UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
Commission File No. 001-13499
EQUITY ONE, INC.
----------------
(Exact name of registrant as specified in its charter)
Maryland 52-1794271
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1696 N.E. Miami Gardens Drive
N. Miami Beach, Florida 33179
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 947-1664
----------------------------------------------------
(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 [X] No [ ]
Applicable only to Corporate Issuers:
As of the close of business on November 2, 2004, 73,090,681 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. Financial Statements Page
Condensed Consolidated Balance Sheets
As of September 30, 2004 and December 31, 2003 (unaudited)...................................... 1
Condensed Consolidated Statements of Operations
For the three and nine month periods ended September 30, 2004 and 2003 (unaudited).............. 3
Condensed Consolidated Statements of Comprehensive Income
For the three and nine month periods ended September 30, 2004 and 2003 (unaudited).............. 5
Condensed Consolidated Statement of Stockholders' Equity
For the nine month period ended September 30, 2004 (unaudited).................................. 6
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2004 and 2003 (unaudited)........................ 7
Notes to the Condensed Consolidated Financial Statements (unaudited)............................ 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 37
Item 4. Controls and Procedures......................................................................... 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................ 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................... 40
Item 3. Defaults upon Senior Securities .............................................................. 40
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 40
Item 5. Other Information ............................................................................ 40
Item 6. Exhibits...................................................................................... 41
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
September 30, December 31,
2004 2003
-------------- --------------
ASSETS
PROPERTIES:
Income producing........................................................ $ 1,777,783 $ 1,594,579
Less: accumulated depreciation.......................................... (86,871) (66,406)
-------------- -------------
1,690,912 1,528,173
Construction in progress and land held for development.................. 44,652 74,686
Properties held for sale................................................ 12,232 14,440
-------------- -------------
Properties, net...................................................... 1,747,796 1,617,299
CASH AND CASH EQUIVALENTS................................................... 1,988 966
CASH HELD IN ESCROW......................................................... 8,734 -
ACCOUNTS AND OTHER RECEIVABLES, NET......................................... 12,135 13,492
SECURITIES AVAILABLE FOR SALE................................................ 29,405 -
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES................................ 2,803 2,861
GOODWILL .................................................................... 14,184 14,014
OTHER ASSETS................................................................. 58,211 28,754
-------------- -------------
TOTAL........................................................................ $ 1,875,256 $ 1,677,386
============== =============
(continued)
1
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
September 30, December 31,
2004 2003
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE
Mortgage notes payable..................................................... $ 480,739 $ 459,103
Unsecured revolving credit facilities..................................... 64,000 162,000
Unsecured senior notes payable............................................ 350,000 150,000
--------------- --------------
894,739 771,103
Unamortized premium/discount on notes payable............................. 20,354 24,218
--------------- --------------
Total notes payable.................................................... 915,093 795,321
OTHER LIABILITIES
Accounts payable and accrued expenses..................................... 42,564 25,211
Tenant security deposits.................................................. 8,324 7,706
Other liabilities......................................................... 3,633 5,924
--------------- --------------
Total liabilities...................................................... 969,614 834,162
--------------- --------------
MINORITY INTERESTS........................................................... 1,388 12,672
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - 10,000 shares authorized but unissued.. - -
Common stock, $0.01 par value - 100,000 shares authorized, 72,864 and 69,353
shares issued and outstanding for 2004 and 2003, respectively.......... 728 694
Additional paid-in capital................................................ 903,569 843,678
Retained earnings......................................................... 10,429 -
Accumulated other comprehensive income (loss)............................. 2,104 (122)
Unamortized restricted stock compensation.................................. (11,988) (10,091)
Notes receivable from issuance of common stock............................. (588) (3,607)
--------------- --------------
Total stockholders' equity.............................................. 904,254 830,552
--------------- --------------
TOTAL........................................................................ $1,875,256 $1,677,386
=============== ==============
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
2
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
RENTAL REVENUE:
Minimum rents ..................................... $ 44,851 $ 37,217 $ 129,034 $ 99,305
Expense recoveries ................................ 12,865 10,243 35,686 27,902
Termination fees .................................. 210 300 618 787
Percentage rent payments .......................... 282 307 1,899 1,679
--------- --------- --------- ---------
Total rental revenue ........................... 58,208 48,067 167,237 129,673
--------- --------- --------- ---------
COSTS AND EXPENSES:
Property operating expenses ....................... 15,656 13,263 43,880 35,911
Rental property depreciation and amortization ..... 9,005 7,231 25,934 18,654
General and administrative expenses ............... 3,722 2,737 10,980 7,936
--------- --------- --------- ---------
Total costs and expenses ...................... 28,383 23,231 80,794 62,501
--------- --------- --------- ---------
INCOME BEFORE OTHER INCOME AND EXPENSES, DISCONTINUED
OPERATIONS AND MINORITY INTEREST .................. 29,825 24,836 86,443 67,172
OTHER INCOME AND EXPENSES:
Interest expense .................................. (12,172) (9,920) (34,156) (27,819)
Amortization of deferred financing fees ........... (379) (230) (990) (764)
Investment income ................................. 1,210 66 1,612 940
Other income ...................................... 174 48 296 138
Loss on extinguishment of debt .................... -- -- -- (513)
--------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND MINORITY
INTEREST .......................................... 18,658 14,800 53,205 39,154
--------- --------- --------- ---------
DISCONTINUED OPERATIONS:
Income from rental properties sold or held for sale 67 1,467 3,145 4,314
Gain on disposal of income producing properties ... 12,215 1,209 13,767 3,083
--------- --------- --------- ---------
Income from discontinued operations ............. 12,282 2,676 16,912 7,397
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST ...................... 30,940 17,476 70,117 46,551
MINORITY INTEREST .................................... (239) (227) (642) (606)
--------- --------- --------- ---------
NET INCOME ........................................... $ 30,701 $ 17,249 $ 69,475 $ 45,945
========= ========= ========= =========
(continued)
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE
Income before discontinued operations $ 0.26 $ 0.23 $ 0.76 $ 0.67
Income from discontinued operations.... 0.17 0.04 0.24 0.13
---------- ---------- ---------- ----------
Total basic earnings per share ...... $ 0.43 $ 0.27 $ 1.00 $ 0.80
========== ========== ========== ==========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE .............. 70,626 63,777 69,820 57,348
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Income before discontinued operations $ 0.26 $ 0.23 $ 0.74 $ 0.66
Income from discontinued operations.... 0.17 0.04 0.24 0.13
---------- ---------- ---------- ----------
Total diluted earnings per share..... $ 0.43 $ 0.27 $ 0.98 $ 0.79
========== ========== ========== ==========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE ............ 72,327 65,523 71,525 58,977
========== ========== ========== ==========
(concluded)
See accompanying notes to the condensed consolidated financial statements.
