UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
Commission File No. 001-7859
IRT PARTNERS L.P.
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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) (Zip Code)
Georgia 58-2404832
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
(305) 947-1664
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No [X]
Applicable only to Corporate Issuers:
Not Applicable.
IRT PARTNERS L.P.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Financial Statements Page
------
Condensed Balance Sheets
As of June 30, 2004 and December 31, 2003 (unaudited) .......... 2
Condensed Statements of Operations
For the three and six month period ended June 30, 2004, for
the three month period ended June 30, 2003, for the period
from January 1, 2003 through February 11, 2003 (merger date)
and the period from February 12, 2003 through June 30, 2003
(unaudited) .................................................... 3
Condensed Statement of Changes in Partners' Capital
For the six month period ended June 30, 2004 (unaudited) ....... 4
Condensed Statement of Cash Flows
For the six month period ended June 30, 2004, for the period
from January 1, 2003 through February 11, 2003 (merger date)
and the period from February 12, 2003 through June 30, 2003
(unaudited) .................................................... 5
Notes to the Condensed Financial Statements (unaudited) ........ 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 14
Item 4. Controls and Procedures......................................... 15
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings .............................................. 15
Item 2. Changes in Securities and Use of Proceeds ...................... 15
Item 3. Defaults upon Senior Securities ................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ............ 16
Item 5. Other Information .............................................. 16
Item 6. Exhibits and Reports on Form 8-K ............................... 16
ITEM 1. FINANCIAL INFORMATION
IRT PARTNERS L.P. (a limited partnership)
CONDENSED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except partnership units)
- --------------------------------------------------------------------------------
June 30, December 31,
2004 2003
------------ ------------
ASSETS
PROPERTIES:
Income producing........................................................ $ 180,873 $ 179,072
Less: accumulated depreciation.......................................... (4,139) (2,641)
------------ ------------
176,734 176,431
Construction in progress and land held for development.................. - 2,012
Properties held for sale................................................ 8,601 8,689
------------ ------------
Properties, net...................................................... 185,335 187,132
CASH AND CASH EQUIVALENTS.................................................. - 11
OTHER ASSETS............................................................... 3,377 2,929
DUE FROM GENERAL PARTNER................................................... 442 -
------------ ------------
TOTAL...................................................................... $ 189,154 $ 190,072
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Mortgage notes payable.................................................. $ 34,082 $ 34,400
Unamortized premium on mortgage notes payable........................... 4,368 4,661
------------ ------------
Total mortgage notes payable......................................... 38,450 39,061
Other liabilities....................................................... 2,970 1,780
------------ ------------
Total liabilities................................................. 41,420 40,841
COMMITMENTS AND CONTINGENT LIABILITIES
LIMITED PARTNERS' CAPITAL (734,266 partnership units for 2004 and 2003,
respectively)........................................................... 11,027 11,118
GENERAL PARTNERS' CAPITAL.................................................. 136,707 138,113
------------ ------------
TOTAL...................................................................... $ 189,154 $ 190,072
============ ============
See accompanying notes to the condensed financial statements.
2
IRT PARTNERS L.P. (a limited partnership)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIOD ENDED JUNE 30, 2004,
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2003, FOR THE PERIOD FROM
JANUARY 1, 2003 TO FEBRUARY 11, 2003 (MERGER DATE), AND FOR THE PERIOD FROM
FEBRUARY 12, 2003 TO JUNE 30, 2003
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
---------------------------------------------
For the Period
-----------------------------
January 1 to February 12
Three Months Ended June 30, February 11, to June 30,
----------------------------
2004 2003 2004 2003 2003
---------- ---------- ---------- ------------ --------------
(Predecessor) (Successor)
RENTAL INCOME.................................... $5,662 $5,731 $11,376 $2,617 $8,851
---------- ---------- ---------- ------------ -------------
COSTS AND EXPENSES:
Property operating expenses.................... 1,606 1,662 3,154 867 2,560
Rental property depreciation and amortization.. 830 576 1,628 515 1,109
General and administrative expenses............ - - - 4 -
---------- ---------- ---------- ------------ -------------
Total costs and expenses................... 2,436 2,238 4,782 1,386 3,669
---------- ---------- ---------- ------------ -------------
INCOME BEFORE OTHER INCOME AND DISCONTINUED
OPERATIONS..................................... 3,226 3,493 6,594 1,231 5,182
OTHER INCOME:
Interest expense............................... (574) (702) (1,154) (375) (1,091)
Amortization of deferred financing fees........ - - - - (1)
Interest income from affiliates................ 1 10 1 15 71
---------- ---------- ---------- ------------ -------------
INCOME FROM CONTINUING OPERATIONS................. 2,653 2,801 5,441 871 4,161
---------- ---------- ---------- ------------ -------------
DISCONTINUED OPERATIONS:
Income from operations of sold properties...... 193 239 420 89 363
Loss on disposal of income producing properties - - - (19) -
---------- ---------- ---------- ------------ -------------
Total loss from discontinued operations.... 193 239 420 70 363
---------- ---------- ---------- ------------ -------------
NET INCOME........................................ $2,846 $3,040 $5,861 $941 $4,524
========== ========== ========== ============ =============
See accompanying notes to the condensed financial statements.
