ITEM 1. BUSINESS.
GENERAL
Ramco-Gershenson Properties Trust (the "Company") is a Maryland real estate investment trust organized pursuant to Articles of Amendment and Restatement of Declaration of Trust dated October 2, 1997.
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. The Company is the successor entity to Ramco-Gershenson Properties Trust (the "Massachusetts Trust") a Massachusetts business 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"). 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.
RPS Realty Trust, a Massachusetts business trust, was formed on June 21, 1988 to be a diversified growth oriented 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, RPS Realty Trust (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 its 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 Company conducts substantially all of its business through Ramco-Gershenson Properties, L.P. (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-Gershenson, Inc. ("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.
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, 2000, the Company had a portfolio of 56 shopping centers, with more than 11,700,000 square feet of gross leasable area ("GLA"), located in Michigan, Ohio, Florida, New Jersey, Maryland, North Carolina, South Carolina, Tennessee, Alabama, Wisconsin, Virginia and Georgia.
The Company's properties consist of 2 regional enclosed malls, 44 community centers, 7 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. This layout is intended to maximize customer traffic for the mall stores. At many regional enclosed malls, freestanding stores are located along the perimeter of the parking area.
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'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 and the acquisition of shopping center properties through one or more joint venture entities. Since December 31, 1998, the Company's has engaged in the sale of mature properties, which have less potential for growth, and the redeployment of the proceeds of those sales to fund acquisition, development and redevelopment activities, to repay variable rate debt and to repurchase outstanding shares. Since December 31, 1998, a total of four shopping centers and two parcels of land have been sold for an aggregate amount of $39,819.
Ramco performs all property management functions for the properties it owns. At December 31, 2000, Ramco had 125 full-time employees devoted exclusively to property management, including personnel on-site at its properties. Property management efforts are directed toward improving tenant sales and rents by continually repositioning the centers. In addition to routine property maintenance, 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 continues to expand and redevelop existing properties in its shopping center portfolio, 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. In order to accomplish its acquisition strategy, the Company entered into a joint venture agreement during 1999, with an affiliate of Investcorp International, Inc., as an alternative source of investment capital to take advantage of favorable acquisition opportunities. During 2000, the Company invested $100,000 for a 10 percent interest in a joint venture, Rossford Development LLC. This joint venture will construct and own Crossroads Center development project. Similar joint ventures may be entered into in the future. 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. In addition, the Company will continue its strategy to sell non-core assets when properties are not viable redevelopment candidates.
DEVELOPMENTS AND EXPANSIONS
In September 2000, the Company substantially completed construction of its Auburn Mile development, a 650,000 square foot shopping center located in Auburn Hills, Michigan. Anchor tenants include Meijer, Target and JoAnn etc.
In June 2000, the Company began construction on its most current development, Crossroads Centre, a 650,000 square foot shopping center located in Rossford, Ohio, a suburb of Toledo. Anchor tenants include Home Depot, Target and Giant Eagle. The center is expected to be completed during the third quarter of 2001. In September 2000, the Company sold this development project to a 10 percent owned joint venture, Rossford Development LLC.
During 2000, the Company completed redevelopment projects aggregating approximately 220,000 square feet at a total cost of approximately $12,400,000 at five of its shopping centers. The Company is currently expanding or redeveloping three shopping centers.
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 4.7% of the Company owned GLA will expire in 2001. If the Company were unable to promptly relet or renew the leases for all or a substantial portion of this space , if the rental rates upon such renewal or reletting were significantly lower than expected rates, or if the Company were unable to maintain its current occupancy levels, then the Company's cash flow and ability to make distributions to shareholders could 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 purpose 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.
The IRS agent conducting the examination has issued his examination report with respect to the tax issues raised in the Tax Audit, including the Asset Issue (collectively, the "Tax Issues"). The 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. Based on the report, the Company could be liable for up to $46.8 million in combined taxes, penalties and interest through March 31, 2001. The IRS examination report notes, however, that the Company is eligible to avoid termination of its REIT status for certain of the years under audit if the Company makes a deficiency distribution to its shareholders. A deficiency dividend would be deductible by the Company, thereby reducing its liability for federal income tax. The proposed adjustments to taxable income would require the Company to pay a deficiency dividend to its current shareholders resulting in combined taxes, penalties, interest and deficiency dividends of approximately $48.2 million as of March 31, 2001.
As noted above, pursuant to a Tax Agreement between Atlantic and the Company, Atlantic assumed all liability arising out of the Tax Audit and Tax Issues, including the payment of the deficiency dividend. Based on the amount of Atlantic's net assets (as determined pursuant to the liquidation basis of accounting), as disclosed in its most recent quarterly report Form 10-Q for the period ended September 30, 2000, 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. The 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, the agent's report sets forth a number of positions, which the Company and its legal counsel believe are not consistent with applicable law and regulations of the IRS. The Company filed an administrative appeal challenging the findings contained in the IRS agent's examination report on April 30, 1999.
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 financial position or results of 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 a 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. Certain affiliates of the Company, 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.
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:
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 and three properties owned by RPT/ INVEST, LLC, a 25% owned joint venture entity, all of the properties are 100% owned by the Operating Partnership or its subsidiaries. These five partially owned properties are included in the above tables.
The Company's properties, by type of center, consist of the following:
- ------------------------- (1) "Annualized Base Rental Revenue" is equal to December 2000 base rental revenues multiplied by 12.
