ITEM 1. BUSINESS
General.
Excel Realty Trust, Inc. (the "Company") was formed in 1985 and reincorporated as a Maryland corporation in 1993. The Company is a self-administered, self-managed equity real estate investment trust ("REIT") which owns and manages neighborhood and community shopping centers and other retail and commercial properties primarily leased on a long-term basis to major retail companies throughout the United States. The terms of such leases typically provide that the tenant is responsible for costs and expenses associated with the ongoing maintenance of the property. The majority of the single tenant property leases also require that tenants pay for structural repairs and maintenance. At December 31, 1997, the Company owned 148 operating properties located in 28 states as outlined in Item 2.
ITEM 2. PROPERTIES
General
Rental revenue and operating expense reimbursements accounted for approximately 78.8% of the Company's total revenues for the year ended December 31, 1997. The Company's management believes that the average base rent per square foot of the Company's existing leases are generally lower than the prevailing market rate base rents for new leases in the geographical regions where the Company operates, reflecting the potential for growth as leases renew.
At December 31, 1997, the Company's operating properties consisted of 80 Shopping Centers, 64 Single Tenant Properties, and four Commercial Properties. As set forth in the table on the following page, such properties were located in 28 states, contained approximately 14.4 million square feet of GLA and had approximately $99.2 million of scheduled ABR as of December 31, 1997.
The Shopping Centers
At December 31, 1997, the Company owned 80 Shopping Centers. The Shopping Centers accounted for approximately 81% of the Company's GLA and approximately 84% of the Company's ABR at December 31, 1997. The Shopping Centers ranged in size from approximately 15,000 to 841,000 square feet. The Company intends to maintain its policy of acquiring shopping centers for long-term investment. The Company maintains an aggressive leasing program to enhance the income potential of each property. It also follows a schedule of regular physical maintenance with a view toward tenant expansion, renovations and refurbishing to preserve and increase the value of its properties. Renovations include upgrading of existing facades, updating signage, resurfacing parking lots and improving parking lot and exterior building lighting.
The majority of the Shopping Centers are anchored by one or more national or regional retailers. The remaining space is generally subject to shorter-term net leases to smaller tenants. A substantial portion of the Company's income from Shopping Centers consists of rent received under long-term leases. Most of these leases provide for payment of fixed base rentals monthly in advance and for the payment by tenants of their pro-rata share of real estate taxes, insurance, utilities and common area maintenance of the shopping center. In general, the Company's Shopping Center leases require the Company to make roof and structural repairs as needed. However, certain of the tenant leases place that responsibility on the tenant. The Company's standard small store lease provides for roof repairs and exterior repairs to be reimbursed by the tenant as part of the common area maintenance.
The Single Tenant Properties
At December 31, 1997, the Company owned 64 Single Tenant Properties under long-term net leases to national or regional tenants. The GLA of these properties ranged in size from approximately 2,000 square feet to 126,000 square feet. These properties accounted for approximately 14% of the Company's ABR and 18% of the Company's total GLA at December 31, 1997. With few exceptions, the tenants are required to pay all operating expenses including roof and structural repairs.
The Commercial Properties
At December 31, 1997, approximately 1% of the total GLA owned by the Company was attributable to the four Commercial Properties under long-term leases to single tenants or groups of tenants. These properties accounted for approximately 2% of the ABR of the Company and its subsidiaries at December 31, 1997 and the GLA ranged in size from approximately 9,100 square feet to 63,000 square feet. One of the Commercial Properties is the 22,000 square foot office building which is the headquarters of the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than various claims and lawsuits arising in the normal course of its business which, in the opinion of the Company's management, are not individually or in the aggregate material to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the NYSE under the symbol "XEL". As of March 20, 1998 there were approximately 1,439 record holders of the Company's common stock, plus those who hold their shares in street name. The Company has paid regular distributions since its commencement of operations in 1987 and intends to pay regular quarterly distributions in the future. Payment of distributions depends upon a number of factors (including primarily the Company's cash flow) and there can be no assurance that distributions will be paid. The following table sets forth the high and low sales price as reported by the NYSE composite tape and the distributions declared each calendar quarter during 1997 and 1996 with respect to the Company's common stock:
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ----------
[a] In April 1995, the Company adopted a policy of declaring distributions to stockholders of record on the first day of the succeeding quarter, instead of the last day of the current quarter. The payment date of 15 days following each quarter remained unchanged. In 1996, a distribution of $0.445 per share was declared on January 1 and paid on January 15. Had the Company not changed its distribution declaration date, the distributions would have been $1.77 in 1995.
[b] The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share effective December 31, 1997. SFAS No. 128 requires the presentation of basic and diluted earnings per share. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the conversion of convertible preferred stock (using the "if converted" method), exercise of stock options and warrants and potential conversion of ERP limited partner units for all periods. All prior period earnings per share amounts have been restated to comply with the SFAS No. 128.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto. Historical results and percentage relationships set forth in the Consolidated Statements of Income contained in the Consolidated Financial Statements, including trends which might appear, should not be taken as indicative of future operations.
Comparison of the year ended December 31, 1997 to the year ended December 31,
Rental revenue and expense reimbursements increased $30.6 million, or 58% to $83.1 million in the year ended December 31, 1997, as compared to $52.5 million for the year ended December 31, 1996. This increase relates partially to the consolidation of Excel Realty Partners, L.P. ("ERP") on April 1, 1997. Had ERP been consolidated with the Company during 1996, rental revenue and expense reimbursements would have been greater in 1996 by $7.0 million. Also, the Company acquired 30 new properties in 1997 that accounted for $16.5 million in revenues and in addition, acquired a shopping mall in December 1996 which accounted for an additional $5.9 million in 1997 revenues. The remaining increase in revenues was attributable to an increase in rents from a full year of operations from the properties acquired in 1996, net of 1997 property sales, and a net increase in rents from its existing properties.
Interest income increased $9.7 million, or 145% to $16.4 million in the year ended December 31, 1997 from $6.7 million in the year ended December 31, 1996. This increase is primarily related to additional notes receivable issued during the year including an increase of $50.3 million related to loans made to ERT Development Corporation ("EDV") to facilitate the development of various development projects. Also, in the second quarter of 1997, the Company reversed a reserve of $0.8 million related to one of its note receivables. The $0.8 million was recognized as interest income and was made due to increased leasing activity on the collateralized property and improved market conditions. Additionally in 1997, the Company recognized $0.7 million of loan fees from certain developers.
Other income in 1997 of $6.0 million represented a $2.1 million or 54% increase from other income in 1996 of $3.9 million. The increase related primarily to an increase in EDV's operations. EDV's net income in the twelve month period ended December 31, 1997 increased by $3.3 million over the same period in 1996. This was offset by a $0.4 million decrease in development fees received from EDV. Also, equity income in ERP was $1.1 million in 1996. As the Company began consolidating ERP's accounts on April 1, 1997, equity income for the first three months in 1997 was $0.4 million, or a decrease of $0.7 million.