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET INCOME............................................$ 30,701 $ 17,249 $ 69,475 $ 45,945
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized holding gain on securities
available for sale.............................. 3,970 - 3,970 47
Change in fair value of cash flow hedges.......... 3,104 (1,995) 1,744) (1,995)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME..................................$ 37,775 $ 15,254 $ 71,701 $ 43,997
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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 Income/(Loss) Compensation Common Stock Equity
-------- ---------- --------- ----------- ------------ ------------ ------------
BALANCE,
JANUARY 1, 2004............ $ 694 $ 843,678 $ - $ (122) $ (10,091) $ (3,607) $ 830,552
Issuance of common stock 34 60,638 - - (1,897) - 58,775
Stock issuance costs...... - (166) - - - - (166)
Repayment of notes
receivable from issuance
of common stock.......... - - - - - 3,019 3,019
Net income................ - - 69,475 - - - 69,475
Dividends paid............ - (581) (59,046) - - - (59,627)
Other comprehensive income
(loss)................... - - - 2,226 - - 2,226
-------- ---------- --------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 2004......... $ 728 $ 903,569 $ 10,429 $ 2,104 $ (11,988) $ (588) $ 904,254
======== ========== ========= =========== =========== =========== ===========
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
OPERATING ACTIVITIES:
Net income............................................................... $ 69,475 $ 45,945
Adjustments to reconcile net income to net cash provided by operating
activities:
Straight line rent adjustment.......................................... (2,715) (1,212)
Provision for losses on accounts receivable............................ 561 359
Amortization of premium/discount on notes payable...................... (3,693) (2,465)
Amortization of deferred financing fees................................ 990 764
Amortization of deferred financing fees included in discontinued
operations............................................................. 89 90
Rental property depreciation and amortization.......................... 25,934 18,654
Rental property depreciation and amortization included in discontinued
operations.......................................................... 864 1,052
Amortization of restricted stock....................................... 3,800 1,851
Equity in losses of joint ventures..................................... 58 117
Gain on sale of securities............................................. (593) (9)
Loss on extinguishment of debt......................................... - 623
Gain on disposal of real estate........................................ (13,767) (3,083)
Minority interests..................................................... 642 606
Changes in assets and liabilities:
Accounts and other receivables........................................ 950 (1,460)
Other assets.......................................................... (15,034) (6,438)
Accounts payable and accrued expenses................................. 15,793 5,975
Tenant security deposits.............................................. 618 503
Other liabilities..................................................... (741) (283)
---------- ----------
Net cash provided by operating activities................................. 83,231 61,589
---------- ----------
INVESTING ACTIVITIES:
Additions to and purchases of properties............................... (140,741) (130,520)
Additions to construction in progress.................................. (19,567) (8,927)
Proceeds from disposal of properties and joint venture interests....... 51,701 13,733
(Increase) decrease in cash held in escrow............................. (8,734) 12,897
Distributions received from joint ventures............................. - 940
Proceeds from repayment of notes receivable............................ 6,080 2,808
Proceeds from sale of securities available for sale.................... 5,814 977
Increase in deferred leasing costs..................................... (5,522) (2,719)
Cash used to purchase securities available for sale.................... (30,653) -
Cash used in the purchase of IRT....................................... - (189,382)
Cash acquired in the IRT acquisition................................... - 1,756
---------- ----------
Net cash used in investing activities..................................... (141,622) (298,437)
---------- ----------
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
FINANCING ACTIVITIES:
Repayment of mortgage notes payable.................................... $ ( 23,122) $ (54,369)
Net (repayment) borrowings under revolving credit facilities........... (98,000) 107,000
Proceeds from senior debt offering..................................... 199,750 -
Increase in deferred financing costs................................... (3,066) (1,075)
Proceeds from stock subscription and issuance of common stock.......... 41,116 232,544
Stock issuance costs................................................... (166) (1,660)
Repayment of notes receivable from issuance of common stock............ 3,019 3,505
Cash dividends paid to stockholders.................................... (59,627) (51,373)
Distributions to minority interests.................................... (491) (668)
---------- ----------
Net cash provided by financing activities................................. 59,413 233,904
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 1,022 (2,944)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 966 2,944
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 1,988 $ -
========== ==========
(Continued)
8
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized...................... $ 30,905 $ 27,003
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized holding gain on securities available for sale..... $ 3,970 $ 47
========== ==========
Change in fair value of cash flow hedges............................... $ (1,744) $ (1,995)
========== ==========
Issuance of restricted stock........................................... $ 5,448 $ 7,534
========== ==========
Note receivable from sale of property and joint venture interest....... $ 4,700 $ 6,762
========== ==========
The Company acquired and assumed various mortgage notes in connection with the
acquisition of rental properties:
Fair value of rental property and other assets acquired.............. $ 92,735 $ 50,463
Assumption of mortgage notes payable................................. (44,758) (27,502)
Fair value adjustment of mortgage notes payable...................... (182) (3,182)
---------- ----------
Cash paid for rental properties...................................... $ 47,795 $ 19,779
========== ==========
The Company issued senior unsecured notes:
Face value of notes.................................................. $ 200,000
Discount............................................................. (250)
----------
Cash received........................................................ $ 199,750
==========
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
==========
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
9
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 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 and in the Boston, Massachusetts metropolitan
area. These shopping centers are primarily anchored by national and regional
supermarket chains 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 its
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 September 30, 2004, the Company's portfolio of neighborhood shopping
centers is located in twelve states in the southern United States and consists
of 182 properties, encompassing 127 supermarket-anchored shopping centers, 9
drug store-anchored shopping centers, 41 other retail-anchored shopping centers,
one self-storage facility, one industrial property, and three retail
developments, as well as non-controlling interests in two joint ventures which
own commercial real estate property. In October 2004, the Company completed the
acquisition of six retail properties in the Boston, Massachusetts metropolitan
area, totaling 391 square feet for total consideration of $119,800, including
the assumption of $12.100 of mortgage indebtedness.
2. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company's management in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X of the U.S. Securities and Exchange Commission (the "SEC").
Accordingly, these unaudited condensed consolidated financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. The results of operations for the
three and nine month periods ended September 30, 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, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003,
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.
10
3. IRT Merger
----------
On February 12, 2003, the Company completed a statutory merger with IRT
Property Company ("IRT"). The Company entered into the merger to acquire 93
properties comprising an aggregate of approximately 10,041,000 square feet of
gross leasable area and to create one of the largest shopping center REITs
focusing on the southeastern United States. The merger provided the Company with
a unique business opportunity to increase its portfolio of properties and
enhance its core portfolio by broadening its concentration in existing markets
and expanding into new markets. This provided the Company with a more stable
earnings stream as a majority of the properties are in high-growth areas of the
southeastern United States. The Company's board of directors a leading shopping
center REIT and provide synergies because of the Company's experience,
geographic locations, greater market capitalization, opportunity for further
growth and liquidity. These factors contributed to a purchase price that
resulted in $11,738 of goodwill. 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 $676 and $715 for the three months ended September
30, 2004 and 2003, respectively, and $2,208 and $1,982 for the nine months ended
September 30, 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 results of operations of any acquired
property are included in the Company's financial statements as of the date of
its acquisition.
11
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 the fair value of, any contractual or
other legal rights and investigates the existence of, and estimates the 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 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
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.
12
The Company has completed the following individual property
acquisitions:
2004 Acquisition Activity
Square Purchase
Date Purchased Property Name City State 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 Square Columbia SC 339,051 45,150
March 31, 2004 Venice Shopping Center Venice FL 111,934 6,447
---------
First Quarter Total............................................................ 107,797
---------
April 8, 2004 Windy Hill N. Myrtle Beach SC 64,465 2,895
April 29, 2004 Hamilton Outparcel Buford GA 0.64 acres 425
May 27, 2004 Medical & Merchants Jacksonville FL 152,761 21,980
June 2, 2004 Westgate Marketplace Houston TX 298,354 47,100
---------
Second Quarter Total............................................................ 72,400
---------
Total................................................................... $ 180,197
=========
There were no acquisitions during the third quarter of 2004.
The Company's allocation of the purchase price for the acquisitions
consummated during 2004 is preliminary and is subject to change. The Company is
in the process of obtaining additional market data related to the fair value of
the land, real property and in-place leases. Management does not believe that
any adjustment would have a material effect on the Company's financial position
or results of operations.
6. Property Held for Sale
----------------------
As of September 30, 2004, four properties were held for sale with a net
book value of $12,232 and comprising 493 gross leasable square feet, of which
three of the properties were sold in October 2004 for total consideration of
$17,250, comprising an aggregate of 299 square feet of gross leasable area.
7. Investments in and Advances to Joint Ventures
---------------------------------------------
The following is a summary of the Company's investments in unconsolidated
joint ventures at September 30, 2004 and December 31, 2003 (all investments in
unconsolidated entities are accounted for under the equity method as the Company
has determined it is not the primary beneficiary):
September 30, December 31,
Entity Location Ownership 2004 2003
- ------------------ ----------------------- ------------- -------------- --------------
PG Partners Palm Beach Gardens, FL 50.0% $ 2,575 $ 2,633
Parcel F, LLC Palm Beach Gardens, FL 50.0% 228 228
-------------- --------------
Total investments in and advances to joint ventures........... $ 2,803 $ 2,861
============== ==============
13
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
September 30, 2004 December 31, 2003
------------------ -----------------
Assets:
Rental properties, net.................... $ 16,450 $ 16,688
Other assets............................... 364 457
------------------ -----------------
Total assets............................... $ 16,814 $ 17,145
================== =================
Liabilities and Ventures' Equity:
Mortgage notes............................. $ 12,794 $ 12,878
Other liabilities.......................... 70 90
Ventures' equity........................... 3,950 4,177
------------------ -----------------
Total ..................................... $ 16,814 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Rental revenues.......................... $ 559 $ 516 $ 1,709 $ 1,677
------------ ------------ ------------ ------------
Total revenues......................... 559 516 1,709 1,677
------------ ------------ ------------ ------------
Expenses:
Operating expenses....................... 181 194 533 595
Interest expense......................... 280 282 835 838
Depreciation............................. 129 140 390 415
Other expense............................ 28 8 65 64
------------ ------------ ------------ ------------
Total expenses........................ 618 624 1,823 1,912
------------ ------------ ------------ ------------
Net loss..................................... $ (59) $ (108) $ (114) $ (235)
============ ============ ============ ============
The Company's equity in losses from joint
ventures reflected in discontinued
operations ............................... $ (30) $ (54) $ (58) $ (117)
============ ============ ============ ============
Significant accounting policies used by the unconsolidated joint ventures
are similar to those used by the Company. The rental property owned by PG
Partners is held for sale and the Company's equity in the operations of the
property is reflected in discontinued operations.
