ITEM 1 - BUSINESS
Mid-Atlantic Realty Trust was incorporated June 29, 1993, and commenced operations effective with the completion of its initial public share offering on September 11, 1993. Mid-Atlantic Realty Trust is the successor to the operations of BTR Realty, Inc. and qualifies as a real estate investment trust, "REIT", for Federal income tax purposes. As used herein, the term "MART" or the "Company" refers to Mid-Atlantic Realty Trust and entities owned or controlled by MART, including MART Limited Partnership (the "Operating Partnership").
The Company is a fully integrated, self-administered real estate investment trust which owns, acquires, develops, redevelops, leases and manages primarily neighborhood or community shopping centers in the Middle Atlantic region of the United States. The Company's primary objectives are to enhance funds from operations ("FFO") per share and maximize shareholder value. To achieve its objectives, the Company seeks to operate its properties for long-term FFO growth. The Company also acquires neighborhood or community shopping centers that either have dominant anchor tenants or contain a mix of tenants which reflects the shopping needs of the communities they serve. The Company also develops and redevelops shopping centers on a tenant-driven basis, leveraging either existing tenant relationships or geographic and demographic knowledge while seeking to minimize exposure to risk associated with long-term land development.
The Company's financial strategy is to execute its operating and growth strategies by utilizing a blend of internally generated funds, issuance of Operating Partnership Units, defined below, proceeds from divestitures, institutional borrowings and issuance of corporate equity or debt, as appropriate. The Company intends to maintain a ratio of secured debt to total estimated property value at or below 50%.
The Company has an equity interest in twenty-nine operating shopping centers, twenty-four of which are wholly owned by the Company and five in which the Company has interests ranging from 50% to 93%, as well as other commercial properties, collectively the "Properties". The Properties have a gross leasable area of approximately 4,225,000 square feet, of which approximately 95% was leased at December 31, 1997. Of these Properties, approximately 97% of the gross leasable area is in the states of Maryland, Virginia, New York and Delaware. The Company also owns seven undeveloped parcels of land totaling approximately 132 acres and varying in size from three to 41 acres.
All of MART's interests in the Properties are held directly or indirectly by, and substantially all of its operations relating to the Properties are conducted through the Operating Partnership. Units of partnership interest in the Operating Partnership ("Units") may be exchanged by the limited partners for cash or common shares of beneficial interest in MART on a one-for-one basis. MART controls the Operating Partnership as the sole general partner, and owns approximately 82% of the Units at December 31, 1997.
The business of the Company is not materially affected by seasonal factors. Although construction may be affected to some extent by inclement weather conditions, usually during winter months, property sales and revenue from income producing properties held for investment are usually not so affected.
The commercial real estate development and investment industry is subject to widespread competition for desirable sites, tenants and financing. The industry is extremely fragmented and there are no principal methods of competition. However, the ability to compete is dependent in part upon the ability to find and complete appropriate real estate investments in a timely manner. While many competitors have fewer assets and financial resources than the Company, there are many competitors with greater financial resources competing for similar business opportunities. Accordingly, it is not possible to estimate the Company's position in the industry. In addition, certain of the Company's real estate projects are near unimproved sites that could be developed commercially and would provide further competition to the Company. The management of the Company believes, however, that the Company competes favorably in the industry due to the quality of its developments, its ability to take advantage of opportunities as they arise, its access to capital and its reputation.
The Company has 56 full time employees and believes that its relationship with its employees is good.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 14
ITEM 2
ITEM 2 - PROPERTIES
The following schedule describes the Company's properties as of December 31, 1997:
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in legal proceedings. However, there are no material legal proceedings presently pending against the Company.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MART's common shares of beneficial interest, par value $.01 per share, ("shares"), began trading on the New York Stock Exchange on September 18, 1997, under the symbol "MRR". The shares were formerly traded on the American Stock Exchange under the symbol "MRR". The following table sets forth, for the quarters indicated, the high and low closing sale prices of MART shares on the AMEX or NYSE, and cash distributions paid per share for the indicated period.
For shareholders during the entire year, for each respective year, it was determined that the per share dividends for each year indicated are taxable as follows:
On February 13, 1998, MART declared a quarterly cash dividend of $.25 per share payable March 16, 1998 to shareholders of record February 28, 1998.
