ITEM 1. BUSINESS
GENERAL
Ramco-Gershenson Properties Trust (the "Company") is a Maryland trust organized pursuant to Articles of Amendment and Restatement of Declaration of Trust dated October 2, 1997. The Company is the successor entity of Ramco-Gershenson Properties Trust (the "Massachusetts Trust"), a Massachusetts business trust. In December 1997, with the approval of its shareholders, the Company changed its state of organization from Massachusetts to Maryland through the termination of the Massachusetts Trust's Amended and Restated Declaration of Trust by amending such Amended and Restated Declaration of Trust to provide for the termination of the Trust, the merger (the "Change of Venue Merger") of the Massachusetts Trust into the Company and the conversion of each outstanding share of beneficial interest in the Massachusetts Trust into a common share of beneficial interest of the Company. The term the "Company" refers to Ramco- Gershenson Properties Trust and/or its predecessors.
The principal office of the Company is located at 27600 Northwestern Highway, Suite 200, Southfield, Michigan 48034.
RPS Realty Trust, a Massachusetts business trust, was formed on June 21, 1988 to be a diversified, growth oriented real estate investment trust ("REIT"). From 1988 until April 30, 1996, RPS Realty Trust was primarily engaged in the business of owning and managing a participating mortgage loan portfolio, and, through its wholly-owned subsidiaries, owning and operating eight real estate properties.
In May 1996, the Company (i) acquired substantially all of the shopping center and retail properties as well as the management organization and business operations, of Ramco-Gershenson, Inc. and certain of its affiliates (the "Ramco Acquisition"), (ii) changed the Company's name from RPS Realty Trust to Ramco- Gershenson Properties Trust, (iii) combined the outstanding shares of the Company by way of a one-for-four reverse split, and, (iv) spun-off eight mortgage loans and two real properties (the "RPS Mortgage Assets") to Atlantic Realty Trust , a newly formed real estate investment trust ("Atlantic"). The Ramco Acquisition was accomplished by the transfer by the Company to Ramco-Gershenson Properties, L.P. (the "Operating Partnership"), a Delaware limited partnership of which the Company is the general partner, of six properties containing approximately 931,000 square feet of gross leasable area ("GLA") and of $68,000,000 in cash, and by the transfer to the Operating Partnership by the principals of Ramco-Gershenson, Inc. (the "Ramco Principals") and by their affiliates (collectively the "Ramco Group"), of, (a) 20 properties containing approximately 4,826,000 square feet of gross leasable area (the "Ramco Properties"), (b) 100% of the non-voting stock and 5% of the voting stock (representing in excess of 95% of the economic interest) in Ramco-Gershenson, Inc. ("Ramco") (c) 50% general partner interests in two partnerships which each own a shopping center comprising a total of approximately 288,000 square feet of GLA (d) rights in and/or options to acquire certain development land totaling approximately 155 acres, (e) options to acquire interests in six shopping center properties and (f) five outparcels totaling 7.1 acres. In return for its transfers, the Ramco Group received 2,377,492 Units ("Units") of the Operating Partnership (representing an approximate 25% limited partnership interest in the Operating Partnership). The acquisition was accounted for using the purchase method. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair market value. Units were valued at approximately $16.50 per share representing the average trading price of the Company's stock immediately preceding and following the Ramco Acquisition. In addition, the Ramco Group received 279,181 Units as a partial earnout relative to Jackson Crossing Shopping Center (representing an approximate 2% limited partnership interest in the Operating Partnership). The Ramco Group's aggregate Units of 2,656,673 represented an approximate 27% limited partnership interest in the Operating Partnership. The Company assumed approximately $176,556,000 of secured indebtedness on the Ramco Properties. The aggregate interest in the Operating Partnership to be received by the Ramco Group may be increased to a maximum of approximately 29% if certain leasing objectives with respect to Jackson Crossing were fulfilled by March 31, 1997. The Company is in the process of evaluating the Jackson Crossing earnout and determining appropriate due diligence procedures to be performed relative to the
proposed calculation. The potential impact of additional units is not expected to be material. Subject to certain limitations, the Units in the Operating Partnership are exchangeable into common shares of the Company on a one-for-one basis. No Units have been exchanged to date. In connection with the Ramco Acquisition, the Company entered into three-year employment agreements with Joel D. Gershenson (the Chairman and a Director of the Company), Dennis E. Gershenson (the President and a Director of the Company), Richard D. Gershenson (an Executive Vice President and the Secretary of the Company), Bruce A. Gershenson (an Executive Vice President and the Treasurer of the Company) and Michael A. Ward (an Executive Vice President and the Chief Operating Officer of the Company). The Ramco Acquisition permitted the Company to become a self-administered, self-managed and fully integrated real estate investment trust.
The Company was organized for the purpose of qualifying as a real estate investment trust ("REIT") under Section 856-860 of the Internal Revenue Code of 1986, as amended (the "Code").
Operations of the Company. The Company is engaged in the business of owning, developing, acquiring, managing and leasing community shopping centers, regional malls and single tenant retail properties, nationally. At December 31, 1997, the Company had a portfolio of 50 shopping centers, with more than 9,700,000 square feet of gross leasable area, located in Michigan, Ohio, Florida, New York, New Jersey, Maryland, North Carolina, South Carolina, Tennessee, Alabama, Wisconsin and Georgia.
The Company's properties consist of 2 regional enclosed malls, 39 community centers, 6 power centers, and 3 single tenant retail properties. Regional enclosed malls are larger retail properties (containing 400,000 to more than 1,000,000 square feet of GLA) with two or more department stores as anchors and a wide variety of stores along enclosed, climate controlled malls connecting the anchors.
Community shopping centers generally range in size up to 400,000 square feet of GLA and are located in developed retail and commercial areas in which other similar centers may be nearby. In addition, with respect to some of these centers, there may be one or more regional enclosed malls nearby. Community shopping centers generally fall into two types: traditional community centers and power centers. Traditional community centers typically are convenient to their trade areas and focus primarily on value-oriented and convenience goods and services. They are designed to service a neighborhood area, and are usually anchored by a supermarket, drugstore or discount retailer providing basic necessities, although certain community centers are free standing single-user buildings. Power centers are different from traditional community centers because they are designed to service a larger trade area and they contain at least two anchors which occupy a substantial portion of the GLA in the center. These anchors are often national retailers which are leaders in their market or "category killers" i.e., larger stores which offer a complete selection of a category of items (e.g., toys, office supplies, home improvement products, electronics, etc.) at low prices, and often in a warehouse format.
The Company conducts substantially all of its business through the Operating Partnership. The Company is the sole general partner of, and has exclusive power to manage and conduct the business of, the Operating Partnership. The Operating Partnership holds substantially all of the Company's interest in its properties, either directly or indirectly through subsidiaries (including subsidiary property partnerships). The Operating Partnership also owns 100% of the non-voting common stock and 5% of the voting common stock of Ramco; such stock ownership enables the Company to receive in excess of 95% of the dividend and liquidating distributions of Ramco. The Company's property management operations are conducted through Ramco to facilitate compliance with certain REIT requirements under the Code. The income attributable to the ownership of the Ramco stock is accounted for under the equity method.
The Company's business objective and operating strategy is to increase funds from operations and cash available for distribution per share. The Company expects to achieve internal growth and to enhance the value of the properties by increasing their rental income over time through (i) contractual rent increases, (ii) the leasing and re-leasing of available space at higher rental levels, and (iii) the selective renovation of the properties. The Company intends to achieve external growth through the selective development of new shopping center properties, the acquisition of shopping center properties and through the expansion and redevelopment of existing properties.
Ramco performs all property management functions for the properties. At December 31, 1997, Ramco had 129 full-time employees devoted exclusively to property management, including on-site personnel. Property management efforts are directed toward improving tenant sales and rents by continually repositioning the centers. Ramco strives to meet the needs of its tenants in the areas of promotion, marketing and ongoing management of its properties and seeks to bring together a sufficient critical mass of complementary tenants. As part of its property management efforts, Ramco monitors tenant mix, store size, sales results and store locations, and works closely with tenants to improve the overall performance of their stores. Ramco seeks to anticipate trends in the retailing industry and introduce new retail names and concepts into its shopping center properties in response to these trends.
As part of its ongoing business strategy, the Company seeks to expand and redevelop existing properties in its shopping center portfolio, as well as newly acquired properties, depending on tenant demands and market conditions. The Company plans to take advantage of attractive purchase opportunities by acquiring additional shopping center properties in underserved, attractive and/or expanding markets. The Company also seeks to acquire strategically located, quality shopping centers that (i) have leases at rental rates below market rates, (ii) have potential for rental and/or occupancy increases or (iii) offer cash flow growth or capital appreciation potential where the Company's financial strength, relationships with retail companies or expansion or redevelopment capabilities can enhance value, and provide anticipated total returns that will increase the Company's cash available for distribution per share. The Company believes that its in-house redevelopment and expansion capabilities provide it with opportunities to acquire shopping center properties that may not necessarily be attractive to other owners.
DEVELOPMENTS IN 1997
In May 1997 the Company acquired Madison Center in Madison Heights, Michigan for approximately $7,400,000. The shopping center is an approximately 186,000 square foot community center anchored by Kmart (87,000 square feet), Dunhams (25,000 square feet), and Oakridge Market (20,000 square feet). The Madison Center is well located in a densely populated trade area with opportunities including the potential expansion of several anchor stores, reconfiguration of existing retail space and development of pad sites on the property.
Pelican Plaza, located in Sarasota, Florida, was acquired in July 1997 for $7,200,000. The shopping center is an approximately 106,000 square foot community shopping center/office development anchored by Linens 'N Things (36,000 square feet). The shopping center is strategically located directly across the street from Sarasota Square, the largest regional enclosed mall in Sarasota County.
On October 30, 1997, the Company completed the acquisition of 15 shopping center properties (the "Southeast Portfolio") which contain approximately 2.5 million square feet of GLA. Approximately 539,000 square feet of GLA at seven of the Southeast Portfolio shopping centers is leased to Wal-Mart, but not currently occupied by Wal-Mart, although Wal-Mart remains obligated under the respective lease agreements. Wal-Mart has entered into various subleases with sub-tenants currently covering approximately 277,000 square feet of GLA. Wal-Mart remains obligated under the terms of the respective lease agreements for varying time periods.
The properties were acquired for approximately $124,500,000. The Southeast Portfolio is comprised of the following:
Athens Town Center is a 210,000 square foot community center located in Athens, Alabama. The center is anchored by Wal-Mart (86,000 square feet) and Bruno's (43,000 square feet). Wal-Mart has subleased its space to Goody's Family Clothing, Tractor Supply Co. and Big Lots.
Cox Creek Plaza is a 139,000 square foot community center located in Florence, Alabama. The center is anchored by Wal-Mart (99,000 square feet). Wal-Mart has subleased its space to Goody's Family Clothing and Toys R Us.
Crestview Corners is a 112,000 square foot community center located in Crestview, Florida. The center is anchored by Wal-Mart (51,000 square feet) and Fleming Foods (29,000 square feet). Wal-Mart currently is not occupying its leased premises but remains obligated to pay rent under the lease agreement.
Cumberland Gallery is a 98,000 square foot community center located in New Tazewell, Tennessee. The center is anchored by Wal-Mart (41,000 square feet) and Ingles Grocery (32,000 square feet).
Edgewood Square is a 217,000 square foot community center located in North Augusta, South Carolina. The center is anchored by Wal-Mart (123,000 square feet), Goody's Family Clothing (35,000 square feet), and Bi-Lo Grocery (32,000 square feet).
Hickory Corners is a 147,000 square foot community center located in Hickory, North Carolina. The center is anchored by Wal-Mart (82,000 square feet) and Food Lion Grocery (25,000 square feet). Construction of a 23,500 square foot OfficeMax store was completed and the store opened in January 1998. Wal-Mart has subleased its space to Media Play and Toys R Us.
Highland Square is a 172,000 square foot community center located in Crossville, Tennessee. The center is anchored by Wal-Mart (82,000 square feet) and Kroger (49,000 square feet). Wal-Mart currently is not occupying its leased premises but remains obligated to pay rent under the lease agreement.
Holly Springs is a 156,000 square foot community center located in Franklin, North Carolina. The center is anchored by Wal-Mart (92,000 square feet) and Ingles Grocery (32,000 square feet).
Indian Hills is a 129,000 square foot community center located in Calhoun, Georgia. The center is anchored by Wal-Mart (66,000 square feet) and Ingles Grocery (32,000 square feet). Wal-Mart currently is not occupying its leased premises but remains obligated to pay rent under the lease agreement.
