UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission File No. 001-13499
EQUITY ONE, INC.
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(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.)
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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 May 5, 2004, 70,312,238 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 and Notes Page
-------
Condensed Consolidated Balance Sheets
As of March 31, 2004 and December 31, 2003 (unaudited)....................................... 1
Condensed Consolidated Statements of Operations
For the three month periods ended March 31, 2004 and 2003 (unaudited)........................ 3
Condensed Consolidated Statements of Comprehensive Income
For the three month periods ended March 31, 2004 and 2003 (unaudited)........................ 5
Condensed Consolidated Statement of Stockholders' Equity
For the three month period ended March 31, 2004 (unaudited).................................. 6
Condensed Consolidated Statements of Cash Flows
For the three month periods ended March 31, 2004 and 2003 (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...................................................................... 31
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings ........................................................................... 32
Item 2. Changes in Securities and Use of Proceeds ................................................... 32
Item 3. Defaults upon Senior Securities ............................................................. 32
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 32
Item 5. Other Information ........................................................................... 32
Item 6. Exhibits and Reports on Form 8-K ............................................................ 33
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Consolidated Financial Statements and Notes
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
March 31, December 31,
2004 2003
-------------- --------------
ASSETS
PROPERTIES:
Income producing............................................... $ 1,740,063 $ 1,594,579
Less: accumulated depreciation................................. (74,485) (66,406)
-------------- --------------
1,665,578 1,528,173
Construction in progress and land held for development......... 54,338 74,686
Properties held for sale....................................... 1,231 14,440
-------------- --------------
Properties, net............................................. 1,721,147 1,617,299
CASH AND CASH EQUIVALENTS......................................... 17 966
CASH HELD IN ESCROW............................................... 1,884 -
ACCOUNTS AND OTHER RECEIVABLES, NET............................... 8,919 13,492
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES..................... 2,860 2,861
GOODWILL ......................................................... 14,578 14,014
OTHER ASSETS...................................................... 42,694 28,754
-------------- --------------
TOTAL............................................................. $ 1,792,099 $ 1,677,386
============== ==============
(continued)
1
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
March 31, December 31,
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE
Mortgage notes payable.......................................................$ 470,263 $ 459,103
Unsecured revolving credit facilities........................................ 50,879 162,000
Unsecured senior notes payable............................................... 350,000 150,000
----------- -----------
871,142 771,103
Unamortized premium/discount on notes payable................................ 23,894 24,218
----------- -----------
Total notes payable....................................................... 895,036 795,321
OTHER LIABILITIES
Accounts payable and accrued expenses........................................ 23,996 25,211
Tenant security deposits..................................................... 8,171 7,706
Other liabilities............................................................ 4,472 5,924
----------- -----------
Total liabilities......................................................... 931,675 834,162
----------- -----------
MINORITY INTEREST............................................................... 12,444 12,672
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - 10,000 shares authorized but unissued..... - -
Common stock, $0.01 par value - 100,000 shares authorized, 70,105 and
69,353 shares issued and outstanding for 2004 and 2003, respectively....... 701 694
Additional paid-in capital................................................... 856,720 843,678
Retained earnings............................................................ 609 -
Accumulated other comprehensive loss......................................... (1,007) (122)
Unamortized restricted stock compensation.................................... (8,455) (10,091)
Notes receivable from issuance of common stock............................... (588) (3,607)
----------- -----------
Total stockholders' equity................................................ 847,980 830,552
----------- -----------
TOTAL...........................................................................$ 1,792,099 $ 1,677,386
=========== ===========
See accompanying notes to the condensed consolidated financial statements. (Concluded)
2
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
RENTAL REVENUE:
Minimum rents........................................................... $ 42,174 $ 28,586
Expense recoveries...................................................... 11,673 7,943
Termination fees........................................................ 69 59
Percentage rent payments................................................ 1,378 1,008
------------ ------------
Total rental revenue................................................. 55,294 37,596
------------ ------------
COSTS AND EXPENSES:
Property operating expenses............................................. 14,458 10,904
Interest expense........................................................ 10,575 7,650
Amortization of deferred financing fees................................. 266 284
Rental property depreciation and amortization........................... 8,432 4,946
General and administrative expenses..................................... 3,452 2,242
------------ ------------
Total costs and expenses............................................ 37,183 26,026
------------ ------------
INCOME BEFORE OTHER INCOME AND EXPENSES, DISCONTINUED
OPERATIONS AND MINORITY INTEREST........................................ 18,111 11,570
OTHER INCOME AND EXPENSES:
Investment income....................................................... 171 441
Other income............................................................ 64 63
Equity in loss of joint ventures........................................ (1) (34)
Loss on extinguishment of debt.......................................... - (623)
------------ ------------
INCOME BEFORE DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................................................ 18,345 11,417
------------ ------------
DISCONTINUED OPERATIONS:
Income from operations of sold properties............................... 74 565
Gain on disposal of income producing properties......................... 2,035 503
------------ ------------
Income from discontinued operations................................... 2,109 1,068
------------ ------------
INCOME BEFORE MINORITY INTEREST............................................ 20,454 12,485
MINORITY INTEREST.......................................................... (215) (141)
------------ ------------
NET INCOME................................................................. $ 20,239 $ 12,344
============ ============
(continued)
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------
2004 2003
-------------- --------------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE
Income before discontinued operations................................... $ 0.26 $ 0.24
Income from discontinued operations..................................... 0.03 0.02
-------------- -------------
Total basic earnings per share........................................ $ 0.29 $ 0.26
============== =============
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE................................................ 69,115 47,163
============== =============
DILUTED EARNINGS PER SHARE
Income before discontinued operations................................... $ 0.26 $ 0.24
Income from discontinued operations..................................... 0.03 0.02
-------------- -------------
Total diluted earnings per share...................................... $ 0.29 $ 0.26
============== =============
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE.............................................. 71,021 48,475
============== =============
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 MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------
2004 2003
----------- ------------
NET INCOME................................................................. $ 20,239 $ 12,344
OTHER COMPREHENSIVE LOSS:
Net unrealized holding loss on securities available for sale........... - (1)
Change in fair value of cash flow hedges............................... (885) -
----------- ------------
COMPREHENSIVE INCOME....................................................... $ 19,354 $ 12,343
=========== ============
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2004
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Notes
Accumulated Unamortized Receivable
Additional Other Restricted from Total
Common Paid-In Retained Comprehensive Stock Issuance of Stockholders'
Stock Capital Earnings Loss Compensation Common Stock Equity
-------- --------- --------- ------------- ------------ ------------- ------------
BALANCE,
JANUARY 1, 2004............ $ 694 $843,678 $ - $ (122) $ (10,091) $ (3,607) $ 830,552
Issuance of common stock.. 7 13,113 - - 1,636 - 14,756
Stock issuance costs...... - (71) - - - - (71)
Repayment of notes
receivable from
issuance of common
stock.................... - - - - - 3,019 3,019
Net income................ - - 20,239 - - - 20,239
Dividends paid............ - - (19,630) - - - (19,630)
Change in fair value of
cash flow hedges......... - - - (885) - - (885)
------- --------- --------- ----------- ----------- ----------- -----------
BALANCE,
MARCH 31, 2004............. $ 701 $856,720 $ 609 $ (1,007) $ (8,455) $ (588) $ 847,980
======= ========= ========= =========== =========== =========== ===========
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------------
2004 2003
-------------- ---------------
OPERATING ACTIVITIES:
Net income............................................................... $ 20,239 $ 12,344
Adjustments to reconcile net income to net cash provided by operating
activities:
Straight line rent adjustment........................................ (544) (333)
Provision for losses on accounts receivable.......................... 237 648
Amortization of premium/discount on notes payable.................... (1,215) (329)
Amortization of deferred financing fees.............................. 266 284
Rental property depreciation and amortization........................ 8,432 4,946
Depreciation and amortization included in discontinued operations.... - 100
Amortization of restricted stock..................................... 1,172 480
Equity in loss of joint ventures..................................... 1 34
Loss on extinguishment of debt....................................... - 623
Gain on disposal of real estate...................................... (2,035) (503)
Minority interest in earnings of consolidated subsidiaries........... 215 141
Changes in assets and liabilities:
Accounts and other receivables....................................... 4,336 908
Other assets......................................................... (3,495) (2,328)
Accounts payable and accrued expenses................................ (995) (5,154)
Tenant security deposits............................................. 465 255
Other liabilities.................................................... 98 (64)
-------------- -----------
Net cash provided by operating activities................................ 27,177 12,052
-------------- -----------
INVESTING ACTIVITIES:
Additions to and purchases of properties.............................. (94,816) (2,166)
Additions to construction in progress................................. (9,883) (6,572)
Proceeds from disposal of rental properties........................... 1,986 6,694
Increase in cash held in escrow....................................... (1,884) (13)
Distributions received from joint ventures............................ - 300
Proceeds from repayments of notes receivable.......................... 1,430 2,753
Increase in deferred leasing costs.................................... (2,472) (692)
Cash used in the purchase of IRT...................................... - (189,382)
Cash acquired in the IRT acquisition.................................. - 1,756
-------------- -----------
Net cash used in investing activities.................................... (105,639) (187,322)
-------------- -----------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable.................................. (3,716) (46,009)
Net borrowings (repayments) under revolving credit facilities......... (111,121) 138,000
Proceeds from senior debt offering.................................... 199,750 -
Increase in deferred financing costs.................................. (2,724) (559)
Proceeds from stock subscription and issuance of common stock......... 12,238 100,276
Stock issuance costs.................................................. (71) (323)
Repayment of notes receivable from issuance of common stock........... 3,019 -
Cash dividends paid to stockholders................................... (19,630) (16,130)
Distributions to minority interest.................................... (232) (250)
-------------- -----------
Net cash provided by financing activities................................ 77,513 175,005
-------------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................ (949) (265)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 966 2,944
-------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................. $ 17 $ 2,679
============== ===========
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized................... $ 10,575 $ 6,945
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized holding gain on securities available for sale... $ (1)
===========
Change in fair value of cash flow hedges............................. $ 885
============
Issuance of restricted stock......................................... $ 882 $ 2,967
============ ============
Note receivable from sale of property................................ $ 4,655
============
The Company acquired and assumed two mortgage notes
in connection with the acquisition of a rental property:
Fair value of rental property and other assets.................... $ 46,592
Assumption of mortgage notes payable.............................. (14,875)
Fair value adjustment of mortgage notes payable................... (1,244)
------------
Cash paid for rental property..................................... $ 30,473
============
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
Assumption of liabilities, unsecured senior notes and mortgage
notes payable................................................... (319,598)
Fair value adjustment of unsecured senior notes and mortgage
notes payable................................................... (22,330)
Common stock issued............................................... (231,737)
---------
Cash paid for IRT acquisition, including transaction costs........ $ 189,382
=========
See accompanying notes to the condensed consolidated financial (Concluded)
statements.
8
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share and square feet 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 predominantly 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, including those partnerships
of which it 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 of which the
Company is not the primary beneficiary and, accordingly, uses the equity method
of accounting for these joint ventures.
As of March 31, 2004, 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 is located in twelve
states in the southern United States and consists of 189 properties,
encompassing 127 supermarket-anchored shopping centers, 11 drug store-anchored
shopping centers, 45 other retail-anchored shopping centers, one self-storage
facility, one industrial property, and four retail developments, as well as
non-controlling interests in two 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 month period ended March 31, 2004 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 elsewhere in this Form 10-Q and with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
audited financial statements and related footnotes for the year ended December
31, 2003, included in the Company's Annual Report on Form 10-K, filed with the
SEC on March 15, 2004.
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.
9
3. IRT Merger
----------
On February 12, 2003, the Company completed a statutory with IRT Property
Company ("IRT"). The Company acquired 93 properties that comprise an aggregate
of approximately 10,041 square feet of gross leasable area. The acquisition
created one of the largest shopping center REITs primarily focusing on the
southeastern United States. The acquisition of IRT was accounted for using the
purchase method and the results of IRT are included in the Company's financial
statements since the date of its acquisition. 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 value of
the Company's common stock was determined based on the average market price over
the 3-day period before and after the terms of the acquisition were agreed to
and announced. There were no contingent payments, options, or commitments
specified in the agreement.
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 predevelopment 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.
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 $812 and $684 for the three months ended March 31,
2004 and 2003, respectively.
5. Business Combinations
---------------------
The Company is actively pursuing acquisition opportunities and will not be
successful in all cases; costs incurred related to these acquisition
opportunities are expensed when it is probable that the Company will not be
successful in the acquisition.
The Company allocates the purchase price of acquired companies and
properties to the tangible and intangible assets acquired, and liabilities
assumed based on their estimated fair values. Fair value is defined as the
amount at which that asset could be bought or sold in a current transaction
between willing parties (other than in a forced or liquidation sale). In order
to allocate the purchase price of acquired companies and properties to the
tangible and intangible assets acquired, the Company identifies and estimates
the fair value of the land, buildings, and improvements, reviews the leases to
determine the existence of, and estimates fair value of, any contractual or
other legal rights and investigates the existence of, and estimates fair value
of, any other identifiable intangible assets. Such valuations require management
to make significant estimates and assumptions, especially with respect to
intangible assets.
10
The cost approach is used as the primary method to estimate the fair value
of the buildings, improvements and other assets. The market value approach is
used as the primary method to estimate the fair value of the land. The
determination of the fair value of contractual intangibles is based on the costs
to originate a lease including commissions and legal costs to the extent that
such costs are not already incurred with a new lease that has been negotiated in
connection with the purchase of a property. In-place lease values are based on
management's evaluation of the specific characteristics of each lease and the
Company's overall relationship with each tenant. Among the factors considered in
the allocation of these values include the nature of the existing relationship
with the tenant, the tenant's credit quality, the expectation of lease renewals,
the estimated carrying costs of the property during a hypothetical expected
lease-up period, current market conditions and costs to execute similar leases.
Estimated carrying costs include real estate taxes, insurance, other property
operating costs and estimates of lost rentals at market rates during the
hypothetical expected lease-up periods, given the specific market conditions.
Above-market, below-market and in-place lease values are determined based on the
present value (using a discount rate reflecting the risks associated with the
leases acquired) of the difference between (i) the contractual amounts to be
paid pursuant to the leases negotiated and in-place at the time of acquisition
and (ii) management's estimate of fair market lease rates for the property or
equivalent property, measured over a period equal to the remaining
non-cancelable term of the lease. The value of contractual intangibles is
amortized over the remaining term of each lease. Other than as discussed above,
the Company has determined that its real estate properties do not have any other
significant identifiable intangible assets.