The number of holders of record of the MART shares as of February 17, 1998 was 1,311.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 18
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain 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. The table presents Selected Financial Data of Mid-Atlantic Realty Trust as of December 31, 1997, 1996, 1995, 1994 and 1993, and for the years ended December 31, 1997, 1996, 1995, 1994 and for the period September 11, 1993 (commencement of operations) through December 31, 1993, and also includes Selected Financial Data of BTR Realty, Inc. as of September 10, 1993 and for the period January 1, 1993 through September 10, 1993. Mid-Atlantic Realty Trust was merged with BTR Realty, Inc. on September 11, 1993. The consolidated financial data of BTR, the predecessor company, are presented for comparative purposes. Certain amounts for prior periods have been reclassified to conform to the 1997 presentation.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 19
ITEM 6 - SELECTED FINANCIAL DATA (Continued)
SUMMARY FINANCIAL DATA The following table sets forth summary financial data on an actual and pro forma basis. Management believes the following data should be used as a supplement to the historical statements of operations. The data should be read in conjunction with the historical financial statements and the notes thereto for MART included in Item 8. The pro forma financial data for 1993 assumes the MART public offering took place on January 1, 1992. The pro forma financial data for 1993 are unaudited and are not necessarily indicative of the results which actually would have occurred if the transactions had been consummated on January 1, 1992.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 20
Quarterly Results of Operations (Unaudited)
The unaudited quarterly results of operations for MART for 1997 and 1996 are summarized as follows:
Quarterly results are influenced by a number of factors including timing of settlements of property sales, completion of operating projects, write-offs of unrecoverable development costs, extraordinary items and valuation allowances for loss on pending sales of properties.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 21
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion compares the Company's results of operations for the year ended December 31, 1997, with those for the year ended December 31, 1996. The discussion also compares the Company's results of operations for the year ended December 31, 1996, with those for the year ended December 31, 1995.
Comparison of 1997 to 1996
Rental revenues increased by $6,553,000 or 25% to $33,115,000 for the year ended December 31, 1997, from $26,562,000 for the year ended December 31, 1996. The portfolio acquisition of ten properties from partnerships associated with Jack H. Pechter ("JHP Acquisition") contributed an increase in rental revenues of approximately $6,383,000. Recently developed or redeveloped properties Owings Mills New Town shopping center, Lutherville Station, Harford Mall Annex and York Road Plaza, contributed $1,404,000 in additional revenues for the period. Occupancy and rental rate increases contributed approximately $613,000. The increases were partly offset by $1,668,000 in rental revenue decreases attributable to the sale of the Gateway International Office property ("Gateway") in September 1997, the sale in May 1996 of the Dobson-Guadalupe shopping center, the sale in September 1996 of the Chandler shopping center, the sale in March 1997 of the Union Hills shopping center and the sale in May 1997 of the Plaza Del Rio shopping center. In addition, $179,000 in rental decreases were primarily related to vacancies.
Tenant recovery revenues increased by $434,000 to $5,569,000 from $5,135,000. The increased tenant recoveries were primarily due to the JHP Acquisition and occupancy increases from the redevelopment of Harford Mall Annex and York Road Plaza, partly offset by lower recoveries related to properties sold.
Other revenues decreased by $241,000 to $468,000 from $709,000 primarily due to lower interest income on partner notes receivable exchanged in July 1996 for additional partnership interests in several properties.
As a result of the above changes total revenues increased by $6,746,000 to $39,152,000 from $32,406,000.
Interest expense increased by $201,000 to $12,555,000 from $12,354,000 primarily due to the JHP Acquisition increasing interest expense approximately $2,892,000. The increase was partly offset by lower interest expense due to the conversion of debentures of approximately $1,940,000 and other interest expense decreases.
Depreciation and amortization increased by $1,541,000 to $6,955,000 from $5,414,000 primarily due to the JHP Acquisition.
Operating expenses increased by $143,000 to $8,961,000 from $8,818,000 primarily due to operations of the JHP Acquisition properties, partly offset by reduced operating expenses related to properties sold.
General and administrative expenses increased by $362,000 to $2,460,000 from $2,098,000 due primarily to increased compensation expenses.
Minority interest expense increased by $905,000 to $1,419,000 from $514,000 due primarily to the addition of minority limited partnership interests in connection with the JHP Acquisition.
For the year ended December 31, 1997, earnings from operations increased by $3,594,000 to $6,802,000 from $3,208,000. For the year ended December 31, 1997, MART had a gain on properties of $17,000, and an extraordinary loss from the early extinguishment of debt of $227,000, which when combined with earnings from operations, resulted in net earnings of $6,592,000, for the period. MART recognized a gain on properties of $301,000 for the year ended December 31, 1996. The gain on properties, when combined with earnings from operations, resulted in net earnings of $3,509,000 for the period.
Comparison of 1996 to 1995
Rental revenues increased by $2,648,000 or 11% to $26,562,000 for the year ended December 31, 1996, from $23,914,000 for the year ended December 31, 1995. The purchase of the Brandywine Commons shopping center in November 1995 and the opening of the Owings Mills New Town shopping center in November 1995 contributed $3,113,000 in additional revenues for the period. Redevelopment, occupancy and rental rate increases contributed to revenue increases of approximately $1,178,000. These increases were partly offset by $1,399,000 in rental revenue decreases attributable to the sale in February 1995 of the Regal Row warehouse project, the sales in January 1996 of the Dolton bowling center and the Park Sedona shopping center, the sale in May 1996 of the Dobson-Guadalupe shopping center, and the sale in December 1995 of the McRay shopping center. In addition, $244,000 in revenue decreases were related primarily to vacancies and lower percentage rents.