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 the respective lease agreement. (5) Tenant closed -- lease obligated (6) 25% joint interest (7) Builder's Square leases which are guaranteed by Kmart (8) This property was sold to a third party, subsequent to December 31, 2000
TENANT INFORMATION
The following table sets forth, as of December 31, 2000, 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.
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(1) "Annualized Base Rental Revenue" is equal to December 2000 base rental revenue multiplied by 12.
Approximately 506,000 square feet of GLA at seven of the Company's shopping centers is leased to Wal-Mart, but not currently occupied by Wal-Mart, although Wal-Mart remains obligated under the respective lease agreements. The leases for the seven Wal-Mart properties expire between 2004 and 2009. Wal-Mart has entered into various subleases, with sub-tenants currently occupying approximately 365,000 of the 506,000 square feet of GLA.
On December 28, 2000, Montgomery Ward ("Wards"), a tenant at two of the Company's properties, Tel-Twelve Mall and Shoppes of Lakeland, filed for protection under Chapter 11 of the Bankruptcy Code. Wards has announced that it will liquidate all assets including the disposition of their leasehold interests. This liquidation may result in an alternative tenant assuming the obligations of the lease and operating in lieu of Wards. On an annual basis, Wards pays approximately $840,000 in base rent and operating and real estate tax expense reimbursement for the two properties.
The following table sets forth the total GLA leased to anchors, retail tenants, and available space, in the aggregate, of the Company's properties as of December 31, 2000:
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(1) "Annualized Base Rental Revenue" is equal to December 2000 base rental revenue multiplied by 12.
The following table sets forth as of December 31, 2000, the total GLA leased to national, regional and local tenants, in the aggregate, of the Company's properties.
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(1) "Annualized Base Rental Revenue" is equal to December 2000 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.
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(1) "Annualized Base Rental Revenue" is equal to December 2000 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
During the fourth quarter of 2000, no matters were submitted for a vote of stockholders of the Company.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION -- The Company's Common Shares are listed and traded on the New York Stock Exchange ("NYSE") under the symbol "RPT".
The following table shows high and low closing prices per share for each quarter in 1999 and 2000.
HOLDERS -- The number of holders of record of the Company's Common Shares was 2,265 as of February 28, 2001.
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, 2000 and 1999, are summarized as follows.
The Company declared the following cash distributions per share to common shareholders for the year ended December 31, 1999:
The Company declared the following cash distributions per share to common shareholders for the year ended December 31, 2000:
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 a 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.
The Company has issued an aggregate of 1,400,000 Series A Preferred Shares 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 $35,000,000 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.
In December 1999, the Board of Trustees approved the repurchase, at management's discretion, of up to $10,000,000 of the Company's common stock. The program allows the Company to repurchase its common stock from time to time in the open market and/or in negotiated transactions. As of December 31, 2000, the Company purchased and retired 89,100 shares of the Company's common stock under this program at a cost of $1,246,000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF PROPERTIES)
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.
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(1) 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 Realty Trust, 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.
(2) In 2000, the Company changed its method of accounting for percentage rental revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." See Note 9 in the accompanying financial statements.
(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 amended effective January 1, 2000. Under the definition, FFO represents income (loss) before minority interest, excluding "extraordinary" items, as defined under accounting principles, gains (losses) on sale of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustment for unconsolidated partnerships and joint ventures. This clarification of the definition of FFO did not change amounts previously reported in 1999.
FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America, consider capital expenditures which have been and will be incurred in the future, the calculations of FFO does not.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with Ramco-Gershenson Properties Trust's (the "Company") Consolidated Financial Statements, the notes thereto, and the comparative summary of selected financial data appearing elsewhere in this report. Dollars are in thousands, except per Share and per Unit amounts.
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 cites 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. The forward-looking statements are identified by terminology such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue" or similar terms. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those projected in the forward-looking statements.
OVERVIEW
The results of operations depends primarily upon rental income. The Company's future success is dependent in part by its ability to maintain occupancy and increase rental rates.
OCCUPANCY -- Occupancy in 2000 remained stable for the Company's overall portfolio with a breakdown by asset category as follows:
AVERAGE BASE RENTS -- Average base rents for the four portfolio categories at December 31 2000 and 1999 were as follows:
LEASE RENEWALS -- The Company achieved the following in base rent for leases that were renewed during 2000:
NEW LEASES -- For new leases entered into during 2000, the Company achieved the following increases in base rent:
- ------------------------- (1) New leases for Anchor Tenants includes three land leases that if excluded from the calculation, would have resulted in $9.18 per square foot rent for new leases entered into during 2000, or a 67.6% increase. If the one land lease at Auburn Mile were excluded from the calculation, power centers would have resulted in $19.03 per square foot for new leases entered into during 2000, or a 119.2% increase.
RESULT OF OPERATIONS (DOLLARS IN THOUSANDS)
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
Total revenue increased 8.3% or $7,054 to $92,327 for the year ended December 31, 2000, compared to $85,273 for the year ended December 31, 1999. Of this increase, minimum rents increased by $449, or 0.8%, to $60,228 in 2000 from $59,779 in 1999. Recoveries from tenants increased $2,398 or 11.2% to $23,884 for the year ended December 31, 2000, compared to $21,486 for the year ended December 31, 1999.