3
IRT PARTNERS L.P. (a limited partnership)
CONDENSED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2004
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
Limited Partners' General Partners'
Capital Capital
---------------- ----------------
Balance, January 1, 2004.................................... $11,118 $138,113
Cash distributions.......................................... (411) (6,947)
Net income.................................................. 320 5,541
---------------- ----------------
Balance, June 30, 2004...................................... $11,027 $136,707
================ ================
See accompanying notes to the condensed financial statements.
4
IRT PARTNERS L.P. (a limited partnership)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2004, FOR THE PERIOD FROM
JANUARY 1, 2003 THROUGH FEBRUARY 11, 2003 (MERGER DATE), AND FOR THE
PERIOD FROM FEBRUARY 12, 2003 THROUGH JUNE 30, 2003
(UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
For the Period
------------------------------------
Six Months January 1 to February 12
Ended June 30, February 11, to June 30,
2004 2003 2003
--------------- ---------------- ----------------
(Predecessor) (Successor)
OPERATING ACTIVITIES:
Net income........................................................... $ 5,861 $ 941 $ 4,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Straight line rent adjustment.................................... (175) (13) (28)
Amortization of deferred financing fees.......................... - 2 1
Amortization of debt premium..................................... (293) - (82)
Rental property depreciation and amortization.................... 1,628 515 1,109
Rental property depreciation and amortization included in
discontinued operations....................................... 110 - -
Gain on disposal of real estate.................................. - 19 -
Changes in assets and liabilities:
Other assets...................................................... (273) 36 308
Other liabilities................................................. 1,190 (641) 949
-------------- -------------- --------------
Net cash provided by operating activities............................ 8,048 859 6,781
-------------- -------------- --------------
INVESTING ACTIVITIES:
Deletions (additions) to rental property.......................... 59 - (636)
Increase in cash held in escrow................................... - - 4,033
-------------- -------------- --------------
Net cash provided by investing activities............................ 59 - 3,397
-------------- -------------- --------------
FINANCING ACTIVITIES:
Repayment of mortgage notes payable............................... (318) - (6,703)
Distributions paid................................................ (7,358) (68) (7,066)
Advances from (to) affiliate, net................................. (442) (725) 3,006
-------------- -------------- --------------
Net cash used in financing activities................................ (8,118) (793) (10,763)
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. (11) 66 (585)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 11 608 674
-------------- --------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................. $ - $ 674 $ 89
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized.................. $ 1,449 $ 375 $ 1,205
============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
The Company merged with IRT and the assets and liabilities of LP
were restated to fair value as follows:
Fair value of assets acquired................................... $ 200,154
Assumption of liabilities and mortgage notes payable............ 46,657
--------------
Partners' capital............................................... $ 153,497
==============
See accompanying notes to the condensed financial statements.
5
IRT PARTNERS L.P. (a limited partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIOD ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(in thousands)
1. Organization
------------
IRT Partners L.P. ("LP" or the "Partnership"), a Georgia limited
partnership, was formed on July 15, 1998 in order to enhance the acquisition
opportunities of its general partner through a downREIT structure. This
structure offers potential sellers the ability to make tax-deferred transfer of
their real estate properties in exchange for partnership units ("OP Units") of
LP.
On February 12, 2003, Equity One, Inc. (the "Company" or "Successor")
completed a statutory merger with IRT Property Company ("IRT" or "Predecessor").
