UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________to ________
Commission File Number 1-7859
IRT PROPERTY COMPANY
--------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1366611
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Galleria Parkway, Suite 1400
Atlanta, Georgia 30339
---------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(770) 955-4406
----------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 2002
------------------------------ ------------------------------------
Common Stock, $1 Par Value 34,199,736 Shares
1
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for IRT Property Company (the
"Company"), including, but not limited to, the section herein entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may contain various "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended, that are based on the Company's
beliefs and assumptions, as well as information currently available to the
Company. Readers can identify these forward-looking statements through the
Company's use of words such as "may," "will," "intend," "project," "would,"
"could," "should," "expect," "anticipate," "assume," "believe," "estimate,"
"continue" or other similar words. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may be beyond the
Company's control. The Company's actual results may differ significantly from
those expressed or implied in such forward-looking statements. Factors that
might cause these differences include, but are not limited to:
- changes in tax laws or regulations, especially those relating to real
estate investment trusts and real estate in general;
- the number, frequency and duration of vacancies that the Company
experiences;
- the Company's ability to solicit new tenants and to obtain lease renewals
from existing tenants on terms that are favorable to the Company;
- tenant bankruptcies and closings;
- the general financial condition of, or possible mergers or acquisitions
involving, the Company's tenants and competitors;
- competition;
- changes in interest rates and national and local economic conditions;
- possible environmental liabilities;
- the availability, cost and terms of financing;
- the Company's ability to identify, acquire, construct or develop
additional properties that result in the returns anticipated or sought;
and
- the Company's ability to effectively integrate properties or portfolio
acquisitions or other mergers or acquisitions.
Readers should not rely on the information contained in any forward-looking
statements and should not expect the Company to update or revise any
forward-looking statements. With respect to such forward-looking statements,
the Company claims protection under the Private Securities Litigation Reform Act
of 1995. The information in this Report, including the information contained in
forward-looking statements, is also qualified by the special cautionary notice
regarding forward-looking statements and the information in the section entitled
"Risk Factors" contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001 and other filings that the Company makes with the
Securities and Exchange Commission, which are incorporated herein by reference.
The documents that the Company files with the Securities and Exchange Commission
are available from the Company, and also may be examined at public reference
facilities maintained by the Securities and Exchange Commission or, to the
extent filed via EDGAR, accessed through the Internet website of the Securities
and Exchange Commission (http://www.sec.gov).
2
ITEM 1. FINANCIAL STATEMENTS
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, December 31,
2002 2001
---------- ----------
ASSETS
Real estate investments:
Rental properties $ 679,383 $ 659,820
Properties under development 15,901 22,599
---------- ----------
695,284 682,419
Accumulated depreciation (119,673) (109,344)
---------- ----------
Net rental properties 575,611 573,075
Net investment in direct financing leases 2,070 2,174
Mortgage loans, net 60 1,160
---------- ----------
Net real estate investments 577,741 576,409
Cash and cash equivalents - 2,457
Prepaid expenses and other assets 14,695 11,634
---------- ----------
Total assets $ 592,436 $ 590,500
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable, net $ 130,196 $ 134,672
7.3% convertible subordinated debentures, net - 23,275
Senior notes, net 149,792 124,760
Indebtedness to banks 17,000 51,654
Accrued interest 3,798 4,598
Accrued expenses and other liabilities 13,990 10,652
---------- ----------
Total liabilities 314,776 349,611
Commitments and contingencies (Note 8)
Minority interest payable 7,719 7,755
Shareholders' equity:
Preferred stock, $1 par value, authorized 10,000,000 shares;
none issued - -
Common stock, $1 par value, 150,000,000 shares authorized;
34,197,736 and 33,234,206 shares issued in
2002 and 2001, respectively 34,198 33,234
Additional paid-in capital 289,695 272,172
Deferred compensation/stock loans (3,495) (1,732)
Treasury stock, at cost, 0 and 2,738,204 shares
in 2002 and 2001, respectively - (22,783)
Cumulative distributions in excess of net earnings (50,457) (47,757)
---------- ----------
Total shareholders' equity 269,941 233,134
---------- ----------
Total liabilities and shareholders' equity $ 592,436 $ 590,500
========== ==========
The accompanying notes are an integral part of these
consolidated balance sheets.
3
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Income from rental properties $22,542 $21,255 $66,989 $63,405
Interest income 13 92 47 372
Interest on direct financing leases 47 51 218 335
Gain on sale of outparcels (7) 258 498 1,003
-------- -------- -------- --------
Total revenues 22,595 21,656 67,752 65,115
-------- -------- -------- --------
EXPENSES:
Operating expenses of rental properties 5,969 5,203 17,204 15,809
Interest expense 5,369 5,719 16,472 17,185
Depreciation 3,889 3,790 11,656 11,239
Amortization of debt costs 186 165 490 477
General and administrative 974 1,076 3,226 3,159
-------- -------- -------- --------
Total expenses 16,387 15,953 49,048 47,869
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATES - - - (4)
-------- -------- -------- --------
Income from continuing operations before income taxes,
minority interest, gain on sale of property
and discontinued operations 6,208 5,703 18,704 17,242
INCOME TAX PROVISION - - (9) (53)
MINORITY INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP (126) (109) (396) (405)
GAIN ON SALES OF PROPERTIES - - - 2,498
-------- -------- -------- --------
Income from continuing operations 6,082 5,594 18,299 19,282
-------- -------- -------- --------
DISCONTINUED OPERATIONS
Income from discontinued operations, net of minority interest 88 122 295 315
Gain on sales of properties, net of minority interest 2,062 - 2,062 -
-------- -------- -------- --------
Income from discontinued operations 2,150 122 2,357 315
-------- -------- -------- --------
Income before extraordinary item 8,232 5,716 20,656 19,597
EXTRAORDINARY ITEM
Loss on extinguishment of debt - - (156) -
-------- -------- -------- --------
NET INCOME $ 8,232 $ 5,716 $20,500 $19,597
======== ======== ======== ========
PER SHARE: (Note 11)
Income from continuing operations - basic $ 0.18 $ 0.19 $ 0.57 $ 0.64
Income from discontinued operations - basic 0.06 - 0.07 0.01
-------- -------- -------- --------
Income before extraordinary item 0.24 0.19 0.64 0.65
Extraordinary item - basic - - (0.01) -
-------- -------- -------- --------
Net earnings - basic $ 0.24 $ 0.19 $ 0.63 $ 0.65
======== ======== ======== ========
Income from continuing operations - diluted $ 0.18 $ 0.19 $ 0.57 $ 0.63
Income from discontinued operations - diluted 0.06 - 0.07 0.01
-------- -------- -------- --------
Income before extraordinary item 0.24 0.19 0.64 0.64
Extraordinary item - diluted - - (0.01) -
-------- -------- -------- --------
Net earnings - diluted $ 0.24 $ 0.19 $ 0.63 $ 0.64
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 33,973 30,388 32,360 30,294
======== ======== ======== ========
Diluted 34,176 31,339 32,551 31,191
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
4
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30,
--------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net earnings $ 20,500 $ 19,597
Adjustments to reconcile earnings to net cash from operating activities:
Depreciation 11,768 11,348
Gain on sale of operating properties (2,185) (2,498)
Gain on sale of outparcels (498) (1,003)
Extraordinary loss on extinguishment of debt 156 -
Minority interest of unitholders in partnership (37) (153)
Straight line rent adjustment (496) (370)
Amortization of deferred compensation 152 88
Amortization of debt costs and discounts 510 501
Amortization of capitalized leasing income 104 119
Changes in assets and liabilities:
Decrease in accrued interest on debentures and senior notes (660) (762)
Increase in interest receivable, prepaid expenses
and other assets (2,431) (882)
Increase in accrued expenses and other liabilities 3,205 2,472
--------- ---------
Net cash flows from operating activities 30,088 28,457
--------- ---------
Cash flows used in investing activities:
Additions to operating properties, net (5,720) (12,143)
Additions to development properties, net (7,851) (6,451)
Proceeds from sale of operating properties, net 6,513 11,260
Proceeds from sale of outparcels, net 1,084 1,330
Purchase of unconsolidated affiliate, net of assets acquired - 177
Distribution from dissolution of unconsolidated affiliate - 21
Funding of mortgage loans - (445)
Collections of mortgage loans, net 253 23
--------- ---------
Net cash flows used in investing activities (5,721) (6,228)
--------- ---------
Cash flows used in financing activities:
Cash dividends, net (23,200) (21,422)
Issuance of common stock, net 38,508 -
Purchase of treasury stock - (405)
Exercise of stock options 657 1,561
Issuance of shares under stock purchase plan 30 -
Proceeds from mortgage notes payable - 20,740
Principal amortization of mortgage notes payable (2,091) (1,890)
Repayment of mortgage notes payable (7,186) -
Proceeds from 7.84% senior notes issuance 25,000 -
Proceeds from 7.77% senior notes issuance - 50,000
Repayment of 7.3% convertible subordinated debentures (23,110) -
Repayment of 7.45% senior notes - (50,000)
Decrease in bank indebtedness (34,654) (19,000)
Payment of deferred financing costs (778) (1,082)
--------- ---------
Net cash flows used in financing activities (26,824) (21,498)
--------- ---------
Net (decrease) increase in cash and cash equivalents (2,457) 731
Cash and cash equivalents at beginning of period 2,457 831
--------- ---------
Cash and cash equivalents at end of period $ - $ 1,562
========= =========
Supplemental disclosures of cash flow information:
Total cash paid during period for interest $ 17,816 $ 18,887
========= =========
The accompanying notes are an integral part of these consolidated statements.
5
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. UNAUDITED FINANCIAL STATEMENTS
These condensed consolidated financial statements for interim periods are
unaudited and should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. The accompanying condensed
consolidated financial statements include the accounts of IRT Property Company
and its wholly-owned subsidiaries, IRT Management Company ("IRTMC"), VW Mall,
Inc., IRT Alabama, Inc. ("IRTAL") and IRT Capital Corporation II ("IRTCCII"),
and its majority-owned subsidiary, IRT Partners L.P. ("LP") (collectively, the
"Company"). Intercompany transactions and balances have been eliminated in the
consolidation. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to a fair presentation of the
financial statements as of September 30, 2002 and 2001 have been recorded. The
results of operations for the interim periods presented are not necessarily
indicative of the results that may be expected for future interim periods or for
the full year.
2. RENTAL PROPERTIES
The rental properties acquired and disposed in 2002 are summarized below.
SHOPPING CENTER ACQUISITIONS
Date Square Year Built/ % Leased Total Initial
Acquired Property Name City, State Footage Renovated at Acquisition Cost Cash Paid
-------- ----------------- ----------- ------- --------- --------------- --------- ----------
2/19/02 Parkwest Crossing Durham, NC 85,602 1991 100% $ 6,620 $ 1,946
SHOPPING CENTER DISPOSITIONS
Date Square Sales Net Gain
Sold Property Name City, State Footage Price Proceeds (Loss)
------- ------------------- ----------- ------- ------ --------- -------
9/25/02 Forest Hills Centre Wilson, NC 74,180 $ 6,850 $ 6,513 $ 2,062 (1)
(1) Net of $123 of minority interest
In connection with the acquisition of Parkwest Crossing, the Company
assumed a $4,800, 8.1% mortgage. See Note 5.
On September 26, 2002, the Company entered into a sale agreement for
Lawrence Commons in Lawrenceburg, TN, to close in the fourth quarter of 2002.
This property is not classified as held for sale within the Condensed
Consolidated Balance Sheets due to the buyer's unconditional right to terminate
the agreement for sixty days after the date of the agreement.
6
3. DEVELOPMENT AGREEMENTS
The Company enters into agreements to develop shopping centers with local
developers. The agreements generally consist of the Company committing to loan a
fixed amount, at a specified interest rate, for the development of the shopping
center with the possibility of the Company then purchasing the center upon the
developer meeting certain budgetary and leasing requirements. The loan is
secured by the development property and due upon completion. The developer is
responsible for all construction matters as well as initial leasing efforts.
Additionally, the Company could enter into a separate agreement to purchase
the completed shopping center. Generally, the purchase price to the Company is
based on the shopping center's net operating income and an implied rate of
return at the time when the developer meets the specified requirements. As of
September 30, 2002, the Company has no such purchase commitments.
The Company is involved in one development loan, Freehome Village, a 89,270
square foot shopping center. As of September 30, 2002, the Company has loaned
$925 for development and the shopping center should be completed in 2003.
Beginning in the second quarter, the Company changed its treatment to account
for the development loan as a property under development in the accompanying
Condensed Consolidated Balance Sheet as of September 30, 2002. As of December
31, 2001, this development loan had been considered as a mortgage loan.
Management believes the effect on prior periods is not significant.
7
4. INVESTMENT IN AND ADVANCES TO AFFILIATES
As of September 30, 2002, LP, IRTCCII, IRTAL and IRTMC guaranteed the
Company's indebtedness under the Company's existing unsecured revolving term
loan and its other senior debt. The guarantees are joint and several and full
and unconditional. The following tables show IRTCCII, IRTAL and IRTMC as
"Combined Subsidiaries."
GUARANTORS
---------------------------- CONSOLIDATED
IRT PROPERTY COMBINED IRT ELIMINATING IRT PROPERTY
COMPANY SUBSIDIARIES PARTNERS, LP ENTRIES COMPANY
------------- ------------- ------------- ------------- -------------
AS OF SEPTEMBER 30, 2002
ASSETS
Net rental properties $ 398,705 $ 29,172 $ 147,734 $ - $ 575,611
Investment in affiliates 124,109 - - (124,109) -
Other assets 35,951 43,137 26,339 (88,602) 16,825
------------- ------------- ------------- ------------- -------------
Total assets 558,765 72,309 174,073 (212,711) 592,436
============= ============= ============= ============= =============
LIABILITIES
Mortgage notes payable 84,485 4,030 41,681 - 130,196
Senior Notes, net 149,792 - - - 149,792
Indebtedness to banks 17,000 - - - 17,000
Other liabilities 78,711 24,017 3,668 (80,889) 25,507
------------- ------------- ------------- ------------- -------------
Total liabilities 329,988 28,047 45,349 (80,889) 322,495
------------- ------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY
Total shareholders' equity 228,777 44,262 128,724 (131,822) 269,941
------------- ------------- ------------- ------------- -------------
Total liabilities and shareholders' equity $ 558,765 $ 72,309 $ 174,073 $ (212,711) $ 592,436
============= ============= ============= ============= =============
GUARANTORS
---------------------------- CONSOLIDATED
IRT PROPERTY COMBINED IRT ELIMINATING IRT PROPERTY
COMPANY SUBSIDIARIES PARTNERS, LP ENTRIES COMPANY
------------- ------------- ------------- ------------- -------------
AS OF DECEMBER 31, 2001
ASSETS
Net rental properties $ 399,312 $ 28,138 $ 145,625 $ - $ 573,075
Investment in affiliates 122,168 - - (122,168) -
Other assets 35,677 33,488 21,248 (72,988) 17,425
------------- ------------- ------------- ------------- -------------
Total assets 557,157 61,626 166,873 (195,156) 590,500
============= ============= ============= ============= =============
LIABILITIES
Mortgage notes payable 93,115 4,093 37,464 - 134,672
Senior Notes, net 124,760 - - - 124,760
Indebtedness to banks 51,654 - - - 51,654
Other liabilities 84,928 24,431 2,154 (65,233) 46,280
------------- ------------- ------------- ------------- -------------
Total liabilities 354,457 28,524 39,618 (65,233) 357,366
------------- ------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY
Total shareholders' equity 202,700 33,102 127,255 (129,923) 233,134
------------- ------------- ------------- ------------- -------------
Total liabilities and shareholders' equity $ 557,157 $ 61,626 $ 166,873 $ (195,156) $ 590,500
============= ============= ============= ============= =============
8
GUARANTORS
---------------------------- CONSOLIDATED
IRT PROPERTY COMBINED IRT ELIMINATING IRT PROPERTY
COMPANY SUBSIDIARIES PARTNERS, LP ENTRIES COMPANY
-------------- ------------- ------------- ------------- --------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES
Income from rental properties $ 15,922 $ 639 $ 5,981 $ - $ 22,542
Interest Income 121 - 76 (184) 13
Interest on direct financing leases 47 - - - 47
Other income 41 4,265 - (4,313) (7)
-------------- ------------- ------------- ------------- --------------
Total revenues 16,131 4,904 6,057 (4,497) 22,595
-------------- ------------- ------------- ------------- --------------
EXPENSES
Operating expenses of rental properties 4,113 166 1,690 - 5,969
Interest expense 4,556 186 816 (189) 5,369
Depreciation 2,829 55 1,005 - 3,889
Amortization of debt costs 180 1 5 - 186
General and administrative 603 110 261 - 974
-------------- ------------- ------------- ------------- --------------
Total expenses 12,281 518 3,777 (189) 16,387
-------------- ------------- ------------- ------------- --------------
Equity in earnings (losses) of affiliates - - - - -
-------------- ------------- ------------- ------------- --------------
Earnings from continuing operations before
income taxes, minority interest, gain on
sales of properties and discontinued operations 3,850 4,386 2,280 (4,308) 6,208
Income tax provision - - - - -
Minority interest in operating partnership 126 - - (252) (126)
Gain on sales of properties - - - - -
-------------- ------------- ------------- ------------- --------------
Income from continuing operations before
discontinued operations and extraordinary item 3,976 4,386 2,280 (4,560) 6,082
Income from discontinued operations (131) - 2,281 - 2,150
Extraordinary item - loss on extinguishment
of debt - - - - -
-------------- ------------- ------------- ------------- --------------
Net income $ 3,845 $ 4,386 $ 4,561 $ (4,560) $ 8,232
============== ============= ============= ============= ==============
GUARANTORS
---------------------------- CONSOLIDATED
IRT PROPERTY COMBINED IRT ELIMINATING IRT PROPERTY
COMPANY SUBSIDIARIES PARTNERS, LP ENTRIES COMPANY
-------------- ------------- ------------- ------------- --------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES
Income from rental properties $ 15,199 $ 322 $ 5,734 $ - $ 21,255
Interest Income 190 - 158 (256) 92
Interest on direct financing leases 51 - - - 51
Other income 284 2,477 - (2,503) 258
-------------- ------------- ------------- ------------- --------------
Total revenues 15,724 2,799 5,892 (2,759) 21,656
-------------- ------------- ------------- ------------- --------------
EXPENSES
Operating expenses of rental properties 3,636 82 1,485 - 5,203
Interest expense 5,058 193 732 (264) 5,719
Depreciation 2,810 63 917 - 3,790
Amortization of debt costs 161 1 3 - 165
General and administrative 746 62 268 - 1,076
-------------- ------------- ------------- ------------- --------------
Total expenses 12,411 401 3,405 (264) 15,953
-------------- ------------- ------------- ------------- --------------
Equity in earnings (losses) of affiliates 2,398 - - (2,398) -
-------------- ------------- ------------- ------------- --------------
Earnings from continuing operations before
income taxes, minority interest, gain on
sales of properties and discontinued operations 5,711 2,398 2,487 (4,893) 5,703
Income tax provision - - - - -
Minority interest in operating partnership 8 - - (117) (109)
Gain on sales of properties 1,390 - - (1,390) -
-------------- ------------- ------------- ------------- --------------
Income from continuing operations before
discontinued operations 7,109 2,398 2,487 (6,400) 5,594
Income from discontinued operations (11) - 133 - 122
-------------- ------------- ------------- ------------- --------------
Net Income $ 7,098 $ 2,398 $ 2,620 $ (6,400) $ 5,716
============== ============= ============= ============= ==============
9
GUARANTORS
------------------------------ CONSOLIDATED
IRT PROPERTY COMBINED IRT ELIMINATING IRT PROPERTY
COMPANY SUBSIDIARIES PARTNERS, LP ENTRIES COMPANY
-------------- -------------- -------------- ------------- --------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES
Income from rental properties $ 46,969 $ 1,568 $ 18,452 $ - $ 66,989
Interest Income 401 - 234 (588) 47
Interest on direct financing leases 218 - - - 218
Other income 383 9,359 - (9,244) 498
-------------- -------------- -------------- ------------- --------------
Total revenues 47,971 10,927 18,686 (9,832) 67,752
-------------- -------------- -------------- ------------- --------------
EXPENSES
Operating expenses of rental properties 11,649 404 5,151 - 17,204
Interest expense 14,164 496 2,400 (588) 16,472
Depreciation 8,462 186 3,008 - 11,656
Amortization of debt costs 474 2 14 - 490
General and administrative 2,090 283 853 - 3,226
-------------- -------------- -------------- ------------- --------------
Total expenses 36,839 1,371 11,426 (588) 49,048
-------------- -------------- -------------- ------------- --------------
Equity in earnings (losses) of affiliates 9,547 - - (9,547) -
-------------- -------------- -------------- ------------- --------------
Earnings from continuing operations before
income taxes, minority interest, gain on
sales of properties and discontinued operations 20,679 9,556 7,260 (18,791) 18,704
Income tax provision - (9) - - (9)
Minority interest in operating partnership 142 - - (538) (396)
Gain on sales of properties - - - - -
-------------- -------------- -------------- ------------- --------------
Income from continuing operations before
discontinued operations and extraordinary item 20,821 9,547 7,260 (19,329) 18,299
Income from discontinued operations (158) - 2,515 - 2,357
Extraordinary item - loss on extinguishment
of debt (156) - - - (156)
-------------- -------------- -------------- ------------- --------------
Net income $ 20,507 $ 9,547 $ 9,775 $ (19,329) $ 20,500
============== ============== ============== ============= ==============
Net cash flows provided by (used in)
operating activities $ 19,932 $ 8,616 $ 10,795 $ (9,255) $ 30,088
============== ============== ============== ============= ==============
.
Net cash flows (used in) provided by
investing activities $ (6,474) $ (1,004) $ 1,757 $ - $ (5,721)
============== ============== ============== ============= ==============
Net cash flows (used in) provided by
financing activities $ (16,610) $ (7,686) $ (12,347) $ 9,819 $ (26,824)
============== ============== ============== ============= ==============
GUARANTORS
------------------------------ CONSOLIDATED
IRT PROPERTY COMBINED IRT ELIMINATING IRT PROPERTY
COMPANY SUBSIDIARIES PARTNERS, LP ENTRIES COMPANY
-------------- -------------- -------------- ------------- --------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES
Income from rental properties $ 45,498 $ 945 $ 16,962 $ - $ 63,405
Interest Income 899 - 328 (855) 372
Interest on direct financing leases 335 - - - 335
Other income 327 8,888 293 (8,505) 1,003
-------------- -------------- -------------- ------------- --------------
Total revenues 47,059 9,833 17,583 (9,360) 65,115
-------------- -------------- -------------- ------------- --------------
EXPENSES
Operating expenses of rental properties 11,088 218 4,503 - 15,809
Interest expense 15,517 479 2,044 (855) 17,185
Depreciation 8,312 153 2,774 - 11,239
Amortization of debt costs 469 2 6 - 477
General and administrative 2,223 170 762 4 3,159
-------------- -------------- -------------- ------------- --------------
Total expenses 37,609 1,022 10,089 (851) 47,869
-------------- -------------- -------------- ------------- --------------
Equity in earnings (losses) of affiliates 8,758 - - (8,762) (4)
-------------- -------------- -------------- ------------- --------------
Earnings from continuing operations before
income taxes, minority interest, gain on
sales of properties and discontinued operations 18,208 8,811 7,494 (17,271) 17,242
Income tax provision - (53) - - (53)
Minority interest in operating partnership 17 - - (422) (405)
Gain on sales of properties 1,390 - 1,108 - 2,498
-------------- -------------- -------------- ------------- --------------
Income from continuing operations before
discontinued operations 19,615 8,758 8,602 (17,693) 19,282
Income from discontinued operations (34) - 349 - 315
-------------- -------------- -------------- ------------- --------------
Net Income $ 19,581 $ 8,758 $ 8,951 $ (17,693) $ 19,597
============== ============== ============== ============= ==============
Net cash flows provided by (used in)
operating activities $ 19,796 $ 7,738 $ 10,666 $ (9,743) $ 28,457
============== ============== ============== ============= ==============
Net cash flows (used in) provided by
investing activities $ (2,481) $ (2,589) $ (1,843) $ 685 $ (6,228)
============== ============== ============== ============= ==============
Net cash flows (used in) provided by
financing activities $ (11,172) $ (4,918) $ (14,466) $ 9,058 $ (21,498)
============== ============== ============== ============= ==============
10
5. MORTGAGE NOTES PAYABLE
On February 19, 2002, the Company assumed a non-recourse, secured loan
totaling $4,800, in connection with the acquisition of Parkwest Crossing. The
secured loan has a fixed interest rate of 8.1%. The loan is due and payable
September 1, 2010 and the principal amortization is based on a thirty year
amortization schedule. Costs associated with assuming the secured loan totaled
$56 and is being amortized over the term of the loan.
On March 1, 2002, the Company prepaid a 9.63% secured loan of approximately
$5,198. The loan was due on June 1, 2002.
On September 30, 2002, the Company prepaid a 7.65% secured loan of
approximately $1,989. The loan was due on December 1, 2002.
6. 7.3% CONVERTIBLE SUBORDINATED DEBENTURES
On January 24, 2002, the Company redeemed all of the outstanding 7.3%
convertible subordinated debentures due August 15, 2003 at par plus accrued
interest. Prior to redemption, 165 bonds were converted into 14,659 shares of
common stock. The Company paid $23,110 to redeem the remaining bonds outstanding
and recognized a $156 extraordinary loss on the extinguishment of unamortized
debt costs.
7. SENIOR NOTES
On January 23, 2002, pursuant to the Medium Term Note Program (the "MTN
Program") established in 2001, the Company issued $25,000 of 7.84% senior
unsecured notes due January 23, 2012. Interest on these senior notes is payable
semi-annually on January 23 and July 23. Costs associated with the issuance of
these senior notes totaled approximately $306 and are being amortized over the
life of the notes.
8. COMMITMENTS AND CONTINGENCIES
Certain of the Company's properties have environmental concerns that have
been or are being addressed. The Company maintains limited insurance coverage
for this type of environmental risk. Although no assurance can be given that
Company properties will not be affected adversely in the future by environmental
problems, the Company presently believes that there are no environmental matters
that are reasonably likely to have a material adverse effect on the Company's
financial position.
9. COMMON STOCK
In May 2002, the Company completed an offering of 3,450,000 shares of
common stock at $11.79 per share. Net proceeds to the Company were approximately
$38,508.
10. DEFERRED COMPENSATION
On May 30, 2002, 160,000 restricted shares of common stock were granted to
certain Company officers as incentives for future services. The restricted
shares vest proportionately over 4 years from the date of grant. The restricted
shares were valued at the closing price of the Company's common stock on May 30,
2002 of $11.97. As of September 30, 2002, the Company had recognized
compensation expense of approximately $64 related to this grant within the
Condensed Consolidated Income Statements.
11
11. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares outstanding during the period. The effects of
the conversion of the operating partnership units held by the minority interest
are dilutive for the three and nine months ended September 30, 2001 and have
been included in the calculation of diluted earnings per share for those
periods. For the three and nine months ended September 30, 2002, the effect of
the operating partnership units have been excluded from the calculation as they
are anti-dilutive for the period. For the three and nine months ended September
30, 2002 and 2001 the effects of the conversion of the 7.3% debentures have been
excluded from the calculation of diluted earnings per share as they are
anti-dilutive for those periods. The effects of certain stock options and
non-vested restricted stock, using the treasury stock method, have been included
in the calculation of diluted earnings per share, as they are dilutive for all
periods presented.
Per Share
Income Shares Amount
------- ------ -------
(In thousands except per share amounts)
For the three months ended September 30, 2002
----------------------------------------------------------
Basic net earnings available to shareholders $ 8,232 33,973 $ 0.24
=======
Options outstanding - 184
Restricted stock - 19
Diluted net earnings available to shareholders $ 8,232 34,176 $ 0.24
======= ====== =======
For the three months ended September 30, 2001
----------------------------------------------------------
Basic net earnings available to shareholders $ 5,716 30,388 $ 0.19
=======
Options outstanding - 106
Restricted stock - 29
Minority interest of unitholders in operating partnership 117 816
Diluted net earnings available to shareholders $ 5,833 31,339 $ 0.19
======= ====== =======
For the nine months ended September 30, 2002
----------------------------------------------------------
Basic net earnings available to shareholders $20,500 32,360 $ 0.63
=======
Options outstanding - 174
Restricted Stock - 17
Diluted net earnings available to shareholders $20,500 32,551 $ 0.63
======= ====== =======
For the nine months ended September 30, 2001
----------------------------------------------------------
Basic net earnings available to shareholders $19,597 30,294 $ 0.65
=======
Options outstanding - 78
Restricted stock - 3
Minority interest of unitholders in operating partnership 422 816
Diluted net earnings available to shareholders $20,019 31,191 $ 0.64
======= ====== =======
12. SUBSEQUENT EVENTS
On October 7, 2002, an agreement was signed for the sale of the Lexington
Shopping Center in Lexington, VA to close on November 29, 2002. This unsolicited
offer was from the single tenant occupying the center. The Company expects to
recognize a gain on the sale of approximately $1,400.
On October 28, 2002, Equity One, Inc. (NYSE: EQY) and the Company executed
a merger agreement pursuant to which Equity One will acquire the Company. In
connection with the merger, each of the Company's shareholders may elect to
receive for each share of the Company's common stock either $12.15 in cash or
0.9 shares of Equity One common stock, or a combination thereof. The terms of
the merger agreement further provide that the holders of no more than 50% of the
Company's outstanding common stock may elect to receive cash.
12
Completion of the transaction, which is expected to take place in the first
quarter of 2003, is subject to the approval of Equity One's and the Company's
shareholders and other customary conditions. The boards of each of the Company
and Equity One have unanimously approved the transaction. Additionally, holders
of approximately 75% of Equity One's common stock and approximately 8% of the
Company's common stock have agreed to vote their shares in favor of the
transactions contemplated by the merger. On the 4th business day prior to the
shareholder meetings, the Equity One holders may withdraw their voting support,
and the Company's board may withdraw its merger recommendation, if Equity One's
weighted average stock price for the 30 preceding trading days is less than
$12.06 or less than $11.00 for the three preceding trading days. In addition, on
the 4th business day prior to the shareholder meetings the Equity One holders
may withdraw their voting support if the Company's weighted average stock price
for the 30 preceding trading days is less than $10.935 or less than $9.935 for
the three preceding trading days.
The Company cannot make any assurances that the merger with Equity One will
be consummated according to the terms set forth in the merger agreement, if at
all. Either the Company or Equity One may terminate the merger agreement if the
merger is not consummated by March 31, 2003. The Company will be required to
pay a $15 million break-up fee to Equity One in the event that the Company
enters into an agreement for a superior transaction or if, under certain
circumstances, the Company's board withdraws its recommendation for the
transaction.
On October 31, 2002, Janet Herszenhorn, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, filed a putative
class action lawsuit in the Superior Court of Cobb County, Georgia, against IRT,
Equity One and each of the directors of IRT. The complaint alleges, among other
things, that IRT and its individual directors breached their fiduciary duties by
agreeing to the merger between Equity One and IRT and that Equity One aided and
abetted such breach. The complaint seeks injunctive relief, an order enjoining
consummation of the merger and unspecified damages.
On October 31, 2002, John Greaves, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, also filed a
putative class action lawsuit in the Superior Court of Cobb County, Georgia,
against IRT, Equity One and each of the directors of IRT. The complaint alleges,
among other things, that IRT and its individual directors breached their
fiduciary duties by agreeing to the merger between Equity One and IRT and that
Equity One aided and abetted such breach. The complaint seeks injunctive relief,
an order enjoining consummation of the merger and unspecified damages.
Although the defendants believe that these suits are without merit and
intend to defend themselves vigorously, there can be no assurance that the
pending litigation will not interfere with the consummation of the merger. IRT
and Equity One do not expect that these suits will interfere with the scheduling
of their respective shareholder meetings or the consummation of the merger, if
approved.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollars in thousands, except per share
amounts)
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this report.
OVERVIEW
IRT Property Company ("IRT" or the "Company") was founded in 1969 and
became a public company in May 1971 (NYSE: IRT). The Company is an owner,
operator, redeveloper and developer of high quality, well located neighborhood
and community shopping centers throughout the southeastern United States. The
Company's portfolio consists of 89 shopping centers, three shopping center
investments, two development properties, one industrial property and three
mortgage loans. The 89 shopping centers and the three shopping center
investments total approximately 9.8 million square feet of retail space and are
located in eleven southeastern states. IRT shopping centers are anchored by
necessity-oriented retailers such as supermarkets, drug stores, national value
retailers and department stores.
GEOGRAPHIC MARKETS
The Company owns and operates 89 shopping centers in ten states primarily
located in Florida (27), Georgia (20), Louisiana (14) and North Carolina (13).
The following table summarizes the Company's shopping centers by state for total
gross leasable area ("GLA") and rental income for the nine months ended
September 30, 2002 and for the year ended December 31, 2001:
% OF GLA % OF RENTAL INCOME
----------------------------- -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Florida 33.2% 32.3% 39.4% 38.4%
Georgia 24.6% 25.1% 24.6% 25.6%
Louisiana 17.5% 17.8% 13.7% 14.4%
North Carolina 12.5% 12.5% 11.7% 11.2%
Tennessee 3.7% 3.7% 3.3% 3.2%
Virginia 2.8% 2.8% 2.3% 2.3%
South Carolina 2.5% 2.6% 2.0% 2.0%
Alabama 2.1% 2.1% 2.1% 2.2%
Mississippi 0.7% 0.7% 0.5% 0.3%
Kentucky 0.4% 0.4% 0.4% 0.4%
-------------- ------------- -------------- -------------
100.0% 100.0% 100.0% 100.0%
============== ============= ============== =============
14
TENANTS AND LEASING
The Company's 89 shopping centers are anchored by necessity-oriented
retailers such as supermarkets, drug stores, national value retailers and
department stores. The Company's five largest tenants, as a percentage of
revenues, are Publix (9.6%), Kroger (7.1%), Wal-Mart (4.6%), Kmart (3.4%) and
Winn Dixie (2.6%). As of September 30, 2002, of the Company's 9.8 million square
feet of retail space, approximately 2.8 million, or 28.9%, was leased to grocery
stores. Including anchor tenants, the Company has over 1,000 different tenants.
The following table represents the percent leased and the average base rent per
square foot leased by state as of September 30, 2002 and December 31, 2001:
AVERAGE BASE RENT
% LEASED PER SQUARE FOOT LEASED
----------------------------- -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Florida 95% 92% $ 9.27 $ 9.10
Georgia 94% 95% 8.19 8.19
Louisiana 77% 87% 7.65 7.22
North Carolina 95% 94% 6.77 6.64
Tennessee 95% 97% 6.49 6.60
Virginia 93% 92% 7.03 6.93
South Carolina 96% 95% 6.08 6.06
Alabama 99% 98% 7.99 7.90
Mississippi 100% 100% 5.63 5.62
Kentucky 56% 94% 8.03 7.81
-------------- ------------- -------------- -------------
Total of all properties 92% 93% $ 8.12 $ 7.94
============== ============= ============== =============
The overall percent leased decreased slightly from 93% at December 31, 2001
to 92% at September 30, 2002. The decrease was due to one of the Company's major
tenants, Kmart, rejecting one lease in Louisiana of 72,897 square feet at the
end of June and one lease in Louisiana of 92,079 square feet in July.
Base rent per square foot leased increased from $7.94 per square foot as of
December 31, 2001 to $8.12 per square foot as of September 30, 2002 due to
increased renewal rental rates, higher rates on the new properties and
disposition of properties in tertiary markets with below market rents. The
Company renewed leases during 2002 at an average increase of 4.3% in rental
revenues. The Company also completed three developments and purchased three
properties during 2001 and 2002, which have higher base rents per square foot.
The necessity-oriented retailers, such as those occupying the Company's
properties, typically perform well in an economic recession; however, adverse
changes in general or local economic conditions could result in the inability of
some existing tenants to meet their lease obligations and could adversely affect
the Company's ability to attract or retain tenants.
In October 1999, a grocery anchor, Jitney Jungle, filed for reorganization
under Chapter 11 of the United States Bankruptcy Code. At the time of filing,
the Company had leases with Jitney Jungle at 10 store locations. Jitney Jungle
disavowed two of these leases at the time of the bankruptcy filing. During 2000,
Jitney Jungle rejected three additional leases, and in January 2001 the
remaining five leases were rejected by the bankruptcy court. As of September 30,
2002, of the 10 original Jitney Jungle locations, three are fully leased to
grocery operators, three are fully leased to other national tenants and one is
partially leased to a national tenant. The Company is negotiating with retailers
for two of the remaining three locations.
15
On January 22, 2002, one of the Company's anchor tenants, Kmart
Corporation, filed for bankruptcy protection. The Company has eight stores
leased to Kmart, which accounted for 3.4% of the Company's total revenues for
the nine months ended September 30, 2002. On March 8, 2002, Kmart Corporation
announced nationwide store closings that included two stores in IRT's portfolio.
Rental income from these two stores in 2001 was approximately $730, including
base rents and all related charges of property taxes and common area
maintenance. Subsequently in June 2002, the two stores, located at Siegen
Village and Pinhook Plaza in Louisiana, closed when store-closing inventory
sales were completed. In July and August, the respective leases were rejected by
Kmart and the Company obtained possession of this space. The Company is
aggressively marketing these locations to prospective tenants and presently
believes revenue lost will not have a material adverse affect on the Company.
Other tenants have also filed for protection under bankruptcy laws,
however; the Company presently believes the potential financial losses likely
will not be significant with regard to the Company's overall portfolio of
tenants.
As of September 30, 2002, our leases with anchor tenants had a weighted
average life of 7.67 years. Anchor tenants are defined as supermarkets, drug
stores, national value retailers, department stores and other tenants leasing in
excess of 10,000 square feet which, in management's opinion, have the
traffic-generating qualities necessary to be considered an anchor. Our leases
with shop tenants, which include all other tenants except anchors, had a
weighted average life of 2.86 years as of September 30, 2002. The following
table represents anchor and shop tenant lease expirations as of September 30,
2002:
APPROXIMATE ANNUALIZED
NUMBER OF LEASED BASE RENT AVERAGE
LEASE YEAR LEASES AREA IN UNDER EXPIRING BASE RENT
EXPIRATION EXPIRING SQUARE FEET LEASES PER SQUARE FOOT
---------- --------- ----------- --------------- ----------------
2002 83 208,290 $ 2,064,281 $ 9.91
2003 315 830,462 8,492,950 10.23
2004 280 792,486 8,347,211 10.53
2005 307 959,172 9,530,468 9.94
2006 191 922,894 8,524,505 9.24
2007 156 909,051 7,551,164 8.31
2008 36 454,169 2,961,991 6.52
2009 23 764,866 4,052,414 5.30
2010 19 280,900 1,826,182 6.50
2011 17 496,761 3,210,617 6.46
2012 14 344,116 2,570,347 7.47
Thereafter 58 1,825,154 13,052,869 7.15
--------- ----------- --------------- ----------------
Total 1,499 8,788,321 $ 72,184,999 $ 8.21
========= =========== =============== ================
16
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates and assumptions within the
financial statements include valuation adjustments to tenant related accounts,
determination of useful lives of assets subject to depreciation or amortization
and impairment evaluation of operating and development properties and other
long-term assets. However, application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ significantly from those estimates.
Additional discussion of accounting policies that we consider to be
significant, including further discussion of the critical accounting policies
described below, are included in the Company's December 31, 2001 Form 10-K notes
to the consolidated financial statements.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Rental revenue
is recognized on a straight-line basis over the initial lease term. Certain
tenants are required to pay percentage rents based on their gross sales
exceeding specified amounts. This percentage rental revenue is recorded upon
collection. The Company receives reimbursements from tenants for real estate
taxes, common area maintenance and other recoverable costs. These tenant
reimbursements are recognized as revenue in the period the related expense is
recorded.
The Company makes valuation adjustments to all tenant related revenue based
upon the tenant's credit and business risk. The Company suspends the accrual of
income on specific investments where interest, reimbursement or rental payments
are delinquent sixty days or more. These valuation adjustments are estimates
that affect the Company's net earnings since an increase or decrease in the
valuation adjustments directly leads to a decrease or increase in net earnings,
respectively.
Rental Properties
Rental properties are stated at cost less accumulated depreciation. Costs
incurred for the acquisition, renovation, and betterment of the properties are
capitalized and depreciated over their estimated useful lives. Recurring
maintenance and repairs are charged to expense as incurred. Depreciation is
computed on a straight-line basis generally for a period of sixteen to forty
years for buildings and significant improvements. Tenant improvements are
depreciated on a straight-line basis over the life of the related lease.
When costs are capitalized, the Company must make a judgment of the useful
life of the asset for purposes of determining the amount of yearly depreciation,
which affects net earnings. If the useful life were increased, yearly
depreciation would be reduced, thus increasing net earnings.
Impairment of Properties
The Company periodically evaluates the carrying value of its long-lived
assets, including operating and development properties, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Impairment is based on whether
it is probable that undiscounted future cash flows from each property will be
less than its net book value. The Company assesses whether there are any
indicators that the value of the asset may be impaired. In addition, judgments
are made in calculating the undiscounted cash flows. These assessments and
judgments could have a material impact on net earnings since, if an impairment
exists, the asset is written down to its estimated fair value and an impairment
loss is recognized thereby reducing net earnings.
17
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THE
THREE MONTHS ENDED SEPTEMBER 30, 2001
Revenues
Total revenues increased $939, or 4.3%, to $22,595 in 2002 primarily due to
an increase in income from rental properties of $1,287 which was partially
offset by decreases in interest income of $79 and interest on direct financing
leases of $4 and gain on sales of outparcels of $265.
Income from rental properties increased $1,287, or 6.1%, to $22,542 in
2002. Included in income from rental properties is minimum rent, percentage rent
and other rental income. Minimum rents increased $820, or 4.8%, primarily due to
an increase in rental rates per square foot from $7.94 in 2001 to $8.12 in 2002
and the core portfolio of properties contributing $389, or an increase of 1.8%,
over 2001. The core portfolio is defined as properties held in the same
corresponding period from the current and prior year, excluding those properties
sold or acquired during the same corresponding period. Income from rental
properties increased $879 due to one property acquired in 2002, one property
acquired in 2001 and two completed developments which was partially offset by a
$17 decrease in income attributable to the sale of four properties in 2001.
Percentage rent, based on tenant's gross sales exceeding specified amounts,
increased $2, or 3.5%, to $59 for 2002. Other rental income such as tenant
reimbursements for common area maintenance ("CAM"), property taxes and
insurance, tenant allowances (bad debt reserves) and lease cancellation fees,
increased $465, or 11.5%, to $4,502. This increase was partially due to an
increase in tenant reimbursements for CAM of $859, or 23.9%. The reimbursements
received as a percentage of expenses were 79.4% in 2002 and 73.7% in 2001. The
increase in the reimbursement percentage is due to the releasing of several of
the former Jitney Jungle locations during late 2001 and early 2002. Tenant
allowances increased $62, or 753.4%, from 2001 and represented only 0.3% of
rental income in 2002. Lease cancellation fees decreased $387, or 94.4%, due to
the one-time lease termination fee of an anchor in 2001.
Interest income decreased $79, or 85.9%, to $13 in 2002 from $92 in 2001.
The decrease was due to interest charged on a development loan that was repaid
in 2001.
Interest on direct financing leases decreased $4, or 7.8%, due to the
recurring amortization of the lease.
Gain on sale of outparcels decreased $265, or 102.7% to $(7) in 2002. In
2001 the Company sold an outparcel compared to no outparcel sales occurring in
2002.
Expenses
Total expenses increased $434, or 2.7%, to $16,387 in 2002 due to increases
in operating expenses of rental properties of $766, depreciation of $99 and
amortization costs of $21, partially offset by a decrease in administrative
expenses of $102 and interest expense of $350.
Operating expenses of rental properties increased $766, or 14.7%, to $5,969
in 2002. This increase was partially due to an increase of real estate taxes of
$183, or 9.6%, over 2001 as a result of increased property values. Insurance
costs increased by $313, or 109.7%, over 2001 due to a significant increase in
premiums as a result of the insurance market environment. The Company amortizes
lease fees that are capitalized and the amortization expense increased $26, or
8.1%, in 2002 due to increased leasing activity in 2001 in connection with the
releasing of the former Jitney Jungle stores. During 2002, the Company executed
over 247,000 square feet of new or renewed leases. Tenant reimbursable operating
expenses increased $229, or 13.6%, primarily due to higher operating and
maintenance costs. Overall, the operating expenses of properties increased due
to core portfolio operating expenses increasing $558, or 10.8%, over 2001 and
the one property acquired in 2002 with the one property acquired during 2001 and
the two development properties completed in 2002, increasing expenses $206.
18
Interest expense decreased $350, or 6.1%, in 2002 primarily due to a
decrease of $328 on bank interest as a result of a lower effective interest rate
of 4.14% in 2002 as compared to 4.56% in 2001 and a lower average borrowing
during 2002 of $20,795 compared to $34,605 during 2001. This decrease was
partially offset by the higher interest rate on the new senior unsecured notes
issued in January 2002 of 7.84% or $65.
The net increase of $99, or 2.6%, in depreciation expense in 2002 was due
to the acquisition of a shopping center in the first quarter of 2002 and two
shopping centers during 2001, net of the effect of the disposition of three
properties in 2001.
Amortization of debt costs increased $21, or 12.7%, due to the $25,000 of
7.84% senior notes issued in January 2002, partially offset by the write-off of
costs relating to the redemption of the 7.3% convertible bonds in January 2002.
General and administrative expenses decreased $102, or 9.5%, to $974 in
2002 primarily due to a $143 decrease in capitalized development costs as
compared to 2001 since two developments were completed in 2002. Total general
and administrative expenses as a percentage of total revenues were 4.3% and 5.0%
for 2002 and 2001, respectively.
Other
Minority interest expense increased $17, or 15.6%, to $126 in 2002.
Minority interest represents the interest of an unaffiliated limited partner in
the earnings of a partnership with the Company. The partnership sold a property
in 2002 thus increasing the net income of the partnership in 2002. No such sales
occurred in 2001. This increase in partnership net income from 2001 is also due
to the Company acquiring one property in 2002 and two properties in 2001 for
inclusion in the partnership, which increased the Company's percentage ownership
of the partnership from 94.1% in 2001 to 94.4% in 2002.
Due to the implementation of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assts," effective January 1, 2002 the operating results of certain real estate
assets sold subsequent to January 1, 2002 and the respective gain relating to
the sale be reported as discontinued operations. As a result, there are no gains
on sale of properties within income from continuing operations in 2002.
The Company sold a property in 2002, compared to none in 2001, leading to
an increase in income from discontinued operations of $2,150 in 2002. Of the
total income from discontinued operations, $88 related to the income from the
discontinued operation and $2,062 related to the gain on the sale of the
property. The 2002 income of $88 represents $171 of rental income, $38 of
property operating expenses, $3 of interest expense, $37 of depreciation expense
and $5 of minority interest expense. The 2001 income of $122 represents $208 of
rental income, $38 of operating expenses, $4 of interest expense, $36 of
depreciation expense and $8 of minority interest expense.
Net Income
Net income increased $2,516, or 44.0%, to $8,232 in 2002 from $5,716 in
2001. The increase was attributable to gains on sales of properties in 2002 and
an increase in revenues primarily from the increase in base rents per square
foot and rental revenues. These increases in revenues were partially offset by
higher operating expenses of the properties.
19
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues
Total revenues increased $2,637, or 4.0%, to $67,752 in 2002 primarily due
to an increase in income from rental properties of $3,584, which was partially
offset by decreases in interest income of $325, interest on direct financing
leases of $117 and gain on sale of outparcels of $505.
Income from rental properties increased $3,584, or 5.7%, to $66,989 in
2002. Included in income from rental properties is minimum rent, percentage rent
and other rental income. Minimum rents increased $2,595, or 5.1%, primarily due
to an increase in rental rates per square foot from $7.94 in 2001 to $8.12 in
2002 and the core portfolio of properties contributing $1,661, or an increase of
2.6%, over 2001. The core portfolio is defined as properties held in the same
corresponding period from the current and prior year, excluding those properties
sold or acquired during the same corresponding period. Income from rental
properties increased $2,269 due to one property acquired in 2002 and two
properties acquired in 2001 which was partially offset by a $356 decrease in
income attributable to the sale of four properties in 2001. Percentage rent,
based on tenant's gross sales exceeding specified amounts, decreased $30, or
3.4%, to $844 for 2002 due to lower sales of existing tenants. Other rental
income such as tenant reimbursements, tenant allowances (bad debt reserves) and
lease cancellation fees, increased $1,019, or 8.1%, to $12,527. This increase
was partially due to an increase in tenant reimbursements for common area
maintenance ("CAM") of $1,427, or 13.0%. The reimbursements received as a
percentage of expenses were 76.8% in 2002 and 73.8% in 2001. This increase is
due to the sales of properties with lower recovery percentages in 2002 and 2001
and the releasing of several former Jitney Jungle spaces. Tenant allowances
decreased $1, or 0.02%, from 2001 and represented only 0.4% of rental income in
2002. Lease cancellation fees decreased $543, or 88.8%, due to the one-time
lease termination fee of an anchor in 2001.
Interest income decreased $325, or 87.4%, to $47 in 2002 from $372 in 2001.
The decrease was due to interest charged on a development loan that was repaid
in 2001.
Interest on direct financing leases decreased $117, or 34.9%, due to the
sale of one direct financing lease investment in May 2001.
Gain on sale of outparcels decreased $505, or 50.3% to $498 in 2002. In
2002 and 2001 the Company sold two and three outparcels, respectively.
Expenses
Total expenses increased $1,179, or 2.5%, to $49,048 in 2002 due to
increases in operating expenses of rental properties of $1,395, depreciation of
$417, amortization of debt costs of $13 and administrative expenses of $67,
partially offset by a decrease in interest expense of $713.
Operating expenses of rental properties increased $1,395, or 8.8%, to
$17,204 in 2002. This increase was partially due to an increase of real estate
taxes of $496, or 8.6%, over 2001 as a result of increased property values.
Insurance costs increased by $891, or 101.2%, over 2001 due to a significant
increase in premiums as a result of the insurance market environment. The
Company amortizes lease fees that are capitalized and the amortization expense
increased $83, or 9.2%, in 2002 due to increased leasing activity in 2001 in
connection with the releasing of the former Jitney Jungle stores. During 2002,
the Company executed over 707,000 square feet of new or renewed leases. Tenant
reimbursable operating expenses decreased $7, or 0.1%, primarily due to lower
operating and maintenance costs. Overall, the operating expenses of properties
increased due to core portfolio operating expenses increasing $835, or 5.3%,
over 2001 and the one property acquired in 2002 with the two properties acquired
during 2001 and the two development properties completed in 2002 increasing
expenses $627. These increases were partially offset by a decrease in expenses
of $62 from the sales of four properties during 2001.
20
Interest expense decreased $713, or 4.1%, in 2002 primarily due to a
decrease of $1,158 on bank interest as a result of a lower effective interest
rate of 4.09% in 2002 as compared to 6.85% in 2001 and a lower average borrowing
during 2002 of $28,081 compared to $33,040 during 2001. This decrease was
partially offset by the higher interest rate on the new senior unsecured notes
issued in January 2002 of 7.84% or $179 and the higher interest rate on the
three mortgage notes obtained in the second quarter of 2001 of 7.17% or $239.
The net increase of $417, or 3.7%, in depreciation expense in 2002 was due
to the acquisition of a shopping center in the first quarter of 2002 and two
shopping centers during 2001, net of the effect of the disposition of three
properties in 2001.
Amortization of debt costs increased $13, or 2.7%, due to the $25,000 of
7.84% senior notes issued in January 2002, partially offset by the write-off of
costs relating to the redemption of the 7.3% convertible bonds in January 2002.
General and administrative expenses increased $67, or 2.1%, to $3,226 in
2002 primarily due to a $140 decrease in capitalized development costs.
Capitalized development costs decreased from 2001 due to two developments being
completed in 202. Total general and administrative expenses as a percentage of
total revenues were 4.8% and 4.9% for 2002 and 2001, respectively.
Other
Income taxes decreased $44, or 83.0%, in 2002 due to a subsidiary not
having as much taxable income in 2002 as 2001.
Minority interest expense decreased $9, or 2.2%, to $396 in 2002. Minority
interest represents the interest of an unaffiliated limited partner in the
earnings of a partnership with the Company. The partnership sold two properties
in 2001 thus decreasing the net income of the partnership in 2001. This decrease
in partnership net income from 2001 is partially offset due to the Company
acquiring one property in 2002 and two properties in 2001 for inclusion in the
partnership, which increased the Company's percentage ownership of the
partnership from 94.1% in 2001 to 94.4% in 2002.
Due to the implementation of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assts," effective January 1, 2002 the operating results of certain real estate
assets sold subsequent to January 1, 2002 and the respective gain relating to
the sale be reported as discontinued operations. As a result, there are no gains
on sale of properties within income from continuing operations in 2002 compare
to the gain on sales of four properties of $2,498 from 2001.
The Company sold a property in 2002, leading to an increase in income from
discontinued operations of $2,357 in 2002. Of the total income from discontinued
operations, $295 related to the income from the discontinued operation and
$2,062 related to the gain on the sale of the property. The 2002 income of $295
represents $566 of rental income, $124 of property operating expenses, $16 of
interest expense, $112 of depreciation expense and $19 of minority interest
expense. The 2001 income of $315 represents $578 of rental income, $120 of
operating expenses, $17 of interest expense, $109 of depreciation expense and
$17 of minority interest expense.
Due to the early extinguishment of the 7.3% convertible debentures in
January 2002, the Company recognized an extraordinary loss of $156 on the
unamortized debt issue costs. No such transaction occurred in 2001.
21
Net Income
Net income increased $903, or 4.6%, to $20,500 in 2002 from $19,597 in
2001. The increase was attributable to an increase in revenues primarily from
the increase in base rents per square foot and rental revenues, partially offset
by a one time extraordinary loss on the extinguishment of debt, higher operating
expenses of the properties along with higher general and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company presently expects cash from operating activities to be its
primary source of funds to pay dividends, mortgage note payments and certain
capital improvements on properties. Net cash from operating activities was
$30,088 in 2002 as compared to $28,457 in 2001, an increase of 5.7%. The
increase in cash flow is due to an increase in net earnings and less gains on
outparcel sales during 2002. Dividends paid during 2002 and 2001 were $23,200
and $21,422, respectively. Mortgage principal payments for 2002 and 2001 were
$2,091 and $1,890, respectively. Total capital expenditures on operating
properties for 2002 and 2001 were $3,875 and $4,240, respectively.
Other planned activities, including property acquisitions, new
developments, certain capital improvement programs and debt repayments, are
expected to be funded to the extent necessary by bank borrowings, mortgage
financing, periodic sales or exchanges of existing properties, the issuance of
OP Units and public or private offerings of stock or debt. Net cash used in
investing activities was $5,721 in 2002, as compared to $6,228 in 2001, a
decrease of $507. This decrease in cash used in investing activities was due to
one acquisition in 2001 as compared to an acquisition in 2002 with an assumed
mortgage partially offset by the capital expenditures relating to the
development program of $7,851 in 2002 compared to $6,451 in 2001 as the Company
completed two developments in 2002 and only one development in 2001.
Net cash used in financing activities increased to $26,824 in 2002 from
$21,498 in 2001, an increase of $5,326 or 24.8%. This increase was due to the
redemption of the convertible debentures in 2002 of $23,110, a repayment of two
mortgages in 2002 of $7,186 and an increase in dividends of $1,778. These
increases were partially offset by the Company issuing $38,508 of common stock
and $25,000 of senior notes in 2002 compared to the Company issuing $50,000 of
senior notes in 2001.
In May 1998, the Company filed a shelf registration statement covering up
to $300,000 of common stock, preferred stock, depositary shares, debt securities
and warrants. In January 2001, the Company filed a new shelf registration
statement to replace and update the 1998 shelf registration statement. The
Company presently intends to use the net proceeds of any offerings under such
shelf registration for general corporate purposes, which may include, without
limitation, repayment of maturing obligations, redemption of outstanding
indebtedness or other securities, financing future acquisitions and for working
capital.
On March 23, 2001, the Company established a Medium Term Note Program (the
"MTN Program"), pursuant to the Company's shelf registration statement filed in
January 2001. The MTN Program allows the Company, from time to time, to issue
and sell up to $100,000 of medium term notes. Medium term notes have a maturity
of nine months or more from the date of issuance. On March 29, 2001, pursuant to
the MTN Program, the Company issued $50,000 of 7.77% medium term notes due April
1, 2006. Net proceeds from the issuance totaled $49,328 and were used to
substantially repay the $50,000 of 7.45% senior notes that were due on April 1,
2001. On January 23, 2002, an additional $25,000 of 7.84% medium term notes were
issued to redeem the 7.3% convertible subordinated debentures. These new notes
are due on January 23, 2012. As a result, the Company has $25,000 of medium term
notes available for issuance under its MTN Program. As of March 31, 2002, the
Company had issued $75,000 in debt securities from the shelf registration.
22
The Company also issued 3,450,000 shares of common stock at an offering
price of $11.79 per share for total proceeds, before expenses, of $40,676 under
the shelf registration statement in May 2002. As a result of the MTN Program and
common stock sales, $184,324 of securities remain available for issuance under
the shelf registration statement.
On January 24, 2002, the Company redeemed all of the outstanding 7.3%
convertible subordinated debentures at par for $23,220. Prior to redemption, 165
bonds were converted into 14,659 shares of common stock.
The Company uses secured borrowings to meet capital requirements. As of
September 30, 2002 the Company had $130,196 in mortgage notes payable at a
weighted average interest rate of 7.60%, which are due in monthly installments
with maturity dates ranging from 2005 to 2024.
In February 2002, the Company assumed a non-recourse, mortgage loan
totaling $4,800, in connection with the acquisition of Parkwest Crossing. The
secured loan has a fixed interest rate of 8.1%. The loan is due and payable in
eight years and the principal amortization is based on a thirty year
amortization schedule.
On March 1, 2002, the Company prepaid a 9.63% mortgage loan of
approximately $5,198. The loan was due on June 1, 2002.
On September 30, 2002, the Company prepaid a 7.65% secured loan of
approximately $1,989. The loan was due on December 1, 2002.
In February 2001, the Company entered into three mortgage loans totaling
$20,740, secured by first mortgages on three properties. These notes are due and
payable in ten years and the principal amortization is based on a thirty year
amortization schedule. The notes bear interest at a weighted average interest
rate of 7.17% and range from 7.02% to 7.25%.
Future principal amortization and balloon payments applicable to mortgage
notes payable at September 30, 2002 are as follows:
Scheduled Balloon
Amortization Payments Total
------------- --------- --------
2002 $ 708 $ - $ 708
2003 2,965 - 2,965
2004 3,192 - 3,192
2005 3,448 24,500 27,948
2006 3,586 54,797 58,383
Thereafter 53,991 150,009 204,000
------------- --------- --------
$ 67,890 $ 229,306 $297,196
============= ========= ========
23
On November 1, 1999, the Company obtained a $100,000 unsecured revolving
loan facility (the "Revolving Loan"), with an original maturity date of November
1, 2002. This Revolving Loan replaced the Company's previous credit facility and
is led by a different financial institution and further backed by a syndicate of
four other financial institutions. Not later than November 1 of each year
commencing in 2000, the Company may request to extend the maturity date for an
additional 12-month period beyond the existing maturity date. The interest rate
is, at the option of the Company, either prime, fluctuating daily, or LIBOR plus
the "Applicable Margin" (currently 105 basis points), which is subject to
adjustment based upon the rating of the senior unsecured long-term debt
obligations of the Company. The Company may borrow, repay and/or reborrow under
this loan at any time. In addition, the Company secured a $5,000 unsecured swing
line, bearing interest at LIBOR plus the Applicable Margin, scheduled to mature
on October 31, 2000. In October 2000, the maturity date of the Revolving Loan
and the swing line was extended to November 1, 2003. The Company also secured an
option to increase the Revolving Loan at its discretion by $50,000. On May 29,
2002, the Company amended and renewed the existing $100 million unsecured line
of credit, as well as extending the Company's option to expand the line by $50
million, until May 29, 2005. The Revolving Loan was also amended to decrease the
Applicable Margin to 105 basis points from 115 basis points. The terms of the
Company's credit facilities and other instruments and agreements relating to our
indebtedness include certain customary operational and financial covenants,
which the Company was in compliance with as of September 30, 2002.
As of September 30, 2002 and December 31, 2001, the borrowings under the
Company's credit facilities totaled $17,000 and $51,654, respectively. The
average interest rates for 2002 and 2001 were 3.88% and 6.48%, respectively. At
September 30, 2002, the weighted average interest rate was 2.86% on outstanding
borrowings under the Revolving Loan.
LP, IRTCCII, IRTAL and IRTMC guarantee the Company's indebtedness under the
Company's existing unsecured revolving term loan and its other senior debt.
The Company presently believes that based on currently proposed plans and
assumptions relating to its operations, the Company's existing financial
arrangements, together with cash flows from operations, will be sufficient to
satisfy its foreseeable cash requirements for the next year. At September 30,
2002 the Company's market capitalization was approximately $698,815, of which
42%, or $296,988, was from financing sources. It is the Company's present
intention to have access to the capital resources necessary to expand and
develop its business, while maintaining its investment grade ratings with
Moody's Investor Services and Standard and Poor's. Currently, Moody's Investor
Services has a Baa3 rating and Standard and Poor's has a BBB- rating on the
Company's senior debt. The Company may, from time to time, seek to obtain funds
through additional security offerings or debt financings in a manner consistent
with its current debt capitalization policy.
RECENT DEVELOPMENTS
On October 28, 2002, Equity One, Inc. (NYSE: EQY) and the Company executed
a merger agreement pursuant to which Equity One will acquire the Company. In
connection with the merger, each of the Company's shareholders may elect to
receive for each share of the Company's common stock either $12.15 in cash or
0.9 shares of Equity One common stock, or a combination thereof. The terms of
the merger agreement further provide that the holders of no more than 50% of the
Company's outstanding common stock may elect to receive cash.
24
Completion of the transaction, which is expected to take place in the first
quarter of 2003, is subject to the approval of Equity One's and the Company's
shareholders and other customary conditions. The boards of each of the Company
and Equity One have unanimously approved the transaction. Additionally, holders
of approximately 75% of Equity One's common stock and approximately 8% of the
Company's common stock have agreed to vote their shares in favor of the
transactions contemplated by the merger. On the 4th business day prior to the
shareholder meetings, the Equity One holders may withdraw their voting support,
and the Company's board may withdraw its merger recommendation, if Equity One's
weighted average stock price for the 30 preceding trading days is less than
$12.06 or less than $11.00 for the three preceding trading days. In addition, on
the 4th business day prior to the shareholder meetings the Equity One holders
may withdraw their voting support if the Company's weighted average stock price
for the 30 preceding trading days is less than $10.935 or less than $9.935 for
the three preceding trading days.
The Company cannot make any assurances that the merger with Equity One will
be consummated according to the terms set forth in the merger agreement, if at
all. Either the Company or Equity One may terminate the merger agreement if the
merger is not consummated by March 31, 2003. The Company will be required to
pay a $15 million break-up fee to Equity One in the event that the Company
enters into an agreement for a superior transaction or if, under certain
circumstances, the Company's board withdraws its recommendation for the
transaction.
On October 31, 2002, Janet Herszenhorn, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, filed a putative
class action lawsuit in the Superior Court of Cobb County, Georgia, against IRT,
Equity One and each of the directors of IRT. The complaint alleges, among other
things, that IRT and its individual directors breached their fiduciary duties by
agreeing to the merger between Equity One and IRT and that Equity One aided and
abetted such breach. The complaint seeks injunctive relief, an order enjoining
consummation of the merger and unspecified damages.
On October 31, 2002, John Greaves, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, also filed a
putative class action lawsuit in the Superior Court of Cobb County, Georgia,
against IRT, Equity One and each of the directors of IRT. The complaint alleges,
among other things, that IRT and its individual directors breached their
fiduciary duties by agreeing to the merger between Equity One and IRT and that
Equity One aided and abetted such breach. The complaint seeks injunctive relief,
an order enjoining consummation of the merger and unspecified damages.
Although the defendants believe that these suits are without merit and
intend to defend themselves vigorously, there can be no assurance that the
pending litigation will not interfere with the consummation of the merger. IRT
and Equity One do not expect that these suits will interfere with the scheduling
of their respective shareholder meetings or the consummation of the merger, if
approved.
INFLATION AND ECONOMIC FACTORS
The effects of inflation upon the Company's results of operations and
investment portfolio are varied. From the standpoint of revenues, inflation has
the dual effect of both increasing the tenant revenues upon which percentage
rentals are based and allowing increased fixed rentals as rental rates rise
generally to reflect higher construction costs on new properties. This positive
effect is partially offset by increasing operating and interest expenses, but
usually not to the extent of the increases in revenues.
The Federal Reserve regulates the supply of money through various means,
including open market dealings in United States government securities, the
discount rate at which banks may borrow from the Federal Reserve, and the
reserve requirements on deposits. Such activities affect the availability and
cost of credit, generally, and the Company's costs under its bank credit
facilities, in particular.
25
ENVIRONMENTAL FACTORS
Certain of the Company's properties have environmental concerns that have
been or are being addressed. The North Carolina Department of Environment,
Health and Natural Resources ("DEHNR") informed the Company, by letter dated
November 30, 2000, that the Company's Industrial property in Charlotte, North
Carolina ("Industrial Property"), continues to be included on the North Carolina
Inactive Hazardous Waste Sites Priority List ("Priority List"). According to
DEHNR, the Priority List is a list of sites in North Carolina where uncontrolled
disposal, spills, or releases of hazardous substances have been
identified. The Company also has been informed by a third-party consultant that
hazardous substances may be present in groundwater under the Industrial Property
in excess of regulatory limits. DEHNR indicated in its November 30 letter that
it was notifying the Company of the inclusion of the Industrial Property on the
Priority List, and that the letter was not an order to conduct any work, but
that the Company was invited to consider a voluntary cleanup.
The Company has begun investigating this matter, including the basis for
inclusion of the Industrial Property on the Priority List and the scope and
source of any such hazardous substances in groundwater (which may be a result
of, among other things, prior ownership and usage of the Industrial Property or
contaminants from other nearby properties). Depending on the results of this
investigation, notification of DEHNR may be required and certain corrective
actions performed. Based on information presently available, the Company
presently believes that the costs of any such corrective action is not expected
to have a material adverse effect on the Company.
Various of our properties include facilities leased to dry cleaners. At
some of the properties, dry cleaning solvents have been discovered in soil
and/or groundwater, and in several cases, preliminary investigations indicate
the amounts exceed applicable groundwater and/or soil protection standards and
may require further investigation or remediation. The costs associated with such
investigation or corrective actions are uncertain.
Since January 1, 2000, the Company has maintained environmental and
pollution legal liability insurance coverage to attempt to mitigate the
associated risks. Although no assurance can be given that Company properties
will not be affected adversely in the future by environmental problems, the
Company presently believes that there are no environmental matters that are
reasonably likely to have a material adverse effect on the Company's financial
position.
FUNDS FROM OPERATIONS
The Company defines funds from operations, consistent with the National
Association of Real Estate Investment Trusts ("NAREIT") definition, as net
earnings on real estate investments less gains (losses) on sale of properties
and extraordinary items plus depreciation and amortization of capitalized
leasing costs. Interest and amortization of issuance costs related to
convertible subordinated debentures and minority interest expenses are added
back to funds from operations when assumed conversion of the debentures and OP
Units is dilutive. The conversion of the debentures, that were redeemed on
January 24, 2002, are dilutive for the nine months ended September 30, 2002 and
the three and nine months ended September 30, 2001. The conversion of the
debentures for the three months ended September 30, 2002, are anti-dilutive and
therefore excluded from the calculation. The conversion of the OP Units are
dilutive for the three and nine months ended September 30, 2002 and are included
in the calculation. Management believes funds from operations should be
considered along with, but not as an alternative to, net earnings as defined by
generally accepted accounting principles as a measure of the Company's operating
performance. Funds from operations does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs.
26
The following data is presented with respect to the calculation of funds
from operations under the NAREIT definition for the three and nine months ended
September 30, 2002 and 2001 (in thousands except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
2002 2001 2002 2001
-------- ------- -------- --------
NET EARNINGS $ 8,232 $ 5,716 $20,500 $19,597
Extraordinary loss on extinguishment of debt - - 156 -
Gain on sales of properties (2,062) - (2,062) (2,498)
Depreciation * 3,868 3,770 11,596 11,160
Amortization of capitalized leasing fees * 345 319 995 914
-------- ------- -------- --------
FUNDS FROM OPERATIONS 10,383 9,805 31,185 29,173
Interest on convertible debentures - 425 109 1,274
Amortization of convertible debenture costs - 25 7 75
Amounts attributable to minority interests 195 177 601 624
-------- ------- -------- --------
FULLY DILUTED FUNDS FROM OPERATIONS $10,578 $10,432 $31,902 $31,146
======== ======= ======== ========
FULLY DILUTED FUNDS FROM OPERATIONS PER SHARE $ 0.30 $ 0.31 $ 0.95 $ 0.94
======== ======= ======== ========
APPLICABLE WEIGHTED AVERAGE SHARES 34,991 33,407 33,548 33,260
======== ======= ======== ========
* Net of amounts attributable to minority interests
Additional Information: The following data is presented with respect to amounts
incurred for improvements to the Company's real estate investments, for the
straight line rent adjustment, for leasing fees paid and for principal
amortization of mortgage notes payable during the three and nine months ended
September 30, 2002 and 2001 (in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
----- ----- ------ ------
Straight line rent adjustment $ 172 $ 99 $ 496 $ 370
===== ===== ====== ======
Revenue-generating capital expenditures
Tenant Improvements - Anchors $ 256 $ 10 $ 256 $1,651
Tenant Improvements - Non anchors 163 332 653 886
----- ----- ------ ------
Total revenue-generating capital expenditures** $ 419 $ 342 $ 909 $2,537
===== ===== ====== ======
Non revenue-generating capital expenditures $ 430 $ 650 $ 828 $2,164
===== ===== ====== ======
Lease fee payments $ 565 $ 487 $1,196 $1,431
===== ===== ====== ======
Scheduled principal amortization $ 705 $ 665 $2,090 $1,890
===== ===== ====== ======
** Includes tenant improvements and capital expenditures to prepare spaces for
leasing. Excludes expansions.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(dollars in thousands)
The Company's primary exposure to market risk is interest rate risk as it
relates to the Company's variable interest rate bank credit facilities. As
market conditions fluctuate, interest rates either increase or decrease and
interest expense from the variable rate bank credit facilities will move in the
same manner as the interest rates. At September 30, 2002, the variable rate debt
represented 5.7% of the total debt outstanding and the average interest rate for
the nine months ended September 30, 2002 was 3.88%. If the average interest rate
for the credit facilities was 100 basis points higher or lower, annual interest
expense would be increased or decreased by approximately $281.
The Company also utilizes mortgage notes payable and senior unsecured notes
with fixed rates. Sudden changes in interest rates generally do not affect the
Company's interest expense as these debt instruments have fixed rates for
extended periods of time. The Company's potential risk is from increases in
long-term real estate mortgage rates or borrowing rates that may occur. As the
debt instruments mature, the Company typically refinances such debt at the then
current market interest rates, which may be more or less than the interest rates
on the maturing debt. As of September 30, 2002, fixed rate debt represented
94.3% of the total debt outstanding.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates or market
conditions, including estimated fair values for the Company's interest rate
sensitive liabilities as of September 30, 2002. As the table incorporates only
those exposures that exist as of September 30, 2002, it does not address
exposures which could arise after that date. Moreover, because there were no
firm commitments to sell the obligations at fair value as of September 30, 2002,
the information presented has limited predictive value. As a result, the
Company's ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposures that arise during a future period and
at prevailing interest rates. Dollar amounts in the following table are in
thousands.
Expected Maturity/Principal Repayment
Nominal* ---------------------------------------------------- Total Fair
Interest Rate 2002 2003 2004 2005 2006 Thereafter Balance Value
-------------- ----- ------ ------ ------- ------- ----------- -------- --------
Variable Rate Liabilities:
Lines of Credit Facilities 2.86% $ - $ - $ - $17,000 $ - $ - $ 17,000 $ 17,000
Fixed Rate Liabilities:
7.25% Senior Notes 7.25% - - - - - 75,000 75,000 91,565
7.77% Senior Notes 7.77% - - - - 50,000 - 50,000 60,460
7.84% Senior Notes 7.84% - - - - - 25,000 25,000 33,156
Mortgage Notes Payable 7.44% 708 2,965 3,192 10,948 8,383 104,000 130,196 142,488
----- ------ ------ ------- ------- ----------- -------- --------
Total Liabilities $ 708 $2,965 $3,192 $27,948 $58,383 $ 204,000 $297,196 $344,669
===== ====== ====== ======= ======= =========== ======== ========
* Average rates as of September 30, 2002
ITEM 4.CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our annual and periodic reports
filed with the SEC is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. These disclosure controls
and procedures are further designed to ensure that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure.
Based on the most recent evaluation, which was completed within 90 days of
the filing of this report, our chief executive officer and chief financial
officer believe that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date we completed our evaluation.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On October 28, 2002, Equity One, Inc. and the Company executed a merger
agreement pursuant to which Equity One will acquire IRT. For a more complete
discussion of the merger agreement, see "Management's Discussion and Analysis of
Financial Condition - Recent Developments."
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 Agreement and Plan of Merger, dated as of October 28, 2002, by and
between IRT Property Company and Equity One, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated October 30, 2002).
4.1 Amendment No. 1 to Shareholder Protection Rights Agreement, dated as
of October 28, 2002, by and between IRT Property Company and SunTrust
Bank, Atlanta, as Rights Agent (incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated October 30,
2002).
99.1 Certification of Chief Executive Officer.
99.2 Certification of Chief Financial Officer.
99.3 Form of IRT Voting Agreement, dated October 28, 2002, by and among
Equity One, Inc. and certain shareholders of IRT Property Company
(incorporated by reference to Exhibit 99.1 to the Company's Current
Report on Form 8-K dated October 30, 2002).
99.4 Form of Equity One, Inc. Voting Agreement, dated October 28, 2002, by
and among IRT Property Company and certain stockholders of Equity One,
Inc. (incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K dated October 30, 2002).
99.5 Voting Agreement, dated as of October 28, 2002, by and between Equity
One, Inc. and E. Stanley Kroenke, in his capacity as a shareholder of
IRT Property Company (incorporated by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K dated October 30, 2002).
99.6 Press Release, dated October 29, 2002 (incorporated by reference to
Exhibit 99.4 to the Company's Current Report on Form 8-K dated October
30, 2002).
(b) Reports on Form 8-K.
The Company did not file 8-K Reports during the three month period
ended September 30, 2002.
On October 30, 2002, the Company filed a Report under Item 1(b) on
Form 8-K to report the Agreement and Plan of Merger.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
IRT PROPERTY COMPANY
Date: November 12, 2002 /s/ Thomas H. McAuley
----- ------------------- ------------------------
Thomas H. McAuley
President & Chief Executive Officer
Date: November 12, 2002 /s/ James G. Levy
----- ------------------- --------------------
James G. Levy
Executive Vice President &
Chief Financial Officer
31
CERTIFICATIONS
I, Thomas H. McAuley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRT Property Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Thomas H. McAuley
------------------------
Thomas H. McAuley
Chief Executive Officer
32
CERTIFICATIONS
I, James G. Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IRT Property Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ James G. Levy
--------------------
James G. Levy
Chief Financial Officer
33