Tenant recovery revenues increased by $483,000 to $5,135,000 from $4,652,000 primarily due to increases from the purchase of Brandywine Commons shopping center and the opening of the Owings Mills New Town shopping center, partly offset by decreases due to the sales of properties referred to above.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 22
Other revenues decreased by $319,000 to $709,000 from $1,028,000 primarily due to the receipt of rental insurance proceeds (relating to fire damage at Rolling Road Plaza in 1992) in 1995 and lower interest income in 1996.
As a result of the above changes total revenues increased by $2,813,000 to $32,406,000 from $29,593,000.
Interest expense increased by $426,000 to $12,354,000 from $11,928,000 primarily due to the increased debt for the development of the Owings Mills New Town and the redevelopment of York Road Plaza.
Depreciation and amortization increased by $430,000 to $5,414,000 from $4,984,000 primarily due to depreciation increases related to the purchase of Brandywine Commons and the development of Owings Mills New Town, York Road Plaza and the Harford Mall Annex, offset partly by decreases related to the sales of properties referred to above.
Operating expenses increased by $1,079,000 to $8,818,000 from $7,739,000, primarily due to the purchase of Brandywine Commons, higher snow removal expenses in 1996, the opening of Owings Mills New Town and higher occupancy at Gateway, partly offset by decreases related to the sales of properties referred to above.
General and administrative expenses increased by $318,000 to $2,098,000 from $1,780,000 due primarily to compensation increases, $168,000, development costs and other net general and administrative expense increases of $150,000.
Minority interest expense decreased by $204,000 to $514,000 from $718,000 due primarily to the acquisition of minority partnership interests.
For 1996, earnings from operations increased by $764,000 to $3,208,000 from $2,444,000. MART also recognized a gain on properties of $301,000, (net of minority interest of $117,000). The gain on properties, when combined with earnings from operations, resulted in net earnings of $3,509,000 for the period. For 1995, MART had a loss on properties of $281,000, a cumulative effect of a change in accounting for percentage rents of $612,000 and a gain on life insurance proceeds of $1,002,000, which when combined with earnings from operations, resulted in net earnings of $3,777,000 for the period.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash Flow Comparison
The following discussion compares the statement of cash flows information for 1997 with the information for 1996 and 1995.
Net cash flow provided by operating activities was $16,006,000, $9,899,000, and $11,193,000 in 1997, 1996 and 1995, respectively. The changes in cash provided by operating activities were due primarily to the factors discussed above in the comparisons of operating results. The level of net cash provided by operating activities is also affected by the timing of receipt of revenues and the payment of operating and interest expenses.
Net cash flow from investing activities decreased by $10,227,000, to a net cash flow used in investing activities of $5,995,000 in 1997 from a net cash flow provided by investing activities of $4,232,000 in 1996. The decrease was primarily a result of more acquisitions of and additions to properties in 1997 than in 1996 partly offset by higher sales of properties in 1997. Milford Commons and Arundel Plaza and development projects Lutherville Station and North East Station were acquired and added to properties and Gateway was sold in 1997.
Net cash flow from investing activities increased by $27,816,000, to a net cash flow provided by investing activities of $4,232,000 in 1996 from a net cash flow used in investing activities of $23,584,000 in 1995. The increase was primarily a result of reduced levels of acquisitions of and additions to properties in 1996 and an increase in proceeds from sales of properties.
Net cash flow used in financing activities decreased by $11,034,000, to $2,597,000 in 1997 from $13,631,000 in 1996. The decrease in cash used was primarily a result of $49,061,000 in proceeds from the common share offering in October 1997, partly offset by higher levels of net principal paydowns in 1997 of $34,943,000 (primarily due to mortgage principal paydowns using offering proceeds and to the line of credit paydown using proceeds of the Gateway sale), as well an increase in dividends paid of $3,467,000 in 1997.
Net cash flow from financing activities decreased by $26,192,000, to net cash flow used in financing activities of $13,631,000 in 1996 from net cash flow provided by financing activities of $12,561,000 in 1995. The decrease was primarily a result of the following: a decrease in net borrowings of $28,081,000 due to the lower levels of development and acquisition costs; a $2,153,000 decrease in purchases of common shares and an increase in dividends paid of $413,000.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 23
Liquidity and Capital Resources
On October 14, 1997, the Company closed an offering and sale of 4,025,000 common shares of beneficial interest at a price of $13 per share. The net proceeds of the sale were approximately $49,061,000. Approximately $32,800,000 of the net proceeds have been applied to repay mortgage loans on properties. The balance of the proceeds was used by MART for the acquisition, development or redevelopment of shopping centers and for general corporate purposes.
The Company had cash and cash equivalents of $8,427,000 at December 31, 1997. The Company currently has a $40,000,000 secured line of credit available for various purposes, including acquisition, development or redevelopment of properties and liquidity, subject to various terms and conditions. The note payable under the bank line of credit had a $3,400,000 balance outstanding at December 31, 1997. The Company received a commitment letter from its primary bank to increase its line of credit from $40,000,000 to $75,000,000. The new credit facility will be unsecured and is subject to agreement on final terms.