Mays Crossing is a 137,000 square foot community center located in Stockbridge, Georgia. The center is anchored by Wal-Mart (73,000 square feet) and Ingles Grocery (27,000 square feet). Wal-Mart has subleased its space to Old America Stores and Big Lots.
Northwest Crossing is a 262,000 square foot community center located in Knoxville, Tennessee. The center is anchored by Wal-Mart (139,000 square feet), Ingles Grocery (44,000 square feet), and Goody's Family Clothing (35,000 square feet).
Ridgeview Crossing is a 212,000 square foot community center located in Elkin, North Carolina. The center is anchored by Wal-Mart (110,000 square feet), Ingles Grocery (32,000 square feet), and Belk Department Store (35,000 square feet).
Stonegate Plaza is a 138,000 square foot community center located in Kingsport, Tennessee. The center is anchored by Wal-Mart (102,000 square feet) and Food Lion Grocery (25,000 square feet).
Taylors Square is a 243,000 square foot community center located in Greenville, South Carolina. The center is anchored by Wal-Mart (134,000 square feet), Belk Department Store (41,000 square feet), and Goody's Family Clothing (35,000 square feet).
Tellico Plaza is a 114,000 square foot community center located in Lenoir City, Tennessee. The center is anchored by Wal-Mart (66,000 square feet) and Bi-Lo Grocery (29,000 square feet).
In December 1997, the Company acquired Village Lakes Shopping Center in Land O' Lakes, Florida for approximately $8,600,000. The shopping center is an approximately 186,000 square foot community center. Village Lakes is anchored by Wal-Mart (85,000 square feet) and Kash 'N Karry Food Store (40,000 square feet).
COMPETITION
Numerous shopping center properties compete with the Company's properties in attracting tenants to lease space. Some of these competing properties may be newer, better located, better capitalized or better tenanted than some of the Company's properties. Furthermore, the Company believes that it is likely that major national or regional commercial property developers will continue to seek development opportunities in
markets where the Company's properties are located. These developers may have greater financial resources than the Company. The number of competitive commercial properties in a particular area could have a material effect on the Company's ability to lease space in its properties or at newly developed or acquired properties and on the rents charged. In addition, the Company may face competition from alternate forms of retailing, including home shopping networks, mail order catalogues and on-line based shopping services which may limit the number of retail tenants that desire to seek space in shopping center properties generally, all of which may affect the Company's ability to make expected distributions.
The Company is subject to the risks that upon expiration of leases for space located in its properties, the leases may not be renewed, the space may not be relet or the terms of renewal or reletting (including the cost of required renovations) may be less favorable than current lease terms. Leases on a total of approximately 6.97% of the Company owned GLA will expire in 1998. If the Company was unable to promptly relet or renew the leases for all or a substantial portion of this space and, if the rental rates upon such renewal or reletting were significantly lower than expected rates, then the Company's cash flow and ability to make distributions to Shareholders may be adversely affected. If the Company was unable to maintain its current occupancy levels then the Company's cash flow and ability to make expected distributions to Shareholders may be adversely affected.
The shopping center industry is seasonal in nature. Tenant sales and occupancy are higher in the fourth quarter due to the Christmas selling season. Back-to-school and Easter events also result in sales fluctuations.
TAX MATTERS
Qualification as a REIT. The Company first elected to qualify as a REIT for the year ended December 31, 1988. The Company's policy is to qualify as a REIT for federal income tax purposes. If the Company so qualifies, amounts paid by the Company as distributions to its shareholders will not be subject to corporate income taxes. For any year in which the Company does not meet the requirements for electing to be taxed as a REIT, it will be taxed as a corporation.
The requirements for qualification as a REIT are contained in sections 856-860 of the Code and the regulations issued thereunder. The following discussion is a brief summary of some of those requirements. Such requirements include certain provisions relating to the nature of a REIT's assets, the sources of its income, the ownership of its stock, and the distribution of its income. Among other things, at the end of each fiscal quarter, at least 75% of the value of the total assets of the Company must consist of real estate assets (including interests in mortgage loans secured by real property and interests in other REIT's) as well as cash, cash items and government securities (the "75% Asset Test"). There are also certain limitations on the amount of other types of securities which can be held by a REIT. Additionally, at least 75% of the gross income of the Company for the taxable year must be derived from certain sources, which include "rents from real property," and interest secured by mortgages on real property. An additional 20% of the gross income of the Company must be derived from these same sources or from dividends, interest from any source, or gains from the sale or other disposition of stock or securities or any combination of the foregoing. There are also restrictions on the percentage of gross income derived from the sale or disposition of certain assets within certain time periods. A REIT is also required to distribute annually at least 95% of its REIT Taxable Income (as defined in the Code) to its shareholders.
During the third quarter of 1994, the Company held more than 25% of its value of its gross assets in overnight Treasury Bill reverse repurchase transactions which the United States Internal Revenue Service (the "IRS") may view as non-qualifying assets for the purposes of satisfying an asset qualification test applicable to REITs, based on a Revenue Ruling published in 1977 (the "Asset Issue"). The Company has requested that the IRS enter into a closing agreement with the Company that the Asset Issue will not impact the Company's status as a REIT. The IRS has deferred any action relating to the Asset Issue pending the further examination of the Company's 1991-1995 tax returns (the "Tax Audit"). Based on developments in the law which have occurred since 1977, the Company's Tax Counsel, Battle Fowler LLP, has rendered an opinion that the Company's investment in Treasury Bill repurchase obligations would not adversely affect its REIT status. However, such opinion is not binding upon the IRS.
In connection with the spin-off of Atlantic, Atlantic has assumed all liability arising out of the Tax Audit and the Asset Issue, including liabilities for interest and penalties and attorneys fees relating thereto. In connection with the assumption of such potential liabilities, Atlantic and the Company have entered into a tax agreement which provides that the Company (under the direction of its Continuing Trustees), and not Atlantic, will control, conduct and effect the settlement of any tax claims against the Company relating to the Tax Audit and the Asset Issue. Accordingly, Atlantic will not have any control as to the timing of the resolution or disposition of any such claims. The Company and Atlantic also received an opinion from Special Tax Counsel, Wolf, Block, Schorr and Solis-Cohen LLP, that, to the extent there is a deficiency in the Company's taxable income arising out of the IRS examination and provided the Company timely makes a deficiency dividend (i.e., declares and pays a distribution which is permitted to relate back to the year for which each deficiency was determined to satisfy the requirement that the REIT distribute 95 percent of its taxable income), the classification of the Company as a REIT for the taxable years under examination would not be affected. Under the tax agreement referred to above, Atlantic has agreed to reimburse the Company for the amount of any deficiency dividend so made. If notwithstanding the above-described opinions of legal counsel, the IRS successfully challenged the status of the Company as a REIT, its status could be adversely affected. If the Company lost its status as a REIT, the Company believes that it will be able to re-elect REIT status for the taxable year beginning January 1, 1999.
Although the IRS agent conducting the examination has not issued his final examination report with respect to the tax issues raised in the Tax Audit, including the Asset Issue (collectively, the "Tax Issues"), the Company has received a preliminary draft of the examining agent's report. The draft report sets forth a number of positions which the examining agent has taken with respect to the Company's taxes for the years that are subject to the Tax Audit, which the Company believes are not consistent with applicable law and regulations of the IRS. If the final report were issued in its current form, the liability of Atlantic to indemnify the Company may be substantial. The Continuing Trustees of the Company are engaged in ongoing discussions with the examining agent and his supervisors with regard to the positions set forth in the draft report. There can be no assurance that, after conclusion of discussions with such agent and his supervisors regarding the draft report, the examining agent will not issue the proposed report in the form previously delivered to the Company (or another form). Issuance of the revenue agent's report constitutes only the first step in the IRS administrative process for determining whether there is any deficiency in the Company's tax liability for the years at issue and any adverse determination by the examining agent is subject to administrative appeal within the IRS and, thereafter, to judicial review. As noted above, pursuant to the tax agreement between Atlantic and the Company, Atlantic has assumed all liability arising out of the Tax Audit and the Tax Issues. Based on the amount of Atlantic's assets, as disclosed in its Annual Report on Form 10-K for the year ended December 31, 1997, the Company does not believe that the ultimate resolution of the Tax Issues will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Environmental Matters. Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environment ("Environmental Laws"), a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances disposed, stored, released, generated, manufactured or discharged from, on, at, onto, under or in such property. Environmental Laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such hazardous or toxic substance. The presence of such substances, or the failure to properly remediate such substances when present, released or discharged, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. The cost of any required remediation and the liability of the owner or operator therefore as to any property is generally not limited under such Environmental Laws and could exceed the value of the property and/or the aggregate assets of the owner or operator. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the cost of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such persons. In addition to any action required by Federal, state or local authorities, the presence or release of hazardous or toxic substances on or from any property could result in private plaintiffs bringing claims for personal injury or other causes of action.
In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company may be potentially liable for remediation, releases or injury. In addition, Environmental Laws impose on owners or operators the requirement of on-going compliance with rules and regulations regarding business-related activities that may affect the environment. Such activities include, for example, the ownership or use of transformers or underground tanks, the treatment or discharge of waste waters or other materials, the removal or abatement of asbestos-containing materials ("ACMs") or lead-containing paint during renovations or otherwise, or notification to various parties concerning the potential presence of regulated matter, including ACMs. Failure to comply with such requirements could result in difficulty in the lease or sale of any affected property and/or the imposition of monetary penalties, fines or other sanctions in addition to the costs required to attain compliance. Various of the Company's properties have or may contain ACMs or underground storage tanks ("USTs"); however, except as set forth below, the Company is not aware of any potential environmental liability which could reasonably be expected to have a material impact on the Company's business or operations. No assurance can be given that future laws, ordinances or regulations will not impose any material environmental requirement or liability, or that a material adverse environmental condition does not otherwise exist.
There was a release of approximately 2,300 gallons of gasoline from a product line break in August 1986 and a release of approximately 1,200 gallons of gasoline from a delivery line break in October 1991 at a gasoline station located at Jackson Crossing. A release of gasoline was also discovered in 1987 at the time of removal of USTs from a gasoline station located adjacent to Lake Orion Plaza. Subsequent investigations indicated that levels of contamination exist in the ground water under such properties. The Ramco Principals, jointly and severally, have agreed to indemnify the Company, the Operating Partnership and their respective subsidiaries and affiliates for any and all damages arising from or in connection with such environmental conditions at the Jackson Crossing and Lake Orion Plaza properties.
Year 2000 Compliance. The Company has assessed the exposure of its computer systems presented by the upcoming change in the millenium. Based on the assessment, the Company believes that all of the Company's material computer systems are currently year 2000 compliant. The Company does not believe that any material expenditures will be required to be fully year 2000 compliant.
ITEM 2.
ITEM 2. PROPERTIES
The Company's properties are located in twelve states primarily throughout the Midwest, East and the Southeast United States as follows:
- ------------------------- (1) Annualized Base Rental Revenue is December 1997 base rental revenues multiplied by 12.
With the exception of Kentwood Towne Centre and Southfield Plaza Expansion in which the Company owns a 50% interest in the partnerships that own such properties, all of the properties are 100% owned by the Operating Partnership or its subsidiaries.
Additional information regarding the Properties is included in the Property Schedule on the following pages.
RAMCO-GERSHENSON PROPERTIES TRUST
PROPERTY SCHEDULE
- ------------------------- (1) Anchor-owned store.
(2) 50% general partner interest.
(3) Represents year opened or acquired/year of latest renovation or expansion by either the Company or the former Ramco Group, as applicable.
(4) Wal-Mart currently is not occupying its leased premises in this shopping center but remains obligated to pay under the terms of their respective lease agreement.
TENANT INFORMATION
The following table sets forth, as of December 31, 1997 information regarding space leased to tenants which in each case, individually account for more than 2% of total annualized base rental revenue from the Company's properties.
- ------------------------- (1) Annualized Base Rental Revenue is December 1997 base rental revenue multiplied by 12.
Approximately 539,000 square feet of GLA at seven of the Southeast Portfolio shopping centers is leased to Wal-Mart, but not currently occupied by Wal-Mart, although Wal-Mart remains obligated under the respective lease agreements. Wal-Mart has entered into various subleases with sub-tenants currently covering approximately 277,000 square feet of GLA.
