new Homegoods store, a new
out-parcel and the re-leasing of a portion of the in-line space. In addition, we
have commenced the complete redevelopment of Crossroads Square (formerly known
as University Mall) in Pembroke Pines, Florida, incorporating a new Lowe's home
improvement store, a new Eckerd drug store and the refurbishing of the remainder
of the center. We have also begun construction of a new 46,000 square foot L.A.
Fitness Sports Club as part of an anticipated 120,000 square foot addition to
our Shops at Skylake in North Miami Beach, Florida.
We are in the planning and permitting stage for several other developments
and redevelopments including: (1) the development of a new 25,000 square foot
CVS drug store-anchored center across the street from our Plaza Alegre shopping
center in Miami, Florida; (2) the redevelopment of Salerno Village in Stuart,
Florida to accommodate a new and expanded Winn Dixie supermarket; and (3) the
development of 20,000 square feet of retail space on a parcel of land located
adjacent to our Cashmere Corners shopping center. These developments are
scheduled for completion between the end of 2003 and the summer of 2004.
We are in the process of reconfiguring and re-leasing the former Winn Dixie
space at our Walden Woods shopping center in Plant City, Florida to accommodate
a 20,000 square foot Dollar Tree store, an additional 13,000 square foot junior
anchor and 12,000 square feet of local space.
As of June 30, 2003, in order to complete the construction of our
development projects, we have committed to fund construction costs of $18.8
million. These obligations principally range from construction contracts and are
generally due as the work is performed. We expect to fund the costs of the
development of these projects from cash generated from our operations,
borrowings under our various revolving credit facilities and other sources of
cash.
On January 23, 2002, we filed a universal shelf registration statement with
the Securities and Exchange Commission, which will permit us, from time to time,
to offer and sell various types of securities, including common stock, preferred
stock, debt securities, depositary shares and warrants, up to a value of $250
million.
In May, 2003, we completed the sale of 3,000,000 shares of common stock of
a price of $16.42 per share in an underwritten public offering. The net proceeds
of $48.7 million from the stock offering were used for general corporate
purposes, including the repayment of debt, ongoing development activities and
the acquisition of additional shopping centers.
27
In July 2003, we filed a second universal shelf registration statement with
the Securities and Exchange Commission, which will permit us, from time to time,
to offer and sell various types of securities, including common stock, preferred
stock, debt securities, depositary shares and warrants, up to a value of $600
million. The registration statement provides us additional flexibility in
accessing capital markets to fund future growth and for general corporate
purposes. In conjunction with the $155 million balance from our prior universal
shelf registration, we now have approximately $755 million of availability under
our existing shelf registration statements.
For the three months ended June 30, 2003, we issued 561,364 shares of our
common stock at prices ranging from $15.75 to $15.87 per share and for the six
months ended June 30, 2003, we issued 785,486 shares of common stock at prices
ranging from $12.76 to $15.87 per share pursuant to our Divided Reinvestment and
Stock Purchase Plan. As of June 30, 2003, our shares remaining for sale under
our Dividend Reinvestment and Stock Purchase Plan totaled 4.2 million.
We believe, based on currently proposed plans and assumptions relating to
our operations, that our existing financial arrangements, together with cash
generated from our operations, will be sufficient to satisfy our cash
requirements for a period of at least twelve months. In the event that our plans
change, our 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 our expansion and development efforts or to the extent
we discover suitable acquisition targets the purchase price of which exceeds our
existing liquidity, we would be required to seek additional sources of
financing. There can be no assurance that any additional financing will be
available on acceptable terms or at all, and any future equity financing could
be dilutive to existing stockholders. If adequate funds are not available, our
business operations could be materially adversely affected.
We believe that we qualify and intend to qualify as a REIT under the
Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all
or a portion of our distributions to stockholders. As distributions have
exceeded taxable income, no provision for federal income taxes has been made.
While we intend to continue to pay dividends to our stockholders, we also will
reserve such amounts of cash flow as we consider necessary for the proper
maintenance and improvement of our real estate and other corporate purposes,
while still maintaining our qualification as a REIT.