8. Borrowings
----------
The following is a summary of the Company's borrowings consisting of
mortgage notes payable, unsecured senior notes payable and unsecured revolving
credit facilities:
September 30, December 31,
2004 2003
-------------- --------------
Mortgage Notes Payable
Fixed rate mortgage loans.......................... $ 480,739 $ 459,103
Unamortized net premium on mortgage notes
payable......................................... 10,633 11,779
-------------- --------------
Total......................................... $ 491,372 $ 470,882
============== ==============
14
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 $160,842 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. The Company is
in the process of seeking consents from the lenders to address these issues. In
the event that the requested assurances or consents are not obtained and the
mortgage holders declare defaults under the mortgage documents, we will, if
required, prepay the remaining mortgage from existing resources, refinancing of
such mortgages, borrowings under our other lines of credit or other sources of
financing. 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.
September 30, December 31,
2004 2003
-------------- --------------
Unsecured Senior Notes Payable
7.77% Senior Notes, due 4/1/06..................... $ 50,000 $ 50,000
7.25% Senior Notes, due 8/15/07.................... 75,000 75,000
3.875% Senior Notes, due 4/15/09................... 200,000 -
7.84% Senior Notes, due 1/23/12.................... 25,000 25,000
Unamortized net premium on unsecured senior
notes payable................................... 9,721 12,439
-------------- --------------
Total......................................... $ 359,721 $ 162,439
============== ==============
The indentures under which the notes were issued have several covenants
which limit the Company's ability to incur debt; require the Company to maintain
unencumbered asset ratios and limit the Company's ability to consolidate, sell,
lease, or convey substantially all of its assets to, or merge with any other
entity. These notes have also been guaranteed by most of the Company's
subsidiaries including IRT Partners L.P. ("LP"). The interest rate on the 7.77%
senior notes is subject to a 50 basis point increase if the Company does not
maintain an investment grade debt rating.
September 30, December 31,
2004 2003
--------------- ---------------
Unsecured Revolving Credit Facilities
Wells Fargo................................... $ 64,000 $ 162,000
City National Bank............................ - -
--------------- ---------------
Total....................................... $ 64,000 $ 162,000
=============== ===============
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 subsidiaries. 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 $20,000 letter of
credit commitment and may, at the request of the Company, be increased up to a
total commitment of $400,000. The facility expires February 12, 2006 with a
one-year extension option. In addition, the facility contains customary
covenants, including financial covenants
15
regarding debt levels, total liabilities, interest coverage, EBITDA coverage
ratios, 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 September 30, 2004,
the Company had $64,000 outstanding on this credit facility. The weighted
average interest rate as of September 30, 2004 was 2.126%.
The Company also has a $5,000 unsecured credit facility with City National
Bank of Florida, of which there was no outstanding balance as of September 30,
2004. This facility also provides collateral for $1,378 in outstanding letters
of credit.
As of September 30, 2004, the availability under the various credit
facilities was approximately $119,274, net of outstanding balances and letters
of credit.
9. Consolidating Financial Information
-----------------------------------
Most of the Company's subsidiaries, including LP, which became a wholly
owned subsidiary of the Company in 2004 and is included in Guarantors for the
2004 periods presented below 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
Equity One, Combined Non Eliminating Consolidated
Condensed Balance Sheet Inc. Subsidiaries Guarantors Entries Equity One
---------- ------------ ------------ ------------ ------------
As of September 30, 2004
ASSETS
Properties, net ............... $ 510,032 $ 835,527 $ 402,237 $ -- $ 1,747,796
Investment in affiliates ...... 435,752 -- -- (435,752) --
Other assets .................. 79,343 30,324 17,793 -- 127,460
---------- ---------- ---------- ----------- ------------
Total ....................... $1,025,127 $ 865,851 $ 420,030 $ (435,752) $ 1,875,256
========== ========== ========== =========== ============
LIABILITIES
Mortgage notes payable ........ $ 72,019 $ 208,049 $ 200,671 $ -- $ 480,739
Unsecured revolving credit
facilities .................. 64,000 -- -- -- 64,000
Unsecured senior notes payable 350,000 -- -- -- 350,000
Unamortized premium/discount on
notes payable ............... 10,460 9,727 167 -- 20,354
Other liabilities ............. 20,964 21,975 11,582 -- 54,521
---------- ---------- ---------- ----------- ------------
Total liabilities ........... 517,443 239,751 212,420 -- 969,614
MINORITY INTERESTS ............... -- -- -- 1,388 1,388
STOCKHOLDERS' EQUITY ............. 507,684 626,100 207,610 (437,140) 904,254
---------- ---------- ---------- ----------- ------------
Total ......................... $1,025,127 $ 865,851 $ 420,030 $ (435,752) $ 1,875,256
========== ========== ========== =========== ============
16
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... 150,000 - - - 150,000
Unamortized premium on notes
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 INTERESTS................. - - - - 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
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- --------------- ------------- --------------
For the three months ended
September 30, 2004
RENTAL REVENUE:
Minimum rents............................... $ 12,263 $ 21,419 $ 11,169 $ 44,851
Expense recoveries.......................... 2,946 6,241 3,678 12,865
Termination fees............................ 26 93 91 210
Percentage rent payments.................... 68 146 68 282
------------ --------------- ------------- --------------
Total rental revenue...................... 15,303 27,899 15,006 58,208
------------ --------------- ------------- --------------
COSTS AND EXPENSES:
Property operating expenses................. 3,790 7,435 4,431 15,656
Rental property depreciation and
amortization.............................. 2,494 4,465 2,046 9,005
General and administrative expenses......... 3,732 (10) - 3,722
------------ --------------- ------------- --------------
Total costs and expenses.................. 10,016 11,890 6,477 28,383
------------- --------------- ------------- =-------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST.................................... 5,287 16,009 8,529 29,825
17
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- --------------- ------------- --------------
For the three months ended
September 30, 2004 (continued)
OTHER INCOME AND EXPENSES:
Interest expense............................ (4,813) (3,268) (4,091) (12,172)
Amortization of deferred financing fees..... (295) (38) (46) (379)
Investment income........................... 1,152 52 6 1,210
Other income................................ 150 24 - 174
------------- --------------- ------------- --------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST........................... 1,481 12,779 4,398 18,658
------------- --------------- ------------- --------------
DISCONTINUED OPERATIONS
Income (loss) from rental properties sold
or held for sale......................... 240 (134) (39) 67
Gain on disposal of income producing
properties................................ 1,130 4,888 6,197 12,215
------------- --------------- ------------- --------------
Total income from discontinued
operations............................ 1,370 4,754 6,158 12,282
------------- --------------- ------------- --------------
INCOME BEFORE MINORITY INTEREST................ 2,851 17,533 10,556 30,940
MINORITY INTEREST.............................. - (223) (16) (239)
------------- --------------- ------------- --------------
NET INCOME..................................... $ 2,851 $ 17,310 $ 10,540 $ 30,701
============= =============== ============= ==============
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
------------ ------------ ---------- --------- -----------
For the three months ended
September 30, 2003
RENTAL REVENUE:
Minimum rents.............................. $ 12,033 $ 11,841 $ 4,660 $ 8,683 $ 37,217
Expense recoveries......................... 3,038 2,875 1,417 2,913 10,243
Termination fees........................... 107 23 17 153 300
Percentage rent payments................... 194 81 23 9 307
------------ ------------ ---------- --------- -----------
Total rental revenue..................... 15,372 14,820 6,117 11,758 48,067
------------ ------------ ---------- --------- ----------
COSTS AND EXPENSES:
Property operating expenses................ 4,088 3,698 1,723 3,754 13,263
Rental property depreciation and
amortization............................. 2,337 2,464 799 1,631 7,231
General and administrative expenses........ 2,694 27 16 - 2,737
------------ ------------ --------- --------- -----------
Total costs and expenses................. 9,119 6,189 2,538 5,385 23,231
------------ ------------ --------- --------- -----------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................... 6,253 8,631 3,579 6,373 24,836
18
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
------------ ------------ ---------- --------- -----------
For the three months ended
September 30, 2003
OTHER INCOME AND EXPENSES:
Interest expense........................... (5,572) (71) (733) (3,544) (9,920)
Amortization of deferred financing fees.... (32) (154) - (44) (230)
Investment income.......................... (64) 128 - 2 66
Other income (expense)..................... 176 (128) - - 48
------------ ------------- -------- --------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST.......................... 761 8,406 2,846 2,787 14,800
------------ ------------- -------- --------- -----------
DISCONTINUED OPERATIONS
Income from rental properties sold or held
for sale................................ 563 704 - 200 1,467
Gain on disposal of income producing
properties............................... - 1,209 - - 1,209
------------ ------------- -------- --------- -----------
Total income from discontinued
operations........................... 563 1,913 - 200 2,676
------------ ------------- -------- --------- -----------
INCOME BEFORE MINORITY INTEREST............... 1,324 10,319 2,846 2,987 17,476
MINORITY INTEREST............................. - (25) (164) (38) (227)
------------ ------------- -------- --------- -----------
NET INCOME.................................... $ 1,324 $ 10,294 $ 2,682 $ 2,949 $ 17,249
============ ============= ======== ========= ===========
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- --------------- -------------- -------------
For the nine months ended
September 30, 2004
RENTAL REVENUE:
Minimum rents............................... $ 36,774 $ 61,604 $ 30,656 $ 129,034
Expense recoveries.......................... 8,688 17,372 9,626 35,686
Termination fees............................ 176 252 190 618
Percentage rent payments.................... 353 806 740 1,899
----------- --------------- -------------- --------------
Total rental revenue...................... 45,991 80,034 41,212 167,237
----------- --------------- -------------- --------------
COSTS AND EXPENSES:
Property operating expenses................. 10,562 21,109 12,209 43,880
Rental property depreciation and
amortization.............................. 7,316 12,836 5,782 25,934
General and administrative expenses......... 10,901 79 - 10,980
----------- --------------- -------------- -------------
Total costs and expenses.................. 28,779 34,024 17,991 80,794
----------- --------------- -------------- -------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST.................................... 17,212 46,010 23,221 86,443
19
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- -------------- ------------- -------------
For the nine months ended
September 30, 2004 (continued)
OTHER INCOME AND EXPENSES:
Interest expense............................ 12,907) (9,849) (11,400) (34,156)
Amortization of deferred financing fees..... (741) (114) (135) (990)
Investment income........................... 1,378 220 14 1,612
Other income................................ 158 138 - 296
------------- -------------- ------------ -------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST............................ 5,100 36,405 11,700 53,205
------------- -------------- ------------ -------------
DISCONTINUED OPERATIONS
Income from rental properties sold or held
for sale................................. 1,756 1,000 389 3,145
Gain on disposal of income producing
properties................................ - 5,537 8,230 13,767
------------- -------------- ------------ -------------
Total income from discontinued operations 1,756 6,537 8,619 16,912
------------- -------------- ------------ -------------
INCOME BEFORE MINORITY INTEREST................ 6,856 42,942 20,319 70,117
MINORITY INTEREST.............................. - (596) (46) (642)
------------- -------------- ------------ -------------
NET INCOME..................................... $ 6,856 $ 42,346 $ 20,273 $ 69,475
============= ============== ============ =============
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
----------- ------------ ---------- --------- -----------
For the nine months ended
September 30, 2003
RENTAL REVENUE:
Minimum rents.............................. $ 30,741 $ 33,066 $ 11,797 $ 23,701 $ 99,305
Expense recoveries......................... 7,063 9,740 3,370 7,729 27,902
Termination fees........................... 180 362 22 223 787
Percentage rent payments................... 467 403 303 506 1,679
----------- ------------ --------- --------- -----------
Total rental revenue..................... 38,451 43,571 15,492 32,159 129,673
----------- ------------ --------- --------- -----------
COSTS AND EXPENSES:
Property operating expenses................ 9,837 11,849 4,405 9,820 35,911
Rental property depreciation and
amortization............................. 5,317 6,967 1,949 4,421 18,654
General and administrative expenses........ 7,973 (53) 16 - 7,936
----------- ------------- -------- --------- -----------
Total costs and expenses................. 23,127 18,763 6,370 14,241 62,501
----------- ------------- -------- --------- -----------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................... 15,324 24,808 9,122 17,918 67,172
20
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
----------- ------------ ---------- --------- -----------
For the nine months ended
September 30, 2003 (continued)
OTHER INCOME AND EXPENSES:
Interest expense........................... (9,301) (5,975) (1,905) (10,638) (27,819)
Amortization of deferred financing fees.... (457) (158) (1) (148) (764)
Investment income.......................... 335 515 71 19 940
Other income (expense)..................... 17 127 - (6) 138
Equity in loss of joint ventures........... - (513) - - (513)
----------- ------------ ---------- --------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST............................ 5,918 18,804 7,287 7,145 39,154
----------- ------------ ---------- --------- -----------
DISCONTINUED OPERATIONS
Income from rental properties sold or held
for sale................................ 1,641 2,104 - 569 4,314
Gain on disposal of income producing
properties............................... - 2,613 - 470 3,083
----------- ------------ ---------- --------- -----------
Total income from discontinued
operations............................. 1,641 4,717 - 1,039 7,397
----------- ------------ ---------- --------- -----------
INCOME BEFORE MINORITY INTEREST............... 7,559 23,521 7,287 8,184 46,551
MINORITY INTEREST............................. - (76) (412) (118) (606)
----------- ------------ ---------- --------- -----------
NET INCOME.................................... $ 7,559 $ 23,445 $ 6,875 $ 8,066 $ 45,945
=========== ============ ========== ========= ===========
10. Stockholders' Equity and Earnings Per Share
The following table reflects the change in number of shares of common stock
issued for the nine months ended September 30, 2004:
Common Options
Stock Exercised Total
---------- ----------- ----------
Board of Directors.......................... 13* 3 16
Officers..................................... 242* 298 540
Employees and other......................... 12* 174 186
Exercise of OP units........................ 734 - 734
Dividend Reinvestment and Stock Purchase Plan 1,941 - 1,941
---------- ----------- ----------
Total.................................. 2,942 475 3,417
=========== ========== ==========
* Reflects shares of "restricted stock" which are subject to forfeiture and vest
over periods from one to four years.