During July 1997 Montgomery Ward ("Wards"), a tenant at three of the Company's properties (Tel-Twelve Mall, Clinton Valley Mall and Shoppes of Lakeland), filed for protection under Chapter 11 of the Bankruptcy Code. In October 1997, Wards issued a list of anticipated store closings which included the stores at the Company's Clinton Valley Mall. This location consists of a 101,200 square foot department store and a 7,480 square foot TBA store (Tires, Batteries and Automotive). The Company was notified in March 1998 that Wards intends to reject the lease. The Company is pursuing replacement tenants to lease the space. On an annual basis, Wards pays approximately $1,000,000 in base rent, operating and real estate tax expense reimbursements for the Clinton Valley Mall.
The following table sets forth, as of December 31, 1997, the total GLA leased to anchors, retail tenants, and available space, in the aggregate, of the Company's properties.
- ------------------------- (1) Annualized Base Rental Revenue is December 1997 base rental revenue multiplied by 12.
The following table sets forth as of December 31, 1997, the total GLA leased to national, regional and local tenants, in the aggregate, of the Company's properties.
- ------------------------- (1) Annualized Base Rental Revenue is December 1997 base rental revenue multiplied by 12.
The following table sets forth lease expirations for the next five years at the Company's properties assuming that no renewal options are exercised.
- ------------------------- (1) Annualized Base Rental Revenue is December 1997 base rental revenue multiplied by 12.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business against or involving the Company or its properties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Special Meeting of Shareholders of the Company was held on December 18, 1997 to consider and vote upon the following matters:
(1) A proposal to consider and vote upon the changing of the Company's state of organization from Massachusetts to Maryland through the termination of the Massachusetts Trust's current Amended and Restated Declaration of Trust by amending such Amended and Restated Declaration of Trust to provide for the termination of the Massachusetts Trust, the merger (the "Change of Venue Merger") of the Massachusetts Trust into a newly-formed Maryland real estate investment trust subsidiary and the conversion of each outstanding share of beneficial interest of the Massachusetts Trust into a common share of beneficial interest of the surviving Maryland trust.
(2) A proposal to consider and vote upon the issuance of Series A Convertible Preferred Shares of the Company and common shares of beneficial interest of the Company to holders of Series A Convertible Preferred Shares issued by the Company upon the conversion or redemption of such Series A Convertible Preferred Shares.
The following table shows the number of votes for and against each proposal and the number of votes abstaining with respect to each proposal:
There were no broker non-votes with respect to any of the proposals at the Special Meeting.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION -- The Company's Common Shares have been listed and traded on the New York Stock Exchange ("NYSE") under the symbol "RPT" since May 13, 1996. The Common Shares were previously listed on the NYSE under the name of RPS Realty Trust, symbol "RPS", from December 28, 1988 until May 10, 1996.
The following table shows high and low closing prices per share for each quarter in 1996 and 1997. The closing prices have been adjusted to reflect the effect of the one-for-four reverse split effective May 1, 1996. On May 10, 1996 the Company spun-off the RPS Mortgage Assets to Atlantic Realty Trust and effected a stock dividend of shares of Atlantic Realty Trust to shareholders of the Company; trading price information for subsequent periods does not include any adjustment for the spin-off transaction.
HOLDERS -- The approximate number of holders of record of the Company's Common Shares was 4,406 as of March 3, 1998.
DIVIDENDS -- Under the Code, a REIT must meet certain requirements, including a requirement that it distribute annually to its shareholders at least 95 percent of its taxable income. Dividend distributions per common share for the years ended December 31, 1997 and 1996, as adjusted for the one-for-four reverse split effective May 1, 1996 are summarized as follows.
The Company declared the following cash distributions per share to common shareholders for the year ended December 31, 1996. The distribution paid April 29, 1996 has been adjusted to reflect the effect of the one-for-four reverse split.
The Company declared the following cash distributions per common share to shareholders for the year ended December 31, 1997:
Effective May 1, 1996, the shareholders of RPS, as part of the spin-off of Atlantic, received one share of beneficial interest of Atlantic Realty Trust for every two shares of RPS that they held, subsequent to the one-for-four reverse split of RPS.
Distributions paid by the Company are at the discretion of the Board of Trustees and depend on a number of factors, including cash flow of the Company, its financial condition and capital requirements, the annual distribution requirements necessary to maintain its status as a REIT under the Code, and such other factors as the Board of Trustees deems relevant.
The Company has an Automatic Dividend Reinvestment Plan (the "DRP Plan") which allows shareholders to acquire additional Common Shares by automatically reinvesting cash dividends. Shares are acquired pursuant to the DRP Plan at a price equal to the prevailing market price of such Shares, without payment of any brokerage commission or service charge. Shareholders who do not participate in the Plan continue to receive cash distributions, as declared.
Upon consummation of the Change of Venue Merger, on December 31, 1997 the Company issued an aggregate of 466,667 Series A Preferred Shares in exchange for a like number of Preferred Units that had been issued by the Operating Partnership to certain clients advised by Morgan Stanley Asset Management, Inc. ("MSAM") and Kimco Realty Corporation ("Kimco"). The Preferred Units were sold pursuant to a Preferred Units and Stock Purchase Agreement dated as of September 30, 1997 among the Company, the Operating Partnership, certain clients advised by MSAM and Special Situations RG REIT, Inc. (the entity the investors used to effect their investment). The Preferred Units were sold for an aggregate consideration of $11,667,000 or $25.00 per Preferred Unit. The sale and issuance of the Preferred Units and Series A Preferred Shares was not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon Section 4(2) of the Securities Act. The purchasers of the Preferred Units and the Series A Preferred Shares were limited to six institutional investors consisting of insurance companies, pension funds and other sophisticated institutional investors each of whom made representations to the Company and the Operating Partnership with respect to its intention to purchase the securities for investment only, and not with a view to or for sale in connection with any distribution. Each investor also represented to the Company and the Operating Partnership that such investor was sophisticated and was able to bear the economic risk of its investment in the Operating Partnership and the Company. No underwriter was involved in the transaction and there were no underwriting discounts or commissions paid in connection therewith.
Under certain circumstances, the Series A Preferred Shares are convertible into Common Shares. Each Series A Preferred Share may be converted into Common Shares at the Stated Value (equal to $25.00) plus any unpaid dividends, if any, for each Series A Preferred Share so converted, for Common Shares issued on conversion priced at $17.50 per Common Share, subject to adjustment under certain circumstances to prevent the dilution of the Series A Preferred Shares, including certain issues of Common Shares by the Company at prices less than $17.50.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS, EXCEPT PER SHARE DATA, WEIGHTED AVERAGE SHARES AND EQUIVALENT SHARES OUTSTANDING, AND COMPANY OWNED GLA IN THOUSANDS)
The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report:
- ------------------------- (1) Pro forma information has been presented as if the Ramco Acquisition, the acquisitions of shopping center properties during 1996 and 1997, and the spin-off of Atlantic Realty Trust had occurred on January 1, 1996.
(2) Effective May 1, 1996, the Company completed the acquisition of substantially all of the shopping center and retail properties, as well as the management organization and business operations of Ramco and its affiliates and the spin-off of its wholly owned subsidiary, Atlantic, a Maryland real estate investment trust. In connection with the Ramco Acquisition, the Company's name was changed to Ramco-Gershenson Properties Trust and a one-for-four reverse stock split was effectuated as of the close of business on May 1, 1996.
(3) Management generally considers Funds From Operations ("FFO") to be one measure of financial performance of an equity REIT. The Company has adopted the most recent National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, which was effective on January 1, 1996. Under the definition, FFO represents income (loss) before minority interest (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustment for unconsolidated partnerships and joint ventures. Therefore, FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company's performance or to cash flows from operating activities as a measure of liquidity or the ability to pay distributions. Furthermore, while net income and cash generated from operating, investing and financing activities, determined in accordance with GAAP, consider capital expenditures which have been and will be incurred in the future, the calculations of FFO does not.
(4) Represents the weighted average total shares outstanding, assuming the redemption of all Operating Partnership Units for Common Shares.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with Ramco-Gershenson Properties Trust Consolidated Financial Statements, the notes thereto, and the comparative summary of selected financial data appearing elsewhere in this report.
RPS Realty Trust, a Massachusetts business trust, was formed on June 21, 1988 to be a diversified, growth oriented real estate investment trust ("REIT"). From 1988 until April 30, 1996, RPS Realty Trust was primarily engaged in the business of owning and managing a participating mortgage loan portfolio, and, through its wholly-owned subsidiaries, owning and operating eight real estate properties. In May 1996, in connection with the closing of the Ramco Acquisition and the consummation of the spin-off of Atlantic Realty Trust, discussed below, RPS Realty Trust successfully completed its plan to transform itself into an equity REIT.
Effective May 1, 1996, RPS Realty Trust completed the acquisition of substantially all of the shopping center and retail properties, as well as the management organization and business operations of Ramco-Gershenson, Inc. and its affiliates (the "Ramco Acquisition") and the spin-off of its wholly owned subsidiary, Atlantic Realty Trust ("Atlantic"), a Maryland real estate investment trust. In connection with the Ramco Acquisition, RPS Realty Trust's name was changed to Ramco-Gershenson Properties Trust and a one-for-four reverse stock split was effectuated as of the close of business on May 1, 1996. Ramco-Gershenson Properties Trust is referred to herein as the "Company".
Concurrent with the Ramco Acquisition, the former owners of the Ramco Properties (as defined below) and the shareholders of Ramco-Gershenson, Inc. ("Ramco") (collectively, the "Ramco Group") contributed to Ramco-Gershenson Properties, L.P. (the "Operating Partnership") (i) their interests in 20 shopping center and retail properties (the "Ramco Properties") containing an aggregate of approximately 4,826,000 square feet of total gross leasable area ("GLA"), of which approximately 3,520,000 square feet is owned by the Operating Partnership, and the balance is owned by certain anchor tenants, (ii) 100% of the non-voting common stock and 5% of the voting common stock in Ramco (representing in excess of a 95% economic interest in Ramco), (iii) 50% general partner interests in two partnerships which each own a shopping center comprising a total of approximately 288,000 square feet of GLA, (iv) rights in and/or options to acquire certain development land, (v) options to acquire the Ramco Group's interest in six shopping center properties and (vi) five outparcels.
In return for these transfers, the Ramco Group received 2,377,492 Units ("Units") of the Operating Partnership (representing an approximate 25% limited partnership interest in the Operating Partnership). The acquisition was accounted for using the purchase method. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair market value. Units, which are convertible into common shares of beneficial interest in the Company, as described below, were valued at approximately $16.50 per Unit representing the average trading price of the Company's shares immediately preceding and following the Ramco Acquisition. In addition, the Ramco Group received 279,181 Units as a partial earnout relative to Jackson Crossing Shopping Center (representing an approximate 2% limited partnership interest in the Operating Partnership). The Ramco Group's 2,656,673 aggregate Units represented an approximate 27% limited partnership interest in the Operating Partnership. In connection with the transfer of the Ramco Properties, the Company assumed approximately $176,556 of secured indebtedness on the Ramco Properties. The aggregate interest in the Operating Partnership to be received by the Ramco Group may be increased to a maximum of approximately 29% if certain leasing objectives with respect to Jackson Crossing were fulfilled by March 31, 1997. The Company is in the process of evaluating the Jackson Crossing earnout and determining appropriate due diligence procedures to be performed relative to the proposed calculation. The potential impact of additional units is not expected to be material. Subject to certain limitations, the interests in the Operating Partnership are exchangeable into common shares of the Company on a one-for-one basis. No Units have been exchanged to date.
Pursuant to the Ramco Acquisition, the Company transferred to the Operating Partnership six properties containing an aggregate of approximately 931,000 square feet of GLA and $68,000 in cash in exchange for 7,123,105 Units of the Operating Partnership (representing a 1% General Partnership interest, and a 72% limited partnership interest after giving effect for the reduction of 2% for the Ramco Group's earnout).
The transfer of the Company's net assets in exchange for Units was accounted for as a reorganization of entities under common control. As such, these assets and liabilities were transferred and accounted for at historical cost in a manner similar to that of a pooling of interests.
Concurrently with the closing of the Ramco Acquisition, the Company's former mortgage loan portfolio as well as certain of its former real estate assets were transferred to Atlantic and the shares of Atlantic were distributed to the Company's shareholders.
In December 1997, through a special meeting of its shareholders, the Company changed its state of organization from Massachusetts to Maryland by means of a merger of the Massachusetts Trust into the Company and the conversion of each outstanding share of beneficial interest in the Trust into a common share of beneficial interest of the Company.