Interest expense increased $4.5 million or 23% to $24.0 million in 1997 from $19.5 million in 1996. The increase primarily relates to additional debt related to property acquisitions and the consolidation of ERP. The outstanding mortgage debt and capital leases were $270.5 million at December 31, 1997 compared to $157.7 million at December 31, 1996. Additionally, the Company issued $75.0 million in Senior Notes in October 1997 and increased borrowings on its credit facility and other notes payable to $168.9 million at December 31, 1997 compared to $81.0 million at December 31, 1996.
Depreciation and amortization expenses increased $4.1 million or 55% in 1997 when compared with 1996. This relates primarily to the increase in buildings from acquisitions made in 1997 and the consolidation of ERP.
Property taxes, repairs and maintenance and other property expenses totaled $14.0 million in 1997 compared to $7.4 million in 1996. This increase primarily relates to property acquisitions and the inclusion of properties held by ERP. The increase of $6.6 million is consistent with the increase of expense reimbursement revenue of $5.6 million. The percentage of these expenses recovered in 1997 through expense reimbursement revenue increased to 73% from 62% in 1996. General and administrative expenses increased by $2.2 million in 1997 from 1996 which was a slight increase as a percentage of total revenues from 4.5% to 4.8%.
In July 1997, the Company bought an interest rate lock related to a proposed senior note offering. The interest rate lock was sold when the senior note offering was postponed and a common stock offering was completed instead. The Company recognized a $0.9 million loss on the sale. The Company later issued its Senior Notes at 6.875% (6.982% effective rate with a discounted issue price). The interest rate lock that was sold had guaranteed the seven year Treasury note at 6.44%. Had the Company issued the Senior Notes in July, the interest rate would have been 0.875% over the seven year Treasury note, or 7.315%. The $0.9 million loss is included in other items. Also included in other items was a $0.6 million currency loss related to a note receivable payable in Canadian dollars.
The Company recognized a net gain on real estate sales of $1.3 million in 1997 compared with a net loss of $0.9 million in 1996. In 1997, the Company sold five Single Tenant Properties for net proceeds of $11.2 million. The net loss in 1996 was primarily a result of a dark building that was sold. The impairment of real estate in 1997 and 1996 relates to one dark building which the Company wrote down to its estimated fair value in each year, respectively.
Net income increased $25.2 million, or 106%, to $49.0 million in 1997 from $23.8 million in 1996. In the third quarter of 1997, the Company increased the quarterly distributions per share to $0.50 from $0.46.
Comparison of the year ended December 31, 1996 to the year ended December 31,
Rental revenue and expense reimbursements decreased $2.7 million, or 5% to $52.5 million in the year ended December 31, 1996, as compared to $55.2 million for the year ended December 31, 1995. This decrease primarily relates to the sale of an office building in December 1995 which accounted for $3.0 million of revenue in 1995. Although property expenses decreased slightly as mentioned below, expense reimbursements increased by $0.8 million. The primary reason for this variance is the sale of the office building. In 1995, the office building accounted for $1.6 million in total expenses of which only $0.2 million was recovered in reimbursements.
Interest income increased $3.5 million, or 109% to $6.7 million in the year ended December 31, 1996 from $3.2 in the year ended December 31, 1995. This increase is primarily related to additional notes receivable issued during the year. The Company's outstanding notes receivable were $83.7 million at December 31, 1996 compared with $22.9 million outstanding at December 31, 1995, an increase of $60.8 million. Of this amount, $27.1 million related to loans made to EDV, $11.9 million related to loans made to ERP primarily to facilitate cash requirements for seven properties contributed to ERP in 1996, $9.5 million was loaned to a Canadian company to facilitate the purchase and redevelopment of a mixed-use commercial building in Toronto, Canada and $12.3 million related to loans made to various other development companies.
Other income in 1996 of $3.9 million represented a $2.9 million increase from other income in 1995 of $1.0 million. The increase related primarily to an increase in fees received from EDV which totaled $2.4 million in 1996 compared to $0.6 million in 1995. Additionally, the Company's equity in earnings from its affiliates accounted for $1.2 million of the increase. This increase is primarily due to ERP's activity. In 1996, seven properties were contributed to ERP. In addition, a full year of operations was recognized on the five properties that were contributed in the fourth quarter of 1995.
Interest expense decreased $3.0 million to $19.5 million in the year ended December 31, 1996 from $22.5 million in 1995. The higher interest expense in 1995 related to $3.7 million of loan costs written-off compared to none in 1996. This was primarily due to the repayment of debt related to the Company's Real Estate Mortgage Investment Conduit (the "REMIC"). Excluding loan cost write-offs, interest expense increased $1.1 million in 1996 which primarily related to the increase in mortgage debt from properties purchased in 1996. Mortgages payable outstanding at December 31, 1996 were $157.7 million compared with $123.8 million outstanding at December 31, 1995.
Depreciation and amortization expenses increased $0.6 million or 9% in 1996 when compared with 1995. This is due to an overall increase in the Company's depreciable real estate, and a full year's operations on the properties purchased in 1995. The Company's buildings at December 31, 1996 totaled $323.4 million compared to $251.0 million at December 31, 1995.
Property taxes, repairs and maintenance and other property expenses decreased $0.6 million or 8% to $7.4 million in the year ended December 31, 1996 from $8.0 million in the year ended December 31, 1995. This decrease was
primarily the result of the sale of the office building in December 1995, as mentioned above, which accounted for $0.7 million of other property expenses in 1995. The properties acquired during 1996 that were not previously under master leases accounted for approximately $0.1 million of other property expenses in 1996. Master lease expenses, which were $4.7 million in the year ended December 31, 1995, decreased to $0.4 million in 1996. In 1996, the three properties under master leases were purchased in the first quarter of 1996 and the master leases were terminated. During 1995, eleven properties were under master leases for at least part of the year. There were no significant changes in the other operating expenses. General and administrative expenses decreased to approximately 4.5% of total revenues in 1996 from 4.8% of total revenues in 1995.
The Company recognized a net loss on real estate sales of $0.9 million in 1996 compared with a net gain of $3.7 million in 1995. The loss in 1996 primarily was the result of a dark building that was sold in 1996. The Company had received a lease termination fee and, subsequent to termination of the lease, sold the building. In 1995 the Company's net gain was primarily associated with the sale of the office building. The impairment of real estate in 1996 relates to another dark building which the Company wrote down by $0.8 million to its estimated fair value.
Net income increased $5.6 million, or 31%, to $23.8 million in 1996 from $18.2 million in 1995. In the third quarter of 1996, the Company increased the quarterly distributions per share to $0.46 from $0.445.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of capital to fund the Company's ongoing operations. The Company's issuance of common and preferred shares and Senior Notes, use of the Company's credit facility and long-term mortgage financing have been the principal sources of capital required to fund its growth.