Critical estimates in valuing certain of the intangible assets and the
assumptions of what marketplace participants would use in making estimates of
fair value include, but are not limited to: future expected cash flows,
estimated carrying costs, estimated origination costs, lease up periods, and the
tenant risk attributes, as well as assumptions about the period of time the
acquired lease will continue to be used in the Company's portfolio and discount
rates used in these calculations. Management's estimates of fair value are based
upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable. Assumptions may not always reflect unanticipated events and
changes in circumstances may occur. In making such estimates, management uses a
number of sources, including appraisals that may be obtained in connection with
the acquisition or financing of the respective property or other market data.
Management also considers information obtained in its pre-acquisition due
diligence and marketing and leasing activities in estimating the fair value of
tangible and intangible assets acquired.
2004 Acquisition Activity
Square Purchase
Date Purchased Property Name City FL Feet/Acres Price
- ----------------- ------------------------- ------------ ------ ------------- ------------
Feb. 3, 2004 Bluebonnet Outparcel Baton Rouge LA 0.9 acres $ 500
Feb. 4, 2004 Pavilion Shopping Center Naples FL 161,245 24,200
March 24, 2004 Village Center Southland TX 118,092 17,475
March 24, 2004 Creekside Plaza Arlington TX 101,016 14,025
March 31, 2004 Sparkleberry Columbia SC 339,051 45,150
March 31, 2004 Venice Shopping Center Venice FL 111,934 6,447
-----------
Total....................................................................... $ 107,797
===========
The Company's allocation of the purchase price for the acquisitions
consummated during 2004 is preliminary and is subject to change. Management does
not believe that any adjustment would have a material effect on the Company's
financial position or results of operations.
11
6. Property Held for Sale
----------------------
As of March 31, 2004, one undeveloped piece of land was classified as
property held for sale.
7. Investments in and Advances to Joint Ventures
---------------------------------------------
A summary of the Company's investments in unconsolidated joint ventures at
March 31, 2004 and December 31, 2003 is as follows (all investments in
unconsolidated entities are accounted for under the equity method):
March 31, December 31,
Entity Location Ownership 2004 2003
- ----------------- -------------------------- ----------- ------------- --------------
PG Partners Palm Beach Gardens, FL 50.0% $ 2,632 $ 2,633
Parcel F, LLC Palm Beach Gardens, FL 50.0% 228 228
------------- --------------
Total investments in and advances to joint ventures............ $ 2,860 $ 2,861
============= ==============
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
March 31, 2004 December 31, 2003
---------------- -----------------
Assets:
Rental properties, net.................... $ 16,558 $ 16,688
Other assets............................... 410 457
---------------- -----------------
Total assets............................... $ 16,968 $ 17,145
================ =================
Liabilities and Ventures' Equity:
Mortgage notes............................. $ 12,849 $ 12,878
Other liabilities.......................... 68 90
Ventures' equity........................... 4,051 4,177
---------------- -----------------
Total ..................................... $ 16,968 $ 17,145
================ =================
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 $1,000 is being depreciated over the useful
lives of the related assets.
Three Months Ended March 31,
-------------------------------------
2004 2003
--------------- -----------------
Revenues:
Rental revenues............................. $ 592 $ 583
--------------- -----------------
Total revenues............................ 592 583
--------------- -----------------
Expenses:
Operating expenses.......................... 174 216
Interest expense............................ 278 277
Depreciation................................ 131 151
Other expense............................... 11 15
--------------- -----------------
Total expenses............................ 594 659
--------------- -----------------
Net loss........................................ $ (2) $ (76)
=============== =================
The Company's equity in loss of joint
ventures...................................... $ (1) $ (34)
=============== =================
12
Significant accounting policies used by the unconsolidated joint ventures
are similar to those used by the Company.
8. Borrowings
----------
Each of the existing mortgage loans is secured by a mortgage on one or more
of the Company's properties. Certain of the mortgage loans involving an
aggregate principal balance of approximately $182.5 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.
On March 26, 2004, the Company completed a $200,000 offering of its senior
unsecured notes that mature on April 15, 2009 (the "2009 Notes"). The 2009 Notes
bear an interest rate of 3.875%. Interest is due semi-annually on April 15 and
October 15 of each year commencing on October 15, 2004. The 2009 Notes were
issued at a discount of $250 that will be amortized against interest expense
over the life of the 2009 Notes. The Company may redeem some or all of the 2009
Notes at any time for a price equal to the principal amount of the Notes being
redeemed plus accrued interest. The 2009 Notes are guaranteed by most of the
Company's wholly-owned subsidiaries and IRT Partners, LP ("LP"). The indenture
under which the 2009 Notes were issued has several covenants which limit the
Company's ability to incur debt; requires the Company to maintain unencumbered
assets of not less than 150% of the aggregate principal amount of all the
outstanding unsecured debt on a consolidated basis; and limits the Company's
ability to consolidate, sell, lease, or convey substantially all of its assets
to, or merge with any other entity.
In addition, the Company has obligations relating to $150,000 principal
amount of unsecured senior notes, bearing interest at fixed 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 an investment grade debt rating. These notes
have also been guaranteed by most of the Company's wholly-owned subsidiaries and
LP.
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 is guaranteed by most of the
Company's wholly-owned subsidiaries as well as LP. Certain provisions of the
facility were amended on March 18, 2004. Based on the Company's current rating,
the LIBOR spread is 1.0%. 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 $170,000 a $35,000 swing line facility for
short term borrowings, a $200,000 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
13
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. As of March 31, 2004, the Company had $48,000 outstanding on this
credit facility. The weighted average interest rate as of March 31, 2004 was
2.08%, including the effect of interest rate swaps.
The Company has a $5,000 unsecured credit facility with City National Bank
of Florida, of which $2,879 was outstanding as of March 31, 2004. This facility
also provides collateral for $1,378 in outstanding letters of credit.
As of March 31, 2004, the availability under the various credit facilities
was approximately $131,000 net of outstanding balances and letters of credit.
9. Consolidating Financial Information
-----------------------------------
Most of the Company's subsidiaries, including LP, have guaranteed the
Company's indebtedness under the unsecured senior notes and revolving credit
facility. The guarantees are joint and several and full and unconditional.