CAPITAL RESOURCES AND LIQUIDITY
The Company generated $17,026 in cash flows from operating activities and $137,649 in cash flows from financing activities for the year ended December 31, 1997. These combined cash flows of $154,675 were used to fund $153,183 of investing activities which were primarily the acquisition of real estate assets.
In order to provide the funds necessary to support the Company's acquisition, development and capital improvement plans, the Company modified its $50,000 credit facility during May and June 1997, to provide for an increase in the borrowings available under the credit facility to $75,000. The Company used proceeds from borrowings under the credit facility to pay for the acquisition of the Madison Center, Pelican Plaza, and Village Lakes shopping centers and for other capital expenditures. During May 1997, the Company acquired the Madison Center, in Madison Heights, Michigan, an approximately 186,000 square foot community shopping center, for approximately $7,400. During July 1997, the Company acquired Pelican Plaza in Sarasota, Florida, an approximately 106,000 square foot shopping center/office development, for approximately $7,200. During December 1997, the Company acquired the Village Lakes Shopping Center, in Land O 'Lakes, Florida, an approximately 186,000 square foot shopping center, for approximately $8,600.
On October 30, 1997, the Company acquired a portfolio of 15 community shopping centers (the "Southeast Portfolio"), comprised of approximately 2.5 million square feet, located in the Southeast United States. The Southeast Portfolio properties are located in Alabama, Florida, Georgia, North Carolina, South Carolina, and Tennessee. The properties were acquired for a purchase price of approximately $124,500.
Financing for the Southeast Portfolio acquisition was obtained by increasing the Company's existing credit facility from $75,000 to $160,000, the assumption of an existing $5,900 mortgage on one of the acquired properties and by the addition of a $45,000 unsecured term loan. The interest rate payable under the revolving credit facility has been reduced from 175 basis points over LIBOR, to between 137.5 and 162.5 basis points over LIBOR, depending on certain debt ratios set forth in the loan agreement. The interest rate payable on the unsecured term loan is between 250 and 275 basis points over LIBOR, which rate is also dependent on certain debt ratios. The Credit Facility and the unsecured term loan mature on May 1, 1999, and the maturity date of each may, under certain circumstances, be extended to October 2000 at the election of the Operating Partnership. The credit facility continues to have, and the term loan has, various financial covenants relating to debt to market capitalization, minimum operating coverage ratios and minimum equity value.
During November 1997, the Company closed on a $50,000 permanent mortgage loan. The net proceeds were utilized to pay down the credit facility, and the availability of the credit facility was reduced to $110,000. At December 31, 1997, $110,000 of the Credit Facility was available for borrowing, of which $81,588 was outstanding. At December 31, 1997, outstanding letters of credit issued under the credit facility total approximately $836. The $50,000 mortgage loan matures December 2007, bears a 6.83% fixed interest rate and is secured by seven shopping center properties.
During December 1997, the Company closed on a $8,500 mortgage loan secured by the Jackson West Shopping Center. The loan matures January 2006 and has a fixed interest rate of 7.17%. The Company has provided a $500 letter of credit to the lender to provide additional collateral for the leaseup of an anchor pad at the shopping center. The Company has one year to sign a lease with an acceptable tenant or the letter of credit proceeds will be utilized to partially prepay the mortgage without prepayment penalty.
At December 31, 1997 the Company was in the process of repositioning the West Oaks I shopping center by constructing spaces for OfficeMax and Designer Shoe Warehouse. The costs relative to the repositioning amount to approximately $3,600, of which $1,400 had been spent in 1997. At the New Towne Plaza, the Company replaced a former Kmart store with a nationally recognized retailer. The projected cost is approximately $2,400, with $417 spent as of December 31, 1997. The Company is in the process of renovating the exterior of the Chester Springs shopping center and remerchandising the center. The cost is expected to be approximately $2,000, of which $411 was spent as of December 31, 1997.
In October 1997, the Company entered into an agreement with certain clients advised by Morgan Stanley Asset Management, Inc. ("MSAM"), and Kimco Realty Corporation ("Kimco") pursuant to which such entities agreed to invest up to an aggregate of $35,000 in the Operating Partnership. The MSAM clients and Kimco initially purchased Operating Partnership Preferred Units which, after shareholder approval in December 1997, were converted into the Company's Series A Convertible Preferred Shares ("Series A Preferred Shares") and, ultimately, may be converted into its Common Shares. The initial investments of $11,667 were made in October 1997.
The equity investment involves the issuance of up to 1.4 million Series A Preferred Shares at a price of $25.00 per share. The remaining commitment of $23,333 may be drawn by the Company over a one-year period and may be used to help fund strategic acquisitions, retenanting or redevelopment activities, or to reduce outstanding debt. The dividend rate on the Series A Preferred Shares is expected to equal that presently being paid to the Company's shareholders.
After the closing of this transaction, the MSAM clients are required to purchase 19.4% of the first $50,000 in a follow-on public offering of the Company's common shares at the offering price less the underwriter's fees, commissions, and discounts per share. Upon consummation of such public offering, all outstanding Series A Preferred Shares will be exchanged into common shares of the Company, at a conversion price of $17.50 per share, which conversion price is subject to adjustment in certain circumstances.
The Company's mortgage debt, secured by certain properties, amounted to $295,618 at December 31, 1997, with a weighted average interest rate of 7.88%. The mortgage debt consists of nine loans secured by various properties, one unsecured term loan, and the Credit Facility which is secured by various properties. Eight of the mortgage loans amounting to $162,030 have maturities ranging from 1998 to 2007, monthly payments which include regularly scheduled amortization, and have fixed interest rates ranging between 6.83% to 8.75%. One of the mortgage loans, evidenced by tax free bonds, amounting to $7,000 secured by Oak Brook Square Shopping Center is non-amortizing, matures in 2010, and carries a floating interest rate equal to 75% of the new issue long-term Capital A rated utility bonds, plus interest to the lender sufficient to cause the lender's overall yield on its investment in the bonds to be equal to 200 basis points over their applicable LIBOR rate (7.325% at December 31, 1997).
Variable rate debt accounted for $133,588 of outstanding debt with a weighted average interest rate of 8.01%. Variable rate debt accounted for approximately 45.2% of the Company's total debt and 26.7% of its total capitalization.
In July 1997, the Company executed an interest rate protection agreement, at a cost of $29, to limit the Company's exposure to increases in interest rates on its floating rate debt. The notional amount of the agreement was $75,000. Based on rates currently in effect under the Company's Credit Facility, the agreement caps the Company's interest rate on $75,000 of floating rate debt to 8.375%, through May 1, 1999, with a floor of 7.125%.
In December 1997, the Company executed an interest rate protection agreement at no cost to limit the Company's exposure to increases in interest rates on its floating rate debt. The notional amount of the
agreement was $50,000. Based on rates currently in effect under the Company's Credit Facility, the agreement caps the Company's interest rate on $50,000 of floating rate debt to 8.375% with a floor of 7.225%, for the period May 1999 to October 2000.
The Company's interest coverage ratio for 1997 was 2.43 and the debt service coverage ratio (which includes the impact of scheduled principal amortization) was 2.15. Based on the debt and the market value of equity, the Company's debt to total market capitalization (debt plus market value equity) ratio was 59.2% at December 31, 1997. On a pro forma basis, if the full MSAM/Kimco equity investment were infused, the debt to total market capitalization would be 56.2% at December 31, 1997.
The two properties in which the Operating Partnership owns an interest and are accounted for on the equity method of accounting are subject to non-recourse mortgage indebtedness. At December 31, 1997, the pro rata share of non-recourse mortgage debt on the unconsolidated properties (accounted for on the equity method) was $6,271 with a weighted average interest rate of 9.14%.
The Company's current capital structure includes property specific mortgages, the unsecured term loan, the Credit Facility, Series A Preferred Shares, Common Shares and a minority interest in the Operating Partnership. At March 31, 1997, the minority interest represented the approximate 27% ownership in the Operating Partnership held by the Ramco Group. On April 1, 1997, the Operating Partnership redeemed 88,530 Units at $16.00 per Unit. The redemption reduced the minority interest from approximately 27% to approximately 26.5%. Currently, the minority interest in the Operating Partnership represents the 26.5% ownership in the Operating Partnership held by the Ramco Group which may, under certain conditions, be exchanged for approximately 2,568,143 Common Shares.
The Units owned by the Ramco Principals are subject to lock-up agreements which provide that the Units cannot be transferred, except under certain conditions, for a period of 30 months after the closing of the Ramco Acquisition (November 1998). In addition, the Units issued to the Ramco Group are exchangeable for shares of the Company on a one-for-one basis. The Company, as sole general partner of the Operating Partnership, has the option to exchange such Units for cash based on the current trading price of the common shares. Assuming the exchange of all limited partnership interests in the Operating Partnership, there would be outstanding approximately 9,691,248 Common Shares with a market value of approximately $190,796 at December 31, 1997 (based on the closing price of $19.6875 per share on December 31, 1997).
The principal uses of the Company's liquidity and capital resources are for acquisitions, development, including expansion and renovation programs, and debt repayment. To maintain its qualification as a real estate investment trust under the Internal Revenue Code, the Company is required to distribute to its shareholders at least 95% of its "Real Estate Investment Trust Taxable Income" as defined in the Internal Revenue Code of 1986, as amended (the "Code").
During July 1997 Montgomery Ward, ("Wards") a tenant at three of the Company's properties, Tel-Twelve Mall, Clinton Valley Mall and Shoppes of Lakeland, filed for protection under Chapter 11 of the Bankruptcy Code. In October 1997, Wards issued a list of anticipated store closings which included the stores at the Company's Clinton Valley Mall. This location consists of a 101,200 square foot department store and a 7,480 square foot TBA store (Tires, Batteries and Automotive). The Company was notified in March 1998 that Wards intends to reject the lease. The Company is pursuing replacement tenants to lease the space. On an annual basis, Wards pays approximately $1,000 in base rent, operating and real estate tax expense reimbursements for the Clinton Valley Mall.
The Company anticipates that the combination of the availability under the Credit Facility, potential new borrowings relative to the acquired properties and development properties, construction loans, the remaining MSAM/Kimco equity commitment, and other potential equity offerings will provide adequate liquidity for the foreseeable future to fund future acquisitions, developments, expansions, repositionings, and to continue its currently planned capital programs and to make distributions to its shareholders in accordance with the Code's requirements applicable to REIT's. Although the Company believes that the combination of factors discussed above will provide sufficient liquidity, no such assurance can be given.
In 1997, the Company began a program to repurchase shares of beneficial interest in the open market to be used as compensation for the Board of Trustees. The Company expects to purchase approximately 5,600 shares annually.
Year 2000 Compliance. The Company has assessed the exposure of its computer systems presented by the upcoming change in the millenium. Based on the assessment, the Company believes that all of the Company's material computer systems are currently year 2000 compliant. The Company does not believe that any material expenditures will be required to be fully year 2000 compliant.
Inflation. Substantially all of the leases at the Company's properties provide for tenants to pay their pro rata share of operating expenses, including common area maintenance and real estate taxes, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. Many of the tenants' leases contain provisions designed to lessen the impact of inflation. Such provisions include the ability to receive percentage rentals based on a tenant's gross sales, which generally increase as prices rise, and or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than ten years, which may enable the Operating Partnership to replace existing leases with new leases at a higher base and/or percentage rentals if rents of the existing leases are below the then existing market rate.
RESULTS OF OPERATIONS
Comparison of year ended December 31, 1997 to year ended December 31, 1996
Total revenues for the year ended December 31, 1997 increased by 46.2%, or $18,731, to $59,244 as compared to $40,513 for the year ended December 31, 1996. The increase was a result of a $15,322 increase in minimum rents, a $277 increase in percentage rents, and a $5,295 increase in recoveries from tenants offset in part by a $2,163 decrease in interest and other income.