INFLATION
Most of our leases contain provisions designed to partially mitigate the
adverse impact of inflation. Such provisions include clauses enabling us 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 our leases require the tenant to pay its share of operating
expenses, including common area maintenance, real estate taxes and insurance,
thereby reducing our exposure to increases in costs and operating expenses
resulting from inflation.
Our financial results are affected by general economic conditions in the
markets in which our 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 to meet their lease obligations and could
otherwise adversely affect our 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 our experience,
generally maintain more consistent sales performance during periods of adverse
economic conditions.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q contain
"forward-looking statements" for purposes of Section 27A of the Securities Act
of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are based on current expectations and
are not guarantees of future performance.
All statements other than statements of historical facts are
forward-looking statements, and can be identified by the use of forward-looking
terminology such as "may," "will," "might," "would," "expect," "anticipate,"
"estimate," "would," "could," "should," "believe," "intend," "project,"
"forecast," "target," "plan," or
28
"continue" or the negative of these words or other variations or comparable
terminology, are subject to certain risks, trends and uncertainties that could
cause actual results to differ materially from those projected. Because these
statements are subject to risks and uncertainties, actual results may differ
materially from those expressed or implied by the forward-looking statements. We
caution you not to place undue reliance on those statements, which speak only as
of the date of this report.
Among the factors that could cause actual results to differ materially are:
o general economic conditions, competition and the supply of and demand
for shopping center properties in our markets;
o management's ability to successfully combine and integrate the
properties and operations of separate companies that we have acquired
in the past or may acquire in the future;
o interest rate levels and the availability of financing;
o potential environmental liability and other risks associated with the
ownership, development and acquisition of shopping center properties;
o risks that tenants will not take or remain in occupancy or pay rent;
o greater than anticipated construction or operating costs;
o inflationary and other general economic trends;
o the effects of hurricanes and other natural disasters; and
o other risks detailed from time to time in the reports filed by us with
the Securities and Exchange Commission.
Except for ongoing obligations to disclose material information as required
by the federal securities laws, we undertake no obligation to release publicly
any revisions to any forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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, interest expense on the variable component of the Company's debt
will move in the same direction. With respect to its mortgage and senior
unsecured notes payable, changes in interest rates generally do not affect the
Company's interest expense as these notes payable are predominantly at
fixed-rates for extended terms with a weighted average life of 6.8 years, and
4.5 years, respectively. Because the Company has the intent to hold its existing
fixed rate notes payable either 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's possible
risk is from increases in long-term interest rates that may occur over a period
of several years, as this may decrease the overall value of its real estate.
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, 2003, the fair value of the fixed
rate mortgage loans was estimated to be $481.5 million compared to the carrying
value amount of $420.3 million, excluding the unamortized premium on notes
payable. If the weighted average interest rate on the Company's fixed rate debt
were 100 basis points lower or higher than the current weighted average rate of
7.43%, the fair market value would be $443.2 million and $400.9 million,
respectively.
The Company estimates the fair market value of its senior unsecured fixed
rate debt using discounted cash flow analysis based on current borrowing rates
for similar types of debt. At June 30, 2003, the fair value of its senior
unsecured fixed rate debt was estimated to be $166.6 million compared to the
carrying value amount of
29
$150.0 million, excluding unamortized premium on notes payable. If the weighted
average interest rate on the Company's fixed rate debt were 100 basis points
lower or higher than the current weighted average rate of 7.55%, the fair market
value would be $155.6 million and $144.5 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 $989,000 based on the Company's variable rate debt
balance on June 30, 2003 encompassing $98.9 million of revolving credit
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. As of June 30, 2003, the Company has
outstanding interest rate swaps in the aggregate amount of $70.0 million for
periods ranging from eight months to 2.7 years.