As a result of the merger, the Company acquired the general partnership
interests in LP held by IRT. The Company now owns approximately 94.4% of LP's
partnership interests. As a result of the substantial change in ownership from
this transaction, "push-down" accounting has been applied to LP's financial
statements and assets and liabilities of LP were restated to fair value in the
same manner as IRT's assets and liabilities were recorded by the Company
subsequent to the merger.
The results of operations for the period from January 1, 2003 through
February 11, 2003 have been recorded based on the historical values of the
assets and liabilities of LP prior to the merger. For the period from February
12, 2003 through June 30, 2004, the results of operations have been recorded
under the fair values assigned to the assets and liabilities after the Company's
merger with IRT.
LP is obligated to redeem each OP Unit held by a person other than the
Company, at the sole 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.
However, the Company may elect, at its option, to acquire any such OP Unit
presented for redemption for one common share of the Company's stock or cash.
At June 30, 2004, LP owns 23 neighborhood and community shopping centers
located in Florida, Tennessee, Georgia and North Carolina. The shopping centers
are anchored by necessity-oriented retailers such as supermarkets, drug stores,
national value retailers and department stores.
2. Basis of Presentation
---------------------
The accompanying unaudited condensed financial statements have been
prepared by LP'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 financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. The results of operations for the three and six month periods
ended June 30, 2004 are not necessarily indicative of the results that may be
expected for the full year. These unaudited condensed 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 the audited financial statements and related footnotes included in the
Annual Report of IRT Partners L.P. on Form 10-K for the year ended December 31,
2003 filed with the SEC on March 22, 2004.
The preparation of condensed financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and
6
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. Rental Properties
-----------------
Income producing property is stated at cost and includes all costs related
to acquisition, development and construction, including tenant improvements,
interest incurred during development, costs of pre-development and certain
direct and indirect costs of development. Costs incurred during the
predevelopment stage are capitalized once management has identified a site,
determined that the project is feasible and that it is probable that LP will be
able to proceed with the project. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Significant renovations
and improvements, which improve or extend the useful life of assets, are
capitalized.
Income producing properties are individually evaluated for impairment when
conditions exist that may indicate that it is probable that the sum of expected
future cash flows (on an undiscounted basis) from a property is less than its
historical net cost basis. Upon determination that a permanent impairment has
occurred, LP records an impairment charge equal to the excess of historical cost
basis over fair value. In addition, LP writes off costs related to
predevelopment projects when it determines that it will no longer pursue the
project.
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 term of the related lease
Equipment 5-7 years
4. Business Combinations
---------------------
The LP 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 LP will not be successful in
the acquisition. The results of operations of any acquired property are included
in the LP's financial statements as of the date of its acquisition.
The LP 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.
The cost approach is used as the primary method to estimate the fair value
of the buildings, improvements and other assets. The cost approach is based upon
the current costs to develop the particular asset in that geographic location,
less an allowance for physical and functional depreciation. The assigned value
for buildings and improvements is based on an as if vacant basis. 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 incurred to originate a lease, including commissions and legal costs,
excluding any new leases negotiated in connection with the purchase of a
property. In-place lease values are based on management's evaluation of the
specific characteristics of
7
each lease and the LP'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
tenant risk attributes, as well as assumptions about the period of time the
acquired lease will continue to be used in the LP'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.
There have been no acquisitions in 2003 or 2004.
5. Mortgage Notes Payable
----------------------
Mortgage notes payable are collateralized by real estate investments. These
notes have stated interest rates ranging from 7.02% to 9.19% and are due in
monthly installments with maturity dates ranging from 2009 to 2015. LP, upon the
merger of IRT and the Company in 2003, recorded a premium on the mortgage notes
of $5,133.
6. Income Taxes
------------
No federal or state income taxes are reflected in the accompanying
condensed financial statements because LP is a partnership and its partners are
required to include their respective share of profits and losses in their income
tax returns.
7. Dispositions
------------
LP has adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, effective January 1, 2002, and has included the operations of
properties sold and held for sale, as well as the gain on sale of sold
properties, as discontinued operations for all periods presented. LP expects to
reclassify historical operating results whenever necessary in order to comply
with the requirements of SFAS No. 144.
8
As of June 30, 2004, one retail property was classified as property held
for sale. This property has an aggregate gross leaseable area of 214 square feet
and an aggregate net book value of $8,601. The operations of this property are
reflected in discontinued operations.