Minimum rents increased 64.6%, or $15,322, to $39,035 for the year ended December 31, 1997 as compared to $23,713 for the year ended December 31, 1996. Percentage rents increased 23.3%, or $277, to $1,467 in 1997 as compared to $1,190 for the year ended December 31, 1996. Recoveries from tenants increased 41.7%, or $5,295, to $17,990 as compared to $12,695 for the year ended December 31, 1996. The $15,322 increase in minimum rents is due to the partial year impact of 1997 acquisitions of $3,196, the full impact of 1996 property acquisitions of $2,430, the full year impact of the Ramco Acquisition of $10,080, and a decrease of $348 related to the former RPS shopping centers. The $10,080 increase related to the full year impact of the Ramco Acquisition consisted of a $9,132 increase for the first four months of 1997 for which the Company did not own the properties in 1996, and a $948 increase during the last eight months for which the Company owned the properties in both 1996 and 1997. The $948 increase in minimum rents at the Ramco Properties was primarily due to the impact of anchor tenant openings at the Tel-Twelve Mall, Jackson West, Jackson Crossing, Troy Towne Center and Spring Meadows Place shopping centers, amounting to $1,052, offset in part by reductions in minimum rents of $111 at the West Oaks I shopping center during its repositioning. The $348 decrease in the minimum rents from the former RPS properties was primarily due to lower occupancy at the Sunshine Plaza shopping center as a result of the vacancy of anchor stores. The increase in recoveries from tenants was due to a higher level of recoverable operating expenses and real estate taxes due to the increase in the number of shopping centers owned in 1997 as compared to 1996, combined with an increase in the overall recovery ratio in 1997 to 101.7% as compared to 98.6% in 1996. The increase in percentage rents was primarily due to the impact of the Ramco Acquisition and the other 1996 acquisitions.
Interest and other income decreased 74.2%, or $2,163, to $752 in 1997 as compared to $2,915 in 1996. The decrease of $2,163 in interest and other income is primarily due to the impact of the spin-off of Atlantic including the transfer of the mortgage loan portfolio to Atlantic effective May 1, 1996. Approximately $183 of the $752 recognized in 1997 was attributable to non-recurring tenant lease obligations.
Total expenses for the year ended December 31, 1997 increased 22.6%, or $8,542, to $46,388 as compared to $37,846 for the year ended December 31, 1996. The increase was due to a $4,819 increase in operating expenses, including recoverable operating expenses and real estate taxes, a $3,418 increase in depreciation and
amortization, a $183 increase in other operating expenses, a $70 increase in general and administrative expenses, and a $8,028 increase in interest expense, offset in part, by a $7,976 decrease in spin-off and other expenses.
Total recoverable expenses, including recoverable operating expenses and real estate taxes, increased $4,819, or 37.4% to $17,692 for the year ended December 31, 1997 from $12,873 for the year ended December 31, 1996. Other operating expenses increased 23.1%, or $183, to $974 in 1997 from $791 in 1996. General and administrative expenses increased $70, or 1.5% from $4,683 in 1996 to $4,753 in 1997. Interest expense increased 119.4%, or $8,028, to $14,753 in 1997 as compared to $6,725 in 1996. Depreciation and amortization increased $3,418, or 71.2%, to $8,216 in 1997 as compared to $4,798 in 1996. The increases in recoverable expenses, other operating expenses, general and administrative expenses, interest expense and depreciation and amortization expense are primarily attributable to the impact of the acquisition of the Ramco Properties effective May 1, 1996 and the impact of shopping center acquisitions during 1996 and 1997. The operating results for the year ended December 31, 1997, included the impact of the acquisition of the Ramco Properties and the shopping centers acquired during 1996 for the full twelve months in 1997, while the results for the year ended December 31, 1996 include the results of the Ramco Properties for only eight months and include the impact of the subsequent 1996 acquisitions only from the date of acquisition. The impact of shopping centers acquired in 1997 is reflected only from the acquisition date until December 31, 1997. In addition, two properties which were part of the Company's portfolio at December 31, 1995 were spun-off to Atlantic effective May 1, 1996.
For the year ended December 31, 1996, the Company incurred $7,976 of spin-off and other expenses for which there were no corresponding costs for the year ended December 31, 1997. These non-recurring costs were primarily a result of the employee severance and bonus expenses, the cost of run-off directors' and officers' liability insurance and the write-off of deferred acquisition costs related to the spin-off of Atlantic.
The loss from unconsolidated entities of $314 in 1997 as compared to $216 in 1996 is due to the impact of the Ramco Acquisition on May 1, 1996.
The minority interest during 1997 was $3,344 as compared to $2,159 in 1996. The minority interest represents the portion of the Operating Partnership that is not owned by the Company. The minority interest for 1997 represents the impact of a full year while in 1996 it represents the impact only from the Ramco Acquisition effective May 1996 until the end of 1996.
Comparison of Pro forma year ended December 31, 1997 to Pro forma year ended December 31, 1996
The Pro Forma Consolidated Statements of Operations which are included in Note 12 to the Consolidated Financial Statements are presented as if the Ramco Acquisition, the Taylor, Holcomb, Lakeland, Madison, Pelican, the Southeast Portfolio, and Village Lakes shopping center acquisitions and the spin-off of Atlantic had occurred on January 1, 1996, and the Company had qualified as a REIT.
Total revenues for the year ended December 31, 1997 increased by 2.2%, or $1,588, to $73,983 as compared to $72,395 for the year ended December 31, 1996. The increase was due to a $1,775 increase in minimum rents, a $351 increase in percentage rents, a $626 decrease in recoveries from tenants, and an increase of $88 in interest and other income.
Minimum rents increased 3.6%, or $1,775, to $51,714 in 1997 as compared to $49,939 for the year ended December 31, 1996. Percentage rents increased 27.7%, or $351, to $1,620 as compared to $1,269 for the year ended December 31, 1996. Recoveries from tenants decreased 3.1%, or $626, to $19,794 in 1997 as compared to $20,420 in 1996. Interest and other income increased 11.5%, or $88, to $855 as compared to $767 in 1996. The $1,775 increase in minimum rents was primarily attributable to initial anchor tenant openings at Jackson West Shopping Center and new anchors at Tel-Twelve Mall, Eastridge Commons, Jackson Crossing and Troy Towne Center amounting to $1,725, offset by decreases in minimum rents of $416 related to Sunshine Plaza and West Oaks I tenant vacancies and/or repositioning efforts. The decrease in recoveries from tenants was due to a corresponding decrease in real estate taxes and recoverable operating expenses. The Company's
overall recovery ratio for 1997 and 1996 remained relatively consistent at 100.1% and 99.2%, respectively. The increase in interest and other income included approximately $183 of non-recurring tenant lease obligations.
Total expenses decreased 10.1%, or $6,828 for the year ended December 31, 1997, to $61,108 from $67,936 for the year ended December 31, 1996. The decrease was primarily due to the non-recurring charge of $7,976 in spin-off and other expenses, a $814 decrease in recoverable operating and real estate tax expense, a $789 increase in depreciation and amortization, a $86 decrease in other operating expenses, a $316 increase in general and administrative expenses, and a $943 increase in interest expense.
For the year ended December 31, 1996 the Company incurred $7,976 of spin-off and other expenses for which there were no corresponding costs for the year ended December 31, 1997. These non-recurring costs were primarily a result of the employee severance and bonus expenses, the cost of run-off directors' and officers' liability insurance, and the write-off of deferred acquisition costs related to the spin-off of Atlantic.
Recoverable operating and real estate tax expenses decreased 4.0%, or $814, to $19,772 for the year ended December 31, 1997 from $20,586 for the year ended December 31, 1996 due to a reduction in real estate taxes and recoverable operating expenses. As noted above, the Company's recovery ratio for the year ended December 31, 1997 remained relatively consistent with the corresponding 1996 period at 100.1%, and 99.2%, respectively.
The increase of 7.8%, or $789, in depreciation and amortization to $10,949 in 1997 from $10,160 in 1996 was attributable to the Jackson West shopping center which opened in June, 1996 and the impact of capital expenditures during 1996 and 1997.
Interest expense increased 4.1% or $943 to $24,183 in 1997 from $23,240 in 1996. The increase was attributable to the impact of borrowings relative to the Jackson West shopping center which opened in June, 1996, development cost reimbursements and other capital expenditures.
General and administrative expenses increased 6.6%, or $316, to $5,085 in 1997 from $4,769 in 1996. The level of general and administrative expenses is impacted by several factors, including the cost reimbursement relationship between the Operating Partnership and Ramco, the capitalization of costs relative to leasing and development at the centers owned by the Operating Partnership and the cost of the Company's administrative activities. Ramco also provides third party management, leasing, brokerage and development services to entities not controlled by the Company. These third party leasing and development fees earned under management contracts are not necessarily earned consistently over time since these fees are based on measurements related to specific transactions and are dependent on the availability of space to lease or develop at the centers. The operating expenses of Ramco include employee expenses, such as salaries and benefits, and office and other expenses. Some of these costs are fixed in nature. The net cost reimbursement to be charged as general and administrative expense to the Operating Partnership is dependent on the ability of Ramco to continue to charge leasing, brokerage and development fees to third party entities, while continuing to generate third party management business. It is also dependent on Ramco's ability to control expenses, the majority of which are employee-related expenses. Some of the expenses of Ramco, those which are directly attributable to revenues to be earned in the future, are charged to the Operating Partnership and capitalized in order to be amortized over the related revenue. The Company's administrative expenses include officers' salaries and benefits, trustee fees, directors' and officers' liability insurance, transfer agent and shareholders' relations expenses, and professional fees including legal, audit and tax.
Following is a breakdown of the general and administrative expenses shown in the Pro forma financial statements:
The increase in general and administrative expenses of $316 was due to an increase of $52 in the Operating Partnership administrative expenses, an increase of $134 in cost reimbursement expenses between the Operating Partnership and Ramco, and an increase of $130 in Shopping Center Level general and administrative expenses.
Comparison of year ended December 31, 1996 to year ended December 31, 1995
Total revenues for the year ended December 31, 1996 increased by 142.3%, or $23,796, to $40,513 as compared to $16,717 for the year ended December 31, 1995. The increase was a result of a $17,242 increase in minimum rents, a $424 increase in percentage rents, and a $10,996 increase in recoveries from tenants offset in part by a $4,866 decrease in interest and other income.
Minimum rents increased 266.5%, or $17,242, to $23,713 for the year ended December 31, 1996 as compared to $6,471 for the year ended December 31, 1995. Percentage rents increased 55.4%, or $424, to $1,190 in 1996 as compared to $766 for the year ended December 31, 1995. Recoveries from tenants increased 647.2%, or $10,996, to $12,695 as compared to $1,699 for the year ended December 31, 1995. The increases in minimum rents, percentage rents, and recoveries from tenants are primarily attributable to the acquisition of the Ramco Properties effective May 1, 1996 and the acquisitions of the Taylor, Lakeland and Holcomb shopping centers effective August 14, November 22, and December 13, 1996, respectively. The operating results have included the impact of eight months of the Ramco Properties in 1996 as compared to none in 1995. In addition, two properties which were part of the Company's portfolio at December 31, 1995 were spun-off to Atlantic effective May 1, 1996 and thus the revenues in 1996 include only four months of their activity as compared to twelve months in 1995. The decrease of $4,866 in interest and other income is due to the impact of the spin-off of Atlantic, including the transfer of the mortgage loan portfolio to Atlantic. The operating results of the Company represents four months of mortgage loan portfolio activity in 1996 as compared to twelve months in 1995.
Total expenses for the year ended December 31, 1996 increased by 187.2%, or $24,667, to $37,846, as compared to $13,179 for the year ended December 31, 1995. The increase was due to a $9,668 increase in
operating expenses, including recoverable operating expenses and real estate taxes, a $3,584 increase in depreciation and amortization, a $608 increase in other operating expenses, a $556 increase in general and administrative expenses, a $6,725 increase in interest expense, and a $7,976 increase in spin-off and other expenses, offset in part by a decrease of $4,450 in the allowance for loan losses.
Total recoverable expenses, including real estate taxes and recoverable operating expenses, increased by 301.7%, or $9,668, to $12,873 as compared to $3,205 for the year ended December 31, 1995. Other operating expenses increased by 332.2%, or $608, to $791 as compared to $183 in 1995. General and administrative expenses increased 13.5%, or $556, to $4,683 as compared to $4,127 in 1995. Depreciation and amortization increased 295.2%, or $3,584, to $4,798 in 1996 as compared to $1,214 in 1995. The increases in recoverable expenses of $9,668, other operating expenses of $608, general and administrative expenses of $556, and depreciation and amortization of $3,584 reflect the impact for the partial year on expenses that are principally attributable to the increase in the size of the real estate shopping portfolio due to the acquisition of the Ramco Properties in May 1996.