Guarantors
--------------------------
IRT Non
Equity Combined Partners, Guaran Eliminating Consolidated
Condensed Balance Sheet One, Inc. Subsidiaries LP -tors Entries Equity One
------------ ------------ ---------- ----------- ----------- -------------
As of March 31, 2004
ASSETS
Properties, net.................. $ 520,241 $ 657,528 $ 185,533 $ 357,845 $ - $ 1,721,147
Investment in affiliates......... 435,752 - - - (435,752) -
Other assets..................... 32,598 23,688 2,927 11,739 - 70,952
----------- ------------ ---------- ----------- ----------- -------------
Total ......................... $ 988,591 $ 681,216 $ 188,460 $ 369,584 $ (435,752) $ 1,792,099
=========== ============ ========== =========== =========== =============
LIABILITIES
Mortgage notes payable........... $ 72,856 $ 171,630 $ 34,241 $ 191,536 $ - $ 470,263
Unsecured revolving credit
facilities..................... 50,879 - - - - 50,879
Unsecured senior notes payable,
net............................ 350,000 - - - - 350,000
Unamortized premium/discount on
notes payable.................. 12,258 5,876 4,516 1,244 - 23,894
Other liabilities................ 13,336 12,989 2,237 8,077 - 36,639
----------- ------------ ---------- ----------- ----------- -------------
Total liabilities.............. 499,329 190,495 40,994 200,857 - 931,675
MINORITY INTEREST................... - - - - 12,444 12,444
STOCKHOLDERS' EQUITY............... 489,262 490,721 147,466 168,727 (448,196) 847,980
----------- ------------ ---------- ----------- ----------- -------------
Total........................... . $ 988,591 $ 681,216 $ 188,460 $ 369,584 $ (435,752) $ 1,792,099
=========== ============ ========== =========== =========== =============
14
Guarantors
--------------------------
IRT Non
Equity Combined Partners, Guaran Eliminating Consolidated
Condensed Balance Sheet One, Inc. Subsidiaries LP -tors Entries Equity One
------------ ------------ ---------- ----------- ----------- -------------
As of December 31, 2003
ASSETS
Properties, net.................. $ 526,136 $ 561,455 $ 187,132 $ 342,576 $ - $1,617,299
Investment in affiliates......... 435,752 - - - (435,752) -
Other assets..................... 22,865 21,926 2,940 12,356 - 60,087
----------- ------------ ---------- ----------- ----------- -------------
Total ......................... $ 984,753 $ 583,381 $ 190,072 $ 354,932 $ (435,752) $1,677,386
=========== ============ ========== =========== =========== =============
LIABILITIES
Mortgage notes payable........... $ 74,726 $ 171,230 $ 34,400 $ 178,747 $ - $ 459,103
Unsecured revolving credit
facilities..................... 162,000 - - - - 162,000
Unsecured senior notes payable,
net............................ 150,000 - - - - 150,000
Unamortized premium on notes 8
payable........................ 13,505 5,950 4,661 102 - 24,218
Other liabilities................ 13,000 15,522 1,780 8,539 - 38,841
----------- ------------ ---------- ----------- ----------- -------------
Total liabilities.............. 413,231 192,702 40,841 187,388 - 834,162
MINORITY INTEREST................... - - - - 12,672 12,672
STOCKHOLDERS' EQUITY................ 571,522 390,679 149,231 167,544 (448,424) 830,552
----------- ------------ ---------- ----------- ----------- -------------
Total............................ $984,753 $ 583,381 $ 190,072 $ 354,932 $ (435,752) $1,677,386
=========== ============ ========== =========== =========== =============
Guarantors
-----------------------------
Condensed Statement of Operations Equity One, Combined IRT Non Consolidated
Inc. Subsidiaries Partners, LP Guarantors Equity One
------------ ------------ ------------ ------------ -------------
For the three months ended
March 31, 2004
RENTAL REVENUE:
Minimum rents.............................. $ 12,768 $ 15,361 $ 4,699 $ 9,346 $ 42,174
Expense recoveries......................... 3,188 4,269 1,230 2,986 11,673
Termination fees........................... 11 51 7 - 69
Percentage rent payments................... 233 346 152 647 1,378
------------ ------------ ------------ ------------ -------------
Total rental revenue..................... 16,200 20,027 6,088 12,979 55,294
------------ ------------ ------------ ------------ -------------
COSTS AND EXPENSES:
Property operating expenses................ 3,622 5,440 1,640 3,756 14,458
Interest expense........................... 4,059 2,459 580 3,477 10,575
Amortization of deferred financing fees.... 155 66 - 45 266
Rental property depreciation and
amortization............................. 2,465 3,397 852 1,718 8,432
General and administrative expenses........ 2,922 430 1 99 3,452
------------ ------------ ------------ ------------ -------------
Total costs and expenses................. 13,223 11,792 3,073 9,095 37,183
------------ ------------ ------------ ------------ -------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................... 2,977 8,235 3,015 3,884 18,111
15
Guarantors
-----------------------------
Condensed Statement of Operations Equity One, Combined IRT Non Consolidated
Inc. Subsidiaries Partners, LP Guarantors Equity One
------------ ------------ ------------ ------------ -------------
For the three months ended
March 31, 2004 (continued)
OTHER INCOME AND EXPENSES:
Investment income.......................... 102 69 - - 171
Other income............................... 9 55 - - 64
Equity in loss of joint ventures........... - (1) - - (1)
------------ ------------ ------------ ------------ -------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST............................ 3,088 8,358 3,015 3,884 18,345
------------ ------------ ------------ ------------ -------------
DISCONTINUED OPERATIONS
Income from operations of sold properties.. - - - 74 74
Gain on disposal of income producing
properties............................... (16) 18 - 2,033 2,035
------------ ------------ ------------ ------------ -------------
Total income from discontinued operations (16) 18 - 2,107 2,109
------------ ------------ ------------ ------------ -------------
INCOME BEFORE MINORITY INTERST................ 3,072 8,376 3,015 5,991 20,454
MINORITY INTEREST............................. (16) (11) (172) (16) (215)
------------ ------------ ------------ ------------ -------------
NET INCOME.................................... $ 3,056 $ 8,365 $ 2,843 $ 5,975 $ 20,239
============ ============ ============ ============ =============
Guarantors
------------------------------
Condensed Statement of Operations Equity One, Combined IRT Partners, Non Consolidated
Inc. Subsidiaries LP Guarantors Equity One
------------ ------------- ------------- ------------ -------------
For the three months ended
March 31, 2003
RENTAL REVENUE:
Minimum rents.............................. $ 7,318 $11,034 $ 2,460 $ 7,774 $28,586
Expense recoveries......................... 1,501 3,344 649 2,449 7,943
Termination fees........................... 52 4 1 2 59
Percentage rent payments................... 175 256 193 384 1,008
------------ ------------- ------------- ------------ ------------
Total rental revenue..................... 9,046 14,638 3,303 10,609 37,596
------------ ------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Property operating expenses................ 2,484 4,007 939 3,474 10,904
Interest expense........................... 1,545 2,125 428 3,552 7,650
Amortization of deferred financing fees.... 114 110 2 58 284
Rental property depreciation and
amortization............................. 945 2,041 553 1,407 4,946
General and administrative expenses........ 2,242 - - - 2,242
------------ ------------- ------------- ------------ ------------
Total costs and expenses................. 7,330 8,283 1,922 8,491 26,026
------------ ------------- ------------- ------------ ------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................... 1,716 6,355 1,381 2,118 11,570
OTHER INCOME AND EXPENSES:
Investment income.......................... 261 118 61 1 441
Other income (expense)..................... - 63 - - 63
16
Guarantors
------------------------------
Condensed Statement of Operations Equity One, Combined IRT Partners, Non Consolidated
Inc. Subsidiaries LP Guarantors Equity One
------------ ------------- ------------- ------------ -------------
For the three months ended
March 31, 2003 (continued)
Equity in loss of joint ventures............ - (34) - - (34)
Loss on extinguishment of debt.............. - (513) - (110) (623)
------------ ------------- ------------- ------------ -------------
INCOME BEFORE DISCONTINUED
OPERATIONS AND MINOR
INTEREST.................................... 1,977 5,989 1,442 2,009 11,417
------------ ------------- ------------- ------------ -------------
DISCONTINUED OPERATIONS
Income from operations of sold properties... - 565 - - 565
Gain on disposal of income producing
properties................................ - 503 - - 503
------------ ------------- ------------- ------------ -------------
Total income from discontinued
operations.............................. - 1,068 - - 1,068
------------ ------------- ------------- ------------ -------------
INCOME BEFORE MINORITY INTEREST................ 1,977 7,057 1,442 2,009 12,485
MINORITY INTEREST.............................. (55) 29 (69) (46) (141)
------------ ------------- ------------- ------------ -------------
NET INCOME..................................... $ 1,922 $ 7,086 $ 1,373 $ 1,963 $12,344
============ ============= ============= ============ =============
10. Stockholders' Equity and Earnings Per Share
-------------------------------------------
The following table reflects the change in number of shares of common stock
outstanding for the three months ended March 31, 2004:
Common Options
Stock Exercised Total
------------- ------------- ------------
Board of Directors.......................... 14 - 14
Officers..................................... 17* 20 37
Employees and other......................... 16* 88 104
Dividend Reinvestment and Stock Purchase
Plan.................................... 597 - 597
------------- ------------- ------------
Total.................................. 644 108 752
============= ============= ============
* Reflects shares of "restricted stock" which are subject to forfeiture and
vest over periods from 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 month periods ended March 31,
2004 and 2003:
Three Months Ended March 31,
-----------------------------
2004 2003
------------ ------------
Denominator for basic earnings per share -
weighted average shares ....................... 69,115 47,163
------------ ------------
Walden Woods Village, Ltd......................... 94 94
Unvested restricted stock ........................ 597 319
Convertible partnership units .................... 734 672
Stock options (using treasury method)............. 481 227
------------ ------------
Subtotal....................................... 1,906 1,312
------------ ------------
Denominator for diluted earnings per share -
weighted average shares........................ 71,021 48,475
============ ============
17
11. 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:
Three Months Ended
March 31,
---------------------------
2004 2003
----------- -----------
Net Income As reported............................... $ 20,239 $ 12,344
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.................................. (194) (169)
----------- -----------
Pro forma................................. $ 20,045 $ 12,175
=========== ===========
Basic earnings per share As reported............................... $ 0.29 $ 0.26
=========== ===========
Pro forma................................. $ 0.29 $ 0.26
=========== ===========
Diluted earnings per share As reported............................... $ 0.29 $ 0.26
=========== ===========
Pro forma................................. $ 0.29 $ 0.25
=========== ===========
12. 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 $6,524 has
been repaid as of March 31, 2004. The notes bear interest at a rate of 5%.