Finally, the Company has registered to sell up to an aggregate of approximately $98,000,000 (based on the public offering price) of additional common shares of beneficial interest and/or debt securities. The shares and debt may be issued from time to time at prices, in amounts and on terms to be determined at the time of offering.
In order to qualify as a REIT for Federal income tax purposes, MART is required to pay dividends to its shareholders of at least 95% of its REIT taxable income. MART intends to pay these dividends from operating cash flows. While MART intends to distribute to its shareholders a substantial portion of its cash flows from operating activities, MART also intends to retain or reserve such amounts as it considers necessary from time to time for the acquisition or development of new properties as suitable opportunities arise and for the expansion and renovation of its shopping centers. Also, MART currently has and expects to continue to maintain a line of credit from its primary bank.
The Company anticipates material commitments for capital expenditures to include, in the next two years, the ongoing redevelopment of five projects in the planning stage at an estimated cost of $7,000,000 to $10,000,000. The Company expects to fund the development projects and other capital expenditures with available net cash flows from operating activities and if necessary with construction loan financing, long-term mortgage financing on unencumbered operating properties or the use of its line of credit.
It is management's intention that MART continually have access to the capital resources necessary to expand and develop its business. Management cannot practically quantify MART's 1998 cash requirements, but expects to meet its short-term liquidity requirements generally through available net cash flow provided by operations and short-term borrowings. To meet its long-term capital requirements, MART intends to obtain funds through additional equity offerings or long-term debt financing in a manner consistent with its financial strategy. The Company anticipates that the cash flow available from operations, together with cash from borrowings and equity offerings, will be sufficient to meet its liquidity and capital needs in both the short- and long-term.
Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with other financial statements. It requires that an enterprise display an amount representing total comprehensive income for each period. It does not require per share amounts of comprehensive income to be disclosed. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of An Enterprise and Related Information"("SFAS No. 131").SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 24
Year 2000 Issue
The Year 2000 issue relates to whether computer systems will properly recognize date sensitive information to allow accurate processing of transactions and data relating to the year 2000 and beyond. Systems that do not properly recognize such information could generate erroneous data or fail.
The Company in recent years has been replacing and upgrading its management information and accounting systems and is addressing the year 2000 issue as part of this effort. The Company has implemented financial accounting, property management and payroll systems which are year 2000 compliant. In addition, as a result of the Company's normal upgrade and replacement processes, it is anticipated that all network and desktop equipment in use will meet the requirements for the year 2000. The Company is in the process of conducting a review of the computer hardware and software in the mechanical systems (e.g., escalators, elevators, heating, ventilating and cooling systems, etc.) at its operating properties to identify year 2000 issues. The review is expected to be completed in the summer of 1998. While it is likely that the review will identify the need to modify and/or replace certain equipment and software, management does not believe that the year 2000 issue will pose significant problems in these systems or that resolution of the problems will have a material effect on the Company's financial condition or results of operations.
Inflation
The majority of leases at the shopping center properties contain provisions for annual increases in rents and/or provisions which may entitle MART to receive percentage rents based on the tenants' gross sales. Such provisions ameliorate the risk to MART of the adverse effects of inflation. If a recession were to begin and continue for a prolonged time, funds from operations could decline as some tenants may have trouble meeting their lease obligations. Most of the leases at the properties require the tenants to pay a substantial share of operating expenses, such as real estate taxes, insurance and common area maintenance costs, and thereby reduce MART's exposure to increased costs. In addition, many of the leases at the properties are for terms of less than ten years, which may enable MART to seek increased rents upon renewal of existing leases if rents are below the then existing market rates.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 25
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 26
INDEPENDENT AUDITORS' REPORT
Board of Trustees and Shareholders Mid-Atlantic Realty Trust:
We have audited the accompanying consolidated balance sheets of Mid-Atlantic Realty Trust and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mid-Atlantic Realty Trust and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for percentage rent revenues in 1995.
/s/ KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Baltimore, Maryland February 18, 1998
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 27
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements. - - ------------------------------------------------------------------
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 28
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements. - - ------------------------------------------------------------------
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 29
MID-ATLANTIC REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Year Ended December 31, 1997, 1996 and 1995
See accompanying notes to consolidated financial statements.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 30
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995
A. Summary of Significant Accounting Policies
Organization
Mid-Atlantic Realty Trust was incorporated June 29, 1993, and commenced operations effective with the completion of its initial public share offering on September 11, 1993. Mid-Atlantic Realty Trust is the successor to the operations of BTR Realty, Inc. and qualifies as a real estate investment trust ("REIT") for Federal income tax purposes. As used herein, the term "MART" or the "Company" refers to Mid-Atlantic Realty Trust and entities owned or controlled by MART, including MART Limited Partnership (the "Operating Partnership").
Description of Business
The Company is a fully integrated, self-administered real estate investment trust which owns, acquires, develops, redevelops, leases and manages primarily neighborhood or community shopping centers in the Middle Atlantic region of the United States.
The Company has an equity interest in twenty-nine operating shopping centers, twenty-four of which are wholly owned by the Company and five in which the Company has interests ranging from 50% to 93%, as well as other commercial properties.
The Company also owns seven undeveloped parcels of land totaling approximately 132 acres which it is holding for development or sale.
All of MART's interests in properties are held directly or indirectly by, and substantially all of its operations relating to the properties are conducted through, the Operating Partnership. - Subject to certain conditions, units of partnership interest in the Operating Partnership ("Units") may be exchanged by the limited partners for cash or, at the option of MART, the obligation may be assumed by MART and paid either in cash or in common shares of beneficial interest in MART on a one-for-one basis. MART controls the Operating Partnership as the sole general partner, and owns approximately 82% of the Units at December 31, 1997.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include all wholly-owned subsidiaries and majority-owned partnerships, including the Operating Partnership. Investments in unconsolidated joint ventures are carried on the equity method. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company owns 100% majority interests in corporate subsidiaries which are general managing partners as well as limited partners in several partnerships which have outside partners with 50% interests. Based upon the structure of the respective partnership management agreements, the Company has control over the 50% owned partnerships and uses the full consolidation method to record the 50% owned partnerships.
Recognition of Rental Revenues
The Company earns rental income under operating leases with tenants. Minimum rental payments are recognized as rental revenues in the period when they are earned according to the applicable lease term. Effective January 1, 1995, the Company changed its accounting policy for percentage rent. Percentage rent revenues are based on store sales, are charged according to a percentage over a stipulated amount of sales for the period according to the lease agreement and are recognized in the period when the percentage rent is earned. During the year ended December 31, 1994, and previously, percentage rent was recognized as rental revenues in the period when the percentage rent was billed and received.
The cumulative effect of this change on January 1, 1995, was to increase net earnings by $612,383. The Company believes that this revised policy is preferable since it provides a better matching of revenues and expenses.
Net Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," in 1997 and, as required by the Statement, net earnings per share (EPS) data for prior periods have been restated to conform to the new standard.
In accordance with the provisions of the Statement, basic EPS is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all dilutive potential common shares outstanding during the period. The dilutive effects of convertible securities are computed using the "if-converted" method and the dilutive effects of options, war-
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 32
rants and their equivalents (including fixed awards and nonvested shares issued under share-based compensation plans) are computed using the "treasury stock" method.
Capitalization Policy
Acquisition costs, interest and other carrying costs, as well as construction and start-up costs of commercial properties are capitalized and charged to undeveloped land, construction in progress or deferred costs as appropriate. In addition, direct costs incurred in the financing and leasing of shopping centers and other commercial properties are deferred until the project is completed and are then amortized over the term of the related mortgage or lease.
Properties
Properties to be developed or held and used in operations are carried at cost, reduced for impairment losses where appropriate. Properties held for sale are carried at the lower of their carrying value (i.e. cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair value less cost to sell.
If events or circumstances indicate that the carrying value of an operating property to be held and used may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash flows to be generated from the property. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized.
Depreciation of buildings and leaseholds is provided using the straight-line method over the estimated useful lives or lease terms of the properties. Improvements for tenants are amortized on a straight-line basis over the terms of the related tenant leases. Expenditures for normal maintenance and repairs are charged against income as incurred.
Share-based Compensation
The Company uses the intrinsic value method to account for share-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares to employees only if the quoted market price of the share at the grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the share. Information concerning the pro forma effects on net earnings and net earnings per share of using a fair value-based method to account for share-based employee compensation plans, rather than the intrinsic value method, is provided in note L.
Income Taxes
The Company has elected to qualify, and intends to continue to qualify as a REIT pursuant to the Internal Revenue Code Sections 856 through 860, as amended. In general, under such Code provisions a trust which, in any taxable year, meets certain requirements and distributes to its shareholders at least 95% of its REIT taxable income will not be subject to Federal income tax to the extent of the income which it distributes.
Cash Equivalents
All highly liquid unrestricted investments with original maturities of three months or less are considered cash equivalents.
Tenant Recovery Revenues
Effective January 1, 1997, the Company changed its reporting of tenant expense recoveries. During the year ended December 31, 1996, and previously, tenant expense recoveries were reported in the operating expense line in the consolidated statements of operations. Management believes reporting tenant expense recoveries separately as a component of revenue provides a more informative presentation of revenues and expenses. The comparative prior period revenue and operating expense data have been reclassified to reflect this change.
Deferred Financing Costs
Costs associated with the issuance of debt are capitalized as deferred financing costs and amortized on a straight-line basis, which is not materially different from the interest method, over the term of the related debt.
Financial Instruments
Fair values of financial instruments approximate their carrying values in the financial statements, except for mortgages payable and convertible subordinated debentures for which fair value information is presented in notes D and J, respectively. The fair values of this debt at December 31, 1997 and 1996, were determined based on discounted estimated future payments to be made. The discount rates used approximate the rates currently offered for borrowings with similar remaining maturities.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 33
B. Portfolio Acquisition
On July 1, 1997, the Company acquired a portfolio of nine shopping centers and one medical office building in the Baltimore metropolitan area from family members and affiliates of the Pechter family ("JHP"). At closing of the transaction ("JHP Acquisition"), the Company formed the Operating Partnership and members of JHP were admitted as limited partners. The Company assigned to the Operating Partnership its beneficial interest in the properties owned by the Company and its subsidiaries in exchange for a number of Units equal to the number of outstanding common shares of beneficial interest of the Company. For the JHP properties, the Operating Partnership issued to the members of JHP 3,235,000 Units. The acquisition was accounted for using the purchase method. The aggregate fair market value of the assets acquired was approximately $120,000,000, including the assumption of existing mortgage indebtedness with a fair value of approximately $84,000,000.
The consolidated statement of operations for the year ended December 31, 1997, includes revenues and expenses related to JHP properties only from the date of acquisition. The Company's unaudited pro forma consolidated results of operations for the years ended December 31, 1997 and 1996, assuming the acquisition occurred at the beginning of each period, are summarized as follows (in thousands, except per share data):
The unaudited pro forma revenues and earnings summarized above are not necessarily indicative of the results that would have occurred if the acquisition had been consummated at the beginning of each period or of future results of operations.
C. Operating Properties
Operating properties consist of the following:
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 34
D. Properties and Related Accumulated Depreciation and Amortization and Mortgages Payable
A summary of the Company's properties and related mortgages payable at December 31, 1997, follows:
Mortgages payable at December 31, 1997, bear interest at rates ranging from 7.55% to 10.25% and mature in installments through 2020. Aggregate annual principal payments applicable to mortgages payable at December 31, 1997, are:
At December 31, 1997, and 1996, the estimated fair values of mortgages payable were $122,038,000 and $73,719,000, respectively.
E. Development Operations
Development operations consist of the following:
Development operations are transferred to operating property costs when a project is completed, at which time depreciation and amortization commences. Construction period interest cost capitalized during 1997 and 1996 was approximately $445,000 and $104,000, respectively.
F. Notes and Accounts Receivable
The Company performs credit evaluations of prospective new tenants and requires security deposits where appropriate. Tenants' compliance with the terms of the leases is monitored closely and the allowance for doubtful accounts is established based on an analysis of the risk of loss on specific tenants, historical trends, and other relevant information. Management believes adequate provision has been made for the Company's credit risk for all receivables.
G. Deferred Financing Costs
Deferred financing costs consist of the following:
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 35
H. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
I. Notes Payable
Notes payable consist of line of credit borrowings of $3,400,000 and $16,400,000 at December 31, 1997 and 1996, respectively. The Company has an agreement with its primary bank that provides for a $40,000,000 secured line of credit. The agreement provides that as long as the Company is in compliance with all loan covenants, the loan maturity date, which at December 31, 1997, was December 31, 2000, will be extended one year automatically each year. Under the agreement, the Bank must give the Company two years notice should it decide to terminate the loan. Availability under the agreement is determined by the amount of collateral provided. At December 31, 1997, $40,000,000 was fully collateralized. The line bears interest at the prime rate. However, the Company has the option to fix the rate at LIBOR plus 1.125% for fixed periods from three to nine months. A stand-by fee is required by the bank for any unused portion of the line. The agreement contains covenants which provide for the maintenance of specified debt service ratios and minimum levels of net worth, and other requirements, among which is the requirement that the Company maintain its status as a REIT, and other normal conditions consistent with bank lines of credit.
The Company has received a commitment letter from its primary bank to increase its line of credit from $40,000,000 to $75,000,000. The new credit facility will be unsecured and is subject to agreement on final terms.
At December 31, 1997, the unused line of credit available to the Company, subject to compliance with all terms and conditions of the agreement and net of outstanding letters of credit of $878,914, was $35,721,086. The maximum level of borrowings under the line of credit was $21,300,000, $21,500,000 and $32,000,000 in 1997, 1996 and 1995, respectively. The average amounts of borrowings were approximately $13,191,000, $11,710,000, and $17,534,000, with weighted average interest rates approximating 7.1%, 7.1%, and 7.8%, in 1997, 1996 and 1995, respectively. The weighted average interest rate at December 31, was 7.1%, 6.9%, and 7.8%, in 1997, 1996, and 1995, respectively.