ITEM 4. CONTROLS AND PROCEDURES
We have evaluated the design and operation of our disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Securities Exchange Act of 1934, or the Exchange Act, and the rules and forms of
the Securities and Exchange Commission. This evaluation was made under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, within the 90-day period prior to
the filing of this quarterly report. Our Chief Executive Officer and Chief
Financial Officer have concluded, based on their review, that our disclosure
controls and procedures, as defined at Exchange Act Rules 13a-14(c) and
15d-14(c), are effective to ensure that information required to be disclosed by
us in reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. In addition, no significant changes were
made to our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
Our management, including our Chief Executive Officer and Chief Financial
Officer, however, does not expect that our disclosure controls or our internal
controls will prevent all errors and fraud. A control system, no matter how well
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. The design of any system of controls also is based in
part upon assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Moreover, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
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 is not expected to have a material adverse affect on
the business, financial condition, results of operations or cash flows of the
Company.
Following the execution of the merger agreement with IRT in October 2002,
three IRT shareholders filed three separate purported class action and
derivative suits in the Superior Court of Cobb County, State of Georgia, against
IRT, IRT's board of directors and Equity One alleging claims of breach of
fiduciary duty by the defendant directors, unjust enrichment and irreparable
harm. The complaints sought declaratory relief, an order enjoining
30
consummation of the merger, and unspecified damages. Although the Georgia court
did not grant the plaintiffs the equitable relief requested and permitted the
completion of the merger, two of these lawsuits, Greaves v. IRT Property
Company, et. al. and Phillips v. IRT Property Company, et. al., were still
pending following the merger and second amended complaints have been filed in
each such suit. The third lawsuit was voluntarily dismissed. Although we believe
that these suits are without merit and intend to continue to defend them
vigorously, there can be no assurance that the pending litigation will be
resolved in our favor.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 12, 2003, the Company completed a private placement of
6,911,000 shares of its common stock. Three affiliated investors, Alony Hetz
Properties & Investments, Ltd., Silver Maple (2001), Inc. and M.G.N. (USA) Inc.
purchased 1.6 million, 1.0 million, and 4.3 million shares of common stock,
respectively, at $13.50 per share. The net proceeds of $93 million in cash were
used to fund a portion of the cost of the acquisition of IRT.
The foregoing issuances were made pursuant to exemption 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 its Annual Meeting of Stockholders on May 30, 2003.
(1) The stockholders elected three nominees to the Board of Directors:
For Withheld
--- ---------
Class A Directors (term to expire in 2006)
Noam Ben-Ozer 55,044,042 106,833
Chaim Katzman 54,027,873 1,123,003
Doron Valero 54,028,393 1,112,483
The following directors' terms of office continued after the meeting:
Peter Linneman
Shaiy Pilpel
Patrick L. Finn
Robert L. Cooney
Nathan Hetz
Dori Segal
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
31
(b) Reports on Form 8-K:
During the quarterly period ended June 30, 2003, the Company filed the
following reports on Form 8-K:
(i) Report on Form 8-K dated May 8, 2003 under Item 7 and 9.
(ii) Report on Form 8-K dated May 13, 2003 under Item 5 and 7.
(iii) Report on Form 8-K dated May 15, 2003 under Item 5 and 7.
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 13, 2003 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 and
Financial Officer)
32
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
--------------------------------------
I, Chaim Katzman, Chief Executive Officer of Equity One, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Equity One,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in a all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 13, 2003 /s/ CHAIM KATZMAN
-----------------------------
Chaim Katzman
Chief Executive Officer
33
CERTIFICATE OF CHIEF FINANCIAL OFFICER
--------------------------------------
I, Howard M. Sipzner, Chief Financial Officer of Equity One, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Equity One,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in a all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: August 13, 2003 /s/ Howard M. Sipzner
-------------------------------
Howard M. Sipzner
Chief Financial Officer
34
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer
EXHIBIT 99.1
------------
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Equity One, Inc.
(the "Company") for the period ended June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Chaim Katzman,
Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: August 13, 2003 /s/ CHAIM KATZMAN
-----------------------------
Chaim Katzman
Chief Executive Officer
EXHIBIT 99.2
------------
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Equity One, Inc.
(the "Company") for the period ended June 30, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Howard Sipzner,
Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: August 13, 2003 /s/ Howard M. Sipzner
-------------------------------
Howard M. Sipzner
Chief Financial Officer