8. Recent Accounting Pronouncements
--------------------------------
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ABR 51. FIN 46
provides guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"), and
how to determine when and which business enterprises should consolidate the VIE.
In addition, FIN 46 requires both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE to make additional
disclosures. The transitional disclosure requirements will take effect almost
immediately and are required for all financial statements issued after January
31, 2003. The 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 Partnership is not a party to any VIE's.
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 Partnership adopted this pronouncement
beginning July 1, 2003. The adoption of SFAS No. 149 did not have a material
impact on the Partnership'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 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 FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The FASB decided to defer
the application of certain aspects of Statement 150 until it could consider some
of the resulting implementation issues. The Partnership has adopted certain
provisions of SFAS No. 150 which did not have a material impact on the
Partnerships financial condition or results of operations. The Partnership is
still evaluating the potential affect 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 Partnership's financial statements.
9
9. Commitments And Contingencies
-----------------------------
LP has guaranteed $350,000 of unsecured senior notes of the Company bearing
interest at fixed interest rates ranging from 3.875% to 7.84% and maturing
between 2006 and 2012. The interest rate on the $50,000, 7.77% senior notes is
subject to a 50 basis point increase if the Company does not maintain an
investment grade debt rating. LP has also guaranteed a $340,000 unsecured
revolving credit facility of the Company, under which $80,500 was outstanding at
June 30, 2004. These notes and revolving credit facility have also been
guaranteed by most of the Company's wholly-owned subsidiaries.
10. Subsequent Events
-----------------
During July 2004, the LP completed the sale of one of its shopping
centers for total consideration of $10,500, representing 214 square feet of
gross leasable space. The Company recognized a gain on the sale of approximately
$1,600.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with LP's unaudited
Condensed Financial Statements, including the notes thereto, which are included
elsewhere herein and LP's audited Financial Statements and notes thereto for the
year ended December 31, 2003 appearing in the Annual Report on Form 10-K of the
Company for the year ended December 31, 2003 filed March 22, 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,"
"IRT Partners," and "LP" in this report refer collectively to IRT Partners L.P.
IRT Merger
- ----------
On February 12, 2003 the Company merged with IRT. The condensed financial
statements and, management's discussion and analysis for the period from January
1, 2003 through February 11, 2003 (merger date) has been combined with the
period from February 12, 2003 through June 30, 2003 to show comparability to the
six months ending June 30, 2004. The following table shows the separate periods
as presented in LP's condensed financial statements as of June 30, 2004.
For the Period
--------------------------------------------
January 1 to February 12 to
February 11, 2003 June 30, 2003 Combined Period
------------------- ------------------ -----------------
(Predecessor) (Successor)
Rental income....................... $ 2,617 $ 8,851 $11,468
=================== ================= ================
Property operating expenses......... $ 867 $ 2,560 $ 3,427
=================== ================= ================
Rental property depreciation........ $ 515 $ 1,109 $ 1,624
=================== ================= ================
Total expenses...................... $ 1,386 $ 3,669 $ 5,055
=================== ================= ================
Interest expense.................... $ 375 $ 1,091 $ 1,466
=================== ================= ================
Other income........................ $ 15 $ 71 $ 86
=================== ================= ================
Net income.......................... $ 941 $ 4,524 $ 5,465
=================== ================= ================
10
For the Period
-------------------------------------------
January 1 to February 12 to
February 11, 2003 June 30, 2003 Combined Period
------------------- ------------------ -----------------
(Predecessor) (Successor)
Cash Flow:
Operating activities............. $ 859 $ 6,781 $ 7,640
=================== ================= =================
Investing activities............. $ - $ 3,397 $ 3,397
=================== ================= =================
Financing activities............. $ (793) $ (10,763) $(11,556)
=================== ================= =================
Results of Operations
Comparison of the Three Months Ended June 30, 2004 to the Three Months Ended
June 30, 2003.
Total revenues from rental properties decreased by approximately $100,000,
or 2.0% to $5.6 million in 2004 from $5.7 million in 2003.
Property operating expenses decreased by $56,000, or 3.3%, to $1.6 million
for 2004 from $1.7 million in 2003 due to a decrease in property maintenance
costs.
Rental property depreciation and amortization increased by $254,000, or
44.0%, to $830,000 for 2004 from $576,000 in 2003 due to the increases in land
and building improvements for completed development projects.