J. Convertible Subordinated Debentures
Effective September 11, 1993, the Company issued $60,000,000 of convertible subordinated debentures at 7.625% scheduled to mature in September 2003. Interest on the debentures is paid semi-annually on March 15 and September 15. The debentures are convertible, unless previously redeemed, at any time prior to maturity into common shares of beneficial interest of the Company at $10.50 per share, subject to certain adjustments. In 1997, $29,693,000 in debentures were converted to 2,827,838 common shares of beneficial interest. In 1996, $12,785,000 in debentures were converted to 1,217,610 common shares of beneficial interest. In 1995, $20,000 in debentures were converted to 1,904 common shares of beneficial interest. The balance of the debentures, at December 31, 1997, of $17,502,000, convertible at $10.50 per share, if fully converted, would produce an additional 1,666,857 shares. Costs associated with the issuance of the debentures were approximately $894,000 at December 31, 1997 and are being amortized through 2003. The debentures are redeemable by the Company at any time at 100% of the principal amount thereof, together with accrued interest. The debentures are subordinate to all mortgages payable. At December 31, 1997 and 1996, the estimated fair values of convertible sub-ordinated debentures were $17,872,000 and $47,195,000, respectively.
K. Income Taxes
As discussed in Note A, the Company plans to maintain its status as a REIT and be taxed under Sections 856-860 of the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for Federal income taxes. At December 31, 1997, the income tax bases of the Company's assets and liabilities were approximately $222,000,000 and $152,000,000, respectively.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 36
L. Shareholders' Equity
Preferred Shares
At its inception on September 11, 1993, MART authorized 2,000,000 preferred shares of beneficial interest at a par value of $.01 per share. At December 31, 1997, none of these shares were issued and outstanding.
Share-Based Plans
The Company has established a 1993 Omnibus share plan and a 1995 share option plan ("Plans") under which trustees, officers and employees may be granted awards of share options, share appreciation rights, performance shares and/or restricted shares. The purpose of the Plans is to provide equity-based incentive compensation based on long-term appreciation in value of MART's shares and to promote the interests of the Company and its shareholders by encouraging greater management ownership of the Company's shares.
At December 31, 1997, 1,491,026 shares were reserved for future issuance under the Plans, including 1,025,000 shares authorized on November 14, 1997, subject to shareholder approval.
Share options generally vest over a three-year period, subject to certain conditions, typically have an exercise price equal to the market price at the grant date or the date that they vest and have a maximum term of ten years. The Company has not granted any share appreciation rights or performance shares.
Changes in options outstanding under the Plans are summarized as follows:
Information about options outstanding at December 31, 1997 is summarized as follows:
The per share weighted-average fair values of options granted during 1997 and 1995 were $.92 and $.63, respectively. No options were granted in 1996. These fair values were estimated on the dates of each grant using the Black-Scholes option-pricing model with the following assumptions:
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 37
L. Shareholders' Equity (Continued)
Share-Based Plans (Continued)
The option prices were equal to the market prices at the date of grant or vesting date for all of the options granted in 1997 and 1995 and, accordingly, no compensation cost has been recognized for options in the financial statements. If the Company had applied a fair value-based method to recognize compensation cost for stock options, net earnings and net earnings per common share would have been reduced as indicated below:
The pro forma amounts reflect only options granted after 1994. Therefore, the full impact of calculating compensation cost for stock options under a fair value-based method is not reflected in the pro forma amounts because compensation cost is recognized over the options' vesting periods and compensation cost for options granted prior to January 1, 1995 is not required to be considered.
Restricted Share Plan
In 1997, the Executive Compensation Committee recommended, and the Board of Trustees approved, a Restricted Share Plan. The Executive Compensation Committee believes that the grant of restricted share awards provides a long-term incentive to persons who contribute to the growth of MART and establishes a direct link between compensation and shareholder return.
In 1997, 400,000 restricted shares were made available for the plan and 368,333 restricted shares with a market value of $13.38 per share were awarded under the plan. These shares are subject to forfeiture restrictions which lapse at defined annual rates to 2008, subject to the recipients' continued employment with the Company. The Company recognizes the amortization of the fair value of the shares awarded as compensation costs over the terms of the awards. Such costs were $825,000 in 1997.
Share Repurchase Plan
On February 14, 1995, the Board of Trustees approved a share repurchase plan which authorized the repurchase of up to approximately 310,000 shares. During the year ended December 31, 1995 the Company purchased 277,200 shares at an average cost of $8.06 per share. On February 12, 1996 the Board of Trustees increased the authorized number of shares that may be repurchased to 410,000. During the year ended December 31, 1996 the Company purchased an additional 8,618 shares at an average cost of $9.45 per share.
M. Commitments
Minimum rental commitments for operating land leases as of December 31, 1997 are as follows:
Certain of the leases contain renewal or purchase options. All of the leases require the Company to pay real estate taxes. Total annual minimum lease payments amounted to $675,000 in 1997, $601,000 in 1996 and $262,000 in 1995.