The sale of Chester Springs and Rivertowne Square in August 1999 to RPT/Invest, LLC and the disposition of Commack (Toys R Us) and Trinity Corners Shopping Center in December 1999 accounted for a reduction in minimum rent of $3,066 for the year ended December 31, 2000. Development projects at White Lake MarketPlace and Auburn Mile contributed $2,441 to minimum rent when compared to 1999. The balance of the increase in minimum rents is primarily attributable to five redevelopment projects completed during 2000.
The increase in recoveries from tenants of $2,398 is primarily due to a higher level of recoverable operating expenses and real estate taxes associated with White Lake MarketPlace and Auburn Mile developments. The overall recovery ratio was 97.3% for the year ended December 31, 2000, compared to 96.8% for the year ended December 31, 1999.
For the twelve months ended December 31, 2000, percentage rents decreased $292 to $1,745, compared to $2,037 for the twelve months ended December 31, 1999. This decrease is primarily the result of the Company's initiative to convert tenants to higher minimum rent, reducing the reliance on percentage rents as a potential source of revenue. Interest and other income increased $1,678, from $997 for the twelve months ended December 31, 1999 to $2,675. Lease termination fees were $1,001 greater in the twelve months ended December 31, 2000 when compared to the same period in 1999 and kiosk license income increased $255 for the period. Gain on sale of land options during the twelve months ended December 31, 2000, accounted for $238 of the increase.
Gain on sales of real estate resulted from the sale of land parcels at Tel-Twelve Mall in April, 2000 and Roseville Plaza in December, 2000.
Total expenses for the year ended December 31, 2000 increased 9.1%, or $6,248 to $74,563, compared to $68,315 for the year ended December 31, 1999. The increase was due to a $2,352 increase in operating expenses, including recoverable operating expenses and real estate taxes, a $1,963 increase in depreciation and
amortization, a $42 increase in other operating expenses, a $2,335 increase in interest expense, and a $444 decrease in general and administrative expenses.
Real estate taxes increased $1,639, or 21.0%, from $7,810 to $9,449 for the year ended December 31, 2000. White Lake MarketPlace and Auburn Mile development projects contributed $1,228 to the increase in real estate taxes when compared to 1999.
Depreciation and amortization increased in 2000 by $1,963, or 14.7% to $15,274 from $13,311 in 1999. The increase is primarily due to the redevelopment projects completed during 2000 and amortization for current year additions of tenant improvements and leasing commissions. Depreciation and amortization for White Lake MarketPlace contributed $286 to the increase.
General and administrative expenses were $5,520 in 2000 as compared to $5,964 in 1999, a decrease of $444, or 7.4%. The decrease is primarily attributable to a $249 gain on sale of real estate recognized by one of the Company's unconsolidated entities in 2000, and by increased leasing and developments fees earned by the unconsolidated entity, which reduced the Company's reimbursement obligation. As a percentage of total revenue, general and administrative expenses were 6.0% and 7.0% for the years ended December 31, 2000 and 1999, respectively.
Interest expense increased $2,335, from $25,421 to $27,756 for the twelve months ended December 31, 2000. The 9.2% increase is the result of higher interest rates on variable rate debt for the twelve months ended December 31, 2000, increased borrowings on the Credit Facility and increased borrowings on the construction loans used to finance White Lake MarketPlace and the Auburn Mile developments.
Earnings from unconsolidated entities increased $402, to $198 in 2000 from a loss of $204 in 1999. Improved operating results of the unconsolidated entities increased $208, from $257 in 1999 to $465 for the year ended December 31, 2000. In addition, depreciation and amortization expense arising from the Company's net basis in the unconsolidated entities' assets decreased by $194 for the year ended December 31, 2000.
The increase in minority interest is the result of higher income before minority interest for the twelve months ended December 31, 2000 when compared to the twelve months ended December 31, 1999. Minority interest represents a 29.2% share of income before minority interest of the operating partnership for the twelve months ended December 31, 2000 and 29.0% for the twelve months ended December 31, 1999. The increase in minority interest percentage resulted from fewer common shares outstanding during the year ended December 31, 2000, as a result of the Company's stock repurchase program.
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
Total revenue increased 11.1% or $8,518 to $85,273 for the year ended December 31, 1999, compared to $76,755 for the year ended December 31, 1998. Of this increase, minimum rents increased by $4,920, or 9.0%, to $59,779 in 1999 from $54,859 in 1998. Recoveries from tenants increased $1,886 or 9.6% to $21,486 for the year ended December 31, 1999, compared to $19,600 for the year ended December 31, 1998.
Approximately $2,975 of the increase in minimum rents resulted from a full year of operations in 1999 for the four properties acquired during 1998. The completion of White Lake MarketPlace development during 1999 contributed $743 to the increase in minimum rents. In addition, $522 of the increase in minimum rents is related to buildable sites delivered to two anchor tenants at the Auburn Mile development during 1999. The balance of the increase in minimum rents is primarily attributable to five redevelopment projects completed during 1999.
The increase in recoveries from tenants is primarily due to a higher level of recoverable operating expenses and real estate taxes due to a full year of operations for the 1998 property acquisitions. The overall recovery ratio decreased to 96.8% in 1999 from 97.4% in 1998. The decrease is attributable to lower recovery
ratios for the 1998 acquisition properties, of approximately 71%, when compared to the existing core portfolio (shopping center properties owned as of January 1, 1998). As the leases expire at these properties, the Company expects that new lease agreements will allow recovery ratios to increase.