Interest only is payable quarterly and the principal is due between 2006 and
2007. In accordance with the provisions of the Sarbanes-Oxley Act of 2002, there
have been no material modifications to any of the terms of the loans granted to
our executives.
13. Minority Interest
-----------------
On December 30, 1998, a wholly owned subsidiary of the Company, Equity One
(Walden Woods) Inc. (the "Walden Woods General Partner"), formed a limited
partnership, in which a retail 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 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
18
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.
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. 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. 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 in order to enhance the acquisition
opportunities of the Company 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 March 31, 2004, there were 734.266 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 share of common stock. Such limited
partnership interests 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 Venice Plaza, a separate general partnership which it
controls and of which it is the primary beneficiary (of a 75% interest). The
minority interest has been presented in the accompanying condensed consolidated
balance sheets.
14. Dispositions
------------
The following table reflects the properties reported in discontinued
operations for the three month period ended March 31, 2004 as well as a listing
of 2003 dispositions:
Square Feet/ Gross Sales Gain On
Property Location Date Sold Acres Price Sale
- ------------------------ -------------------- ------------- -------------- ---------- ----------
2004 Dispositions
- ------------------------
Southwest Walgreens Phoenix, AZ February 93,402 $ 6,650 $ 2,035
========== ==========
Square Feet/ Gross Sales Gain On
Property Location Date Sold Acres Price Sale
----------------------- -------------------- ------------- -------------- ---------- ----------
2003 Dispositions
-----------------------
Eckerd.................... Leesburg, FL March 12,739 $ 4,050 $ 326
Eckerd.................... Melbourne, FL March 10,908 2,715 177
---------- ----------
First quarter 2003............................................................. 6,765 503
Pompano................ Pompano Beach, FL April 80,697 3,400 470
Huntcrest outparcels... Huntcrest, GA May 2.94 acres 1,686 -*
Oak Square Joint Venture.. Gainesville, FL June n/a 2,230 901
CDG (Park Place) LLC JV... Plano, TX September n/a 4,434 1,209
Heritage Walk............. Milledgeville, GA November 159,991 10,000 -*
Stadium Plaza............. Phenix City, AL December 70,475 4,800 -*
---------- -----------
Total for 2003 ................................................................ $ 33,315 $3,083
========== ===========
19
*Properties acquired as part of the IRT Property Company merger, for which
no gain/(loss) has been recognized due to purchasing accounting.
The Company classified the results of operations from the properties sold
during 2003 and 2004 as income from discontinued operations in the accompanying
condensed consolidated statements of operations. The condensed consolidated
statements of operations for these properties are shown below:
Three Months Ended
March 31,
-------------------------
2004 2003
---------- -----------
Rental revenue................................... $ 91 $ 654
---------- -----------
Property operating expenses...................... 54 154
Interest expense................................. - 69
Amortization of deferred financing fees.......... - 1
Rental property depreciation and amortization.... - 100
---------- -----------
Total expenses................................... 54 324
---------- -----------
Investment income................................ 37 90
---------- -----------
Equity in income of joint ventures............... - 145
---------- -----------
Income from discontinued operations.............. $ 74 $ 565
========== ===========
15. Debt Extinguishment
-------------------
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.
During 2003, the Company prepaid four mortgages and incurred a loss of $623 on
the early extinguishment of debt.
16. New Accounting Pronouncements and Changes
-----------------------------------------
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ARB 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 consolidation 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 or annual period ending after December 15, 2003.
The Company has evaluated the effect of FIN 46 and has determined where it is
the primary beneficiary and has consolidated those VIE's. Where the Company has
determined it is not the primary beneficiary of the VIE, it reports the VIE
under the equity method. The adoption of FIN 46 did not require a change in the
accounting treatment of any VIE's. The Company has not become a party to any
VIE's during 2003.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which clarifies the accounting
and reporting for derivative instruments, including derivative instruments that
are embedded in contracts. This statement is effective for contracts entered
into or modified after June 30, 2003. The Company adopted this pronouncement
beginning July 1, 2003. The adoption of SFAS No. 149 did not have a material
impact on the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for the
20
classification and measurement of financial instruments that possess
characteristics similar to both liability and equity instruments. SFAS No. 150
also addresses the classification of certain financial instruments that include
an obligation to issue equity shares. On October 29, 2003, the FASB voted to
defer, for an indefinite period, the application of the guidance in SFAS No.
150. The FASB decided to defer the application of certain aspects of Statement
150 until it could consider some of the resulting implementation issues. The
Company has adopted certain provisions of SFAS No. 150 which did not have a
material impact on the Company's financial condition or results of operations.
The Company is still evaluating the potential effect of the provisions of SFAS
No. 150 that have been deferred to future periods.
In December 2003, the FASB issued Statement No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits. This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. This Statement retains the
disclosure requirements contained in FASB Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it replaces.
It requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The adoption of SFAS No. 132 (revised) did not
have a material impact on the Company's financial statements.
17. Commitments and Contingencies
-----------------------------
As of March 31, 2004, 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.
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, 2003 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, 2003 filed March 15, 2004. 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 ("IRT")
completed a statutory merger. The transaction has been accounted for as a
purchase and the results of Equity One include the activity of IRT since
February 12, 2003.