Interest expense decreased by $128,000, or 18.2%, to $574,000 for 2004 from
$702,000 in 2003 related to the payment of mortgage notes and a decrease of
approximately $107,000 due to the increase in amortization of the debt premium.
There were no dispositions during 2004 or 2003.
As a result of the foregoing, net income decreased by $194,000, or 6.5%, to
$2.8 million for 2004 from $3.0 million in 2003.
Comparison of the Six Months Ended June 30, 2004 to the Six Months Ended June
30, 2003.
For purposes of this discussion the period from January 1 to February 11,
2003 has been combined with the period from February 12 to June 30, 2003. This
has been done to show comparability to the six months ending June 30, 2004.
Total revenues from rental properties decreased approximately $100,000 or
1.0% to $11.4 million in 2004 from $11.5 million in 2003.
Property operating expenses decreased by $273,000, or 8.0%, to $3.2 million
for 2004 from $3.4 million in 2003 due to a decrease in property maintenance
costs.
Rental property depreciation and amortization remained constant at $1.6
million for 2004 from $1.6 million in 2003.
Interest expense decreased by $312,000, or 21.0%, to $1.2 million for 2004
from $1.5 million in 2003 related to the payment of mortgage notes and interest
expense decreased by approximately $211,000 due to the increase in amortization
of the debt premium.
11
There were no dispositions during 2004 or 2003.
As a result of the foregoing, net income increased by $392,000, or 7.1%, to
$5.9 million for 2004 from $5.5 million in 2003.
Liquidity and Capital Resources
LP's principal demands for liquidity are maintenance expenditures, repairs,
property taxes and tenant improvements, leasing costs, debt service and
distributions to its OP Unit holders. LP presently expects cash from its
operating activities to be the primary source of funds to pay distributions,
mortgage note payments and certain capital improvements on LP's properties.
CASH FLOWS
- ----------
Net cash provided by operating activities of $8.0 million for the six
months ended June 30, 2004 included: (i) net income of $5.9 million, (ii)
adjustments for non-cash items which increased cash flow by $1.3 million, and
(iii) a net change in operating assets and liabilities that increased cash flow
by $917,000, compared to net cash provided by operating activities of $7.6
million for the six months ended June 30, 2003, which included:(i) net income of
$5.5 million, (ii) adjustments for non-cash items which increased cash flow by
$1.5 million, and (iii) a net change in operating assets and liabilities that
increased cash flows by $652,000.
Net cash provided by inventing activities for the six months ended June 30,
2004 was $59,000.
Net cash provided by investing activities of $3.4 million for the six
months ended June 30, 2003 included construction, development and other capital
improvements of $636,000 offset by proceeds of $4 million from escrowed funds
from the sale of properties.
Net cash used in financing activities of $8.1 million for the six months
ended June 30, 2004 included: (i) monthly principal payments on mortgage notes
of $318,000, (ii) distributions to OP Unit holders of $7.4 million and,(iii)
advances to affiliates of $442,000, compared to net cash used by financing
activities of $11.6 million for the six months ended June 30, 2003 which
included: (i) distributions to OP Unit holders of $7.1 million, and (ii) monthly
principal payments and mortgage payoffs of $6.7 million offset by net advances
from affiliates of $2.3 million.
DEBT
- ----
LP guarantees the Company's unsecured senior debt and unsecured revolving
credit facilities.
LP, through the Company, uses unsecured borrowings to meet its capital
requirements. As of June 30, 2004, LP had $34.1 million in mortgage notes
payable at a weighted average interest rate of 8.4%, which are due in monthly
installments with maturity dates ranging from 2009 to 2015.
As of June 30, 2004, the scheduled amortization and balloon payments due on
LP's mortgage notes payable are as follows (in thousands):
Scheduled Balloon
Year Amortization Payments Total
--------------------------- -------------- ------------- ------------
2004....................... $ 332 $ - $ 332
2005....................... 709 - 709
2006....................... 771 - 771
2007....................... 838 - 838
2008....................... 908 - 908
2009....................... 967 5,583 6,550
2010....................... 905 4,352 5,257
12
Scheduled Balloon
Year Amortization Payments Total
--------------------------- -------------- ------------- ------------
2011....................... $ 750 $ 9,571 $ 10,321
2012....................... 567 6,458 7,025
Thereafter................. 1,371 - 1,371
-------------- -------------- -------------
Total.................. $ 8,118 $ 25,964 $ 34,082
============== ============== =============
Our debt level could subject us to various risks, including the risk that
our cash flow will be insufficient to meet required payments of principal and
interest, and the risk that the resulting reduced financial flexibility could
inhibit our ability to develop or improve our rental properties, withstand
downturns in our rental income or take advantage of business opportunities. In
addition, because we currently anticipate that only a small portion of the
principal of our indebtedness will be repaid prior to maturity, it is expected
that it will be necessary to refinance the majority of our debt. Accordingly,
there is a risk that such indebtedness will not be able to be refinanced or that
the terms of any refinancing will not be as favorable as the terms of our
current indebtedness.