In order to continue to expand and develop its portfolio of properties and other investments, the Company intends to finance future acquisitions and growth through the most advantageous sources of capital available to the Company at the time, which may include the sale of common stock, preferred stock or debt securities through public offerings or private placements, the incurrence of additional indebtedness through secured or unsecured borrowings and the reinvestment of proceeds from the disposition of assets. In 1997, the Company received investment grade credit ratings of Baa3 and BBB- from Moody's and Standard and Poor's, respectively, on unsecured senior debt securities issued from the Company's $500 million shelf registration. The Company's financing strategy is to maintain a strong and flexible financial position by (i) maintaining a prudent level of leverage, (ii) maintaining a large pool of unencumbered properties, (iii) managing its variable rate exposure, (iv) amortizing existing property specific non-recourse mortgages over the term of the anchor leases for such mortgaged properties, and (v) maintaining a conservative distribution payout ratio.
The Company may seek variable rate financing from time to time if such financing appears advantageous in light of then-prevailing market conditions. In such case, the Company will consider hedging against interest rate risk through interest rate protection agreements, interest rate swaps or other means.
In April 1997, the Company filed with the Commission a $500 million shelf registration statement. This registration statement was filed for the purpose of issuing debt securities, preferred stock, depositary shares, common stock or warrants. Currently, approximately $197.5 million is available to the Company on this registration statement.
In January 1998, the Company issued 6,300,000 depositary shares each representing 1/10 of a share of 8 5/8% Series B Cumulative Redeemable Preferred Stock (the "Preferred B Shares"). The offering price was $25.00 per depositary share with an annual dividend equal to $2.15625 per share, payable quarterly. Net proceeds from the offering totaled approximately $152.5 million.
In 1997, the Company completed two stock offerings. In July, the Company issued 2,500,000 shares of common stock with a market price of $28.00 per share. The net proceeds were approximately $26.6875 per share, or $66.5 million. In January, the Company issued 4,600,000 shares of 8 1/2% Series A Cumulative Convertible Preferred Stock (the "Preferred A Shares"). Net proceeds totaled approximately $111.4 million. The Preferred A Shares have an annual distribution of $2.125 per share payable quarterly. The Preferred A Shares are convertible by the holder at any time into shares of the Company's common stock at a conversion price of $26.06 per share. On or after February 5, 2002, the Preferred A Shares are redeemable by the Company at $25.00 per share in either shares of
common stock or cash at the Company's election. The Preferred A Shares rank senior to the Company's common stock and are on a parity with the Preferred B Shares with respect to the payment of dividends and amounts payable upon liquidation, dissolution or winding down of the Company. In March 1998, 2,211,120 Preferred A Shares were converted into 2,121,183 shares of the Company's common stock.
In October 1997, the Company issued $75.0 million of 6.875% Senior Notes due 2004 (the " Senior Notes"). The effective interest rate on the Senior Notes is 6.982% (6.875% coupon with proceeds before underwriting discount of $74.6 million). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
The proceeds from the Senior Notes and stock offerings were used to repay debt, acquire properties, make loans to EDV and to third party developers to facilitate the development of properties and for general corporate purposes.
The Company has an unsecured revolving credit facility for up to $150.0 million from a group of seven banks (the "Credit Facility") which carries an interest rate of LIBOR plus 1.20%. The actual amount available to the Company is dependent on covenants such as the value of unencumbered assets and certain ratios. The Credit Facility expires December 1999. The outstanding balance of $148.6 million at December 31, 1997 was repaid in January 1998 with proceeds from the Company's Preferred B Shares offering.
In 1995, the Company formed ERP to own and manage certain real estate properties and on April 1, 1997, the Company began consolidating the accounts of ERP. At December 31, 1997, there were 2,833,000 limited partner units outstanding of which 1,681,000 were held by third parties. These units are due distributions totaling $0.9 million per quarter and are redeemable for common stock of the Company or cash, at certain dates.
In 1995, EDV was organized to finance, acquire, develop, hold and sell real estate in the short-term for capital gains and/or receive fee income. The Company owns 100% of the outstanding preferred shares of EDV. The preferred shares are entitled to receive dividends equal to 95% of net income from cash flows, if any. Cash requirements to facilitate EDV transactions have primarily been obtained through borrowings from the Company and are expected to continue in the future. Interest and principal payments are repaid to the Company as excess cash is available which is primarily expected to occur when development projects are completed and sold. The Company has guaranteed $30 million of an $85 million construction loan related to a retail development project in Orlando, Florida. The project is expected to be completed in August 1998.
In September 1997, the Company established $25.7 million in credit facilities to certain developers. The total outstanding amounts on the credit facilities of $14.0 million at December 31, 1997 carry interest at 11% to 12%, are collateralized by real estate, and are payable on the earlier of the sale of certain real estate or seven years. In 1997, the Company recognized $0.7 million in loan fees related to credit facilities.
In December 1997, the Company filed a registration statement with the Securities and Exchange Commission with respect to the Company's intention to spin off Excel Legacy Corporation ("Legacy"), a newly-formed corporation which is a wholly-owned subsidiary of the Company (the "Spin-off"). Legacy was organized to create and realize value by identifying and making opportunistic real estate investments which are not restricted by REIT tax laws or influenced by the Company's objectives of increasing cash flows and maintaining certain leverage ratios. Prior to the Spin-off, EDV will transfer four notes receivable, a leasehold interest in a parcel of land, an office building and a single tenant building to the Company for a total consideration of $33.3 million. The Company will reduce the note receivable from EDV (which was $90.1 million at December 31, 1997). The Company will contribute the above assets from EDV together with ten single tenant properties owned by the Company with a December 31, 1997 book value of approximately $46.2 million and a property under development with a book value of $14.7 million to Legacy, in exchange for 23,160,757 common shares of Legacy, assumption of debt by Legacy on the ten single tenant properties of approximately $34.2 million, and issuance of a note payable from Legacy to the Company in the amount of $20.6 million. The Spin-off is expected to take place on or about March 31, 1998 through a dividend distribution to the Company's common stockholders, of all Legacy common stock held by the Company. The distribution will consist of one share of Legacy common stock for each share of the Company's common stock held on the record date of March 2, 1998. Upon completion of the Spin-off, Legacy will cease to be a wholly-owned subsidiary of the Company and begin operating as an independent public company. The Company's executive officers will continue to manage the Company's operations as well as supervise the management of Legacy.
The Company has elected to be taxed as a REIT for federal income tax purposes and must distribute at least 95% of its taxable income to its stockholders in order to avoid income taxes. Although the Company receives most of its rental payments on a monthly basis, it intends to make quarterly distribution payments. Amounts accumulated for distributions will be invested by the Company in short-term marketable instruments including deposits at commercial banks, money market accounts, certificates of deposit, U.S. government securities or other liquid investments (including GNMA, FNMA, and FHLMC mortgage-backed securities) as the Board of Directors deems appropriate.