Gain on sales of real estate resulted from the sale of two properties, Trinity Corners and a single tenant retail Toys "R" Us, in December 1999.
Total expenses for the year ended December 31, 1999 increased 6.2%, or $3,973 to $68,315 as compared to $64,342 for the year ended December 31, 1998. The increase was due to a $2,084 increase in operating expenses, including recoverable operating expenses and real estate taxes, a $1,122 increase in depreciation and amortization, a $416 increase in general and administrative expenses, a $326 increase in other operating expenses and a $25 increase in interest expense. The increase in recoverable expenses, including recoverable operating expenses and real estate taxes, is primarily attributable to the four acquisitions made during 1998.
Depreciation and amortization increased in 1999 by $1,122, or 9.2% to $13,311 from $12,189 in 1998. The increase resulted primarily from depreciation and amortization of the shopping centers acquired in 1998, the completion of White Lake MarketPlace and the redevelopment projects during 1999.
General and administrative expenses were $5,964 in 1999 as compared to $5,548 in 1998, an increase of $416, or 7.5%. The increase is attributable to the growth of the Company and the full year effect of increased full-time employees hired during the last half of 1998. General and administrative expenses were reduced by a $251 gain on sale of real estate recognized by one of the Company's unconsolidated entities in 1999, which reduced the Company's reimbursement obligation.
Loss from unconsolidated entities decreased from $304 in 1998 to $204 in 1999 and is due in part to the impact of the RPT/Invest LLC joint venture included for part of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $17,126 in cash flows from operating activities for the year ended December 31, 2000 and used $12,779 to fund investing activities. Development of three shopping centers and improvements to existing properties used $27,332 and additional investments in two joint ventures used $1,430 during the year ended December 31, 2000. Proceeds from the sale of real estate provided $5,431 during the year. Financing activities used $7,152 during the twelve months ended December 31, 2000. Borrowings on a mortgage loan provided $25,000, borrowings on the Credit Facility provided $13,130, net of repayments of $20,120, and borrowing on construction loans provided $3,931. Cash distributions to shareholders, holders of operating partnership units, and dividends paid to preferred shareholders amounted to $20,413.
The Company's mortgages and notes payable amounted to $354,008 at December 31, 2000, with a weighted average interest rate of 8.3%. The debt consists of ten loans secured by various properties, plus two construction loans, one unsecured term loan and the Credit Facility, as described below. Nine of the mortgage loans amounting to $213,786 have maturities ranging from 2003 to 2008, monthly payments which include regularly scheduled amortization, and have fixed interest rates ranging between 6.83% to 8.81%. One of the mortgage loans, evidenced by tax free bonds, amounting to $6,800 secured by Oak Brook Square Shopping Center, 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 (7.95% at December 31, 2000).
In August 2000, the Company entered into a $25,000 fixed rate mortgage loan with Lincoln National Life Insurance Company, secured by ten properties. The loan is an expansion of an existing mortgage facility that is due January 2006. The total amount of the obligation is approximately $110,000, with a blended interest rate of 8.3%. The Company used $20,000 of the proceeds to reduce the unsecured variable rate term loan and the remainder was used to pay for capital expenditures and other working capital requirements.
The Company has a $18.5 million construction loan to finance the Auburn Mile shopping center development located in Auburn Hills, Michigan. The loan carries an interest rate of 200 basis points over LIBOR, an effective rate of 8.5% at December 31, 2000, and matures March 2001. At the Company's option,
the loan can then be converted to a 2-year term loan. Approximately $18.0 million has been borrowed at December 31, 2000. It is the Company's intention to exercise its option to convert the construction loan to a two year term loan.
The Company has a $14 million construction loan to finance the White Lake MarketPlace shopping center development. The loan carries an interest rate of 185 basis points over LIBOR, an effective rate of 8.5% at December 31, 2000 and matures January 2001. At the Company's option, the loan can then be converted to a 2-year term loan. Approximately $13.6 million was borrowed at December 31, 2000. Subsequent to December 31, 2000, White Lake MarketPlace property was sold. A portion of the sales proceeds was used to repay the construction loan. See Note 15 in the accompanying financial statements.
The Company renewed an unsecured term loan amounting to $25,000, maturing September 2003. This term loan bears interest between 325 and 450 basis points over LIBOR, depending on certain debt ratios (10.6% at December 31, 2000). The Company reduced this term loan by $20,000 from its former balance of $45,000, utilizing funds from the expansion of its fixed rate mortgage loan. Under terms of the loan agreement, the Company was required to make quarterly principal payments commencing December 2000.
The Company renewed a $110,000 Credit Facility, of which $101,830 was outstanding as of December 31, 2000. This credit facility bears interest between 162.5 and 225 basis points over LIBOR depending on certain debt ratios (effective interest rate of 8.7% at December 31, 2000) and matures September 2003. The credit facility is secured by mortgages on various properties and contains financial covenants relating to liabilities-to-assets ratio, minimum operating coverage ratios and a minimum equity value. As of December 31, 2000, the Company was in compliance with the covenant terms.
Outstanding letters of credit issued under the Credit Facility amounted to $399 at December 31, 2000.
The Company used proceeds from the borrowings under the Credit Facility, mortgage loan and the construction loans to finance the development of the above-mentioned properties and to pay for other capital expenditures.