Spin-off and other expenses were $7,976 in 1996 as compared to zero in 1995. These non-recurring costs were primarily a result of the employee severance and bonus expenses, the cost of run-off directors' and officers' liability insurance and the write-off of the Company's deferred acquisition costs related to the spin-off of Atlantic. The allowance for loan losses was zero in 1996 as compared to $4,450 in 1995. Total expenses for the year ended December 31, 1995 included an addition for loan losses of $4,450, no such addition to the allowance was required in 1996.
Interest expense was $6,725 in 1996 as compared to zero in 1995. The increase of $6,725 was due to the partial year effect of the debt assumed in connection with the Ramco Acquisition and additional borrowings for subsequent acquisitions and development cost reimbursements. Interest expense for the year ended December 31, 1996 included approximately $140 in additional costs for the period May 1 to May 10, 1996 due to the closing of the Ramco Acquisition being effective May 1, 1996 while the Company contributed the RPS cash on May 10, 1996 thus incurring additional interest expense on the assumed debt.
The loss from unconsolidated entities of $216 in 1996 as compared to zero in 1995 is due to the impact of the Ramco Acquisition during May 1996, and the 50% general partner interests in two partnerships which each own a shopping center.
The minority interest of $2,159 in 1996 represents the 27% share of income of the Operating Partnership relative to the period May 1, 1996 to December 31, 1996 allocable to the Ramco Group.
FUNDS FROM OPERATIONS
Management generally considers funds from operations ("FFO") to be one measure of financial performance of an equity REIT. It has been presented to assist investors in analyzing the performance of the Company and to provide a relevant basis for comparison to other REITs.
The Company has adopted the most recent National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO, which was effective on January 1, 1996. Under the NAREIT definition, FFO represents income (loss) before minority interest (computed in accordance with generally accepted accounting principles), excluding gains (losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures.
Therefore, FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indication of the Company's performance or to cash flows from operating activities as a measure of liquidity or of the ability to pay distributions. Furthermore, while net income and cash generated from operating, investing and financing activities determined in accordance with generally accepted accounting principles consider capital expenditures which have been and will be incurred in the future, the calculation of FFO does not.
The following pro forma FFO are presented as if the Ramco Acquisition, and the acquisitions of each shopping center acquired in 1996 and 1997, and the spin-off of Atlantic had occurred January 1, 1996.
The following table illustrates the calculation of actual FFO for the year ended December 31, 1997 and pro forma FFO for the years ended December 31, 1997 and 1996:
- ------------------------- (1) For basic, represents the weighted average total shares outstanding, assuming the redemption of all Operating Partnership Units for Common Shares. For diluted, represents the weighted average total shares outstanding, assuming the redemption of all Operating Partnership Units for Common Shares, the Series A Preferred Shares converted to Common Shares, and the common shares issuable under the treasury stock method upon exercise of stock options.
CAPITAL EXPENDITURES
During 1997, the Company spent approximately $3,391 on revenue generating capital expenditures including tenant allowances, leasing commissions paid to third-party brokers, legal costs relative to lease documents, and capitalized leasing and construction costs. These types of costs generate a return through rents from tenants over the term of their leases. Revenue enhancing capital expenditures, including expansions, renovations or repositionings were approximately $8,095. Revenue neutral capital expenditures, such as roof and parking lot repairs which are anticipated to be recovered from tenants, amounted to approximately $1,080.
During 1997, the Company spent approximately $149,573 on the acquisition of the Madison Center, Pelican Plaza, the Southeast Portfolio, and the Village Lakes shopping centers.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share." This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common shares or potential common shares. This Statement replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings.
The provisions of the Statement were adopted as of December 31, 1997 and the adoption of this Statement did not have an impact on the Company's previously reported EPS amounts.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" which establishes standards for disclosing information about an entity's capital structure. The Statement was adopted as of December 31, 1997 and did not have a material effect on the Company's financial statement presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and displaying comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Statement is effective for the Company's financial statements for the year ending December 31, 1998. The adoption of the Statement is not expected to have a material effect on the Company's financial statement presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information about operating segments in financial statements. It also establishes standards for disclosure about products and services, geographical areas, and major customers. The Statement is effective for the Company's financial statements for the year ending December 31, 1998. Management has not determined the impact of the Statement on the Company's financial statements.
This Form 10-K contains forward-looking statements with respect to the operation of certain of the Company's properties. Management of the Company believes the expectations reflected in the forward-looking statements made in this document are based on reasonable assumptions. Certain factors could occur that might cause actual results to vary. These include general economic conditions, the strength of key industries in the cities in which the Company's properties are located, the performance of the Company's tenants at the Company's properties and elsewhere, and other factors discussed in the Company's report filed with the Securities and Exchange Commission.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages to, which are included herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to Ramco-Gershenson Properties Trust definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Annual Report on Form 10-K with respect to its Annual Meeting of Shareholders to be held on June 10, 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to Ramco-Gershenson Properties Trust definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Annual Report on Form 10-K with respect to its Annual Meeting of Shareholders to be held on June 10, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to Ramco-Gershenson Properties Trust definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Annual Report on Form 10-K with respect to its Annual Meeting of Shareholders to be held on June 10, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to Ramco-Gershenson Properties Trust definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Annual Report on Form 10-K with respect to its Annual Meeting of Shareholders to be held on June 10, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(A)(1) FINANCIAL STATEMENTS
See pages to, which are included herein.
(A)(3) EXHIBITS
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated November 14, 1997. The company reported under Item 2, the acquisition of the Southeast Portfolio on October 30, 1997 and the related financing.
The Company filed a Current Report on Form 8-K/A dated January 13, 1998. The Company reported under Item 2, the acquisition of the Southeast Portfolio on October 30, 1997. Included in the filing were the following financial statements:
INDEPENDENT AUDITORS' REPORT
Ramco-Gershenson Southeast Portfolio, Combined Historical Summary of Revenues and Direct Operating Expenses for the Year Ended December 31, 1996 and the Nine Months Ended September 30, 1997 (Unaudited)
Notes to Combined Historical Summary of Revenues and Direct Operating Expenses for the Year Ended December 31, 1996, and the Nine Months Ended September 30, 1997 (Unaudited)
Ramco-Gershenson Properties Trust Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1997 (Unaudited)
Ramco-Gershenson Properties Trust Pro Forma Consolidated Statements of Operations for the Year Ended December 31, 1996 (Unaudited) and the Nine Months Ended September 30, 1997 (Unaudited)
Ramco-Gershenson Properties Trust Statement of Estimated Taxable Operating Results of the Southeast Portfolio and Estimated Cash to be Made Available by the Operations of the Southeast Portfolio for the Twelve Month Period Ended September 30, 1997 (Unaudited)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of registrant and in the capacities and on the dates indicated.
RAMCO-GERSHENSON PROPERTIES TRUST
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of Ramco-Gershenson Properties Trust:
We have audited the accompanying consolidated balance sheets of Ramco-Gershenson Properties Trust and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements 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 consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of Ramco-Gershenson Properties Trust and subsidiaries as of December 31, 1997 and 1996, and the 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.
Deloitte & Touche LLP Detroit, Michigan February 17, 1998
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------- (*) The 1996 and 1995 historical results consist of the operations of RPS Realty Trust prior to the Spin-Off Transaction and the Ramco Acquisition, which was effective on May 1, 1996 (Note 1).
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------- (*) The 1996 and 1995 historical results consist of the operations of RPS Realty Trust prior to the Spin-Off Transaction and the Ramco Acquisition, which was effective on May 1, 1996 (Note 1).
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
1. RAMCO ACQUISITION AND SPIN-OFF TRANSACTION
RPS Realty Trust, a Massachusetts business trust, was formed on June 21, 1988 to be a diversified, growth-oriented real estate investment trust.
Effective May 1, 1996, RPS Realty Trust completed the acquisition of substantially all of the shopping center and retail properties, as well as the management organization and business operations of Ramco-Gershenson, Inc. and its affiliates (the "Ramco Acquisition") and the spin-off of its wholly owned subsidiary, Atlantic Realty Trust ("Atlantic"), a Maryland real estate investment trust. In connection with the Ramco Acquisition, RPS Realty Trust's name was changed to Ramco-Gershenson Properties Trust and a one-for-four reverse stock split was effectuated as of the close of business on May 1, 1996. Ramco-Gershenson Properties Trust is referred to herein as the "Company".
Concurrent with the Ramco Acquisition, the former owners of the Ramco Properties (as defined below) and the shareholders of Ramco-Gershenson, Inc. ("Ramco") (collectively, the "Ramco Group") transferred to Ramco-Gershenson Properties, L.P. (the "Operating Partnership") (i) their interests in 20 shopping center and retail properties (the "Ramco Properties") containing an aggregate of approximately 4,826,000 square feet of total gross leasable area ("GLA"), of which approximately 3,520,000 square feet is owned by the Operating Partnership, and the balance is owned by certain anchor tenants, (ii) 100% of the non-voting common stock and 5% of the voting common stock in Ramco (representing in excess of a 95% economic interest in Ramco), (iii) 50% general partner interests in two partnerships which each own a shopping center, (iv) rights in and/or options to acquire certain development land, (v) options to acquire the Ramco Group's interest in six shopping center properties and (vi) five outparcels.
In return for these transfers, the Ramco Group received 2,377,492 Units ("Units") of the Operating Partnership (representing an approximate 25% limited partnership interest in the Operating Partnership). The acquisition was accounted for using the purchase method. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair market value. Units, which are convertible into common shares of beneficial interest in the Company, as described below, were valued at approximately $16.50 per Unit representing the average trading price of the Company's shares immediately preceding and following the Ramco Acquisition. In addition, the Ramco Group received 279,181 Units as a partial earnout relative to Jackson Crossing Shopping Center (representing an approximate 2% limited partnership interest in the Operating Partnership). The Ramco Group's 2,656,673 aggregate Units represented an approximate 27% limited partnership interest in the Operating Partnership. In connection with the transfer of the Ramco Properties, the Company assumed approximately $176,556 of secured indebtedness on the Ramco Properties. The aggregate interest in the Operating Partnership to be received by the Ramco Group may be increased to a maximum of approximately 29% if certain leasing objectives with respect to Jackson Crossing were fulfilled by March 31, 1997. The Company is in the process of evaluating the Jackson Crossing earnout and determining appropriate due diligence procedures to be performed relative to the proposed calculation. The potential impact of additional units is not expected to be material. Subject to certain limitations, the interests in the Operating Partnership are exchangeable into common shares of the Company on a one-for-one basis. No Units have been exchanged to date.
Pursuant to the Ramco Acquisition, the Company transferred to the Operating Partnership six properties containing an aggregate of approximately 931,000 square feet of GLA and $68,000 in cash in exchange for 7,123,105 Units of the Operating Partnership (representing a 1% General Partnership interest, and a 72% limited partnership interest after giving effect to the reduction of 2% for the Ramco Group's earnout).
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The transfer of the Company's net assets in exchange for Units was accounted for as a reorganization of entities under common control. As such, these assets and liabilities were transferred and accounted for at historical cost in a manner similar to that of a pooling of interests.
Concurrently with the closing of the Ramco Acquisition, the Company's former mortgage loan portfolio as well as certain of its former real estate assets were transferred to Atlantic and the shares of Atlantic were distributed to the Company's shareholders.
For the year ended December 31, 1996 non-recurring expenses, including expenses related to the spin-off of Atlantic, have been charged to operations as follows:
At December 31, 1996, the Company had a payable to its former Chairman and President of $1,600, plus interest, representing the final installment of his severance package. The final installment was paid in December 1997 under the terms of an amended agreement.
In connection with the Ramco Acquisition, the due to related entities of $1,325 and $1,053 at December 31, 1997 and 1996, respectively, represents unreimbursed development costs of $565 and $568, respectively, and funds collected on behalf of the Ramco Group relating to receivables prior to the closing of $760 and $485, respectively.
In December 1997, with the approval of its shareholders, the Company changed its state of organization from Massachusetts to Maryland by means of a merger of the Massachusetts Trust into the Company and the conversion of each outstanding share of beneficial interest in the Trust into a common share of beneficial interest of the surviving Company. The par value of the common shares was reduced from $.10 per share in 1996 to $.01 per share in 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements for the year ended December 31, 1997, and 1996 include the accounts of the Company and its majority owned subsidiary, the Operating Partnership (73.5% owned by the Company at December 31, 1997) and its wholly owned subsidiary, Ramco Properties Associates Limited Partnership, a financing subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements of the Company include the effects of the Ramco Acquisition and the spin-off of Atlantic as well as the operations of the Operating Partnership commencing May 1, 1996.
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 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. Actual results could differ from those estimates.
REVENUE RECOGNITION -- Shopping center space is generally leased to retail tenants under leases which are accounted for as operating leases. Minimum rents are recognized on the straight-line method over the terms of the leases. Percentage rents are recognized as earned on an accrual basis over the terms of the leases. The leases also typically provide for tenant recoveries of common area maintenance, real estate taxes and other operating expenses. These recoveries are recognized as revenue in the period the applicable costs are incurred.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An allowance for doubtful accounts has been provided against the portion of tenant accounts receivable which is estimated to be uncollectible. Accounts receivable in the accompanying balance sheet is shown net of an allowance for doubtful accounts of approximately $910 and $417 as of December 31, 1997 and 1996, respectively.
Until May 1, 1996, interest income on mortgage loans was recognized on the accrual method during the periods in which the mortgage loans were outstanding. Deferred interest, due at the maturity of the mortgage loan, was recognized as income based on the interest method using the implicit rate of interest on the mortgage loan. Contingent and additional contingent income, extension fee income and prepayment premium income was recognized as cash was received.
Mortgage loans receivable at December 31, 1995 was $36,023. Payments of $3,468 were received during 1996. Effective May 1, 1996 $32,555 of mortgage loans receivable was spun-off to Atlantic Realty Trust (Note 1).
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.
INCOME TAX STATUS -- The Company conducts its operations with the intent of meeting the requirements applicable to a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986 as amended (the "Code"). In order to maintain qualification as a real estate investment trust, the REIT is required to distribute at least 95% of its taxable income to shareholders and meet certain other asset and income tests as well as other requirements. As a real estate investment trust, the REIT will generally not be liable for federal corporate income taxes. Thus, no provision for federal income taxes has been included in the accompanying financial statements.
REAL ESTATE -- Real estate assets are stated at cost. Costs incurred for the acquisition, development, construction, and improvement of properties are capitalized, including direct costs incurred by Ramco. Depreciation is computed using the straight-line method over estimated useful lives. Expenditures for improvements and construction allowances paid to tenants are capitalized and amortized over the remaining life of the initial terms of each lease. Maintenance and repairs are charged to expense when incurred.
In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of" which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. The provisions of this Statement were adopted as of January 1, 1996 and the adoption of this Statement did not have an impact on the carrying value of the real estate. The Company periodically evaluates the carrying value of its long-lived assets.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS -- In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" which establishes standards for disclosing information about an entity's capital structure. This Statement was adopted as of December 31, 1997 and did not have a material effect on the Company's financial statement presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and displaying comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Statement is effective for the Company's financial statements for the year ended December 31, 1998. The adoption of the Statement is not expected to have a material effect on the Company's financial statement presentation.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information about operating segments in financial statements. It also establishes standards for disclosure about products and services, geographical areas, and major customers. The Statement is effective for the Company's financial statements for the year ending December 31, 1998. Management has not determined the impact of the Statement on the Company's financial statements.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES -- Consist of 50% general partner interests in Kentwood Town Center ("Kentwood") and the Southfield Plaza Expansion ("Southfield Plaza") and the Company's 100% interest in the non-voting and 5% interest in the voting common stock of Ramco. These investments are not unilaterally controlled and are therefore accounted for on the equity method.
OTHER ASSETS -- Consist primarily of financing costs and leasing costs which are amortized using the straight-line method over the terms of the respective agreements.
MINORITY INTEREST -- Represents the Ramco Group's interest as a limited partner in the Operating Partnership. Such interest is held in the form of Units of the Operating Partnership which are exchangeable on an equivalent basis with Common Shares of the Company. During the year ended December 31, 1997, the Operating Partnership redeemed 88,530 Operating Partnership Units at $16.00 per Unit. This redemption reduced the minority interest from approximately 27% to 26.5%.
DERIVATIVE FINANCIAL INSTRUMENTS -- In managing interest rate exposure on certain floating rate debt, the Company at times enters into interest rate protection agreements. When interest rates change, the differential to be paid or received is accrued to interest expense and is recognized over the life of the agreements. The costs of these transactions are deferred and amortized over the contract period. The amortized costs of these transactions and interest income and interest expense on these interest rate protection agreements are included in interest expense.
EARNINGS PER COMMON SHARE -- In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share ("EPS") and applies to all entities with publicly held common shares or potential common shares. This statement replaces the presentation of primary EPS and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS reflects the potential dilution of securities that could share in the earnings. The provisions of this Statement were adopted as of December 31, 1997 and the adoption of this Statement did not have an impact on the Company's previously reported EPS amounts.
Basic earnings per share is computed based on income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Net income has been reduced by $278 in 1997 for Preferred Share dividends declared in order to determine income available to common shareholders. Diluted earnings per share is computed based upon income available to common shareholders while adding back the preferred share dividends, divided by the weighted average number of dilutive potential shares. The dilutive potential common shares include shares issuable under the treasury stock method upon exercise of stock options amounting to 25,000 in 1997.
In 1997, conversion of the Series A Preferred Shares and the Operating Partnership Units would have been anti-dilutive and, therefore, were not considered in the computation of diluted earnings per share.
Earnings per common share and the weighted average number of shares outstanding for 1995 have been adjusted to reflect the one-for-four reverse stock split which occurred on May 1, 1996 (Note 1).
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1996 and 1995 financial statements in order to conform with the 1997 presentation.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. REAL ESTATE
The Company's real estate at December 31, 1997 and December 31, 1996 consists of the following:
REAL ESTATE ACQUISITIONS
The Company has made the following property acquisitions (the "Property Acquisitions") during the years ended December 31, 1997 and 1996 and the consolidated financial statements include the effects of the Property Acquisitions commencing with the date of acquisition (Note 12). All acquisitions have been accounted for using the purchase method of accounting. The purchase prices were allocated to the assets acquired and liabilities assumed based upon their estimated fair market value.
4. OTHER ASSETS
Other assets at December 31, 1997 and December 31, 1996 are as follows:
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. MORTGAGES AND NOTES PAYABLE
Mortgages and notes payable consist of the following:
The mortgage notes are secured by mortgages on properties that have an approximate net book value of $276,619 as of December 31, 1997. The Credit Facility is secured by mortgages on various properties that have an approximate net book value of $101,179 as of December 31, 1997.
During 1997, the Company modified its $50,000 Credit Facility in stages up to $160,000 in order to provide funds for acquisitions and capital projects. During November 1997, the Company closed on a $50,000 permanent mortgage loan. The net proceeds were utilized to pay down the Credit Facility, and the availability of the Credit Facility was reduced to $110,000. At December 31, 1997, $110,000 of the Credit Facility was available for borrowing, of which $81,588 was outstanding. The interest rate payable under the Credit Facility and the unsecured term loan, is between 137.5 and 162.5 basis points over LIBOR, and between 250 and 275 basis points over LIBOR, respectively, depending on certain debt ratios set forth in the agreements. At December 31, 1997, outstanding letters of credit issued under the Credit Facility, not reflected in the accompanying consolidated balance sheet, total approximately $836.
The Credit Facility contains financial covenants relating to debt to market capitalization, minimum operating coverage ratios, and a minimum equity value. As of December 31, 1997 the Company was in compliance with the covenant terms.
In July 1997, the Company executed an interest rate protection agreement, at a cost of $29, to limit the Company's exposure to increases in interest rates on its floating rate debt. The notional amount of the agreement was $75,000. Based on rates currently in effect under the Company's Credit Facility, the agreement caps the Company's interest rate on $75,000 of floating rate debt to 8.375%, with a floor of 7.125%, through May 1, 1999.
In December 1997, the Company executed an interest rate protection agreement at no cost to limit the Company's exposure to increases in interest rates on its floating rate debt. The notional amount of the agreement was $50,000. Based on rates currently in effect under the Company's Credit Facility, the agreement caps the Company's interest rate on $50,000 of floating rate debt to 8.375%, with a floor of 7.225%, for the period May 1999 to October 2000. The Company is exposed to credit loss in the event of non-performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counterparty.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents scheduled principal payments on mortgages and notes payable as of December 31, 1997:
6. LEASES
Approximate future minimum rentals under noncancelable operating leases in effect at December 31, 1997, assuming no new or renegotiated leases nor option extensions on lease agreements, is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. UNCONSOLIDATED ENTITIES
Condensed financial statement information of Ramco, Kentwood and Southfield Plaza Expansion as of December 31, 1997 and 1996, and for the year ended December 31, 1997 and the eight months ended December 31, 1996 are presented as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's share of the unconsolidated entities' income of $208 and $132, for the year ended December 31, 1997 and the eight months ended December 31, 1996, respectively, was reduced by $522 and $348, respectively, which represents depreciation and amortization adjustments arising from the Company's net basis adjustments in the unconsolidated entities' assets. These adjustments result in a net loss of $314 and $216 from unconsolidated entities for the year ended December 31, 1997 and the eight months ended December 31, 1996.
8. COMMITMENTS AND CONTINGENCIES
Substantially all of the properties have been subjected to Phase I environmental audits. Such audits have not revealed nor is management aware of any environmental liability that management believes would have a material adverse impact on the Company's financial position or results of operations. Management is unaware of any instances in which it would incur significant environmental costs if any or all properties were sold, disposed of or abandoned.
During the third quarter of 1994, the Company held more than 25% of the value of its gross assets in overnight Treasury Bill reverse repurchase transactions which the United States Internal Revenue Service (the "IRS") may view as non-qualifying assets for the purposes of satisfying an asset qualification test applicable to REITs, based on a Revenue Ruling published in 1977 (the "Asset Issue"). The Company has requested that the IRS enter into a closing agreement with the Company that the Asset Issue will not impact the Company's status as a REIT. The IRS has deferred any action relating to the Asset Issue pending the further examination of the Company's 1991-1995 tax returns (the "Tax Audit"). Based on developments in the law which have occurred since 1977, the Company's Tax Counsel, Battle Fowler LLP, has rendered an opinion that the Company's investment in Treasury Bill repurchase obligations would not adversely affect its REIT status. However, such opinion is not binding upon the IRS.
In connection with the spin-off of Atlantic, Atlantic has assumed all liability arising out of the Tax Audit and the Asset Issue, including liabilities for interest and penalties and attorney fees relating thereto. In connection with the assumption of such potential liabilities, Atlantic and the Company have entered into a tax agreement which provides that the Company (under the direction of its Continuing Trustees), and not Atlantic, will control, conduct and effect the settlement of any tax claims against the Company relating to the Tax Audit and the Asset Issue. Accordingly, Atlantic will not have any control as to the timing of the resolution or disposition of any such claims. The Company and Atlantic also received an opinion from Special Tax Counsel, Wolf, Block, Schorr and Solis-Cohen LLP, that, to the extent there is a deficiency in the Company's taxable income arising out of the IRS examination and provided the Company timely makes a deficiency dividend (i.e, declares and pays a distribution which is permitted to relate back to the year for which each deficiency was determined to satisfy the requirement that the REIT distribute 95 percent of its taxable income), the classification of the Company as a REIT for the taxable years under examination would not be affected. Under the tax agreement referred to above, Atlantic has agreed to reimburse the Company for the amount of any deficiency dividend so made. If notwithstanding the above-described opinions of legal counsel, the IRS successfully challenged the status of the Company as a REIT, its status could be adversely affected. If the Company lost its status as a REIT, the Company believes that it will be able to re-elect REIT status for the taxable year beginning January 1, 1999.
Although the IRS agent conducting the examination has not issued his final examination report with respect to the tax issues raised in the Tax Audit, including the Asset Issue (collectively, the "Tax Issues"), the Company has received a preliminary draft of the examining agent's report. The draft report sets forth a number of positions which the examining agent has taken with respect to the Company's taxes for the years that are subject to the Tax Audit, which the Company believes are not consistent with applicable law and regulations of the IRS. If the final report were issued in its current form, the liability of Atlantic to indemnify the Company may be substantial. The Continuing Trustees of the Company are engaged in ongoing
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discussions with the examining agent and his supervisors with regard to the positions set forth in the draft report. There can be no assurance that, after conclusion of discussions with such agent and his supervisors regarding the draft report, the examining agent will not issue the proposed report in the form previously delivered to the Company (or another form). Issuance of the revenue agent's report constitutes only the first step in the IRS administrative process for determining whether there is any deficiency in the Company's tax liability for the years at issue and any adverse determination by the examining agent is subject to administrative appeal within the IRS and, thereafter, to judicial review. As noted above, pursuant to the tax agreement between Atlantic and the Company, Atlantic has assumed all liability arising out of the Tax Audit and the Tax Issues. Based on the amount of Atlantic's assets, as disclosed in its Annual Report on Form 10-K for the year ended December 31, 1997, the Company does not believe that the ultimate resolution of the Tax Issues will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
During July 1997 Montgomery Ward ("Wards") a tenant at three of the Company's properties (Tel-Twelve Mall, Clinton Valley Mall and Shoppes of Lakeland), filed for protection under Chapter 11 of the Bankruptcy Code. In October 1997, Wards issued a list of anticipated store closings which included the stores at the Company's Clinton Valley Mall. This location consists of a 101,200 square foot department store and a 7,480 square foot TBA store (Tires, Batteries and Automotive). The Company was notified in March 1998 that Wards intends to reject the lease. The Company is pursuing replacement tenants to lease the space. On an annual basis, Wards pays approximately $1,000 in base rent, operating and real estate tax expense reimbursements for the Clinton Valley Mall.