The Company calculates funds from operations ("FFO") as net income before gain or loss on real estate sales (net of gain or loss on sales of undepreciated property), plus depreciation on real estate, amortization, amortized leasing commission costs, loan costs written off, and other non-recurring items. FFO does not represent cash flows from operations as defined by generally accepted accounting principles, and may not be comparable to other similarly titled measures of other REITs. The Company believes, however, that to facilitate a clear understanding of its operating results, FFO should be examined in conjunction with its net income as reductions for certain items are not meaningful in evaluating income-producing real estate, which historically has not depreciated. The following information is included to show the items included in the Company's FFO for the past three years (in thousands except per share amounts):
(a) Only amortization of organizational costs are shown as amortization expense in the Consolidated Statements of Income. Loan cost amortization and loan costs written-off are classified as interest expense and leasing commission amortization is classified as part of other operating expenses in the Consolidated Statements of Income.
(b) These amounts relate to third party ERP units and other common stock equivalents.
ECONOMIC CONDITIONS
The majority of the Company's leases contain provisions deemed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rents which generally increase as prices rise, and/or escalation clauses which are typically related to increases in the consumer price index or similar inflation indices. In addition, the Company believes that many of its existing lease rates are below current market levels for comparable space and that upon renewal or re-rental such rates may be increased to current market rates. This belief is based upon an analysis of relevant market conditions, including a comparison of comparable market rental rates, and upon the fact that many of such leases have been in place for a number of years and may not contain
escalation clauses sufficient to match the increase in market rental rates over such time. Most of the Company's leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. In addition, the Company periodically evaluates its exposure to interest rate fluctuations, and may enter into interest rate protection agreements which mitigate, but do not eliminate, the effect of changes in interest rates on its floating rate loans.
Many regions of the United States, including regions in which the Company owns property, may experience economic recessions. Such recessions, or other adverse changes in general or local economic conditions, could result in the inability of some existing tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. The Company's shopping centers are typically anchored by discount department stores, supermarkets and drug stores which usually offer day-to-day necessities rather than high priced luxury items. These types of tenants, in the experience of the Company, generally continue to maintain their volume of sales despite a slowdown in economic conditions.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Form 10-K may be deemed to be "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. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the following risks:
Economic Performance and Value of Centers Dependent on Many Factors. Real property investments are subject to varying degrees of risk. The economic performance and values of real estate can be affected by many factors, including changes in the national, regional and local economic climates, local conditions such as an oversupply of space or a reduction in demand for real estate in the area, the attractiveness of the properties to tenants, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and increased operating costs. In recent years, there has been a proliferation of new retailers and a growing consumer preference for value-oriented shopping alternatives that have, among other factors, heightened competitive pressures. In certain areas of the country, there may also be an oversupply of retail space. As a consequence, many companies in all sectors of the retailing industry have encountered significant financial difficulties. A substantial portion of the Company's income is derived from rental revenues from retailers in neighborhood and community shopping centers. Accordingly, no assurance can be given that the Company's financial results will not be adversely affected by these developments in the retail industry.
Dependence on Rental Income from Real Property. Since substantially all of the Company's income is derived from rental income from real property, the Company's income and funds for distribution would be adversely affected if a significant number of the Company's tenants were unable to meet their obligations to the Company or if the Company were unable to lease a significant amount of space in its properties on economically favorable lease terms. There can be no assurance that any tenant whose lease expires in the future will renew such lease or that the Company will be able to re-lease space on economically advantageous terms.
Illiquidity of Real Estate Investments. Equity real estate investments are relatively illiquid and therefore tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, mortgage payments and, to the extent the properties are not subject to triple net leases, certain significant expenditures such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, the Company's income and funds for distribution would be adversely affected. A portion of the Company's properties are mortgaged to secure payment of indebtedness, and if the Company were unable to meet its mortgage payments, a loss could be sustained as a result of foreclosure on such properties by the mortgagee.
Risk of Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major tenant or a number of smaller tenants may have an adverse impact on the properties affected and on the income produced by such properties. Under bankruptcy law, a tenant has the option of assuming (continuing) or rejecting (terminating) any unexpired lease. If
the tenant assumes its lease with the Company, the tenant must cure all defaults under the lease and provide the Company with adequate assurance of its future performance under the lease. If the tenant rejects the lease, the Company's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. The amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one years' lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments).
Environmental Risks. Under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property or disposed of by it, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). Such liability may be imposed whether or not the Company knew of, or was responsible for, the presence of such hazardous or toxic substances.
Reliance on Major Tenants. As of December 31, 1997, the Company's two largest tenants were Kmart Corporation and Wal-Mart Stores, Inc. whose scheduled ABR accounted for approximately 10.4% and 9.2%, respectively, of the Company's 1997 total revenues. The financial position of the Company and its ability to make distributions may be adversely affected by financial difficulties experienced by either of such tenants, or any other major tenant of the Company, including a bankruptcy, insolvency or general downturn in business of any such tenant, or in the event any such tenant does not renew its leases as they expire.
Control by Directors and Executive Officers. As of December 31, 1997, directors and executive officers of the Company beneficially owned approximately 12.0% of the Company's common stock. Accordingly, such persons should continue to have substantial influence over the Company and on the outcome of matters submitted to the Company's stockholders for approval.
Year 2000. The Company currently uses Management Reports Inc. ("MRI") software on a Novell local area network. The MRI software will require an upgrade to make it year 2000 compliant, which the Company intends to install prior to December 31, 1999. The Company does not believe that additional costs associated with the software upgrade and additional implementation and training costs will be material to the Company's financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item appear with an Index to Financial Statements and Schedules, starting on page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and financial disclosure.
PART III
ITEMS 10 THROUGH 13
Incorporated by reference to the Company's Proxy Statement for its 1998 annual meeting of stockholders to be filed subsequently hereto.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:
A Current Report on Form 8-K was filed with the Commission on October 3, 1997 regarding the Company's acquisition of properties in Charleston, SC; Miami, FL; Naples, FL; Elizabethtown, PA; and Arlington, TX (including financial statements of the properties acquired).
A Current Report on Form 8-K was filed with the Commission on October 15, 1997 regarding the Company's offering of 6.875% Senior Notes due 2004.
A Current Report on Form 8-K was filed with the Commission on December 17, 1997 regarding the Company's acquisition of a property in Clearwater, FL (including financial statements of the property acquired).
A Current Report on Form 8-K was filed with the Commission on December 30, 1997 regarding the Company's acquisition of properties in Westminster, CO and Winchester TN (including financial statements of the properties acquired).
(c) Exhibits:
Refer to Exhibit Index as follows.
EXHIBIT INDEX - -------------
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 33-63160, filed with the Commission on May 21, 1993, as amended, in which this exhibit bore the same number, unless otherwise indicated.
(2) Incorporated by reference to the Company's report on Form 8-K dated February 7, 1997, in which this exhibit bore the same number, unless otherwise indicated.
(3) Incorporated by reference to the Company's report on Form 8-K dated January 14, 1998, in which this exhibit bore the same number, unless otherwise indicated.