In December 2000, the Company entered into an interest rate swap agreement that limited the Company's exposure to increases in interest rates on its floating rate debt. The notional amount of the agreement was $25,000. Based on rates currently in effect under the Company's Credit facility, the agreement provides for a fixed rate of 8.29% through December 2003. The Company is exposed to credit loss in the event of non-performance by the counter party to the interest rate swap agreement, however, the Company does not anticipate non-performance by the counter party. The Company will continue to evaluate the economic benefits of swap agreements as a method of managing its interest rate risks.
After taking into account the impact of converting the variable rate debt into fixed rate debt by use of the interest rate swap agreement, at December 31, 2000, the Company's variable rate debt accounted for approximately $140,221 of outstanding debt with a weighted average interest rate of 9.0%. Variable rate debt accounted for approximately 39.6% of the Company's total debt and 27.5% of its total capitalization.
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 69.4% at December 31, 2000.
In April 2000, the Company contributed $1,287 to RPT/INVEST, LLC, an unconsolidated joint venture, in connection with the acquisition of East Town Plaza shopping center located in Madison, Wisconsin.
On September 29, 2000, the Company assigned 90 percent of its interest in Rossford Development LLC to an unrelated party. Simultaneously, the Company invested $100 in the entity. The joint venture reimbursed the Company approximately $9,700 for advances paid for the acquisition of land and construction in progress related to the development of the Crossroads Center project, located in Rossford, Ohio.
The properties in which Ramco-Gershenson Properties, L.P. (the "Operating Partnership"), owns an interest and which are accounted for on the equity method of accounting are subject to non-recourse mortgage
indebtedness. At December 31, 2000, the pro rata share of non-recourse mortgage debt on the unconsolidated properties (accounted for on the equity method) was $15,798 with a weighted average interest rate of 8.8%.
The Company's capital structure at December 31, 2000, includes property specific mortgages, two construction loans, the unsecured term loan, the Credit Facility, Series A Preferred Shares, Common Shares and a minority interest in the Operating Partnership. Currently, the minority interest in the Operating Partnership represents a 29.2% ownership in the Operating Partnership which may, under certain conditions, be exchanged for 2,944,977 Common Shares.
As of December 31, 2000, Operating Partnership Units ("OP Units") issued are exchangeable for Common Shares of the Company on a one-for-one basis. The Company, as sole general partner of the Operating Partnership, has the option to settle exchanged OP Units in cash based on the current trading price of the Company's Common Shares. Assuming the exchange of all limited partnership interests in the Operating Partnership, there would be outstanding 10,074 common shares with a market value of approximately $130,331 at December 31, 2000 (based on the closing price of $12.938 per share on December 31, 2000).
The principal uses of the Company's liquidity and capital resources are for acquisitions, development, including expansion and renovation programs, debt repayment and repurchase of its common stock. To maintain its qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "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 Code.
The Company anticipates that the combination of the availability under the Credit Facility, construction loan, the sale of existing properties, and potential new debt will satisfy its expected working capital requirements through at least the next 12 months. The Company anticipates adequate liquidity for the foreseeable future to fund future developments, expansions, repositionings, and to continue its currently planned capital programs, to repurchase up to $10 million of the Company's common stock and to make distributions to its shareholders in accordance with the Code's requirements applicable to REITs. Although the Company believes that the combination of factors discussed above will provide sufficient liquidity, no such assurance can be given.
ECONOMIC CONDITIONS
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.
The retail industry has experienced some financial difficulties during the past few years and certain local, regional and national retailers have filed for protection under bankruptcy laws. If this trend should continue, the Company's future earnings performance could be negatively impacted.
SENSITIVITY ANALYSIS
The Company has exposure to interest rate risk on its debt obligations. Based on the Company's debt and interest rates and the interest rate swap agreement in effect at December 31, 2000, a 0.25 percent increase in interest rates would decrease earnings and cash flows by approximately $350 and a 0.25 percent decrease in interest rates would increase earnings and cash flows by approximately $350.
FUNDS FROM OPERATIONS
Management generally considers funds from operations ("FFO") to be one measure of financial performance of an equity REIT. FFO is 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 amended effective January 1, 2000. Under the NAREIT definition, FFO represents income before minority interest, excluding "extraordinary" items, as defined under generally accepted accounting principles, cumulative effects of accounting changes, gains on sales of property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. This clarification of the definition did not change amounts previously reported in 1999. Therefore, FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America, consider capital expenditures which have been and will be incurred in the future, the calculations of FFO does not.
The following table illustrates the calculation of FFO for the years ended December 31, 2000 and 1999:
- ------------------------- (1) Excludes $375 gain on sale of undepreciated land in 2000 and includes $251 gain on sale of property of an unconsolidated entity in 1999.
(2) 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 2000, the Company spent approximately $11,728 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 $14,734. Revenue neutral capital expenditures, such as roof and parking lot repairs, which are anticipated to be recovered from tenants, amounted to approximately $713.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, as amended, establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as either assets or liabilities in the balance sheet and measurement of those instruments at fair value. This statement is effective for the Company as of January 1, 2001. The accounting for change in the fair value of a derivative depends on the use of the derivative. The Company adopted SFAS 133 on January 1, 2001. The cumulative effect of adopting this standard will be a reduction of shareholder's equity in the amount of $348, all of which will be recorded as accumulated other comprehensive income within the Statement of Shareholders' Equity.
On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which among other topics, establishes standards for when the lessor can recognize contingent rental income that is based on future specified targets within the lessor's fiscal year. The SAB concluded that contingent revenue should be recorded in the period in which the specified target that results in contingent rental income is achieved. The Company had previously recorded percentage rents throughout the year based on rent estimated to be due from the tenant.