We 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 partners. If adequate funds are not available, our
business operations could be materially adversely affected.
Inflation and Recession Consideration
Most of our leases contain provisions designed to partially mitigate the
adverse impact of inflation. Such provisions include clauses enabling us to
receive percentage rents based on tenant gross sales above predetermined levels,
which rents generally increase as prices rise, or escalation clauses which are
typically related to increases in the Consumer Price Index or similar inflation
indices. Most of our leases require the tenant to pay its share of operating
expenses, including common area maintenance, real estate taxes and insurance,
thereby reducing our exposure to increases in costs and operating expenses
resulting from inflation.
Our financial results are affected by general economic conditions in the
markets in which our properties are located. An economic recession, or other
adverse changes in general or local economic conditions could result in the
inability of some existing tenants to meet their lease obligations and could
otherwise adversely affect our ability to attract or retain tenants. The
properties are typically anchored by supermarkets, drug stores and other
consumer necessity and service retailers which typically offer day-to-day
necessities rather than luxury items. These types of tenants, in our experience,
generally maintain more consistent sales performance during periods of adverse
economic conditions.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report on Form 10-Q contain
"forward-looking statements" for purposes of Section 27A of the Securities Act
of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements are based on current expectations and
are not guarantees of future performance.
13
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
LP utilizes mortgage notes payable with fixed rates. Sudden changes in
interest rates generally do not affect LP's interest expense as these debt
instruments have fixed rates for extended periods of time. LP's potential risk
is from increases in long-term real estate mortgage rates or borrowing rates
that may occur. As the debt instruments mature, LP typically refinances such
debt at the then current market interest rates, which may be more or less than
the interest rates on the maturing debt. The weighted average life for our fixed
rate mortgage notes is 6.3 years. LP had no floating rate debt outstanding as of
June 30, 2004.
LP estimates the fair market value of LP's long term, fixed rate mortgage
loans using discounted cash flow analysis based on current borrowing rates for
similar types of debt. At June 30, 2004, the fair value of the fixed rate
mortgage loans was estimated to be $40.7 million compared to the carrying value
amount of $34.0 million. If the weighted average interest rate on LP's fixed
rate debt were 100 basis
14
points lower or higher than the current weighted average rate of 8.4%, the fair
market value would be $32.9 million and $36.3 million, respectively.
Other Market Risks
- ------------------
As of June 30, 2004, LP had no material exposure to other market risk
(including foreign currency exchange risk, commodity price risk or equity price
risk).
ITEM 4. 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 management,
including the Chief Executive Officer and Chief Financial Officer of Equity One,
Inc., in their capacity as officers of our general partner, 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.
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 the Chief Executive Officer and Chief
Financial Officer of Equity One, Inc., in their capacity as officers of our
general partner, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, the Chief Executive
Officer and Chief Financial Officer of Equity One, Inc., in their capacity as
officers of our general partner 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 June 30, 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
None.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND PURCHASE OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer of Equity One, Inc., in
his capacity as Chief Executive Officer of LP's general partner,
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 of Equity One, Inc., in
his capacity as Chief Financial Officer of LP's general partner,
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 of Equity One, Inc., in their capacity as officers of
LP's general partner, 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:
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2004 IRT PARTNERS L.P.
BY: Equity One, Inc., general partner
/s/ HOWARD M. SIPZNER
------------------------------------
Howard M. Sipzner
Executive Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION
---------- -----------
31.1 Certification of Chief Executive Officer of Equity One, Inc., in
his capacity as Chief Executive Officer of LP's general partner,
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 of Equity One, Inc., in
his capacity as Chief Financial Officer of LP's general partner,
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 of Equity One, Inc., in their capacity as officers of
LP's general partner, 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.