21
The following table sets forth the computation of basic and diluted shares
used in computing earnings per share for the three and nine month periods ended
September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Denominator for basic earnings per share
- weighted average shares ................ 70,626 63,777 69,820 57,348
----------- ----------- ------------ ------------
Walden Woods Village, Ltd.................... 94 94 94 94
Unvested restricted stock ................... 600 492 572 592
Convertible partnership units ............... 623 734 697 619
Stock options (using treasury method)........ 384 426 342 324
----------- ----------- ------------ ------------
Subtotal.................................. 1,701 1,746 1,705 1,629
----------- ----------- ------------ ------------
Denominator for diluted earnings per share
- weighted average shares................. 72,327 65,523 71,525 58,977
=========== =========== ============ ============
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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Income As reported.............................. $ 30,701 $ 17,249 $ 69,475 $ 45,945
Stock based employee compensation
expense included in reported net
income................................ - - - -
Total stock based employee compensation
expense determined under fair value
based method forall awards............ 190 278 574 614
------------ ------------ ------------ ------------
Pro forma................................ $ 30,511 $ 16,971 $ 68,901 $ 45,331
============ ============ ============ ============
Basic earnings
per share As reported.............................. $ 0.43 $ 0.27 $ 1.00 $ 0.80
============ ============ ============ ============
Pro forma................................ $ 0.43 $ 0.27 $ 0.99 $ 0.79
============ ============ ============ ============
Diluted earnings
per share As reported.............................. $ 0.43 $ 0.27 $ 0.98 $ 0.79
============ ============ ============ ============
Pro forma................................ $ 0.42 $ 0.26 $ 0.97 $ 0.78
============ ============ ============ ============
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
22
exercise of options to purchase shares of the Company's common stock of which
$6,524 has been repaid as of September 30, 2004. The outstanding notes bear
interest at a rate of 5% per annum. Interest only is payable quarterly and the
principal amount of each of the notes is due in June 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, the limited partners
received 93.656 limited partnership units. The Company and the Walden Woods
Minority Partners have entered into an agreement (the "Redemption Agreement")
whereby the Walden Woods Minority Partners can request that the Company purchase
either their limited partnership units or any shares of Company common stock
which they have received in exchange for their limited partnership units at a
price of $10.30 per unit or per share no earlier than two years, nor later than
fifteen years, after the exchange date of January 1, 1999. As a result of the
Redemption Agreement, the minority interest has been presented in the
accompanying condensed consolidated balance sheet. In addition, under the terms
of the limited partnership agreement, the Walden Woods Minority Partners do not
have an interest in the common stock of the Company except to the extent of
dividends declared on such common stock. Accordingly, a preference in earnings
has been allocated to the Walden Woods Minority Partners to the extent of the
dividends declared. The 93.656 shares of common stock of the Company held by the
consolidated limited partnership are not considered outstanding in the
calculation of basic earnings per share.
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, the
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. During September 2004, the Limited Partners' OP Units were redeemed in
exchange for 734.266 shares of the Company's common stock. LP is now a wholly
owned subsidiary of the Company.
The Company also has a controlling general partnership interest (75%
interest) in Venice Plaza and records a minority interest for the limited
partners' share of equity.
14. Dispositions
------------
The following table reflects the properties sold during 2004 and 2003:
Square Feet/ Gross Sales Gain (Loss)
Property Location Date Sold Acres Price On Sale
- --------------------------- ---------------- ---------- ------------ ----------- -----------
2004 Dispositions
- ---------------------------
Southwest Walgreens........ Phoenix, AZ February 93,402 $ 6,650 $ 2,035
----------- -----------
First quarter 2004......................................................... 6,650 2,035
----------- -----------
Watson Central............ Warner Robbins, GA June 227,747 6,000 (483)
----------- -----------
23
Square Feet/ Gross Sales Gain (Loss)
Property (continued) Location Date Sold Acres Price On Sale
- --------------------------- ---------------- ---------- ------------ ----------- -----------
Second quarter 2004........................................................ $ 6,000 $ (483)
----------- -----------
Plaza Del Rey.............. Miami, FL July 50,146 9,000 6,197
Forrest Gallery............ Tullahoma, TN July 214,450 10,500 1,560
Epsilon.................... West Palm Beach, FL August 18,707 2,650 1,176
Millervillage.............. Baton Rouge, LA September 94,559 2,700 1,130
Plymouth Park (4 properties) Irving, TX September 728,566 24,000 2,152
----------- -----------
Sale of income producing properties........................................ 48,850 12,215
Miramar Outparcel.......... Miramar, FL August 2.0 acres 1,500 158
----------- -----------
Third quarter 2004......................................................... 50,350 12,373
----------- -----------
Total for 2004 ......................................................... $ 63,000 $ 13,925
=========== ===========
Square Feet/ Gross Sales Gain (Loss)
Property Location Date Sold Acres Price On Sale
- --------------------------- --------------- ---------- ------------ ----------- -----------
2004 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 out parcels...... Huntcrest, GA May 2.94 acres 1,686 -
Oak Square Joint Venture... Gainesville, FL June n/a 2,230 901
----------- -----------
Second Quarter 2003........................................................ 7,316 1,371
----------- -----------
CDG (Park Place) LLC JV.... Plano, TX September n/a 4,434 1,209
----------- -----------
Third quarter 2003......................................................... 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
=========== ===========
The Company classified the results of operations from the properties sold
during 2003 and 2004 and held for sale at September 30, 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 Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ --------------
Rental revenue................................ $ 1,765 $ 3,035 $ 7,550 $ 8,837
------------ ------------ ------------ --------------
Property operating expenses................... 1,124 939 2,658 2,672
Rental property depreciation and
amortization............................... 271 343 864 1,052
------------ ------------ ------------ --------------
Total expenses................................ 1,395 1,282 3,522 3,724
------------ -------------- ------------ --------------
Interest expense.............................. (243) (378) (735) (1,107)
Amortization of deferred financing fees....... (30) (29) (89) (90)
Equity in income of joint ventures............ (30) 121 (59) 508
Loss on extinguishment of
debt.......................................... - - - (110)
------------ ------------ ------------ --------------
Income from discontinued operations........... $ 67 $ 1,467 $ 3,145 $ 4,314
============ ============ ============ ==============
24
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 of which $110 is reflected in income from
rental properties sold or held for sale.
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 was
revised in December 2003. FIN 46 provides guidance on identifying entities for
which control is achieved through means other than through voting rights, or
variable interest entities ("VIE"), and how to determine when and which business
enterprises should consolidate the operating results of a 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 those cases in which it is the
primary beneficiary and has consolidated the operating results of those VIEs.
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 VIEs owned by the Company.
The Company has not become a party to any VIEs during 2003 or 2004.
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 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.
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 post
retirement 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 (as revised) did not
have a material impact on the Company's financial statements.
25
17. Commitments and Contingencies
-----------------------------
As of September 30, 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.
However, none of the litigation outstanding as of September 30, 2004, in the
opinion of management, will have a material adverse effect on the financial
condition or results of operations of the Company.
18. Subsequent Events
-----------------
In October 2004, the Company completed the sale of three properties for
total consideration of $17,250, comprising an aggregate of 299 square
feet of gross leasable area.
In October 2004, the Company completed the acquisition of six retail
properties in the Boston, Massachusetts metropolitan area, totaling 391 square
feet for total consideration of $119,800, including the assumption of $12,100 of
mortgage indebtedness. The Company funded the cash from funds on hand and
borrowings under our existing credit facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 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. The results of operations for an interim period may not
give a true indication of results for the entire 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.
Critical Accounting Policies
Our 2003 Annual Report on Form 10-K contains a description of the critical
accounting policies of the Company, including revenue recognition, cost
capitalization, impairment of real estate assets, purchase accounting treatment
for acquisitions, impairment testing of goodwill, and joint venture accounting.
For the three and nine month period ended September 30, 2004, there were no
material changes to these policies.
Overview
During the first nine months of 2004 we executed our business strategy as
follows:
o Increased the average rental rate on 290 lease renewals aggregating
653,000 square feet by 4.2% to $13.59 per square foot;
o Executed 314 new leases totaling 1.2 million square feet at an average
rental rate of $10.74 per square foot, which, net of lost leases,
resulted in net absorption of 83 square feet;
o Acquired 10 properties totaling $180.2 million, adding over 1.3
million square feet of gross leasable area;
o Sold ten non-core properties for $61.5 million and an out parcel for
$1.5 million, generating $18.9 million of gains on sale; and
o Raised $200 million in an unsecured debt offering with a yield of
3.902% of which $100 million was swapped to a floating rate of 6 month
LIBOR in arrears plus 0.4375%.
26
The various factors we use to evaluate our third quarter of 2004 operating
results are as follows:
o Increased the rental rate on 105 lease renewals aggregating 202,000
square feet by 3.9% to $14.50 per square foot;
o Executed 104 new leases totaling 288,000 square feet at an average
rental rate of $12.31 per square foot, which net of lost leases
resulted in net absorption of 476 square feet; and
o Sold eight non-core properties for $48.9 million and an out parcel for
$1.5 million, generating $12.4 million of gains on sale.
Results of Operations
Our consolidated results of operations often are not comparable from period
to period due to the impact of property acquisitions, dispositions, development
and redevelopment. A large portion of the change in our statement of operations
line items is related to these changes in the portfolio.
On February 12, 2003, Equity One, Inc. and IRT Property Company ("IRT")
completed a statutory merger. The merger has been accounted for as a purchase,
and the results of Equity One include the activity of IRT since February 12,
2003.