(4) Incorporated by reference to the Company's Registration Statement on Form S-3 File No. 33-59195, filed with the Commission on May 9, 1995, as amended, in which this exhibit bore the same number, unless otherwise indicated.
(5) Incorporated by reference to the Company's Registration Statement on Form S-3, file No. 333-24615, filed with the Commission on April 4, 1997, as amended, in which this exhibit bore the same number, unless otherwise indicated.
(6) Incorporated by reference to the Company's report on Form 8-K dated July 3, 1997, in which this exhibit bore the same number, unless otherwise indicated.
(7) Incorporated by reference to the Company's Proxy Statement dated April 1, 1996 relating to the 1996 Annual Meeting of Stockholders of the Company, in which this exhibit bore the same number, unless otherwise indicated.
(8) Incorporated by reference from the Company's report on Form 10-K dated March 13, 1995, in which this exhibit bore the same number, unless otherwise indicated.
(9) Incorporated by reference to the Company's Registration Statement on Form S-8, file No. 333-02329, filed with the Commission on April 8, 1996, in which this exhibit bore the same number, unless otherwise indicated.
(10) Incorporated by reference from the Company's report on Form 10-K dated March 13, 1996, as amended, in which this exhibit bore the same number, unless otherwise indicated.
(11) Incorporated by reference from the Company's report on Form 8-K dated July 3, 1997, as amended, in which this exhibit bore the same number, unless otherwise indicated.
(12) Incorporated by reference to the Company's report on Form 8-K dated September 18, 1997, in which this exhibit bore the same number, unless otherwise indicated.
(13) Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EXCEL REALTY TRUST, INC.
DATE: March 23, 1998 By: /s/ Gary B. Sabin ----------------------------- GARY B. SABIN President and Chief Executive Officer
DATE: March 23, 1998 By: /s/ David A. Lund ----------------------------- DAVID A. LUND Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Gary B. Sabin March 23, 1998 - ---------------------------------- ----------------------------- GARY B. SABIN, Director, Date President, Chief Executive Officer and Chairman of the Board
/s/ Richard B. Muir March 23, 1998 - ---------------------------------- ----------------------------- RICHARD B. MUIR, Director Date and Executive Vice President
/s/ Boyd A. Lindquist March 23, 1998 - ---------------------------------- ----------------------------- BOYD A. LINDQUIST, Director Date
/s/ D. Charles Marston March 23, 1998 - ---------------------------------- ----------------------------- D. CHARLES MARSTON, Director Date
/s/ Robert E. Parsons, Jr. March 23, 1998 - ---------------------------------- ----------------------------- ROBERT E. PARSONS, JR., Director Date
/s/ Bruce A. Staller March 23, 1998 - ---------------------------------- ----------------------------- BRUCE A. STALLER, Director Date
/s/ John H. Wilmot March 23, 1998 - ---------------------------------- ----------------------------- JOHN H. WILMOT, Director Date
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Excel Realty Trust, Inc.
We have audited the consolidated financial statements and the financial statement schedules of Excel Realty Trust, Inc. and subsidiaries as listed in item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Excel Realty Trust, Inc. and subsidiaries as of December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
San Diego, California March 13, 1998
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ----------
The accompanying notes are an integral part of the financial statements.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------
The accompanying notes are an integral part of the financial statements.
\
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ----------
The accompanying notes are an integral part of the financial statements.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) ----------
The accompanying notes are an integral part of the financial statements.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Excel Realty Trust, Inc. (the "Company") was formed in 1985 and subsequently reincorporated as a Maryland corporation. The Company is in the business of purchasing and operating commercial real estate The Company is operated as a self-administered, self-managed real estate investment trust (REIT).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and all significantly owned partnerships. All significant intercompany accounts have been eliminated in consolidation.
On April 1, 1997, the Company began consolidating the accounts of Excel Realty Partners, L.P., a Delaware limited partnership ("ERP"), when the Company converted its loans into an equity investment in ERP. Prior to April 1, 1997, the Company accounted for ERP on the equity method of accounting. The Company uses the equity method to account for its investment in ERT Development Corporation, a Delaware corporation ("EDV") (Note 4).
INCOME TAXES
The Company has elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Under these provisions, the Company and its subsidiaries will not be subject to federal income tax if 95% of its real estate investment trust taxable income (before dividends paid deduction) is distributed to shareholders and certain gross income, asset diversification, share ownership and disclosure requirements are met. Accordingly, no provision for federal income taxes is included in the accompanying consolidated financial statements.
REAL ESTATE
Land, buildings and building improvements are recorded at cost. Depreciation is computed using the straight-line method over estimated useful lives of 40 years for buildings and 2 to 40 years for building improvements. Expenditures for maintenance and repairs are charged to expense as incurred and significant renovations are capitalized.
The Company assesses whether there has been a permanent impairment in the value of its real estate by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include a lessee's ability to pay rent under the terms of the lease. If a property is leased at a significantly lower rent, the Company may recognize a permanent impairment loss if the income stream is not sufficient to recover its investment. Such losses have been determined as the difference between the carrying value and the fair value of the property and are included in the Consolidated Statements of Income.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
DEFERRED LEASING AND LOAN ACQUISITION COSTS
Costs incurred in obtaining tenant leases and long-term financing are amortized to other property expense and interest expense, respectively, on the straight-line method over the terms of the related leases or debt agreements.
REVENUE RECOGNITION
Base rental revenue is recognized on the straight-line basis, which averages minimum rents over the terms of the leases. Certain of the leases provide for additional rental revenue by way of percentage rents to be paid based upon the level of sales achieved by the lessee. These percentage rents are recorded on the accrual basis and are included on the Consolidated Statements of Income in rental revenue. The leases also typically provide for tenant reimbursement of common area maintenance and other operating expenses which are included in the accompanying Consolidated Statements of Income as expense reimbursements.
NET INCOME PER COMMON SHARE
The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share effective December 31, 1997. SFAS No. 128 requires the presentation of basic and diluted earnings per share. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the conversion of convertible preferred stock (using the "if converted" method), exercise of stock options and warrants and potential conversion of ERP limited partner units for all periods. All prior period earnings per share amounts have been restated to comply with SFAS No. 128 (Note 9).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial statements for the years ended December 31, 1996 and 1995 in order to conform with the current period's presentation.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
2. REAL ESTATE:
ACQUISITIONS
In 1997, the Company acquired 27 shopping centers located in California (12), Florida (3), Arizona (2), Pennsylvania (2), Tennessee (2), Colorado, Georgia, Nevada, North Carolina, South Carolina, and Texas. The Company also purchased buildings leased to single tenants, Winn Dixie and Kmart, in Tennessee and Florida, respectively, an out-parcel in Minnesota and the remaining interest of a property owned in Tennessee. The total cost of these properties was approximately $365,919,000. The Company assumed mortgage debt of $34,042,000 and capital leases of $26,850,000 in the above transactions. In January 1998, the Company acquired a shopping center located in California for approximately $9,500,000 and two single tenant properties under construction located in Colorado. The cost of these two properties after construction is expected to total approximately $50,000,000. In March 1998, the Company acquired a shopping center located in California for approximately $41,000,000.