N. Leases
The Company's shopping centers and other commercial properties are generally leased on a long-term basis. All leases are classified as operating leases. Future minimum lease payments receivable under noncancelable operating leases are as follows:
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 38
The minimum future lease payments do not include contingent rentals which may be paid under certain leases on the basis of a percentage of sales in excess of stipulated amounts. Contingent rentals amounted to $816,000 in 1997, $1,012,000 in 1996 and $1,246,000 in 1995. On a prospective basis, no more than 3.3% of annual rental revenue is derived from any one tenant, except Giant Food of Maryland. Giant Food minimum lease payments represent approximately 11.7% for the years 1998 through 2002 and 32% thereafter of the total minimum lease payments above. The percentages of total minimum lease payments in the years 1998 and beyond are high due to the fact that Giant Food leases have long lease terms compared with other major tenants who use renewal option terms. Renewal option minimum lease payments are not included in the totals above.
O. Other Revenues
Other revenues consists of the following:
P. Gain (Loss) on Properties
Gain (loss) on properties consists of the following:
The gain (loss) on sales of operating properties includes minority interest of $75,173 for the year ended December 31,1997.
The gain (loss) on sales of operating properties and gain (loss) on sales of properties held for sale, net, include minority interest of $21,194 and $96,049, respectively, for the year ended December 31, 1996.
Q. Gain on Life Insurance Proceeds
In January, 1995, the Company received $1,002,000 in life insurance proceeds as a result of the death of a former BTR general partner and officer.
R. Net Earnings Per Share
The following table sets forth information relating to the computation of basic and diluted earnings per share:
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 39
S. Subsequent Events
The Company acquired Wayne Heights Plaza on January 26, 1998, for approximately$5,400,000. The Company acquired Wayne Avenue Plaza on February 11, 1998, for approximately $10,700,000 which included the assumption of a mortgage approximating $8,300,000.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the identity and business experience of the trustees of MART and their remuneration, in the definitive proxy statement (to be filed pursuant to Regulation 14A) with respect to the election of trustees at the 1998 annual meeting of shareholders, is incorporated herein by reference.
The Executive Officers of MART are as follows:
Each executive officer is elected for a term expiring at the next regular annual meeting of the Board of Trustees of the Company or until his successor is duly elected and qualified.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 40
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Registrant's Proxy Statement to be filed with respect to the 1998 annual meeting of shareholders.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the Registrant's Proxy Statement to be filed with respect to the 1998 annual meeting of shareholders.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Registrant's Proxy Statement to be filed with respect to the 1998 annual meeting of shareholders.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements The following financial statements of Mid-Atlantic Realty Trust and Subsidiaries are included in Part II Item 8: Independent auditors' report Consolidated balance sheets as of December 31, 1997 and 1996 Consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 Consolidated statements of shareholders' equity for the years ended December 31, 1997, 1996 and 1995 Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995 Notes to consolidated financial statements
(a) 2. Financial Statement Schedule Schedule III-Real estate and accumulated depreciation and amortization All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a) 3. Exhibits
(b) Reports on Form 8-K. None. *Filed herewith
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 41
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 42
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 43
(1) The changes in total cost of properties are as follows:
(2) The changes in accumulated depreciation are as follows:
(3) The aggregate basis of properties for Federal income tax purposes is approximately $279,000,000 at December 31, 1997. (4) See Item 2 for geographic location of properties. (5) Freestate includes one bowling center in Illinois.
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - PAGE 44
ENHIBIT 21. PARENT AND SUBSIDIARIES OF REGISTRANT
The subsidiaries of MART are listed below. All are engaged in the ownership and/or development of commercial real estate in the United States. All are included in the consolidated financial statements filed as part of this Annual Report.
The following are partnerships in which Mid-Atlantic Realty Trust has partnership interests:
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST - - -PAGE 45
SIGNATURES
Pursuant to the requirements of Section 13 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.
MID-ATLANTIC REALTY TRUST
Date: 3/26/98 /s/ F. Patrick Hughes ------------------------------------------ F. Patrick Hughes, President Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated:
Date: 3/26/98 /s/ LeRoy E. Hoffberger ------------------------------------------- LeRoy E. Hoffberger, Chairman
Date: 3/26/98 /s/ F. Patrick Hughes ------------------------------ F. Patrick Hughes, Trustee, Principal Executive Officer
Date: 3/26/98 /s/ Paul G. Bollinger --------------------------------- Paul G. Bollinger, Controller, Principal Financial Officer
Date: 3/26/98 /s/ Eugene T. Grady ----------------------------------------------- Eugene T. Grady, Treasurer
Date: 3/26/98 /s/ Robert A. Frank ----------------------------------------------- Robert A. Frank, Trustee
Date: 3/26/98 /s/ Marc P. Blum ----------------------------------------------- Marc P. Blum, Trustee
Date: 3/27/98 /s/ M. Ronald Lipman ----------------------------------------------- M. Ronald Lipman, Trustee
Date: 3/26/98 /s/ Jack H. Pechter ----------------------------------------------- Jack H. Pechter, Trustee
Date: 3/26/98 /s/ Daniel S. Stone ----------------------------------------------- Daniel S. Stone, Trustee
Date: 3/27/98 /s/ David F. Benson ----------------------------------------------- David F. Benson, Trustee
1997 ANNUAL REPORT - MID - ATLANTIC REALTY TRUST