The following summarizes items from our unaudited condensed consolidated
statements of operations which we think are important in understanding our
operations and/or those items which have significantly changed in 2004 compared
to 2003:
----------------------------- ------------------------------
For the three month period For the nine month period
ended September 30, ended September 30,
----------------------------- ------------------------------
% %
2004 2003 Change 2004 2003 Change
-------- --------- ------ -------- --------- ------
Total rental revenue ................ $ 58,208 $ 48,067 21.1% $167,237 $ 129,673 29.0%
======== ========= ====== ======== ========= ======
Property operating expenses ......... $ 15,656 $ 13,263 18.0% $ 43,880 $ 35,911 22.2%
======== ========= ====== ======== ========= ======
Rental property depreciation and
amortization ........................ $ 9,005 $ 7,231 24.5% $ 25,934 $ 18,645 39.0%
======== ========= ====== ======== ========= ======
General and administrative expenses . $ 3,722 $ 2,737 36.0% $ 10,980 $ 7,936 38.4%
======== ========= ====== ======== ========= ======
Interest expense .................... $ 12,172 $ 9,920 22.7% $ 34,156 $ 27,819 22.8%
======== ========= ====== ======== ========= ======
Comparison of the Three Months Ended September 30, 2004 to the Three Months
Ended September 30, 2003
Total rental revenue increased by $10.1 million, or 21.1%, to $58.2 million
in 2004 from $48.1 million in 2003. The following factors accounted for this
difference:
o Same property rental revenue increased by approximately $1.5 million;
o Properties acquired during 2004 increased revenue by approximately
$4.7 million;
o Properties acquired during 2003 increased revenue by approximately
$3.1 million; and
o Other property rental revenue increased by $826,000 primarily related
to the completion of development properties.
Property operating expenses increased by $2.4 million, or 18.0%, to $15.7
million for 2004 from $13.3 million in 2003. The following factors contributed
to this difference:
27
o Same property operating expenses increased by $497,000, mostly related
to $431,000 of expenses incurred for the clean-up of damage caused by
the hurricanes;
o Properties acquired during 2004 increased operating expenses by $1.1
million;
o Properties acquired during 2003 increased operating expenses by
approximately $728,000; and
o Other property operating expenses increased by $59,000 related to the
completion of development properties.
Rental property depreciation and amortization increased by $1.8 million, or
24.5%, to $9.0 million for 2004 from $7.2 million in 2003. The following factors
primarily accounted for this difference:
o Properties acquired during 2004 increased depreciation and
amortization by approximately $652,000;
o Properties acquired during 2003 increased depreciation and
amortization by approximately $374,000; and
o Completed developments and additions to existing properties increased
depreciation and amortization by approximately $748,000.
General and administrative expenses increased by $1.0 million, or 36.0%, to
$3.7 million for 2004 from $2.7 million in 2003. Compensation and employer
related expenses increased by $676,000, general office expenses increased by
$182,000, public relations and marketing expenses increased by $87,000 and
professional fees increased by $82,000. These expense increases were due to the
increase in staffing resulting from the growth of our business and costs
incurred related to compliance with expanded regulatory requirements under the
Sarbanes-Oxley Act of 2002.
Interest expense increased by $2.3 million, or 22.7%, to $12.2 million for
2004 from $9.9 million in 2003. This difference was primarily due to:
o An increase of $1.7 million attributable to the $200 million unsecured
senior notes issued during March of 2004;
o An increase of $619,000 attributable to the debt related to the
acquisition of properties during 2004;
o An increase of $508,000 attributable to the debt related to the
acquisition of properties during 2003;
o A increase of $34,000 attributable to a decrease in capitalized
interest related to development activity; and
o A decrease of $731,000 attributable to the paydown of the revolving
credit facilities due to the issuance of the $200 million unsecured
senior notes.
Investment income increased by $1.1 million due to an increase in interest
and dividends of $547,000 on the securities available for sale, notes receivable
received from the sale of a rental property and realized gains on the sale of
securities of $592,000.
We sold eight income producing properties in the third quarter of 2004 and
had four properties and a joint venture interest held for sale as of September
30, 2004. The associated operating results of $67,000 for these properties are
reflected as income from discontinued operations. The 2003 discontinued
operations reflect a reclassification of operations for properties sold during
2003 and 2004
28
and properties held for sale at September 30, 2004. We recognized a gain of
$12.2 million in the third quarter of 2004 related to the disposal of these
eight properties and recognized a gain of $1.2 million in the third quarter of
2003 related to the disposal of a property.
As a result of the foregoing, net income increased by $13.5 million, or
78.0%, to $30.7 million for 2004 from $17.2 million in 2003.
Comparison for the Nine Months Ended September 30, 2004 to the Nine Months Ended
September 30, 2003
Total rental revenue increased by $37.6 million, or 29.0%, to $167.2
million in 2004 from $129.7 million in 2003. The following factors accounted for
this difference:
o Same property rental revenue increased by approximately $1.9 million;
o The acquisition of IRT in 2003 increased revenue by approximately
$11.0 million;
o Other properties acquired during 2003 increased revenue by
approximately $14.4 million;
o Properties acquired during 2004 increased revenue by approximately
$8.7 million; and
o Other property rental revenue increased by $1.6 million primarily
related to the completion of development properties.
Property operating expenses increased by $8.0 million, or 22.2%, to $43.9
million for 2004 from $35.9 million in 2003. The following factors contributed
to this difference:
o Same property operating expenses increased by $420,000, mostly related
to $431,000 of expenses incurred for the clean-up of damage caused by
the hurricanes;
o The acquisition of IRT increased operating expenses by approximately
$904,000;
o Other properties acquired during 2003 increased operating expenses by
approximately $3.8 million;
o Properties acquired during 2004 increased operating expenses by $2.4
million; and
o Other property operating expenses increased by $456,000 due to
completion of development properties.
Rental property depreciation and amortization increased by $7.3 million, or
39.0%, to $25.9 million for 2004 from $18.7 million in 2003. The following
factors primarily accounted for this difference:
o The acquisition of IRT increased depreciation and amortization by
approximately $2.8 million;
o Other properties acquired during 2003 increased depreciation and
amortization by approximately $2.1 million;
o Properties purchased in 2004 increased depreciation and amortization
by approximately $1.4 million; and
29
o Completed developments in 2004 and 2003 increased depreciation and
amortization by approximately $925,000.
General and administrative expenses increased by $3.0 million, or 38.4%, to
$11.0 million for 2004 from $7.9 million in 2003. Compensation and employer
related expenses increased by $2.5 million, general office expenses increased by
$363,000 and professional fees increased by $207,000. These expense increases
were due to the increase in staffing resulting from the growth of our business
and costs incurred related to compliance with expanded regulatory requirements
under the Sarbanes-Oxley Act of 2002.
Interest expense increased by $6.3 million, or 22.8%, to $34.2 million for
2004 from $27.8 million in 2003. This difference was primarily due to:
o An increase of $781,000 attributable to the assumption of mortgage
loans and senior unsecured debt in the acquisition of IRT in 2003;
o An increase of $967,000 attributable to debt related to the
acquisition of properties during 2004;
o An increase of $2.3 million attributable to the debt related to the
acquisition of properties during 2003;
o An increase of $3.1 million attributable to the $200 million unsecured
senior notes issued during March of 2004;
o A decrease of $226,000 attributable to an increase in capitalized
interest related to development activity; and
o A decrease of $600,000 related to the disposition of five properties
and the repayment of a mortgage payable.
Investment income increased by $672,000 due to an increase in interest and
dividends of $79,000 on the investment of securities available for sale, notes
receivable received from the sale of a rental property and realized gains on the
sale of securities of $593,000.
During 2003, we repaid various mortgage notes prior to their stated
maturities and incurred a loss on the extinguishment of debt of $623,000 of
which $110,00 is reflected in income from properties sold or held for sale.
We sold ten income producing properties during the nine months ended
September 30, 2004 and have four properties and a joint venture interest held
for sale as of September 30, 2004. The associated operating results of $3.1
million for these properties are reflected as income from discontinued
operations. The 2003 discontinued operations reflect a reclassification of
operations for properties sold during 2003 and 2004 and properties held for sale
at September 30, 2004. We recognized a gain of $13.8 million in the nine months
ended September 30, 2004 related to the disposal of these ten properties and
recognized a gain of $3.1 million in the nine months ended September 30, 2003
related to the disposal of five properties.