The Company has elected to adopt the provisions of SAB 101 as of April 1, 2000. The cumulative effect of such adoption was a reduction in percentage rental revenue retroactive to January 1, 2000, of approximately $1,264.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item is included in this report at Item 7 under the caption "Liquidity and Capital Resources".
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial Statements of Ramco-Gershenson Properties Trust and the Independent Auditors' Report thereon are filed pursuant to this Item 8 and are included in this report at Item 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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 13, 2001.
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 13, 2001.
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 13, 2001.
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 13, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
14(a)(1) Financial Statements of Ramco-Gershenson Properties Trust and the Independent Auditors' Report thereon are filed with this report:
The following financial statements of Ramco-Gershenson Properties Trust and the Independent Auditors' Report thereon are filed with this report:
14(a)(2) Financial Statement Schedules required by Item 14(d).
(a)(3) EXHIBITS
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.
DELOITTE & TOUCHE
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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP Detroit, Michigan February 13, 2001
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
1. ORGANIZATION
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. Ramco-Gershenson Properties Trust is referred to herein as 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. At December 31, 2000, the Company had a portfolio of 56 shopping centers, with more than 11,700,000 square feet of gross leasable area, located in the Midwest, East and Southeast United States. The Company's centers are usually anchored by discount department stores or supermarkets and the tenant base consists primarily of national and regional retail chains and local retailers. The Company's credit risk, therefore, is concentrated in the retail industry.
Revenues from the Company's largest tenant amounted to 10.2% and 10.8% of total revenues for the years ended December 31, 1999 and 1998 respectively. No single tenant accounted for more than 10.0% of revenue for the year ended December 31, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements for the years ended December 31, 2000, and 1999 include the accounts of the Company and its majority owned subsidiary, the Operating Partnership (70.8% owned by the Company at December 31, 2000 and 71.0% at December 31, 1999) and its wholly owned subsidiary, Ramco Properties Associates Limited Partnership, a financing subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the 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. Certain of the leases also provide for additional revenue based on contingent percentage income and is recorded on an accrual basis once the specified target that triggers this type of income is achieved. 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.
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 $1,283 and $1,490 as of December 31, 2000 and 1999 respectively.
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,
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the lower of cost or net realizable value. Costs incurred for the acquisition, development, construction, and improvement of properties are capitalized, including direct costs incurred by the Company. 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.
Real estate assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. To the extent an impairment has occurred, the excess of carrying value over its estimated net realizable value will be charged to income.
OTHER ASSETS -- Consist primarily of prepaid expenses, proposed development and acquisition costs, and financing and leasing costs which are amortized using the straight-line method over the terms of the respective agreements.
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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement, as amended, establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives as either assets or liabilities in the balance sheet and measurement of those instruments at fair value. This statement is effective for the Company as of January 1, 2001. The accounting for change in the fair value of a derivative depends on the use of the derivative. The Company adopted SFAS 133 on January 1, 2001. The cumulative effect of adopting this standard will be a reduction of shareholder's equity in the amount of $348, all of which will be recorded as accumulated other comprehensive income within the Statement of Shareholders' Equity.
3. INVESTMENT IN REAL ESTATE
Investment in real estate consists of the following:
GAIN ON SALES OF REAL ESTATE -- During 2000, the Company sold two parcels of land and recognized an aggregate gain of $3,795. In addition, a subsidiary of Ramco-Gershenson, Inc. (Ramco), an unconsolidated
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entity, sold a parcel of land and recognized a gain of $249. Accordingly, the cost reimbursement by the Operating Partnership to Ramco was reduced by the amount of the gain, thereby reducing the Company's general and administrative expenses in 2000.
In December 1999, the Company sold two shopping centers and recognized an aggregate gain of $974. A subsidiary of Ramco sold a parcel of land during 1999 and recognized a gain of $251. The cost reimbursement by the Operating Partnership to Ramco was reduced by the amount of the gain, thereby reducing the Company's general and administrative expenses in 1999.
4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company's equity investments in unconsolidated entities at December 31, 2000 was comprised of 50% general partner interests in Kentwood Town Center ("Kentwood") and the Southfield Plaza Expansion ("Southfield Plaza"), the Company's 100% interest in the non-voting and 5% interest in the voting common stock of Ramco, a 25% interest in RPT/INVEST, LLC (RPT/Invest) and a 10 percent interest in Rossford Development LLC. These investments are not unilaterally controlled and are therefore accounted for on the equity method.
On August 30, 1999 the Company entered into a joint venture agreement with an affiliate of Investcorp International, Inc. (Investcorp) to create RPT/Invest. The purpose of the joint venture is to acquire existing shopping centers with purchase prices totaling up to $125 million located in the Midwest, Mid-Atlantic and Northeast United States.
During 1999, the Company sold two existing properties to RPT/Invest for cash of approximately $27,800, net of $2,500 equity contribution (25% interest in the joint venture). The sale of the two properties resulted in a gain of approximately $722, which has been deferred and included in the equity investment of the unconsolidated entity. The Company used the proceeds from the sale to repay $25,000 of variable rate debt on its revolving Credit Facility. Investcorp contributed cash of approximately $7,600 in exchange for their 75% equity interest in the joint venture.
In April 2000, the Company contributed $1,287 to the joint venture, in connection with the acquisition of East Town Plaza shopping center located in Madison, Wisconsin.
RPT/Invest is managed by a five member Investment Committee, consisting of three members appointed by Investcorp and two members appointed by the Company. Under terms of the joint venture agreement, the Company will continue to manage the properties, including leasing and operating responsibilities, for which the Company will receive management fees, leasing commissions and asset management fees. In addition, the Company is responsible for identifying and acquiring properties and is expected to receive fees from the joint venture for such services.
The joint venture agreement includes a provision whereby the Company has the right to purchase any property acquired by the joint venture during specific time periods from the date of acquisition of the property.
On September 29, 2000, the Company assigned 90 percent of its interest in Rossford Development LLC to an unrelated party. Simultaneously, the Company invested $100 in the entity. The joint venture reimbursed the Company approximately $9,700 for advances paid for the acquisition of land and construction in progress related to the development of the Crossroads Center project, located in Rossford, Ohio.
Under terms of the joint venture agreement, the Company is responsible for the development, leasing and management of the project, for which the Company will receive fees. The joint venture agreement included a provision whereby the Company has the right to purchase the project during specific time periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined condensed financial information of the Company's unconsolidated entities is summarized as follows:
The Company's share of the unconsolidated entities' income of $465, $257 and $218, for the years ended December 31, 2000, 1999 and 1998, was reduced by $267 in 2000, $461 in 1999, and $522 in 1998, which represents depreciation and amortization adjustments arising from the Company's net basis adjustments in the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unconsolidated entities' assets. These adjustments result in net earnings (loss) of $198, ($204) and ($304) from unconsolidated entities' assets for the years ending December 31, 2000, 1999 and 1998 respectively. In addition, the Company's investment in RPT/Invest is approximately $722 lower than the net basis in the unconsolidated entity as a result of deferring the gain on the sale of the two properties sold to the joint venture.
5. OTHER ASSETS
Other assets at December 31 are as follows:
6. MORTGAGES AND NOTES PAYABLE
Mortgages and notes payable at December 31 consist of the following:
The mortgage notes and construction loans are secured by mortgages on properties that have an approximate net book value of $338,767 as of December 31, 2000. The Credit Facility is secured by mortgages on various properties that have an approximate net book value of $168,716 as of December 31, 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 2000, the Company entered into a $25,000 fixed rate mortgage loan with Lincoln National Life Insurance Company, secured by ten properties. The loan is an expansion of an existing mortgage facility that is due January 2006. The total amount of the obligation is approximately $110,000 with a blended interest rate of 8.3%.
The Company renewed an unsecured term loan amounting to $25,000, maturing September 2003. This term loan bears interest between 325 and 450 basis points over LIBOR, depending on certain debt ratios (10.6% at December 31, 2000). The Company reduced this term loan by $20,000 from its former balance of $45,000, utilizing funds from the expansion of its fixed rate mortgage. Under terms of the loan agreement, the Company is required to make quarterly principal payments commencing in December 2000.
On September 29, 2000, the Company renewed the $110,000 Credit Facility, of which $101,830 was outstanding as of December 31, 2000. The renewed credit facility bears interest between 162.5 and 225 basis points over LIBOR depending on certain debt ratios (effective interest rate of 8.7% at December 31, 2000) and matures September 2003. The credit facility is secured by mortgages on various properties and contains financial covenants relating to liabilities-to-assets ratio, minimum operating coverage ratios and a minimum equity value. As of December 31, 2000, the Company was in compliance with the covenant terms.
At December 31, 2000, outstanding letters of credit issued under the Credit Facility, not reflected in the accompanying consolidated balance sheet, total approximately $399.
In December 2000, the Company entered into an interest rate swap agreement that limited the Company's exposure to increases in interest rates on its floating rate debt. The notional amount of the agreement was $25,000. Based on rates currently in effect under the Company's Credit facility, the agreement provides for a fixed rate of 8.29% through December 2003. The Company is exposed to credit loss in the event of non-performance by the counter party to the interest rate swap agreement, however, the Company does not anticipate non-performance by the counter party.
The following table presents scheduled principal payments on mortgages and notes payable as of December 31, 2000:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LEASES
Approximate future minimum rentals under noncancelable operating leases in effect at December 31, 2000, assuming no new or renegotiated leases nor option extensions on lease agreements, are as follows:
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (EPS) (in thousands, except share and per share data):
In 2000, 1999 and 1998, conversion of the Series A Preferred Shares and of the Operating Partnership Units would have been antidilutive and, therefore, were not considered in the computation of diluted earnings per share.
9. CHANGE IN METHOD OF ACCOUNTING FOR PERCENTAGE RENTAL REVENUE
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which among other topics, requires that real estate companies should not recognize contingent percentage rents until the specified target that triggers this type of income is achieved. The Company had previously recorded percentage rents throughout the year based on rent estimated to be due from the tenant.
The Company has elected to adopt the provisions of SAB 101 as of April 1, 2000. The cumulative effect of such adoption is a reduction in percentage rental revenue retroactive to January 1, 2000, of approximately $1,264.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following pro forma amounts reflect the effect of retroactive application of the change in method of accounting for percentage rents that would have been made in 1999 and 1998 had the new method been in effect:
10. COMMITMENTS AND CONTINGENCIES
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.
The IRS agent conducting the examination has issued his examination report with respect to the tax issues raised in the Tax Audit, including the Asset Issue (collectively, the "Tax Issues"). The 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
regulations of the IRS. Based on the report, the Company could be liable for up to $46.8 million in combined taxes, penalties and interest through March 31, 2001. The IRS examination report notes, however, that the Company is eligible to avoid termination of its REIT status for certain of the years under audit if the Company makes a deficiency distribution to its shareholders. A deficiency dividend would be deductible by the Company, thereby reducing its liability for federal income tax. The proposed adjustments to taxable income would require the Company to pay a deficiency dividend to its current shareholders resulting in combined taxes, penalties, interest and deficiency dividends of approximately $48.2 million as of March 31, 2001.
As noted above, pursuant to a Tax Agreement between Atlantic and the Company, Atlantic assumed all liability arising out of the Tax Audit and Tax Issues, including the payment of the deficiency dividend. Based on the amount of Atlantic's net assets (as determined pursuant to the liquidation basis of accounting), as disclosed in its most recent quarterly report Form 10-Q for the period ended September 30, 2000, 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. The 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, the agent's report sets forth a number of positions, which the Company and its legal counsel believe are not consistent with applicable law and regulations of the IRS. The Company filed an administrative appeal challenging the findings contained in the IRS agent's examination report on April 30, 1999.
In December 1999, the Board of Trustees approved the repurchase, at management's discretion, of up to $10,000 of the Company's common stock. The program allows the Company to repurchase its common stock from time to time in the open market and/or in negotiated transactions. As of December 31, 2000, the Company purchased and retired 89,100 shares of the Company's common stock under this program at a cost of $1,246.
In connection with the development and expansion of various shopping centers as of December 31, 2000, the Company has entered into agreements for the construction of the shopping centers of approximately $1,001.
11. SHAREHOLDERS' EQUITY
Convertible Series A 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 Preferred Operating Partnership 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. During 1998, the Company issued 933,000 Series A Preferred Shares receiving net proceeds of approximately $22,682.
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 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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").
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, 2000, 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.
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.
12. STOCK OPTION PLANS
1996 Share Option Plan -- In May 1996, the Company adopted the 1996 Share Option Plan (the "Plan") to enable its employees to participate in the ownership of the Company. The Plan was amended in June 1999 to provide for the maximum number of common shares available for issuance under the Plan to equal 9 percent of the total number of issued and outstanding common shares (on a fully diluted basis assuming the exchange of all OP units and Series A Preferred Shares for common shares), which number would equal approximately 1,087 common shares at December 31, 2000. The Plan provides for the award of up to 1,087 stock options to purchase common shares of beneficial interest, at the fair market value at the date of grant, to executive officers and employees of the Company. The Plan is administered by the independent trustee members of the Compensation Committee of the Board of Trustees, whose members are not eligible for grants under the Plan. Stock options granted 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. No more than 50,000 share options may be granted to any one individual in any calendar year.
1997 Non-Employee Trustee Stock Option Plan -- On June 10, 1997, the Company adopted 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 annually on the Company's annual meeting date, beginning June 10, 1997. Stock options granted
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Information relating to the 1996 Share Option Plan and the 1997 Non-Employee Trustee Stock Option Plan (the "Plans") from December 31, 1997 through December 31, 2000 is as follows:
At December 31, 2000, the range of exercise prices and weighted average remaining contractual life of outstanding options was $14.06 -- $21.63, and 7.2 years.
The fair value of options granted during 2000, 1999 and 1998 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 accounts for the Plans in accordance with Accounting Principles Board Opinion No. 25 under which no compensation cost has been recognized for stock option awards. There would be 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."
13. 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, 2000 and 1999 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, the Company had outstanding an interest rate swap agreement with a major financial institution. The agreement has a notional amount of $25,000 under a three-year term and expires in December 2003. The fair value of this agreement was ($348) at December 31, 2000.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth the quarterly results of operations for the years ended December 31, 2000 and 1999 (in thousands, except per share amounts):
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(1) As of April 1, 2000, the Company changed its method of accounting for percentage rents, as required under the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The newly adopted method requires the Company to recognize contingent percentage rental income only when the specified target that triggers this type of income is achieved. The cumulative effect of adopting this change in accounting is a reduction in percentage rental income as of January 1, 2000.
For the quarters ended during 2000, net income and basic and diluted earnings per share are before the cumulative effect of the change in accounting principle.
15. SUBSEQUENT EVENT
In January 2001, the Company sold White Lake MarketPlace to Pontiac Mall Limited Partnership ("PMLP") for cash of $20,200, resulting in a gain on sale of approximately $5,000. Various executive officers/directors of the Company are partners in PMLP. The property was offered for sale, utilizing the services of a national real estate brokerage firm, and the Company accepted the highest offer from an unrelated party. Subsequently the buyer cancelled the agreement. PMLP presented a comparable offer, which resulted in more favorable economic benefits to the Company. The sale of the property to PMPL was entered into upon the unanimous approval of the independent members of the Company's board of directors.
Under terms of an agreement with PMLP, the Company will continue to manage the property and will receive management fees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. REAL ESTATE ASSETS
Net Investment in Real Estate Assets at December 31, 2000
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------------------- (a) If prior to May 1996, constructed by a predecessor of the Company
(b) The aggregate cost of land and buildings and improvements for federal income tax purposes is approximately $447 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.
The changes in real estate assets and accumulated depreciation for the years ended December 31, 2000, and 1999 are as follows:
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SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
EXHIBIT INDEX