In 1996, the Company acquired three shopping centers in North Carolina, two shopping centers in Georgia, one shopping center in Arizona and a shopping center in Utah. The total cost of the properties was $93,190,000 of which the Company assumed $43,332,000 in mortgage debt.
SALES
In 1997, the Company sold five single tenant properties for proceeds of $11,214,000. A net gain of $1,264,000 was recognized on the sales. The Company sold four single-tenant properties in 1996. The net sales price of these properties totaled $4,741,000 and the Company recognized a $933,000 net loss.
IMPAIRMENT OF REAL ESTATE
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company has written down the value of dark single-tenant properties by $741,000 in 1997 and $844,000 in 1996, to their estimated fair value based upon current market data. Another property was written down in the second quarter of 1996 by $1,246,000 but was reclassified as part of the net loss on sale of real estate when it was sold in the third quarter of 1996.
REAL ESTATE HELD FOR SALE
At December 31, 1997, the Company has a property with a book value of $14,702,000 held for sale/redevelopment in Arizona. Depreciation expense is no longer being charged to the property and costs to hold the property until sale are being capitalized. This property was transferred to Excel Legacy Corporation ("Legacy") in March 1998 (Note 4).
ENVIRONMENTAL MATTERS
Soil and groundwater contamination exists at Carmen Plaza in Camarillo, California, Cudahy Plaza in Cudahy, California, and Bristol Plaza in Santa Ana, California. Environmental professionals retained by the Company estimate that the total, cumulative cost of remediation for these properties will be approximately $1.8 million to $5.5 million. In connection with each of these properties, the Company has entered into a remediation and indemnity agreement, which obligates the prior owner of the properties (including in some cases, principals of the prior owner) to perform the remediation and to indemnify the Company for any losses it may suffer because of the contamination or remediation. Although there can be no assurance that the remediation estimates of the
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
2. REAL ESTATE, CONTINUED:
environmental professionals are accurate or that the prior owners will perform their obligations under the remediation and indemnity agreements, the Company does not expect the environmental conditions at these properties to have a material adverse effect on the Company.
The Company has identified asbestos minerals relating to spray-applied fireproofing materials in Clearwater Mall in Clearwater, Florida which was acquired by the Company in December 1997. Environmental professionals retained by the Company estimate that the total cumulative cost of remediation for this property will be approximately $3.2 million. The estimated cost of this remediation, which was capitalized as part of the acquisition price of this property, is included in other liabilities in the Company's Consolidated Balance Sheet at December 31, 1997.
MASTER LEASE AND OPTION AGREEMENT
In 1995, the Company entered into master lease and option agreements with respect to eleven shopping centers. Under the master leases, the Company received all cash flow in excess of the master lease expense which included lease payments to the lessor and interest payments from debt service. All of the rental revenue and related operating expenses of these properties have been included in the Company's Consolidated Statements of Income. In 1996 and 1995, the Company purchased ten of the properties under the option agreements and terminated the master lease and purchase option on the one remaining property. Upon purchase of these properties, the master leases were canceled.
3. NOTES RECEIVABLE:
The Company had the following notes receivable at December 31, 1997 and 1996:
Interest and principal payments from EDV are primarily received upon the completion of development projects. Interest receivable from EDV was $7,628,000 and $879,000 at December 31, 1997 and 1996, respectively.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
3. NOTES RECEIVABLE, CONTINUED:
The Company has made loans totaling $16,050,000 Canadian dollars ($11,235,000 U.S. dollars at December 31, 1997) to a Canadian company which used the proceeds to acquire a 50% joint venture interest in a mixed-use commercial building known as "Atrium on Bay", and an adjacent land parcel in Toronto, Canada. The loan is collateralized by the Canadian company's interest in the building.
In 1997, the Company established $25,680,000 in credit facilities to certain developers. The total outstanding amounts on the credit facilities of $14,049,000 carry interest at 11% to 12%, are collateralized by real estate, and are payable on the earlier of the sale of real estate or seven years. In 1997, the Company recognized $720,000 in loan fees related to the credit facilities.
4. INVESTMENTS:
EXCEL REALTY PARTNERS, L.P.
In 1995, ERP was formed to own and manage certain real estate properties. The Company is the sole general partner of ERP. The general partner is entitled to receive 99% of all net income and gains before depreciation, if any, after the limited partners receive their stipulated distributions. On April 1, 1997, loans and related interest receivable in the amount of $23,427,000 from the Company to ERP were converted into limited partnership interests in ERP. Upon this transaction, the Company began consolidating the accounts of ERP which were previously accounted for on the equity method. Properties have been contributed to ERP in exchange for limited partnership units (which may be redeemed at stipulated prices for cash or the issuance of the Company common shares at the Company's option) and cash. At December 31, 1997, there were approximately 2,833,000 limited partner units outstanding of which the Company owned approximately 1,152,000 units. Quarterly distributions approximate $882,000 for limited partner units held by third parties.
PRO FORMA FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following Company actual and unaudited pro forma condensed consolidated balance sheets and income statements have been presented as if the Company had converted its notes and related interest receivable from ERP on December 31, 1996 and January 1, 1995 respectively. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of what the actual financial position would have been at December 31, 1996, or what actual results of operations of the Company would have been had the transaction actually occurred on January 1, 1996, nor do they purport to represent the actual results of operations of the Company for future periods.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
4. INVESTMENTS, CONTINUED:
ERT DEVELOPMENT CORPORATION
In 1995, EDV was organized to finance, acquire, develop, hold and sell real estate in the short-term for capital gains and/or receive fee income. The Company owns 100% of the outstanding preferred shares of EDV. The preferred shares receive 95% of the dividends, if any. Cash requirements to facilitate EDV's transactions have primarily been obtained through borrowings from the Company. Summary unaudited financial information for EDV is as follows (in thousands):
EDV's receivables include loans of approximately $15,100,000 made to a joint venture partnership under a loan commitment related to a retail development project in Florida. In 1997, the joint venture obtained a construction loan which is expected to total approximately $85,000,000 of which $30,000,000 is guaranteed by the Company.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
4. INVESTMENTS, CONTINUED:
EXCEL LEGACY CORPORATION
In December 1997, the Company filed a registration statement with the Securities and Exchange Commission with respect to the Company's intention to spin off Excel Legacy Corporation ("Legacy"), a newly-formed corporation which is a wholly-owned subsidiary of the Company (the "Spin-off"). Legacy was organized to create and realize value by identifying and making opportunistic real estate investments which are not restricted by REIT tax laws or influenced by the Company's objectives of increasing cash flows and maintaining certain leverage ratios. Prior to the Spin-off, EDV will transfer four notes receivable, a leasehold interest in a parcel of land, an office building and a single tenant building to the Company for a total consideration of $33,300,000. The Company will reduce the note receivable from EDV. The Company will contribute the above assets from EDV together with ten single tenant properties owned by the Company with a December 31, 1997 book value of approximately $46,200,000 and a property held for sale/redevelopment (Note 2) to Legacy, in exchange for 23,160,757 common shares of Legacy, assumption of debt by Legacy on the ten single tenant properties of approximately $34,200,000, and issuance of a note payable from Legacy to the Company in the amount of $20,600,000. The Spin-off is expected to take place on or about March 31, 1998 through a dividend distribution to the Company's common stockholders, of all Legacy common stock held by the Company. The distribution will consist of one share of Legacy common stock for each share of the Company's common stock held on the record date of March 2, 1998. Upon completion of the Spin-off, Legacy will cease to be a wholly-owned subsidiary of the Company and begin operating as an independent public company. The Company's executive officers will continue to manage the Company's operations as well as supervise the management of Legacy.