As a result of the foregoing, net income increased by $23.5 million, or
51.2%, to $69.5 million for 2004 from $45.9 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 and in
particular, REITs. The National Association of Real Estate Investment
30
Trusts ("NAREIT") stated in its April 2002 White Paper on Funds from Operations,
"Historical cost accounting for real estate assets implicitly assumes that the
value of real estate assets diminish predictably over time. Since real estate
values instead 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". It states further that "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 operating
performance. 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,
including the ability to make distributions, (iii) is not an alternative to cash
flow as a measure of liquidity, and (iv) 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.
The following table illustrates the calculation of FFO for the three and
nine month periods ended September 30, 2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income ........................................ $ 30,701 $ 17,249 $ 69,475 $ 45,945
Adjustments:
Rental property depreciation and
amortization, including discontinued
operations................................... 9,276 7,574 26,798 19,706
Gain on disposal of income producing
properties................................... (12,215) (1,209) (13,767) (3,083)
Minority interest.............................. 223 227 596 606
Other Items:
Interest on convertible partnership units ...... - - - 43
Pro-rata share of real estate depreciation
from joint ventures......................... 65 83 197 383
----------- ----------- ----------- -----------
Funds from operations ............................. $ 28,050 $ 23,924 $ 83,299 $ 63,600
=========== =========== =========== ===========
FFO increased by $4.2 million, or 17.6%, to $28.1 million for the three
months ended September 30, 2004, from $23.9 million for the comparable period of
2003. FFO increased by $19.7 million, or 31.4%, to $83.3 million for the nine
months ended September 30, 2004 from $63.6 million for the comparable period of
2003.
31
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Earnings per diluted share*....................... $0.43 $0.27 $0.98 $0.79
Adjustments:
Rental property depreciation and
amortization, including discontinued
operations................................. 0.13 0.12 0.37 0.33
Gain on disposal of income producing
properties................................. (0.17) (0.02) (0.19) (0.05)
Other items:
Pro-rata share of real estate depreciation
from joint ventures........................ - - - 0.01
----------- ----------- ----------- -----------
Funds from operations per diluted share........... $0.39 $0.37 $1.16 $1.08
=========== =========== =========== ===========
* 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 $83.2 million for the nine months ended
September 30, 2004 included: (i) net income of $69.5 million, (ii) adjustments
for non-cash and gain on sale items which increased cash flow by $12.1 million,
and (iii) a net change in operating liabilities and operating assets that
increased cash flow by $1.6 million, compared to net cash provided by operations
of $61.6 million for the nine months ended September 30, 2003, which included
(i) net income of $45.9 million, (ii) adjustments for non-cash items which
increased cash flow by $17.4 million, and (iii) a net change in operating assets
over operating liabilities that reduced cash flow by $1.7 million.
Net cash used in investing activities of $141.6 million for the nine months
ended September 30, 2004 included: (i) the acquisition of two parcels of land
held for future development and eight shopping centers for $136.0 million, (ii)
construction, development and other capital improvements of $24.3 million, (iii)
increased leasing costs of $5.5 million, (iv) an increase in cash held in escrow
of $8.7 million, and (v) the purchase of securities held for investment for
$30.7 million, offset by (a) proceeds from the sale of properties of $51.7
million, (b) proceeds from payment of notes receivable of $6.1 million, and (c)
proceeds from the sale of securities held for investment of $5.8 million. These
amounts should be compared to net cash used in investing activities of $298.4
million for the nine months ended September 30, 2003 which included: (i) the
acquisition of one parcel of land held for future development, an outparcel, a
grocery store building at one of our existing centers and four shopping centers
for $116.9 million, (ii) construction, development and other capital
improvements of $22.5 million, (iii) the acquisition of IRT for $187.6 million,
net of cash received, and (iv) increased leasing costs of $2.7 million, offset
by (a) proceeds from the sale of four properties and a joint venture interest of
$13.7 million, (b) proceeds from escrowed funds on sale of properties to utilize
tax deferred exchanges for $12.9 million, (c) proceeds from payment of notes
receivable of $2.8 million and (d) proceeds from other sources of $1.9 million.
Net cash provided by financing activities of $59.4 million for the nine
months ended September 30, 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 $40.9 million, and (iii) proceeds from repayment of notes receivable of
$3.0 million, offset by (a) the repayment of eight mortgage notes for $15.9
million and monthly principal payments on mortgage notes of $7.2 million, (b)
cash dividends paid to common stockholders of $59.6 million, (c) repayments
under revolving credit facilities of $98.0 million, (d) an increase in deferred
financing costs of $2.4 million related to the issuance of senior notes, and (e)
other miscellaneous uses of $700,000 compared to net cash provided by financing
activities of $233.9 million
32
for the nine months ended September 30, 2003 which included: (i) net borrowing
on the revolving credit facilities of $115.0 million, less the pay down of $8.0
million on the credit facility assumed in the IRT merger, (ii) net proceeds from
the issuance of common stock of $230.9 million, and (iii) proceeds from
repayment of notes receivable of $3.5 million, offset by (a) the repayment of
nine mortgage notes for $48.4 million and monthly principal payments on mortgage
notes of $6.0 million, (b) cash dividends paid to common stockholders of $51.4
million, and (c) other miscellaneous uses of $1.7 million.
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.
The following table presents mortgage notes payable as of September 30,
2004 and December 31, 2003:
September 30, December 31,
2004 2003
------------- -------------
(in thousands)
Mortgage Notes Payable
Fixed rate mortgage loans........................... $ 480,739 $ 459,103
Unamortized net premium on mortgage notes
payable........................................... 10,633 11,779
------------- -------------
Total........................................... $ 491,372 $ 470,882
============= =============
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 $160.8 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. The Company is
in the process of seeking consents from the lenders to address these issues. In
the event that the requested assurances or consents are not obtained and the
mortgage holders declare defaults under the mortgage documents, we will, if
required, prepay the remaining mortgage from existing resources, refinancing of
such mortgages, borrowings under our other lines of credit or other sources of
financing. 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.
The following table presents unsecured senior notes payable as of September
30, 2004 and December 31, 2003:
33
September 30, December 31,
2004 2003
------------- -------------
(in thousands)
Unsecured Senior Notes Payable
7.77% Senior Notes, due 4/1/06.............................. $ 50,000 $ 50,000
7.25% Senior Notes, due 8/15/07............................. 75,000 75,000
3.875% Senior Notes, due 4/15/09............................ 200,000 -
7.84% Senior Notes, due 1/23/12............................. 25,000 25,000
Unamortized net premium on unsecured senior
notes payable............................................. 9,721 12,439
------------- -------------
Total................................................... $359,721 $162,439
============= =============
The indentures under which the notes were issued have several covenants
which limit the Company's ability to incur debt; require the Company to maintain
unencumbered assets ratio and limit the Company's ability to consolidate, sell,
lease, or convey substantially all of its assets to, or merge with any other
entity. These notes have also been guaranteed by most of the Company's
subsidiaries. The interest rate on the 7.77% senior notes is subject to a 50
basis point increase if the Company does not maintain an investment grade debt
rating.
The following table presents the unsecured revolving credit facilities as
of September 30, 2004 and December 31, 2003:
September 30, December 31,
2004 2003
------------- -------------
(in thousands)
Unsecured Revolving Credit Facilities
Wells Fargo....................................... $ 64,000 $ 162,000
City National Bank................................ - -
------------- -------------
Total........................................... $ 64,000 $ 162,000
============= =============
The Company has a $340 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 guaranteed by most of the Company's subsidiaries. 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 million, a
$35 million swing line facility for short term borrowings, a $20 million letter
of credit commitment and may, at the request of the Company, be increased up to
a total commitment of $400 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 September 30, 2004, the Company had $64 million outstanding on
this credit facility. The weighted average interest rate as of September 30,
2004 was 2.126%, including the effect of interest rate swaps.
The Company has a $5 million unsecured credit facility with City National
Bank of Florida, of which no amount was outstanding as of September 30, 2004.
This facility also provides collateral for $1.4 million in outstanding letters
of credit.
As of September 30, 2004, the availability under the various credit
facilities was approximately $119,274 net of outstanding balances and letters of
credit. During October 2004, the Company borrowed approximately $70 million on
the credit facilities for the acquisition of the Boston Properties.
34
As of September 30, 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) are
as follows (in thousands):
Secured Debt Unsecured Debt
---------------------------- -----------------------------
Revolving Total
Scheduled Balloon Unsecured Credit Principal Balance
Year Amortization Payments Senior Notes Facilities Due at Maturity
-------------- ------------- ------------ -------------- ------------ -----------------
2004.......... $ 2,495 $ - $ - $ - $ 2,495
2005.......... 10,039 30,093 - - 40,132
2006.......... 10,246 24,758 50,000 64,000 149,004
2007.......... 10,356 2,864 75,000 - 88,220
2008.......... 10,415 40,104 - - 50,519
2009.......... 10,063 24,332 200,000 - 234,395
2010.......... 9,067 98,471 - - 107,538
2011.......... 7,230 93,433 - - 100,663
2012.......... 5,951 40,056 25,000 - 71,007
2013.......... 5,526 - - - 5,526
Thereafter.... 36,446 8,794 - - 45,240
------------- ------------ -------------- ------------ -----------------
Total..... $ 117,834 $ 362,905 $ 350,000 $ 64,000 $ 894,739
============= ============ ============== ============ =================
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.
DEVELOPMENTS AND REDEVELOPMENTS
As of September 30, 2004, we have over 20 development and redevelopment
projects underway or in the planning stage totaling approximately $64.0 million
of asset value and, based on current plans and estimates, requiring
approximately $19.4 million of additional capital to complete beyond the $44.7
million already invested. These include:
o CVS Plaza in Miami, Florida where we are completing the lease up of
the non-anchor space at a new 29,204 square foot drug store-anchored
shopping center that we built across the street from our recently
completed Publix supermarket anchored Plaza Alegre shopping center;
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 Pointe Plaza in
Smithfield, North Carolina; Eustis Square in Eustis, Florida; Oakbrook
Square in Palm Beach Gardens, Florida and Venice Plaza in Venice,
Florida, where we have reconfigured and redeveloped previously vacant
anchor and other space and are completing the associated lease-up;
o Ambassador Row Courtyard 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 of land we currently own and control.
35
These developments and redevelopments are scheduled for completion between
the fourth quarter of 2004 and mid 2006.
During the nine month period ended September 30, 2004, we completed and
leased a total of $41.8 million of development projects resulting in incremental
net operating income of approximately $4.6 million on an annualized basis.
EQUITY
- ------
For the three months ended September 30, 2004, we issued 735,000 shares of
our common stock at prices ranging from $17.86 to $19.42 per share and for the
nine months ended September 30, 2004, we issued 1.9 million shares of our common
stock at prices ranging from $16.83 to $19.42 per share pursuant to our Divided
Reinvestment and Stock Purchase Plan. As of September 30, 2004, we have 207,381
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. Additional financing may not 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
Many 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-
36
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
- ------------------
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. We intend to utilize variable rate indebtedness
available under our
37
unsecured revolving credit facilities in order to initially fund future
acquisitions, development costs and for other operating needs. With respect to
our fixed rate mortgage notes and fixed rate senior unsecured notes, changes in
interest rates generally do not affect the Company's interest expense as these
notes are predominantly at fixed-rates for extended terms. Because the Company
has the intent to hold its existing fixed rate notes either to maturity or until
the sale of the associated property, these fixed-rate notes do not pose a
interest rate risk to the Company's results of operations or its working capital
position, only upon the refinancing of that mortgage. 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.
As of September 30, 2004, we had approximately $164.0 million of
outstanding floating rate debt, including $100 million of fixed rate borrowings
that we have converted to floating rate borrowings through the use of hedging
agreements. We do not believe that the interest rate risk represented by our
floating rate debt is material as of September 30, 2004, in relation to our
$894.7 million of outstanding debt, our $1.8 billion of total assets and the
$2.3 billion total market capitalization as of that date.
If interest rates on our variable rate debt increase by 1%, the increase in
annual interest expense on our variable rate debt would decrease future earnings
and cash flows by approximately $1.6 million. If interest rates on our variable
rate debt decrease by 1%, the decrease in interest expense on our variable rate
debt would increase future earnings and cash flows by approximately $1.6
million. This assumes that the amount outstanding under our variable rate debt
remains at approximately $164.0 million (including the $100 million of fixed
rate debt converted to floating rate debt through the use of hedging
agreements), the balance as of September 30, 2004.
The fair value of our fixed rate debt is $773.6 million, which includes the
mortgage notes and fixed rate portion of the senior unsecured notes payable
(excluding the unamortized premium/discount). If interest rates increase by 1%,
the fair value of our total fixed rate debt would decrease by approximately
$75.5 million. If interest rates decrease by 1%, the fair value of our total
outstanding debt would decrease by approximately $6.8 million. This assumes that
our total outstanding fixed rate debt remains at $730.7 million, the balance as
of September 30, 2004.
Hedging Activities
- ------------------
To manage our exposure to interest rate risk, we follow established risk
management policies and procedures, including the use of a variety of derivative
financial instruments. We do not enter into derivative instruments for
speculative purposes. We require that the hedging derivative instruments be
effective in managing 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 and in accounts
payable and accrued expenses and 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 matures. Additionally, any derivative instrument used for
risk management that becomes ineffective is marked to market and the change
included in net income.
The Company is exposed to credit risk, in the event of non-performance by
the counter-parties to the hedge agreements. The Company believes that it
mitigates its credit risk by entering into these agreements with major financial
institutions. 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.
38
In conjunction with our policy to manage interest rate risk, we have
entered into interest rate swaps to hedge the variability of monthly cash
outflows attributable to changes in variable interest rates, such as LIBOR.
Under our outstanding swap agreement, we have hedged $100 million of the $200
million fixed rate unsecured senior notes due April 15, 2009 to a variable
interest rate equal to the six month LIBOR rate in arrears plus 0.4375% to lower
the overall effective borrowing rate, and mitigate the future interest rate
risk.
A summary of the terms of the derivative instrument, as of September 30,
2004, and a reconciliation of the fair value and adjustments to accumulated
other comprehensive income (loss) are as follows (in thousands):
Hedge type................................................................. Cash Flow
Description................................................................ Swap
Total Notional Amount................................................ $ 100,000
=================
Interest Rates............................................................. 2.61%
Maturity date.............................................................. April 15, 2009
Accumulated other comprehensive loss attributable to cash flow hedges:
Balance at December 31, 2003........................................... $ (122)
Change in fair value for the nine months ended September 30, 2004...... (1,744)
-----------------
Balance at September 30, 2004........................................ $ (1,866)
=================
The estimated fair value of this financial instrument has been determined,
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimate of fair value. Accordingly, the estimate presented
herein is not necessarily indicative of the amount 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.
Other Market Risks
- ------------------
As of September 30, 2004, we had no material exposure to any other market
risks (including foreign currency exchange risk, commodity price risk or equity
price risk).
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
39
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 September 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
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 16, 2004, the Company completed the issuance of an aggregate
of 734,266 shares of its common stock to Tamarac Trust, Trust No. 101, Riverside
Trust, Trust No. 102, and Charlotte Square Trust, Trust No. 103, each a limited
partner of the Company's subsidiary, IRT Partners L.P. These shares were issued
following the limited partners' request for redemption of their limited
partnership units pursuant to the Agreement of Limited Partnership of IRT
Partners L.P., dated as of July 14, 1998, between the Company, as successor by
merger to IRT Property Company and general partner, and IRT Management Company,
as initial limited partner. Following the request for redemption by these
limited partners and in accordance with the partnership agreement, the Company
elected to pay the redemption price for the units by issuing the 734,266 shares.
As a result of the redemption, IRT Partners L.P. is now indirectly, wholly owned
by the Company. The transaction was effected without registration under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section
4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting was adjourned from May 21, 2004 until July 28,
2004. At the reconvened meeting, the stockholders voted to approve the Company's
Amended and Restated 2000 Executive Incentive Compensation Plan as follows:
For Against Abstain Unvoted/Broker Non-Votes
-------------- ------------- ----------- ---------------------------
42,053,903 4,030,895 228,673 16,114,588
ITEM 5. OTHER INFORMATION
None.
40
ITEM 6. EXHIBITS
(a) Exhibits:
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 2004 EQUITY ONE, INC.
/s/ HOWARD M. SIPZNER
--------------------------------------
Howard M. Sipzner
Executive Vice President and
Chief Financial Officer(Principal
Accounting and Financial Officer)
41
INDEX TO EXHIBITS
-----------------
Exhibits Description
-------- -----------
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.