21
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Total rental revenue increased by $17.7 million, or 47.1%, to $55.3 million
in 2004 from $37.6 million in 2003. The following factors accounted for this
difference:
o The acquisition of IRT in 2003 increased revenue by approximately
$10.8 million;
o Properties acquired during 2004 increased revenue by approximately
$461,000.
o Properties acquired during 2003 increased revenue by approximately
$5.7 million; and
o Other property rental revenue increased by $703,000 primarily related
to the completion of a development property, lease-up of vacant space,
and rental rate increases.
Property operating expenses increased by $3.6 million, or 32.6%, to $14.5
million for 2004 from $10.9 million in 2003. The following factors contributed
to this difference:
o The acquisition of IRT increased operating expenses by approximately
$1.9 million;
o Properties acquired during 2003 increased operating expenses by
approximately $1.5 million;
o Properties acquired during 2004 increased operating expenses by
$108,000; and
o Other property operating expenses increased by $219,000.
Rental property depreciation and amortization increased by $3.5 million, or
71.4%, to $8.4 million for 2004 from $4.9 million in 2003. The following factors
primarily accounted for this difference:
o The acquisition of IRT increased depreciation and amortization by
approximately $2.0 million;
o Properties acquired during 2003 increased depreciation and
amortization by approximately $855,000; and
o Completed developments and properties purchased in 2004 increased
depreciation and amortization by approximately $629,000.
Interest expense increased by $2.9 million, or 37.7%, to $10.6 million for
2004 from $7.7 million in 2003. This difference was primarily due to:
o An increase in interest expense of $2.3 million as a result of the
assumption of mortgage loans and senior unsecured debt in the
acquisition of IRT in 2003;
o Interest incurred on the debt related to the acquisition of properties
during 2003 of $862,000;
o These increases to interest expense were partially offset by an
increase in capitalized interest of $129,000 related to development
activity.
General and administrative expenses increased by $1.2 million, or 54.5%, to
$3.4 million for 2004 from $2.2 million in 2003. Compensation and employer
related expenses increased by $1.1 million and other general office expenses
increased by $100,000. These expense increases were due to the increase in
staffing resulting from the IRT acquisition.
22
Investment income decreased by $270,000 due to the principal repayments
received on notes receivable.
During 2003, we repaid various mortgage notes prior to their stated
maturities and incurred a loss on the extinguishment of debt of $623,000.
We sold a property and have one property that is held for sale for the
three month period ended March 31, 2004. The associated operating results of
$74,000 of such properties are reflected as income from operations of sold
properties. The 2003 discontinued operations reflect a reclassification of
operations for properties sold during 2003 and 2004. We recognized a gain of
$2.0 million in the first quarter of 2004 related to the disposal of a property
and recognized a gain of $503,000 in the first quarter of 2003 related to
disposal of several properties.
As a result of the foregoing, net income increased by $7.9 million, or
64.2%, to $20.2 million for 2004 from $12.3 million in 2003.
FUNDS FROM OPERATIONS
We believe Funds From Operations ("FFO") (combined with the primary GAAP
presentations) is a useful supplemental measure of our operating performance
that is a recognized metric used extensively by the real estate industry, in
particular, REITs. Accounting for real estate assets using historical cost
accounting under accounting principles generally accepted in the United States
of America ("GAAP") assumes that the value of real estate diminishes predictably
over time. The National Association of Real Estate Investment Trusts ("NAREIT")
stated in its April 2002 White Paper on Funds from Operations "since real estate
values...have historically risen or fallen with market conditions, many industry
investors have considered presentations of operating results for real estate
companies that use historical cost accounting to be insufficient by themselves."
FFO, as defined by NAREIT, is "net income (computed in accordance with
GAAP), excluding (gains or losses) from sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations on the same basis." We believe that
financial analysts, investors and stockholders are better served by the clearer
presentation of comparable period operating results generated from our FFO
measure. 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 is presented to assist investors in analyzing our performance and to
provide an indication of our ability to fund capital expenditures, distribution
requirements and other cash needs. FFO (i) does not represent cash flow from
operations as defined by GAAP, (ii) is not indicative of cash available to fund
all cash flow needs and liquidity, including the ability to make distributions,
and (iii) should not be considered as an alternative to net income (which is
determined in accordance with GAAP) for purposes of evaluating our operating
performance. We believe net income is the most directly comparable GAAP measure
to FFO.
23
The following table illustrates the calculation of FFO for the three month
periods ended March 31, 2004 and 2003:
Three Months Ended March 31,
-------------------------------
2004 2003
------------- -------------
Net income ...................................................... $ 20,239 $ 12,344
Adjustments:
Rental property depreciation and amortization, including
discontinued operations................................... 8,432 5,046
Gain on disposal of income producing properties.............. (2,035) (503)
Minority interest............................................ 199 131
Other Items:
Interest on convertible partnership units .................... - 65
Pro-rata share of real estate depreciation from joint
ventures............................................. .... 65 161
------------- -------------
Funds from operations ........................................... $ 26,900 $ 17,244
============= =============
FFO increased by $9.7 million, or 56.4%, to $26.9 million for the three
months ended March 31, 2004, from $17.2 million for the comparable period of
2003.
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:
Three Months Ended March 31,
-------------------------------
2004 2003
----------- -----------
Earnings per diluted share*.................................. $ 0.29 $ 0.26
Adjustments:
Rental property depreciation and amortization, including
discontinued operations................................ 0.12 0.11
Gain on disposal of income producing properties.......... (0.03) (0.01)
----------- -----------
Funds from operations per diluted share...................... $ 0.38 $ 0.36
=========== ===========
* Earnings per diluted share reflect the add-back of interest on convertible
partnership units and the minority interest(s) which are convertible to shares
of our common stock.
CASH FLOWS
Net cash provided by operations of $27.2 million for the three months ended
March 31, 2004 included: (i) net income of $20.2 million, (ii) adjustments for
non-cash and gain on sale items which increased cash flow by $6.5 million, and
(iii) a net change in operating liabilities and operating assets that increased
cash flow by $409,000, compared to net cash provided by operations of $12.1
million for the three months ended March 31, 2003, which included (i) net income
of $12.3 million, (ii) adjustments for non-cash items which increased cash flow
by $6.1 million, and (iii) a net change in operating liabilities and operating
assets that reduced cash flow by $6.4 million.
Net cash used in investing activities of $105.6 million for the three
months ended March 31, 2004 included: (i) the acquisition of one parcel of land
held for future development and five shopping centers for $94.8 million, (ii)
construction, development and other capital improvements of $9.9 million (iii)
increased leasing costs of $2.5 million, and (iv) an increase in cash held in
escrow of $1.9 million, offset by (a) proceeds from the sale of one property of
$2.0 million, and (b) proceeds from payment of notes receivable of $1.4 million.
These amounts should be compared to net cash used in investing activities of
$187.3 million for the three months ended March 31, 2003 which included: (i) the
acquisition of one parcel of land held for future development for $2.2 million,
(ii) construction, development and other capital improvements of $6.6 million,
(iii) the acquisition of IRT for $187.6 million, net of cash received,
24
and (iv) increased leasing costs of $692,000, offset by (a) proceeds from the
sale of two properties of $6.7 million, and (b) proceeds from payment of notes
receivable of $2.8 million, and (c) distributions received from joint ventures
of $300,000.
Net cash provided by financing activities of $77.5 million for the three
months ended March 31, 2004 included: (i) net proceeds from the issuance of
senior notes of $199.8 million, (ii) net proceeds from the issuance of common
stock of $12.2 million, and (iii) proceeds from repayment of notes receivable of
$3.0 million, offset by (a) the payoff of one mortgage note for $1.4 million and
monthly principal payments on mortgage notes of $2.3 million, (b) cash dividends
paid to common stockholders of $19.6 million, (c) repayments under revolving
credit facilities of $111.1 million (d) an increase in deferred financing costs
of $2.7 million related to the issuance of senior notes and (e) other
miscellaneous uses of $303,000 compared to net cash used by financing activities
of $175.0 million for the three months ended March 31, 2003 which included: (i)
net proceeds from issuance of common stock of $100.0 million, and (ii) net
borrowings on the revolving credit facilities of $138.0 million, offset by (a)
the payoff of six mortgage notes for $43.5 million and monthly principal
payments on mortgage notes of $2.5 million, (b) cash dividends paid to common
stockholders of $16.1 million, (c) an increase in deferred financing costs of
$559,000 and (d) other miscellaneous uses of $573,000.
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.
DEBT
- ----
On March 26, 2004, the Company completed a $200 million offering of its
senior unsecured notes that mature on April 15, 2009 (the "2009 Notes"). The
2009 Notes bear an interest rate of 3.875%. Interest is due semi-annually on
April 15 and October 15 of each year commencing on October 15, 2004. The 2009
Notes were issued at a discount of $250,000 that will be amortized against
interest expense over the life of the 2009 Notes. The Company may redeem some or
all of the 2009 Notes at any time for a price equal to the principal amount of
the Notes being redeemed plus accrued interest. The 2009 Notes are guaranteed by
most of the Company's wholly-owned subsidiaries and IRT Partners, LP ("LP"). The
indenture under which the 2009 Notes were issued has several covenants which
limit the Company's ability to incur debt; requires the Company to maintain
unencumbered assets of not less than 150% of the aggregate principal amount of
all the outstanding unsecured debt on a consolidated basis; and limit the
Company's ability to consolidate, sell, lease, or convey substantially all of
its assets to, or merge with any other entity.
In addition, the Company has obligations relating to $150 million principal
amount of unsecured senior notes, bearing interest at fixed 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 an investment grade debt rating. These notes
have also been guaranteed by most of the Company's wholly-owned subsidiaries and
LP.
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 is
25
guaranteed by most of the Company's wholly-owned subsidiaries. Certain
provisions of the facility were amended on March 18, 2004. Based on the
Company's current rating, the LIBOR spread is 1.0%. 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 $170.0 million, a
$35.0 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. As of March 31, 2004, the Company had $48 million outstanding on this
credit facility. The weighted average interest rate as of March 31, 2004 was
2.08%, including the effect of interest rate swaps.
The Company has a $5.0 million unsecured credit facility with City National
Bank of Florida, of which $2.9 million was outstanding as of March 31, 2004.
This facility also secures $1.4 million in outstanding letters of credit.
Our revolving credit facility balances as of March 31, 2004 and December
31, 2003 consisted of the following:
March 31, December 31,
2004 2003
------------- --------------
(in thousands)
Unsecured Revolving Credit Facilities
City National Bank of Florida..................... $ 2,879 $ -
Wells Fargo....................................... 48,000 162,000
------------- --------------
Total revolving credit facilities ............. $ 50,879 $ 162,000
============= ==============
As of March 31, 2004, the availability under the various credit facilities
was approximately $131.0 million net of outstanding balances and letters of
credit.
Our mortgage and unsecured senior notes payable balances as of March 31,
2004 and December 31, 2003 consisted of the following:
March 31, December 31,
2004 2003
-------------- -------------
(in thousands)
Mortgage and Unsecured Senior Notes Payable
Fixed rate mortgage loans............................. $ 470,263 $ 459,103
Unsecured senior notes payable........................ 350,000 150,000
Unamortized premium/discount on notes payable......... 23,894 24,218
-------------- -------------
Total mortgage and unsecured senior notes payable... $ 844,157 $ 633,321
============== =============
The interest rate of the Company's 7.77% senior note is subject to a 50
basis point increase if the Company does not maintain an investment grade debt
rating. The senior unsecured notes have also been guaranteed by most of the
Company's wholly-owned subsidiaries and LP.
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
26
approximately $182.5 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 March 31, 2004, our total debt of $871.1 million (less cash on hand)
divided by our gross real estate assets of $1.8 billion equals 48.4%.
As of March 31, 2004, scheduled principal amortization and the balances due
at the maturity of our various mortgage and unsecured senior notes payable and
revolving credit facilities (excluding unamortized premium or discount on notes
payable) are as follows (in thousands):
Secured Debt Unsecured Debt
------------------------------- --------------------------------
Revolving Total
Schedule Balloon Unsecured Credit Principal Balance
Year Amortization Payments Senior Notes Facilities Due at Maturity
-------------- --------------- -------------- -------------- -------------- ---------------------
2004.......... $ 7,248 $ 2,727 $ - $ 2,879 $ 12,854
2005.......... 9,954 30,093 - - 40,047
2006.......... 10,170 24,758 50,000 48,000 132,928
2007.......... 10,290 2,864 75,000 - 88,154
2008.......... 10,365 40,104 - - 50,469
2009.......... 10,024 24,332 200,000 - 234,356
2010.......... 9,049 80,848 - - 89,897
2011.......... 7,230 93,433 25,000 - 125,663
2012.......... 5,952 40,056 - - 46,008
2013.......... 5,525 - - - 5,525
Thereafter.... 36,447 8,794 - - 45,241
--------------- -------------- -------------- -------------- ---------------------
Total..... $122,254 $ 348,009 $ 350,000 $ 50,879 $ 871,142
=============== ============== ============== ============== =====================
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.
DEVELOPMENT ACTIVITY
- --------------------
As of March 31, 2004, we had over 25 development and redevelopment
projects underway or in the planning stage totaling approximately $80.5 million
of asset value and, based on current plans and estimates, requiring
approximately $26.2 million of additional investment to complete beyond the
$54.3 million already expended. These include:
o CVS Plaza in Miami, Florida where we are completing the lease up of
the local space at a new 31,804 square foot drug store-anchored
shopping center we built across the street from our recently completed
Publix supermarket anchored Plaza Alegre shopping center;
27
o Shops at Skylake in North Miami Beach, Florida, where we are in the
process of adding 29,000 square feet of retail and office space;
o Bandera Festival in San Antonio, Texas; Centre Point in Smithfield,
North Carolina; Copperfield in Houston, Texas; East Bay Plaza in
Largo, Florida; Eustis Square in Eustis, Florida; Gulf Gate Plaza in
Naples, Florida; Oakbrook Square in Palm Beach Gardens, Florida; and
Walden Woods in Plant City, Florida, where we have reconfigured and
redeveloped previously vacant anchor and other space and are
completing the associated lease-up;
o Ambassador Row Courtyards in Lafayette, Louisiana where we are
reconfiguring a portion of the center and adding an out parcel; and
o The development of two supermarket-anchored shopping centers, one in
Homestead, Florida and the other in McDonough, Georgia, both on
parcels we currently own and control.
These developments and redevelopments are scheduled for completion between
the second quarter of 2004 and early 2006.
During the first quarter of 2004, we completed and leased $28.2 million of
development product resulting in incremental net operating income in excess of
$3.0 million on an annualized basis.
EQUITY
- ------
For the three months ended March 31, 2004, we issued 597,000 shares of our
common stock at prices ranging from $18.18 to $18.99 per share pursuant to our
Divided Reinvestment and Stock Purchase Plan. As of March 31, 2004, we have 1.6
million shares remaining for sale under that plan.
FUTURE CAPITAL REQUIREMENTS
- ---------------------------
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.
DISTRIBUTIONS
- -------------
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,
28
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 "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.
29
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 and, interest rates increase or
decrease, interest expense on the variable component of the Company's debt will
move in the same direction. With respect to our 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 6.35 years and 4.49 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 March 31, 2004, the fair value of the fixed
rate mortgage loans was estimated to be $527.4 million compared to the carrying
value amount of $470.3 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
7.40%, the fair market value would be $494.4 million and $449.5 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 March 31, 2004, the fair value of its senior
unsecured fixed rate debt was estimated to be $347.1 million compared to the
carrying value amount of $350.0 million. 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 5.18%, the fair market value would be $364.3
million and $336.6 million, respectively.
At March 31, 2004, the Company's variable rate debt balance consisted of
$50.9 million of revolving credit facilities, of which $20.0 million has been
hedged under interest rate swaps pursuant to which the Company pays fixed
interest rates and $30.9 million remains subject to changes in interest rates.
In addition, $100 million of the $200 million senior unsecured notes due April
15, 2009 have been swapped to a floating rate equal to the six month LIBOR rate
in arrears plus 0.4375%. If the weighted average interest rate on the unhedged
portion of the Company's total variable rate debt of $130.9 million were 100
basis points higher or lower, annual interest expense would increase or decrease
by approximately $1.3 million. At March 31, 2004, the fair value of the $20.0
million that is fixed under interest rate hedges was estimated to be a deficit
to the Company of $188,000, while the fair value of the $100 million that is
floating under interest rate hedges was estimated to be a deficit to the Company
of $819,000.
In the normal course of business, we are exposed to the effects of interest
rate changes that could affect our results of operations or cash flows. We limit
these risks by following established risk management policies and procedures,
including the use of a variety of derivative financial instruments to manage or
hedge interest rate risk. We do not enter into derivative instruments for
speculative purposes. We require that the hedging derivative instruments be
effective in reducing interest rate risk exposure. This effectiveness is
essential to qualify for hedge accounting. Changes in the hedging instrument's
fair value related to the effective portion of the risk being hedged are
included in accumulated other comprehensive income or loss. In those cases,
hedge effectiveness criteria also require that it be probable that the
underlying transaction occurs.
Hedges that meet these hedging criteria are formally designated as cash
flow hedges at the inception of the derivative contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item ceases
to exist, the change in the fair value of the derivative instrument is marked to
market with the change included in net income in each period until the
derivative instrument
30
matures. Additionally, any derivative instrument used for risk management that
becomes ineffective is marked to market.
We do not anticipate non-performance by any of our counterparties. Net
interest differentials to be paid or received under a swap contract and/or
collar agreement are included in interest expense as incurred or earned.
Interest rate hedges that are designated as cash flow hedges hedge the
future cash outflows on debt. Interest rate swaps that convert variable payments
to fixed payments, interest rate caps, floors, collars and forwards are cash
flow hedges. The unrealized gains or losses in the fair value of these hedges
are reported on the balance sheet and included in accounts payable and accrued
expenses with a corresponding adjustment to either accumulated other
comprehensive income or loss or in earnings depending on the hedging
relationship. If the hedging transaction is a cash flow hedge, then the
offsetting gains or losses are reported in accumulated other comprehensive
income or loss. Over time, the unrealized gains or losses held in accumulated
other comprehensive income or loss will be recognized in earnings consistent
with when the hedged items are recognized in earnings.
In conjunction with our policy to reduce interest rate risk, we have
entered into interest rate swaps to hedge the variability of monthly cash
outflows attributable to changes in LIBOR. Under certain of the swaps, we
receive LIBOR based payments and pay a fixed rate. Under one of the swap
agreements we have hedged $100 million of the $200 million unsecured senior
notes due April 15, 2009 to a variable interest rate equal to the six month
LIBOR rate in arrears plus 0.4375%. A summary of the terms of the derivative
instruments, as of March 31, 2004, and a reconciliation of the fair value and
adjustments to accumulated other comprehensive loss (in thousands) are as
follows:
Hedge type............................................................... Cash Flow
Description.............................................................. Swap
Range of notional amounts................................................ $10,000 - $100,000
===================
Total................................................................. $ 120,000
===================
Range of interest rates................................................... 1.92% - 3.875%
Range of maturity dates................................................... 3/14/05 - 4/15/09
Total accumulated other comprehensive loss at December 31, 2003........... $ (122)
Change in fair value for the three months ended March 31, 2004.......... (885)
-------------------
Total accumulated other comprehensive loss at March 31, 2004............. $ (1,007)
===================
The estimated fair value of our financial instruments has been determined
by us, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that we could realize in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
For purposes of the Securities and Exchange Commission's market risk
disclosure requirements, we have estimated the fair value of our financial
instruments at March 31, 2004. The fair value estimates presented herein are
based on pertinent information available to management as of March 31, 2004.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts as of March 31, 2004, future estimates of fair
value and the amounts which may be paid or realized in the future may differ
significantly from amounts presented below. The Company's revolving credit
facilities and the portion of the unsecured notes payable that were swapped to
variable interest rates are sensitive to changes in interest rates.
31
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Also, we have investments in certain unconsolidated entities. As we do not
control or manage these entities, our disclosure controls and procedures with
respect to such entities are necessarily substantially more limited than those
we maintain with respect to our consolidated subsidiaries.
As required by Rule 13a-15(b) under the Securities and Exchange Act of
1934, we carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures were effective at
the reasonable assurance level 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 SEC
rules and forms.
There have been no changes in our internal controls over financial
reporting during the quarter ended March 31, 2004, that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 Supplemental Indenture No. 5 dated April 23, 2004 between
the Company and Sun Trust Bank, as Trustee.
4.2 Supplemental Indenture No. 6 dated April , 2004 between
the Company and Sun Trust Bank, as Trustee.
10.1 Third Amendment to Stockholders Agreement.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
and Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934, as amended and 18 U.S.C. 1350, as created by Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
During the quarterly period ended March 31, 2004, the Company filed the
following reports on Form 8-K:
(i) Report on Form 8-K dated January 6, 2004 under Item 5.
(ii) Report on Form 8-K dated March 22, 2004 under Item 5.
(iii) Report on Form 8-K dated March 25, 2004 under Item 5 and 7.
(iv) Report on Form 8-K dated March 31, 2004 under Item 5 and 7
33
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: May 10, 2004 EQUITY ONE, INC.
/s/ HOWARD M. SIPZNER
----------------------------
Howard M. Sipzner
Executive Vice President and
Chief Financial Officer
(Principal Accounting
and Financial Officer)
INDEX TO EXHIBITS
Exhibits Description
- ------- -----------
4.1 Supplemental Indenture No. 5 dated April 23, 2004 between
the Company and Sun Trust Bank, as Trustee.
4.2 Supplemental Indenture No. 6 dated April 23, 2004 between
the Company and Sun Trust Bank, as Trustee.
10.1 Third Amendment to Stockholders Agreement.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended
and Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) under the Securities Exchange
Act of 1934, as amended and 18 U.S.C. 1350, as created by Section
906 of the Sarbanes-Oxley Act of 2002.