5. MORTGAGES PAYABLE:
The Company had the following mortgages payable at December 31, 1997 and 1996:
The principal payments required to be made on mortgages payable are as follows (in thousands):
Mortgages of $59,477,000 are fully amortizing with the final monthly payments to be made between the years 2004 and 2018.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
6. SENIOR NOTES PAYABLE:
In 1997, the Company issued $75,000,000 of 6.875% Senior Notes due 2004 (the "Senior Notes"). The effective rate on the Senior Notes is 6.982% (6.875% coupon with proceeds before the underwriting discount of $74,561,000). Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 each year. Net proceeds were used to repay outstanding amounts on the credit facility and for general corporate purposes.
7. NOTES PAYABLE:
The Company had the following notes payable at December 31, 1997 and 1996:
The Company has a revolving credit facility of up to $150,000,000 in unsecured advances from a group of seven banks. The facility expires December 1999 and bears an interest rate based upon the credit rating of the Company. In August 1997, the Company received prospective investment credit ratings of Baa3 and BBB- from Moody's Investor Service and Standard and Poor's Corporation, respectively, on future senior debt securities issued from the Company's $500 million shelf registration. Accordingly, the interest rate on the credit facility is 1.2% over LIBOR.
In July 1997, the Company bought an interest rate lock related to a proposed Senior Note Offering. The interest rate lock was sold when the Senior Note Offering was postponed until October 1997 and a Common Stock Offering was completed instead. The Company recognized a $896,000 loss on the sale which is included in other items on the Consolidated Statements of Income.
8. CAPITAL LEASES:
In 1997, the Company acquired a leasehold interest in three shopping centers in California ("Master Leased Centers"). The term of the leases are thirty-four years and the monthly lease payment is $201,000. In addition, the Company has purchased the option to acquire fee title to the Master Leased Centers, exercisable at various times during the terms of the respective leases. The owner of one of the Master Leased Centers has the option to require the Company to purchase the property after the occurrence of certain events. There are no principal payments due on the leases until a Master Leased Center is acquired.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
9. STOCKHOLDERS' EQUITY:
EQUITY OFFERINGS
In January 1998, the Company issued 6,300,000 depositary shares each representing 1/10 of a share of 8 5/8% Series B cumulative redeemable preferred stock (the "Preferred B Shares"). The offering price was $25.00 per depositary share with an annual dividend equal to $2.15625, payable quarterly. Net proceeds from the offering totaled $152,538,000.
In July 1997, the Company issued 2,500,000 shares of common stock with a market price of $28.00 per share for net proceeds of $26.6875 per share or $66,719,000. In February 1997, the Company issued 4,600,000 shares of 8 1/2% Series A Cumulative Convertible Preferred Stock at $25.00 per share (the "Preferred A Shares") with net proceeds totaling approximately $111,400,000. The Preferred A Shares are entitled to an annual distribution of $2.125 per share and are convertible into common shares at a price of $26.06 per share. On or after February 5, 2002, the Preferred A Shares are redeemable by the Company at $25.00 per share in either shares of common stock or cash at the Company's election. The Preferred A Shares rank senior to the Company's common stock and are on a parity with the Preferred B Shares with respect to the payment of dividends and amounts payable upon liquidation, dissolution or winding down of the Company. In March 1998, 2,211,120 Preferred A Shares were converted into 2,121,183 shares of the Company's common stock.
In June 1996, the Company issued 1,725,000 shares of common stock at $20.625 per share and in December 1996, the Company issued an additional 2,990,000 shares of common stock at $22.875 per share.
Proceeds from the above offerings were used to repay debt, acquire properties, make loans to EDV and for general corporate purposes.
DISTRIBUTIONS
In 1997, distributions of $0.46, $0.46, $0.50, $0.50 were declared to common stockholders for each of the four quarters, respectively. In 1996, distributions of $0.445, $0.445, $0.46 and $0.46 were declared for each of the four quarters, respectively. In April 1995, the Company adopted a policy of declaring distributions to stockholders of record on the first day of the succeeding quarter, instead of the last day of the current quarter. The payment date of 15 days following each quarter remained unchanged. As such, in 1995, distributions of $0.43 per share were declared on March 31 and paid on April 15 and distributions of $0.445 per share were declared on July 1 and October 1 and paid on July 15 and October 15, respectively. In 1997, distributions of $0.32, $0.53, $0.53 ($2.125 per annum) were paid in April, July, and October 1997, respectively, on the Preferred A Shares.
For the years ended December 31 1997, 1996 and 1995, approximately 0%, 9%, and 28%, respectively, of the distributions received by shareholders were considered to be a return of capital for tax purposes.
OPTIONS AND WARRANTS
The Company has adopted the 1993 Stock Option Plan (the "1993 Stock Plan") for executive officers and other key employees of the Company and its subsidiaries which was amended in 1996. In May 1994, the Company adopted the Directors 1994 Stock Option Plan (the "1994 Stock Plan") for directors options which was also amended in 1996.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
9. STOCKHOLDERS' EQUITY, CONTINUED:
Options may be granted under the 1993 Stock Plan for a period through 2003 and under the 1994 Stock Plan through the year 2004. Options under these plans are exercisable for 10 years from the date of grant. The exercise price of stock options may not be less than 100% of the fair market value of the stock on the date of grant. The aggregate number of shares issuable upon exercise of options under the 1993 Stock Plan may not exceed 1,450,000 shares and the aggregate number of shares issuable upon exercise of options under the 1994 Stock Plan may not exceed 240,000 shares.
Stock option and warrant activity are summarized as follows:
The options and warrants expire at various dates through December 2007. Of the options and warrants, 1,601,316 were issued to officers, directors or affiliates of the Company. At December 31, 1997, options for 143,350 and 168,250 shares were available for granting under the 1993 Stock Plan and 1994 Stock Plan, respectively.