9. SHAREHOLDERS' EQUITY
Series A Convertible Preferred Shares -- In October 1997, the Company entered into an agreement with certain clients advised by Morgan Stanley Asset Management, Inc. ("MSAM"), and Kimco Realty Corporation ("Kimco") pursuant to which such entities agreed to invest up to an aggregate of $35,000 in the Operating Partnership. The MSAM clients and Kimco initially purchased Operating Partnership Preferred Units which, after shareholder approval in December 1997, were converted into the Company's Series A Convertible Preferred Shares ("Series A Preferred Series") and, ultimately, may be converted into Common Shares. The initial investments of $11,667 were made in October 1997.
The equity investment involves the issuance of up to 1.4 million Series A Preferred Shares at a price of $25.00 per share. The remaining commitment of $23,333 may be drawn by the Company over a one-year period and may be used to help fund strategic acquisitions, retenanting or redevelopment activities, or to reduce outstanding debt. The dividend rate on the Series A Preferred Shares is expected to equal that presently being paid to the Company's common shareholders.
After the closing of this transaction, the MSAM clients are required to purchase 19.4% of the first $50,000 in a follow-on public offering of the Company's Shares at the offering price less the underwriter's fees, commissions, and discounts per share. Upon consummation of such public offering, all outstanding Series A Preferred Shares will be exchanged into Common Shares of the Company, at a conversion price of $17.50 per share, which conversion price is subject to adjustment in certain circumstances.
The Series A Preferred Shares were issued on December 31, 1997. The Series A Preferred Shares rank senior to the Common Shares with respect to dividends and upon liquidation, dissolution or winding up of the Company. The Series A Preferred Shares are entitled to receive cumulative dividends, payable quarterly in arrears, at an annual rate equal to the greater of (i) 9.60% of the stated value ($25.00 per share) and (ii) the dividend rate expressed as an annual rate which is implicit in the amount of dividends actually paid with respect to Common Shares, based on a $17.50 per share price for the Common Shares, determined as of each quarterly dividend payment date (the "Payable Component").
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Payable Component will be increased by an amount equal to an annual rate of 3% under certain circumstances. The holders of Series A Preferred Shares have the right to vote on all matters which holders of Common Shares are entitled to vote upon on an as converted basis, as though such holders own Common Shares. In addition, the Trust will not be permitted to engage in or effect certain types of transactions or actions without the approval of holders of at least 51% of the outstanding Series A Preferred Shares voting separately as a class. The conversion price for Common Shares of $17.50 contain anti-dilution rights and will be adjusted to reflect the effects of stock dividends, distributions, subdivisions or combination.
The Series A Preferred Shares are subject to mandatory conversion on the date which is the earlier of a qualified underwritten offering or the maturity date which is on October 3, 2002. At the option of the holders, the Series A Preferred Shares will be convertible in whole or in part into Common Shares at the stated value plus unpaid dividends prior to the maturity date or qualified underwritten offering date. The maturity date will be accelerated and all Series A Preferred Shares will be redeemed in cash at the stated value plus unpaid dividends in the event that it is determined by the IRS that it will, for any period, deny to the Company the tax benefits associated with REIT qualification and either or both of the following circumstances arise: (i) the Company does not receive (within a period of 60 days of the date established by the IRS as the date of which the deficiency dividend or other additional taxes are required to be paid) the full indemnity payment for such loss of tax benefits that the Company is entitled to receive from Atlantic pursuant to the Tax Agreement with Atlantic, or (ii) counsel reasonably satisfactory to MSAM is unable to provide to the holders of the Series A Preferred Shares affirmative advice that, commencing not later than with the taxable year ending December 31, 1999, the Company will, notwithstanding such determination by the IRS, be able to elect to be qualified and taxed as a REIT under the Code, and its proposed method of operation will enable it so to qualify for following years.
Shareholder Rights Plan -- On December 6, 1989, the Company's Board of Trustees (the "Board") declared a dividend distribution of one share purchase right to each outstanding share of beneficial interest, $.10 par value per share, to shareholders of record at the close of business on December 18, 1989. These rights may be exercised to purchase one share of beneficial interest at a price of $80 per share, subject to adjustment, under certain specified conditions at the Board's option. These rights are not exercisable or transferable apart from the shares of beneficial interest until the distribution date, which is the earlier of (i) 10 days following a public announcement that any person or group has acquired beneficial ownership of 20 percent or more of the outstanding shares (the "Share Acquisition Date"), (ii) 10 days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20 percent or more of the outstanding shares or (iii) the day the Board determines that any person or group has become the beneficial owner of an amount of shares the Board determines to be substantial (which amount shall in no event be less than 10 percent of the shares outstanding) and the Board shall determine that such beneficial ownership is intended to cause the Company to repurchase the shares owned by such person or group or is reasonably likely to cause a material adverse impact on the Company's business. The rights, which do not have voting rights, expire on December 6, 1999 and may be redeemed by the Company at a price of $.01 per right at any time until rights expire or, if earlier, 10 days following the Share Acquisition Date.
Upon the occurrence of certain events following the distribution date, the holder of each right will have the right to receive, upon exercise, shares (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the right. In certain events in which the Company is not a surviving entity or has transferred 50 percent or more of its assets or earnings power, the rights will entitle the holder, upon exercise, to receive equity securities of the acquiring company having a value equal to two times the exercise price of the right.
Dividend Reinvestment Plan -- The Company has a dividend reinvestment plan that allows for participating shareholders to have their dividend distributions automatically invested in additional shares of beneficial interest in the Company based on the average price of the shares acquired for the distribution.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTION PLANS
1989 Trustees' Stock Option Plan -- On April 4, 1989, the Board approved the establishment of the 1989 Trustees' Stock Option Plan (the "Former Trustees' Plan") which permitted the Company to grant options to purchase up to 350,000 shares of beneficial interest in the Company at the fair market value at the date of grant. The Company had 350,000 options outstanding under the Former Trustees' Plan at December 31, 1995. In connection with the Ramco Acquisition and Spin-off Transaction, all Trustees who had been granted options under the Former Trustees' Plan surrendered their options to the Company without consideration.
1989 Employee's Stock Option Plan -- On June 21, 1989, the Board approved the establishment of the 1989 Employee Stock Option Plan which permitted the Company to grant options to purchase up to 1,550,000 shares of beneficial interest in the Company at the fair market value at the date of grant. On December 6, 1989, 1,355,000 options were granted. Option shares in the amount of 125,000 were purchased from certain employees prior to the closing of the Ramco Acquisition and Spin-off Transaction for $.50 per share and the balance of the options were canceled.
1996 Share Option Plan -- Concurrent with the Ramco Acquisition, the Company adopted the 1996 Share Option Plan (the "Plan") to enable its employees to participate in the ownership of the Company. The Plan is designed to attract and retain executive officers and other key employees of the Company, to encourage a proprietary interest in the Company, and to provide incentives to employees.
Under the Plan, executive officers and employees of the Company may be granted options to acquire shares of beneficial interest of the Company ("Options"). The Plan is administered by the independent trustee members of the Compensation Committee of the Board of Trustees, who are authorized to select the executive officers and other employees to whom Options are to be granted. No member of the compensation committee is eligible to participate in the Plan.
The compensation committee, at its discretion, determines the number of Options to be granted. At June 30, 1996, the Plan provided for Options to purchase up to 855,000 shares of beneficial interest of the Company. However, no more than 50,000 share options may be granted to any one individual in any calendar year. Share options issued under the Plan allow for the purchase of shares of beneficial interest at the fair market value of the shares at the date of grant. Stock options granted to officers and employees under the Plan vest and become exercisable in installments on each of the first three anniversaries of the date of grant and expire ten years after the date of grant.
In connection with the Ramco Acquisition and the spin-off of Atlantic, the Company granted certain principals of the Ramco Group, options to purchase 120,000 shares at an exercise price of $16.00 per share.
1997 Non-Employee Trustee Stock Option Plan -- On April 27, 1997, the Board approved the establishment of the 1997 Non-Employee Trustee Stock Option Plan (the "Trustees' Plan") which permits the Company to grant non-qualified options to purchase up to 100,000 common shares of beneficial interest in the Company at the fair market value at the date of grant. Each Non-Employee Trustee will be granted an option to purchase 2,000 shares on the Company's annual meeting date. There were 14,000 options issued effective June 10, 1997. The Trustees' Plan is designed to provide Company participants with an increased incentive to make contributions to the long-term performance and growth of the Company and its subsidiaries, to join the interests of participants with the interest of shareholders of the Company, and to facilitate attracting qualified independent trustees. Stock options granted to participants vest and become exercisable in installments on each of the first two anniversaries of the date of grant and expire ten years after the date of grant.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to the 1996 Share Option Plan and the 1997 Non-Employee Trustee Stock Option Plan (the "Plans") from inception through December 31, 1997 is as follows:
At December 31, 1997, the range of exercise prices and weighted average remaining contractual life of outstanding options was $15.44 - $17.87 and 8.8 years, respectively.
The fair value of options granted during 1997 and 1996 was estimated to be negligible on the date of grant. All options granted were non-qualified share options. This was determined using the Black-Scholes option pricing model with the following weighted average assumptions used:
The Company measures compensation in accordance with Accounting Principles Board Opinion No. 25 under which no compensation cost has been recognized for stock option awards. There is no material difference if compensation cost had been calculated consistent with the provisions of Statement of Financial Standards No. 123, "Accounting for Stock Based Compensation". Therefore, there would be no change in the Company's pro forma net income and earnings per share for 1997 and 1996 (Note 12).
11. FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107 requires disclosure about fair value of all financial instruments. The carrying values of cash and cash equivalents, receivables, accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturity of these financial instruments. As of December 31, 1997 and 1996 the mortgages and notes payable amounts are also a reasonable estimate of their fair value because their interest rates approximate the current borrowing rates available to the Company.
The fair values of the Company's interest rate protection agreements represent the estimated amount the Company would receive or pay to terminate the financial instruments at December 31, 1997. At December 31, 1997 the fair value of the cap agreements was $187 and the fair value of the floor agreements was ($296).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma consolidated statements of operations have been presented as if (i) the Ramco Acquisition, the Property Acquisitions, and the spin-off of Atlantic had occurred on January 1, 1996, and (ii) the Company had qualified as a REIT, distributed all of its taxable income and, therefore had incurred no tax expense during the periods. In management's opinion, all adjustments necessary to reflect the Ramco Acquisition, the Property Acquisitions and the spin-off of Atlantic have been made. The pro forma consolidated statements of operations are not necessarily indicative of what the actual results of operations of the Company would have been had such transactions actually occurred as of January 1, 1996, nor do they purport to represent the results of the Company for future periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
During 1996, the Company recorded spin-off and other related expenses of $1,657, $6,276, and $43 in the first, second and third quarters respectively. These non-recurring costs were primarily a result of the employee severance and bonus expenses, the cost of run-off directors' and officers' liability insurance, and the write-off of deferred acquisition costs related to the spin-off of Atlantic. There were no corresponding costs for 1997.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. REAL ESTATE ASSETS
Net investment in real estate assets at December 31, 1997 consisted of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------------------- (a) If constructed by a predecessor of the Company.
(b) The aggregate cost of land and buildings and improvements for federal income tax purposes is approximately $445 million.
(c) Depreciation for all properties is computed over the useful life which is generally forty years.
(d) The property is pledged as collateral on the secured line of credit.
(e) The property is pledged as collateral on secured mortgages.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The changes in real estate assets and accumulated depreciation for the years ended December 31, 1997, and 1996 are as follows:
EXHIBIT INDEX