SFAS No. 123, Accounting for Stock-Based Compensation, requires either the recording or disclosure of compensation cost for stock-based employee compensation plans at fair value. The Company has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation costs have been recognized by the Company.
Had compensation cost for the Company's two stock option plans been recognized based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net income in 1997 would have been reduced by $1,618,000 from $48,962,000 ($2.06 per share basic, and $1.97 per share - diluted) to $47,344,000 ($1.97 per share - basic, and $1.89 per share - diluted). In 1996 net income would have been reduced by $576,000, from $23,796,000 ($1.66 per share - basic and $1.62 per share - diluted) to $23,220,000 ($1.62 per share - basic and $1.58 per share - diluted) and in 1995, net income would have been reduced by $340,000, from $18,192,000 ($1.51 per share - basic and diluted) to $17,852,000 ($1.49 per share - basic and diluted).
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 7.85%; expected volatility of 18.22%; risk-free interest rate of 5.73% to 6.49%; and expected lives of 4 to 5 years.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
9. STOCKHOLDERS' EQUITY, CONTINUED:
DISTRIBUTION REINVESTMENT PLAN
The Company has adopted a distribution reinvestment plan (the "Plan"). Shares purchased under the Plan will be, at the Company's discretion, either newly issued shares of the Company, shares purchased in the open market or a combination of the foregoing. Distributions may be invested in newly issued shares at a 5% discount from the average closing price for the five trading days prior to the distribution pay date or in shares purchased in the open market without brokerage commissions or service charges.
EARNINGS PER SHARE (EPS)
In accordance with the disclosure requirements of SFAS No. 128 (Note 1), a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts).
10. FINANCIAL INSTRUMENTS AND CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations of risk consist principally of cash, accounts receivable and notes receivable. The following fair value disclosure was determined by the Company, using available market information and discounted cash flow analyses as of December 31, 1997 and 1996. However, considerable judgement is necessary to interpret market data and to develop the related estimates
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
10. FINANCIAL INSTRUMENTS AND CREDIT RISK, CONTINUED:
of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize upon disposition. The use of different estimation methodologies may have a material effect on the estimated fair value amounts. The Company believes that the carrying values reflected in the Consolidated Balance Sheets at December 31, 1997 and 1996 approximates the fair values for cash, accounts receivable and payable, notes receivable, variable-rate debt, and senior notes payable, and that the market value of its real estate held for sale exceeds the carrying value. The Company estimates that the fair values of its fixed-rate mortgage debt at December 31, 1997 and 1996 is approximately $181,000,000 and $155,000,000, respectively compared to carrying values of $170,000,000 and $153,000,000 on the Company's books.
At December 31, 1997 the Company's largest and second largest tenant's scheduled annual base rents ("ABR") account for approximately 10% and 9% of the Company's total revenues, respectively. The Company's next three largest tenant's ABR account for approximately 8% in total of the Company's revenues. At December 31, 1997, the Company owned 148 properties located in 28 states. There were 14 properties in California, 14 properties in North Carolina, 13 properties in Indiana, 12 properties in Arizona and 11 properties in Georgia. Approximately 44% of the Company's ABR are derived from these five states.
11. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE (IN THOUSANDS):
The amounts paid for interest during the years ended December 31, 1997, 1996 and 1995 were $21,334,000 $18,116,000 and $16,507,000, respectively.
In 1997, the Company acquired real estate and other assets of $116,232,000 without the use of cash by issuing $39,332,000 of ERP limited partner units, assuming $43,385,000 of mortgages payable and $26,850,000 of capitalized leases, retiring $3,104,000 of notes receivable and assuming $3,561,000 of notes payable and other liabilities. On April 1, 1997, the Company began consolidating the accounts of ERP when notes and related interest receivable in the amount of $23,427,000 from the Company were converted into limited partnership interests in ERP. Upon this transaction, ERP assets of $81,600,000 (including cash of $355,000) and liabilities of $52,263,000 (net of payables to the Company) were consolidated with the Company's accounts. Also in 1997, the Company redeemed $1,196,000 of ERP limited partnership units by issuing common stock.
In 1996, the Company acquired real estate and interests in partnerships of $45,073,000 without the use of cash. The Company assumed $43,389,000 of mortgage debt, net of other assets and liabilities, and issued $1,684,000 of common stock. The Company also exchanged $2,947,000 in common stock to repay mortgage debt. In 1995, the Company acquired real estate of $23,997,000 without the use of cash be assuming $22,784,000 of mortgages payable, net of other assets and liabilities, and issued $1,213,000 of common stock.
12. MINIMUM FUTURE RENTALS:
The Company leases its shopping centers and single-tenant buildings to tenants under noncancelable operating leases generally requiring the tenant to pay a minimum rent adjusted by either (i) fixed increases, (ii) a percentage of gross sales, or (iii) a CPI index. The leases generally either (i) require the tenant to pay all expenses of operating the property such as insurance, property taxes and structural repairs and maintenance, or (ii) require the tenant to reimburse the Company for the tenant's share of real estate taxes and other common area maintenance expenses.
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ----------
12. MINIMUM FUTURE RENTALS, CONTINUED:
Minimum future rental revenue for the next five years for the commercial real estate owned at December 31, 1997 and subject to noncancelable operating leases is as follows (in thousands):
13. RETIREMENT PLAN:
The Company has a 401(k) retirement plan (the "401(k) Plan") covering most of the officers and employees of the Company. The 401(k) Plan permits participants to contribute, until termination of employment with the Company, up to a maximum of 15% of their compensation to the 401(k) Plan. In addition, contributions of participants are matched by the Company in an amount equal to 50% of the participant's contribution in Company stock (up to a maximum of 3% of such person's compensation) plus an annual discretionary contribution, to be determined by the Board of Directors, based upon the performance of the Company. For the years ended December 31, 1997, 1996 and 1995, the Company incurred costs of $109,000, $77,000 and $46,000, respectively, in connection with the 401(k) Plan.
14. NEW PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board issued SFAS No. 131, Disclosures about Segments in an Enterprise and Related Information and SFAS No. 130, Comprehensive Income, which become effective in 1998. The Company has determined that the adoption of these SFASs will not have a material effect on the consolidated financial statements.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997 and 1996 is as follows (in thousands except per share amounts):
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
----------
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (IN THOUSANDS) ----------------------
(1) Listing does not include debt related to capitalized leases on three ERP properties totaling $26,850.
(2) At December 31, 1997, this property was held for sale / redevelopment. Depreciation expense is not being charged to the property.
(3) Tenant improvements and other costs capitalized subsequent to acquisition are depreciated over 2 - 40 years.
(4) These properties are owned by Excel Realty Partners, L.P. ("ERP") . The Company began consolidating the accounts of ERP on April 1, 1997. Acquisition dates are dates properties were contributed to ERP.
(continued)
EXCEL REALTY TRUST, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS) ----------
[a] Reconciliation of total real estate carrying value for the past three years is as follows:
[b] Reconciliation of accumulated depreciation for the past three years is as follows: