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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 1-6309
HRE PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 04-2458042
(State of incorporation) (I.R.S. Employer
Identification No.)
321 RAILROAD AVENUE
GREENWICH, CONNECTICUT 06830
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (203) 863-8200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of January 6, 1998: Common Shares, par value $.01 per share -
$74,065,000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 5,167,495 Common
Shares, par value $.01 per share, as of January 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held on March 11,
1998 (certain parts as indicated herein) (Part III).
TABLE OF CONTENTS
Form 10-K
Item No. Report Page
- -------- -----------
PART I
1. Business 3
2. Properties 8
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for the Registrant's Common Equity and
Related Shareholder Matters 10
6. Selected Financial Data 12
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 16
PART III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 17
12. Security Ownership of Certain Beneficial Owners and Management 17
13. Certain Relationships and Related Transactions 17
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 17
2
PART I
ITEM I. BUSINESS.
Organization
- ------------
HRE Properties, Inc. was organized on July 7, 1969 as an unincorporated
business trust under the laws of the Commonwealth of Massachusetts pursuant to a
Declaration of Trust dated July 7, 1969, as amended. On March 12, 1997, the
shareholders of HRE Properties ("Trust") approved a plan of reorganization of
the Trust from a Massachusetts business trust to a corporation organized in
Maryland. The plan of reorganization was effected by means of a merger of the
Trust into HRE Properties, Inc. (the "Company"). As a result of the plan of
reorganization, the Trust was merged with and into the Company, the separate
existence of the Trust ceased, the Company was the surviving entity in the
merger and each issued and outstanding common share of beneficial interest of
the Trust was converted into one share of Common Stock, par value $.01 per
share, of the Company. Prior to the merger, the Company had no assets or
liabilities and conducted no operations other than those incident to its
organization and the merger. Pursuant to the merger, all properties, assets,
liabilities and obligations of the Trust became the properties, assets,
liabilities and obligations of the Company.
The Company has qualified and has elected to be taxed as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code of 1986, as
amended (the "Code"). Pursuant to such provisions of the Code, a trust which
distributes at least 95% of its real estate investment trust taxable income to
its shareholders each year and which meets certain other conditions will not be
taxed on that portion of its taxable income which is distributed to its
shareholders. The Trust intends to continue to qualify as a real estate
investment trust for federal income tax purposes.
Description of Business
- -----------------------
The Company's sole business is the ownership of real estate investments
which consist principally of equity investments in income-producing properties,
with primary emphasis on properties in the northeastern part of the United
States. The Company's core properties consist of community shopping centers in
the northeastern part of the United States. The remaining properties include
office and retail buildings and industrial properties. The Company also seeks to
identify desirable properties for acquisitions which it acquires in the normal
course of business. In addition, the Company regularly reviews its portfolio and
from time to time considers and effects the sale of certain properties.
At October 31, 1997, the Company owned or had an equity interest in twenty
properties comprised of shopping centers, single tenant retail stores, office
buildings and service and distribution facilities located in twelve states
throughout the United States, containing a total of 2,983,200 square feet of
gross leasable area. For a description of the Company's individual investments,
see Item 2.
The Company intends to continue to invest substantially all of its assets
in income producing real estate, with a primary emphasis on shopping centers,
although the Company will retain the flexibility to invest in other types of
real property. While the Company is not limited to any geographical location,
the Company's current strategy is to invest primarily in properties located in
the northeastern region of the United States.
Investment and Operating Strategy
- ---------------------------------
The Company's investment objective is to increase cash flow, current income
and consequently the value of its existing portfolio of properties, and to seek
continued growth through (i) the strategic re-tenanting, renovation and
expansion of its existing properties, and (ii) the selective acquisitions of
income-producing real estate properties, primarily neighborhood and community
shopping centers, in the geographic regions, where the Company presently
operates.
3
These neighborhood and community shopping center properties are designed to
attract local area customers and would typically be anchored by a supermarket,
discount department store or drugstore tenant offering day-to-day necessities
rather than high-priced luxury items.
Core Properties
- ---------------
The Company considers those properties which are directly managed by the
Company, located close to the Company's headquarters and concentrated in the
community shopping center sector to be core properties. Of the twenty properties
in the Company's portfolio, eleven properties are considered core properties
consisting of eight community shopping centers, one mixed-use (retail/office)
property and two office buildings (including the Company's executive
headquarters). The properties contain in the aggregate 1,292,700 square feet of
gross leasable area. The Company's core retail properties collectively had 169
tenants providing a wide range of retail products and services. Tenants include
national supermarkets, discount department stores, a regional electronic store
and local retailers. At October 31, 1997, the core properties were 95% leased.
A substantial portion of the Company's operating lease income from retail
tenants consists of rent received under short- and intermediate-term leases.
Most of the leases provide for the payment of fixed base rentals monthly in
advance and for the payment by tenants of a pro-rata share of the real estate
taxes, insurance, utilities and common area maintenance expenses incurred in
operating the shopping centers.
Non-Core Properties
- -------------------
In fiscal 1995, the Board of Directors expanded and refined the strategic
objectives of the Company to refocus the real estate portfolio into one of
self-managed retail properties located in the Northeast and authorized a plan to
sell the non-core properties of the Company in the normal course of business
over a period of several years. The Company believes that economic conditions in
the real estate markets where the Company's non-core properties are located have
improved and that opportunities to sell those properties have also improved. At
October 31, 1997, the non-core properties, including the Company's investment in
unconsolidated joint venture and undeveloped land, total nine properties, having
an aggregate net book value of $31,247,000 ($32,986,000 at October 31, 1996) and
comprise the Company's office (with the exception of the Company's
headquarters), distribution and service facilities, and certain retail
properties located outside of the northeast region of the United States. The
Company expects that the ultimate sales of the non-core properties over the next
several years will result in net gains to the Company.
At October 31, 1997, the Company's non-core properties consisted of one
office building, containing 212,000 square feet of gross leasable area (GLA),
four retail properties totaling 557,500 square feet, four industrial properties
with a total of 921,000 square feet of GLA and 4.2 acres of undeveloped land.
The non-core properties were 98% leased at October 31, 1997.
The office property has four tenants which offer a range of services,
including engineering, management and administrative.
The four service and distribution facilities are 100% occupied and consist
of two automobile and truck parts distribution warehouses, one truck sales and
service center and one automobile tire distribution facility. The service and
distribution facilities are net leased under long-term lease arrangements
whereby the tenants pay all taxes, insurance, maintenance and other operating
costs of the property during the term of the lease.
The four retail properties consist of a 231,000 square foot shopping center
located in Clearwater, Florida containing 46 tenants and single tenant
properties leased to Mervyn's, a division of Dayton-Hudson Corp. and Value City
Stores, Inc. under long term "triple net" leases whereby the tenants pay all
4
taxes, insurance, maintenance and other operating costs of the property during
the term of the lease.
The Clearwater, Florida property, known as the Countryside Square Shopping
Center is owned by a joint venture in which the Company is the general partner.
In fiscal 1997, the Company formed the joint venture with certain former
shareholders of the Company to own and manage the shopping center. The Company
contributed the shopping center at its net carrying amount (which amount
approximated its fair value of $13 million at the date of contribution), and the
limited partners, including Kimco Realty Corp. who manages the property,
contributed 600,000 common shares of the Company to the limited partnership.
At October 31, 1997, the Company also owned a portfolio of mortgage notes
receivable consisting of fixed rate mortgages aggregating $3,605,000. The fixed
rate mortgages are secured by retail properties sold by the Company in prior
years.
During the five year period ended October 31, 1997, the Company acquired an
interest in nine properties totalling 920,900 square feet of gross leasable
space at an aggregate cost of approximately $62 million. In the same period, the
Company spent nearly $9.1 million to expand, renovate, improve and lease its
existing properties. During the five year period ended October 31, 1997, the
Company has sold or disposed of twelve properties totalling 1,566,000 square
feet of gross leasable area which the Company determined no longer fit into its
strategic plans.
Recent Developments
- -------------------
During fiscal 1997, the Company purchased or acquired interests in two
properties totalling 185,500 square feet of gross leasable area. One of the
properties acquired was an interest in the Eastchester Mall, a 68,000 square
foot retail property in Eastchester, New York. The Company's interest is as the
sole general partner of a newly formed partnership. The Company contributed
$375,000 for its interest and the former owner contributed the property subject
to a $5 million first mortgage in return for an 85% limited partner interest.
The limited partner is entitled to preferential distributions of cash flow from
the property and, after three years may put its interest to the Company for a
combination of cash and common stock of the Company. After 10 years, the Company
has the option to purchase the limited partner's interest in the partnership for
certain agreed upon amounts.
In order to preserve the tax position of the limited partner, the partnership
agreement places certain restrictions on the sale or refinancing of the property
without the limited partner's consent.
In addition, the Company spent $4.0 million for leasing costs and capital
improvements to properties it already owns. Substantially all such capital
improvements were incurred in connection with the Company's leasing activities.
The Company leased or renewed 364,000 square feet of gross leasable area in
fiscal 1997, including a new lease for 94,000 square feet at its Southfield,
Michigan office building and the renewal and extension of a lease for 86,000
square feet of space at the Tempe, Arizona retail property. The square footage
leased or renewed in fiscal 1997 comprised 12% of the total gross leasable area
of the Company's properties.
After the close of the Company's fiscal year, the Company sold 350,000 shares of
8.99% Series B Senior Cumulative Preferred Stock in a private placement at a
price of $100 per share to institutional investors. Net proceeds of the offering
of approximately $33,700,000 are expected to be used to reduce outstanding
indebtedness in fiscal 1998 and make acquisitions.
Matters Relating to the Real Estate Business
- --------------------------------------------
The Company is subject to certain business risks arising in connection with
owning real estate which include, among others, (1) the bankruptcy or insolvency
of, or a downturn in the business of, any of
5
its major tenants, (2) the possibility that such tenants will not renew their
leases as they expire, (3) vacated anchor space affecting the entire shopping
center because of the loss of the departed anchor tenant 's customer drawing
power, (4) risks relating to leverage, including uncertainty that the Company
will be able to refinance its indebtedness, and the risk of higher interest
rates, (5) potential liability for unknown or future environmental matters, and
(6) the risk of uninsured losses. Unfavorable economic conditions could also
result in the inability of tenants in certain retail sectors to meet their lease
obligations and otherwise could adversely affect the Company's ability to
attract and retain desirable tenants. The Company believes that its shopping
centers are relatively well positioned to withstand adverse economic conditions
since they typically are anchored by grocery stores, drug stores and discount
department stores that offer day-to-day necessities rather than luxury goods.
Compliance with Governmental Regulations
- ----------------------------------------
The Company, like others in the commercial real estate industry, is subject
to numerous environmental laws and regulations. Although potential liability
could exist for unknown or future environmental matters, the Company believes
that its tenants are operating in accordance with current laws and regulations
and has established procedures to monitor these operations.
Competition
- -----------
The real estate investment business is highly competitive. The Company
competes for real estate investments with investors of all types, including
domestic and foreign corporations, financial institutions, other real estate
investment trusts and individuals. In addition, the Company's properties are
subject to local competitors from the surrounding areas. The Company does not
consider its real estate business to be seasonal in nature.
The Company's shopping centers compete for tenants with other regional,
community or neighborhood shopping centers in the respective areas where Company
retail properties are located. The Company's office buildings compete for
tenants principally with office buildings throughout the respective areas in
which they are located. In most areas where the Company's office buildings are
located, competition for tenants is intense. Leasing space to prospective
tenants is generally determined on the basis of, among other things, rental
rates, location, physical quality of the property and availability of space.
Since the Company's industrial properties are all net leased under
long-term lease arrangements which are not due to expire in the near future, the
Company does not currently face any competitive pressures with respect to such
properties.
Property Management
- -------------------
The Company actively manages and supervises the operations and leasing at
all of its core properties. Seven of the Company's non-core properties are net
leased to single tenants under long-term lease arrangements, in which case,
property management is provided by the tenants. The Company's two remaining
non-core properties are managed by property management companies retained by the
Company. The Company closely supervises the property management firms it engages
to manage its properties.
Employees
- ---------
The Company's executive offices are located at 321 Railroad Avenue,
Greenwich, Connecticut. It occupies approximately 5,000 square feet in a two
story office building owned by the Company.
6
The Company has 15 employees, eight of whom oversee the management of the
Company's real estate portfolio, or analyze potential acquisition properties and
determine which properties, if any, to sell. The Company's remaining employees
serve in various professional, executive and administrative capacities.
7
ITEM II PROPERTIES.
Core Properties
---------------
The following table sets forth information concerning each core property at
October 31, 1997. Except as otherwise noted, all core properties are 100% owned
by the Company.
Gross
Year Year Leasable Number of
Location Completed Acquired Square Feet Acres Tenants Leased Principal Tenant
-------- --------- -------- ----------- ----- ------- ------ ----------------
Meriden, Ct 1989 1993 300,000 29.2 20 96% ShopRite Supermarket
Springfield, MA 1970 1970 293,000 26.0 18 88% Great Atlantic & Pacific Tea Co.
Danbury, Ct 1989 1995 193,000 19.3 22 98% Barnes & Noble
Carmel, NY 1983 1995 126,000 19.0 12 60% ShopRite Supermarket
Newington, NH 1975 1979 102,000 14.3 10 97% JoAnn Fabrics
Wayne, NJ 1959 1992 102,000 9.0 46 99% Great Atlantic & Pacific Tea Co.
Farmingdale, NY 1981 1993 70,000 5.6 13 97% King Kullen Supermarket
Eastchester, NY 1978 1997 68,000 4.0 10 100% Food Emporium (Division of A&P)
(1)
Somers, NY 1989 1992 19,000 4.9 12 100% Putnam County Savings Bank
Greenwich, CT 1983 1993 10,000 .2 3 100% HRE Properties, Inc.
Greenwich, CT 1983 1994 9,700 .2 3 88% Rogers & Goffigon
(1) The Company has a general partner interest in this property.
8
Non-Core Properties
- -------------------
The following table sets forth information concerning each non-core
property in which the Company owned an equity interest at October 31, 1997.
Except as otherwise noted, non-core properties are 100% owned by the Company.
Year Year Rentable Number of
Location Completed Acquired Square Feet Acres Tenants Leased Principal Tenant
-------- --------- -------- ----------- ----- ------- ------ ----------------
Southfield, MI1 1973 1983 212,000 7.8 5 100% Giffels Associates
Clearwater, FL1 1983 1985 231,000 21.5 46 95% Albertson's Supermarket
Mesa, AZ 1971 1971 92,000 7.6 1 100% Mervyn's
Tempe, AZ 1970 1970 117,000 8.6 2 100% Mervyn's
Jonesboro, GA 1973 1997 117,500 9.0 1 100% Value City Stores, Inc.
Albany, GA 1972 1972 476,000 51.3 1 100% Firestone
Dallas, TX 1970 1970 253,000 14.5 1 100% Chrysler Corporation
St. Louis, MO 1970 1970 163,000 16.0 1 100% Chrysler Corporation
Syracuse, NY 1973 1973 29,000 10.0 1 100% Navistar International
- ----------
1 The Company has a general partner interest in this property.
9
ITEM III LEGAL PROCEEDINGS.
No legal proceedings are required to be reported under this Item.
ITEM IV SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended October 31, 1997.
ITEM PURSUANT TO INSTRUCTION 3 OF ITEM 401 (B) OF REGULATION S-K:
EXECUTIVE OFFICERS OF THE COMPANY.
For information regarding Executive Officers of the Company--See Item
X.
PART II
ITEM V MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
(a) Price Range of Common Shares
The Common Shares of the Company are traded on the New York Stock
Exchange under the symbol "HRE". The following table sets forth the high and low
closing sales prices for the Company's Common Shares during the fiscal years
ended October 31, 1997 and October 31, 1996 as reported on the New York Stock
Exchange:
Fiscal Year Ended Fiscal Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
High Low High Low
---- --- ---- ---
Fourth Quarter $20-7/16 $17-3/4 $16 $14-1/4
Third Quarter 18-1/4 16-1/4 16 14
Second Quarter 18 16-1/4 15-5/8 13-1/2
First Quarter 18-1/2 14-7/8 14-1/8 13-1/8
(b) Approximate Number of Equity Security Holders:
At December 31, 1997 (latest date available), there were 2,248
shareholders of record of the Company's Common Shares.
(c) Dividends Declared on Common Shares and Tax Status
The following table sets forth the dividends declared per Common Share
and tax status for Federal income tax purposes of the dividends paid during the
fiscal years ended October 31, 1997 and 1996:
Fiscal Year Ended Gross Dividend Ordinary Income
October 31, 1997: Paid Per Share Distribution
-------------- ------------
Fourth Quarter $ .32 $ .32
Third Quarter $ .32 $ .32
Second Quarter $ .31 $ .31
First Quarter $ .31 $ .31
----- -----
$1.26 $1.26
===== =====
10
Portion of Dividend Designated as:
----------------------------------
Fiscal Year Ended Gross Dividend Ordinary Income Capital Gain
October 31, 1996: Paid Per Share Distribution Distribution
- ----------------- -------------- ------------ ------------
Fourth Quarter $ .31 $ .26 $ .05
Third Quarter $ .31 $ .26 $ .05
Second Quarter $ .31 $ .26 $ .05
First Quarter $ .29 $ .24 $ .05
----- ----- -----
$1.22 $1.02 $ .20
===== ===== =====
The Company made distributions to shareholders aggregating $1.26 per
Common Share during the fiscal year ended October 31, 1997. The Company has paid
quarterly dividends on its Common Shares since it commenced operations as a real
estate investment trust in 1969.
Although the Company intends to continue to declare quarterly dividends
on its Common Shares, no assurances can be made as to the amounts of any future
dividends. The declaration of any future dividends by the Company is within the
discretion of the Board of Directors, and will be dependent upon, among other
things, the earnings, financial condition and capital requirements of the
Company, as well as any other factors deemed relevant by the Board of Directors.
Two principal factors in determining the amounts of dividends are (i) the
requirement of the Code that a real estate investment trust distribute to
shareholders at least 95% of its real estate investment trust taxable income,
and (ii) the amount of the Company's funds from operations.
The Company has a Dividend Reinvestment and Share Purchase Plan which
allows shareholders to acquire additional shares by automatically reinvesting
dividends. Shares are acquired pursuant to the Plan at a price equal to the
higher of 95% of the market price of such shares on the dividend payment date or
100% of the average of the daily high and low sales prices for the five trading
days ending on the day of purchase without payment of any brokerage commission
or service charge. Approximately 14% of the Company's eligible stockholders
currently participate in the Plan.
11
ITEM VI SELECTED FINANCIAL DATA.
(In thousands, except per share data)
Year Ended October 31, 1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Total Assets $ 137,430 $ 132,160 $ 149,099 $ 142,559 $ 119,330
Mortgage Notes Payable $ 43,687 $ 39,798 $ 57,212 $ 46,386 $ 24,227
Revenues $ 24,827 $ 24,432 $ 22,853 $ 18,969 $ 16,162
Operating Income (Loss) $ 8,589 $ 3,930 $ (3,703) $ 1,262 $ (7,293)
Gains on Sales of Properties -- $ 6,341 $ 7,567 $ 82 $ 2,330
Net Income (Loss) $ 8,589 $ 10,271 $ 3,864 $ 1,344 $ (4,963)
Funds from Operations* $ 10,189 $ 9,525 $ 8,510 $ 7,653 $ 6,748
PER SHARE DATA:
Net Income (Loss) $ 1.67 $ 1.91 $ .72 $ .26 $ (.94)
Cash Dividends $ 1.26 $ 1.22 $ 1.14 $ 1.10 $ 1.08
*Defined as net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of properties, plus depreciation, amortization, the elimination of
significant non-recurring charges and credits and after adjustments for
unconsolidated joint ventures.
12
ITEM VII. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources include its cash and cash
equivalents, funds available from bank borrowings and long-term mortgage debt
and sales of real estate investments. The Company meets its liquidity
requirements primarily by generating cash from the operations of its properties.
Payments of expenses related to real estate operations, capital improvement
programs, debt service, management and professional fees, and dividend
requirements place demands on the Company's liquidity.
The Company believes that the financial resources currently available to it are
sufficient to meet all of its known obligations and commitments and to make
additional real estate investments when appropriate opportunities arise. At
October 31, 1997, the Company had cash and cash equivalents of $1.9 million
compared to $1.8 million in 1996. The Company also has available $15 million in
unsecured lines of credit with two major commercial banks. The credit lines are
available to finance the acquisition, management or development of commercial
real estate and for working capital purposes. The credit lines expire at various
periods in 1998 and outstanding borrowings, if any, may be repaid from proceeds
of debt financings or sales of properties. At October 31, 1997, there were no
outstanding borrowings under existing lines of credit. It is the Company's
intent to renew these credit lines as they expire in 1998. Long-term debt
consists of mortgage notes payable totalling $43.7 million, of which $10.4
million in principal payments are due in fiscal 1998 (including a mortgage note
of $9.1 million, which matures in March, 1998). The mortgage loans bear interest
at fixed rates that range from 7.5% to 9.75%.
In January, 1998, the Company sold a $35 million, 8.99% Series B Senior
Cumulative Preferred Stock issue in a private placement with institutional
investors. Net proceeds of $33.7 million from the sale of the perpetual
preferred stock issue are expected to be used to repay approximately $24 million
of mortgage debt (including the $9.1 million mortgage referred to above) and to
make acquisitions.
The Company expects to make real estate investments periodically. In addition to
proceeds from the sale of the preferred stock issue, the funds for such
investments may come from existing liquid assets, line of credit arrangements,
proceeds from property sales, financing of acquired or existing properties or
the sale of mortgage notes receivable. During the five years ended October 31,
1997, the Company utilized the proceeds of sales, available cash and long-term
mortgage debt to acquire nearly $62 million of properties. The Company also
invests in its existing properties and, during fiscal 1997, spent approximately
$4.1 million on its properties for capital improvement and leasing costs. In
fiscal 1997, the Company purchased or obtained interests in two properties and
land.
In fiscal 1995, the Board of Directors expanded and refined the strategic
objectives of the Company to refocus the real estate portfolio into one of
self-managed retail properties located in the Northeast and authorized a plan to
sell the non-core properties of the Company in the normal course of business
over a period of several years. The non-core properties comprise all of the
Company's office (except its headquarters), distribution and service facilities,
and certain retail properties located outside of the Northeast region of the
United States. As a result of this change in investment strategy, the Company
recorded a charge of $7,000,000 in fiscal 1995, to adjust the carrying value of
its non-core properties to the lower of cost or estimated net realizable value.
The Company believes that economic conditions in the real estate markets where
the Company's non-core properties are located have improved and that
opportunities to sell those properties have also improved. The Company expects
the ultimate sales of the non-core properties over a period of years to result
in net gains to the Company. During fiscal 1996, the Company sold three non-core
properties for aggregate sales proceeds of $20 million and realized net gains on
the sales of the properties of $6,341,000. The proceeds from these sales were
used principally to reduce outstanding mortgage indebtedness by approximately
$19 million. There were no sales of
13
properties in fiscal 1997. At October 31, 1997, the non-core properties,
including the Company's investment in unconsolidated joint venture and
undeveloped land, total nine properties having an aggregate net book value of
$31,247,000.
The Company's Board of Directors have authorized a program to purchase up to one
million of the Company's common shares over the next two to three years. The
Company expects to finance the purchase of such common shares from available
cash or proceeds from the sales of its non-core assets. The repurchase program
is subject to postponement or termination at any time in light of prevailing
market conditions and other factors. The Company has repurchased 41,700 shares
at an aggregate cost of $646,000 from available cash since inception of the
program.
FUNDS FROM OPERATIONS
Funds from Operations is defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of properties, plus depreciation and amortization, and
the elimination of significant non-recurring charges and credits and after
adjustments for unconsolidated joint ventures. The Company believes the level of
Funds from Operations to be an appropriate supplemental financial measure of its
operating performance. Funds from Operations does not represent cash flows from
operations as defined by generally accepted accounting principles, is not
indicative that cash flows are adequate to fund all cash needs and is not
considered to be an alternative to net income. The Company considers recoveries
of investment in properties subject to financing leases to be analogous to
amortization for purposes of calculating Funds from Operations. In fiscal 1997,
Funds from Operations increased to $10,189,000 from $9,525,000 in 1996, and
$8,510,000 in 1995. The improvement in fiscal 1997 is primarily the result of
new leasing at certain of the Company's properties and lower interest expense
from repayment of mortgage debt in fiscal 1996.
RESULTS OF OPERATIONS
FISCAL 1997 VS. FISCAL 1996
REVENUES
Operating lease revenues amounted to $23,336,000 in fiscal 1997 compared to
$22,770,000 in fiscal 1996. Fiscal 1997 revenues include a one-time negotiated
settlement amount of $3,250,000 received from a tenant for, among other things,
unpaid percentage rentals due the Company in accordance with the terms of the
tenant's lease. In fiscal 1996, the Company sold three operating properties.
These properties contributed $2,200,000 in combined operating lease income in
that year. Rental income from properties owned in both 1997 and 1996 increased
by 5.3% in fiscal 1997. The increase in 1997 operating lease income results from
leasing of previously vacant space at several of the Company's properties during
fiscal 1996, the effect of which is reflected this year.
Earlier in the year, the Company entered into a joint venture to own and manage
its Countryside Square shopping center. The property was contributed by the
Company to the joint venture and for financial accounting purposes, the property
is accounted for an unconsolidated joint venture. Accordingly, the 1997 results
of operations of the Company exclude the revenues and expenses of the property.
Revenues of the property amounted to $2,067,000 in fiscal 1996.
EXPENSES
Total expenses amounted to $16,238,000 in fiscal 1997 compared to $20,502,000
last year. The largest
14
expense category is property expenses of the real estate operating properties.
The decrease in property expenses in 1997 reflect the effect of the sales of
three properties during fiscal 1996, the absence of operating expenses of the
Countryside Square property referred to above, lower utility and maintenance
costs this year.
Interest expense decreased by $1,517,000 in fiscal 1997 from the repayment
during fiscal 1996 of $16.6 million of mortgage notes payable.
Depreciation and amortization expense decreased in fiscal 1997 principally from
the sale of three operating properties during fiscal 1996.
IMPACT OF YEAR 2000
The Company has begun to assess the Year 2000 issue to identify and correct
potential system processing problems as it approaches the next millenium. At the
present time, the Company believes that no material changes or replacements to
its existing accounting and management systems are required to comply with the
Year 2000 issue. The Company however, has not determined the impact, if any, on
its operations that may result as a consequence of any of its tenants, vendors,
service providers or other entities to which it has business or operational
relationships to comply with the Year 2000 issue. The Company intends to monitor
and maintain on-going discussions with such entities to ensure that the
Company's business operations are not adversely affected as a result of the
inability of such entities to comply.
FISCAL 1996 VS. FISCAL 1995
REVENUES
Total revenues increased 6.9% to $24,432,000 in fiscal 1996 compared to
$22,853,000 in fiscal 1995. Operating lease revenues, which comprise more than
90% of the Company's total revenues, increased by $2,767,000 or 14% resulting
from the additional rents of two retail properties acquired in fiscal 1995 and
new leasing at certain of the Company's core properties. Overall, the Company's
portfolio was 94% leased at year end. When adjusted to exclude properties
acquired and sold in 1995 and 1996, rental income increased by 9% in fiscal 1996
from additional leasing of previously vacant space.
Other income in fiscal 1995 included $600,000 of non-recurring contract
extension and other fees earned in connection with the sale of a property.
Finance lease income decreased in fiscal 1996 as a result of the sale of four
distribution properties in fiscal 1995 which were accounted for as direct
finance leases.
The gains on sales of properties in 1996 resulted from the sales of office
properties in Denver, Colorado and Houston, Texas and one retail property in
Manassas, Virginia.
EXPENSES
Total expenses were $20,502,000 in fiscal 1996 compared to $26,556,000 in fiscal
1995. Included in fiscal 1995 expenses were write-downs in the carrying value of
investments of $7,000,000 to the carrying values of two of the Company's
non-core properties to their estimated net realizable values. (See discussion
under Liquidity and Capital Resources). Property expenses totalled $8,780,000 in
fiscal 1996, compared to $7,691,000 in fiscal 1995. For properties owned during
both 1996 and 1995, expenses in fiscal 1996 increased by 12% principally from
higher snow removal costs, real estate taxes, and repairs. The increase in
property expenses related to properties acquired or sold during fiscal 1996 and
1995 amounted to $370,000 in fiscal 1996.
Interest expense in fiscal 1996 decreased from the repayment of outstanding
borrowings under the Company's credit lines and approximately $16.6 million in
mortgage notes payable. The credit lines and mortgage notes payable were repaid
from proceeds of sales of properties.
Depreciation and amortization increased in fiscal 1996 from the addition of two
properties acquired in fiscal 1995 and capital expenditures for tenant
improvements and deferred charges.
General and administrative expenses decreased in fiscal 1996 principally from
the absence of rental expense incurred under a lease agreement which expired in
December 1995 for the Company's former executive office space. The Company
currently occupies space in one of its office properties.
15
ITEM VIII. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements required by this Item, together with
the report of the Company's independent public accountants thereon and the
supplementary financial information required by this Item are included under
Item XIV of this Annual Report.
ITEM IX. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No information is required to be reported under this Item.
PART III
ITEM X. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company has filed with the Securities and Exchange Commission its
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
March 11, 1998. The additional information required by this Item is included
under the caption "ELECTION OF DIRECTORS" of such Proxy Statement and is
incorporated herein by reference.
Executive Officers of the Registrant.
The following sets forth certain information regarding the executive
officers of the Company:
Name Age Offices Held
- ---- --- ------------
Charles J. Urstadt 69 Chairman and Chief Executive Officer (since
September 1989)
Willing L. Biddle 36 President and Chief Operating Officer
(since December, 1996); Executive Vice
President and Chief Operating Officer
(since March, 1996); Senior Vice President
- Management (since June, 1995); Vice
President - Retail (June, 1994 to June,
1995); Vice President - Asset Management
(April 1993 to 1994); Vice President,
Levites Realty Management Corp (1989 to
1993); prior to 1989, Second Vice
President, Chase Manhattan Bank
James R. Moore 49 Executive Vice President and Chief
Financial Officer (since March, 1996);
Senior Vice President and Chief Financial
Officer (since September 1989); Secretary
(since April 1987) and Treasurer (since
December 1987); Vice President-Finance and
Administration (April 1987 to September
1989); prior to April 1987, Senior Manager,
Ernst & Young
Raymond P. Argila 49 Senior Vice President and Chief Legal
Officer (since June 1990); formerly Senior
Counsel, Cushman & Wakefield, Inc.
(September 1987 to May 1990) and associates
with Finley, Kumble, Wagner, Heine,
Underberg, Manley, Myerson & Casey (from
March to June 1987); Vice President and
Chief Legal Office, Pearce, Urstadt, Mayer
& Greer Realty Corp. from (January 1984 to
March 1987).
Officers of the Company are elected annually by the Directors.
Mr. Urstadt has been the Chairman of the Board of Directors since 1986, and
a Director since 1975. Mr. Urstadt also serves as the Chairman of Urstadt
Property Company, Inc. (formerly Pearce,
16
Urstadt, Mayer & Greer Inc.) and has served in such capacity for more than five
years.
ITEM XI. EXECUTIVE COMPENSATION.
The Company has filed with the Securities and Exchange Commission its
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
March 11, 1998. The information required by this Item is included under the
caption "ELECTION OF DIRECTORS - Compensation and Transactions with Management
and Others of such Proxy Statement and is incorporated herein by reference.
ITEM XII. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company has filed with the Securities and Exchange Commission its
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
March 11, 1998. The information required by this Item is included under the
caption ELECTION OF DIRECTORS - Security Ownership of Certain Beneficial Owners
and Management of such Proxy Statement and is incorporated herein by reference.
ITEM XIII. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has filed with the Securities and Exchange Commission its
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
March 11, 1998. The information required by this Item is included under the
caption ELECTION OF DIRECTORS - Compensation and Transactions with Management
and Others of such Proxy Statement and is incorporated herein by reference.
PART IV
ITEM XIV. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
A. Financial Statements and Financial Statement Schedules
1. Financial Statements --
The consolidated financial statements listed in the accompanying index
to financial statements on Page 20 are filed as part of this Annual
Report.
2. Financial Statement Schedules --
The financial statement schedules required by this Item are filed with
this report and are listed in the accompanying index to financial
statements on Page 20. All other financial statement schedules are
inapplicable.
B. Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the fiscal year ended October 31, 1997.
C. Exhibits.
Listed below are all Exhibits filed as part of this report. Certain
Exhibits are incorporated by reference from documents previously filed
by the Company with the Securities and Exchange Commission pursuant to
Rule 12b-32 under the Securities Exchange Act of 1934, as amended.
Exhibit
17
(3) Articles of Incorporation and By-laws.
3.1 Amended Articles of Incorporation of the Company, (incorporated by
reference to Exhibit C of Amendment No.1 to Registrant's Statement on
Form S-4 (No. 333-19113)
3.2 By-laws of the Company, (incorporated by reference to Exhibit D of
Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No.
333-19113).
(4) Instruments Defining the Rights of Security Holders, Including Indentures.
4.1 Common Stock: See Exhibit 3.1 hereto.
4.2 Preferred Shares: See Exhibit 3.1 hereto.
4.3 Preferred Share Purchase Rights: See Exhibits 3.1 and 10.3 hereto.
(10) Material Contracts.
10.1 Form of Indemnification Agreement entered into between the Registrant
and each of its Directors and for future use with Directors and
officers of the Company (incorporated herein by reference to Exhibit
10.1 of the Registrant's Annual Report on Form 10-K for the year ended
October 31, 1989).*
10.2 Amended and Restated Change of Control Agreement between the Registrant
and James R. Moore dated November 15, 1990 (incorporated herein by
reference to Exhibit 10.3 of the Registrant's Annual Report on Form
10-K for the year ended October 31, 1990).*
10.3 Amended and Restated Rights Agreement between the Company and The Bank
of New York, as Rights Agent, dated as of March 12, 1997 (incorporated
herein by reference to Exhibit 1 of the Registrant's Current Report on
Form 8-K dated March 12, 1997).
10.4 Change of Control Agreement dated as of June 12, 1990 between the
Registrant and Raymond P. Argila (incorporated herein by reference to
Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the
year ended October 31, 1990).*
10.4.1 Agreement dated December 19, 1991 between the Registrant and Raymond P.
Argila amending the Change of Control Agreement dated as of June 12,
1990 between the Registrant and Raymond P. Argila (incorporated herein
by reference to Exhibit 10.6.1 of the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1991).*
10.5 Change of Control Agreement dated as of December 20, 1990 between the
Registrant and Charles J. Urstadt (incorporated herein by reference to
Exhibit 10.8 of the Registrant's Annual Report on Form 10-K for the
year ended October 31, 1990).*
10.6 Amended and Restated HRE Properties Stock Option Plan (incorporated
herein by reference to Exhibit 10.8 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1991).*
10.6.1 Amendments to HRE Properties Stock Option Plan dated June 9, 1993
(incorporated by reference to Exhibit 10.6.1 of the Registrant's Annual
Report on Form 10-K for the year ended October 31, 1995).*
10.7 Amended and Restated Change of Control Agreement dated as of November
6, 1996 between the Registrant and Willing L. Biddle (incorporated by
reference to Exhibit 10.7 of the Registrant's Annual Report on Form
10-K for the year ended October 31, 1996).*
10.8 Countryside Square Limited Partnership Agreement of Limited Partnership
dated as of November 22, 1996 between HRE Properties, as General
Partner and the persons whose names are set forth on Exhibit A of the
Agreement, as Limited Partners (incorporated by reference to Exhibit I
of the Registrant's Current Report on Form 8-K dated November 22,
1996).
18
10.9 Restricted Stock Plan (incorporated by reference to Exhibit B of
Amendment No. 1 to Registrant's Registration Statement on Form S-4 (No.
333-19113)*).
10.10 Exccess Benefit and Deferred Compensation Plan.*
(21) Subsidiaries.
21.1 List of Company's subsidiaries (incorporated by reference to Exhibit
22.1 of the Registrant's Annual Report on Form 10-K for the year ended
October 31, 1988).
(23) Consents of Experts and Counsel.
23.1 The consent of Arthur Andersen LLP to the incorporation by reference of
their reports included or incorporated by reference herein in the
Registrant's Registration Statements on Form S-3 (No.33-57119), Form
S-4 (No. 333-19113), Form S-8 (No.2-93146) and Form S-8 (No. 33-41408)
is filed herewith as part of this report.
(27) Financial Data Schedule.
27.1 Financial Data Schedule
* Management contract, compensatory plan or arrangement required to be filed
as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
19
HRE PROPERTIES, INC.
ITEM XIVA. INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
----
Consolidated Balance Sheets at October 31, 1997 and 1996 21
Consolidated Statements of Income for each of the
three years ended October 31, 1997 22
Consolidated Statements of Cash Flows for each of the
three years ended October 31, 1997 23
Consolidated Statements of Stockholders' Equity
for each of the three years ended October 31, 1997 24
Notes to Consolidated Financial Statements 25-33
Report of Independent Public Accountants 34
Schedule.
- ---------
The following consolidated financial statement schedules of HRE Properties, Inc.
are included in Item XIV(d):
III Real Estate and Accumulated Depreciation - October 31, 1997 35
IV Mortgage Loans on Real Estate - October 31, 1997 38
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
20
HRE PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
October 31,
1997 1996
---- ----
ASSETS
Real Estate Investments:
Properties owned-- at cost, net of accumulated depreciation $94,489 $ 88,280
Properties available for sale - at cost, net of accumulated
depreciation and recoveries 22,327 32,986
Investment in unconsolidated joint venture 8,920 -
Mortgage notes receivable 3,605 3,706
-------- --------
129,341 124,972
Cash and cash equivalents 1,922 1,819
Interest and rent receivable 2,649 2,795
Deferred charges, net of accumulated amortization 2,468 1,592
Other assets 1,050 982
-------- --------
$137,430 $132,160
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $43,687 $39,798
Accounts payable and accrued expenses 1,603 774
Deferred directors' fees and officers' compensation 550 470
Other liabilities 1,175 1,152
-------- --------
47,015 42,194
-------- --------
Minority Interest 2,125 -
Stockholders' Equity:
Preferred stock,par value $.01 per share; 20,000,000 shares authorized;
none issued and outstanding - -
Excess stock, par value $.01 per share; 10,000,000 shares authorized;
none issued and outstanding - -
Common stock, par value $.01 per share; 70,000,000 shares authorized;
5,167,495 and 5,346,081 outstanding in 1997 and 1996, respectively 51 53
Additional paid in capital 117,763 120,581
Distributions in excess of accumulated net income (28,530) (30,668)
Unamortized restricted stock compensation and Notes receivable
from officer/stockholders (994) -
-------- --------
88,290 89,966
$137,430 $132,160
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
21
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended October 31,
----------------------
1997 1996 1995
---- ---- ----
REVENUES:
Operating leases $ 23,336 $ 22,770 $ 20,003
Financing leases 451 612 1,165
Interest and other 932 1,050 1,685
Equity income of unconsolidated joint venture 108 -- --
-------- -------- --------
24,827 24,432 22,853
-------- -------- --------
OPERATING EXPENSES:
Property expenses 7,024 8,780 7,691
Interest 3,350 4,867 5,281
Depreciation and amortization 4,132 5,132 4,804
General and administrative expenses 1,550 1,545 1,610
Directors' fees and expenses 182 178 170
Write-downs in carrying value of investments -- -- 7,000
-------- -------- --------
16,238 20,502 26,556
-------- -------- --------
OPERATING INCOME (LOSS) 8,589 3,930 (3,703)
GAINS ON SALES OF PROPERTIES -- 6,341 7,567
-------- -------- --------
NET INCOME $ 8,589 $ 10,271 $ 3,864
======== ======== ========
NET INCOME PER COMMON SHARE $ 1.67 $ 1.91 $ .72
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,146 5,365 5,349
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
22
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended October 31,
----------------------
1997 1996 1995
-------- -------- --------
OPERATING ACTIVITIES:
Net income $ 8,589 $ 10,271 $ 3,864
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,132 5,132 4,924
Amortization of restricted stock 111 -- --
Recovery of investment in properties owned
subject to financing leases 1,021 954 1,355
Equity in income of unconsolidated joint venture (108) -- --
Gains on sales of properties -- (6,341) (7,567)
Write-downs in carrying value of investments -- -- 7,000
Decrease (increase) in interest and rent receivable 146 (104) (348)
Increase (decrease) in accounts payable and accrued expenses 909 (206) (95)
(Increase) decrease in other assets and other liabilities, net (45) 95 (98)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,755 9,801 9,035
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions of properties (3,226) (880) (26,809)
Improvements to properties and deferred charges (3,951) (5,617) (2,959)
Proceeds from sale of mortgage note receivable -- -- 3,750
Net proceeds from sales of properties -- 17,988 12,822
Investment in unconsolidated joint venture (384) -- --
Payments received on mortgage notes receivable 101 231 76
Miscellaneous -- -- (119)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,460) 11,722 (13,239)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from bank loans -- 5,250 --
Proceeds from mortgage notes 5,000 6,000 11,250
Dividends paid (6,451) (6,538) (6,100)
Proceeds from sales of additional common shares 385 282 337
Purchases of common shares (15) (631) --
Payments on mortgage notes payable and bank loan (6,111) (31,164) (2,924)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,192) (26,801) 2,563
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 103 (5,278) (1,641)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,819 7,097 8,738
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,922 $ 1,819 $ 7,097
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
23
HRE PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares and per share data)
Unamortized
restricted
stock
Outstanding (Distributions compensation
Number of Additional Treasury In Excess of and
Common Par Paid In Shares at Accumulated Notes
Shares Value Capital Cost Net Income) Receivable Total
------ ----- ------- ---- ----------- ---------- -----
BALANCES-- OCTOBER 31, 1994 5,341,696 $ 53 $ 123,454 $ (2,861) $ (32,165) $-- $ 88,481
Net Income -- -- -- -- 3,864 -- 3,864
Cash dividends paid ($1.14 per share) -- -- -- -- (6,100) -- (6,100)
Sale of additional common shares under
dividend reinvestment plan 18,862 -- 260 -- -- -- 260
Exercise of stock options 6,668 -- 77 -- -- -- 77
--------- ----- ---------- -------- ---------- ------- ---------
BALANCES-- OCTOBER 31, 1995 5,367,226 53 123,791 (2,861) (34,401) -- 86,582
Net income -- -- -- -- 10,271 -- 10,271
Cash dividends paid ($1.22 per share) -- -- -- -- (6,538) -- (6,538)
Sale of additional common shares under
dividend reinvestment plan 19,555 -- 282 -- -- -- 282
Purchase of common shares held in treasury (40,700) -- (631) -- -- (631)
--------- ----- ---------- -------- ---------- ------- ---------
BALANCES - OCTOBER 31, 1996 5,346,081 53 124,073 (3,492) (30,668) -- 89,966
Net income -- -- -- -- 8,589 -- 8,589
Cash dividends paid ($1.26 per share) -- -- -- -- (6,451) -- (6,451)
Sale of additional common shares under
dividend reinvestment plan 16,621 -- 299 -- -- -- 299
Exercise of stock options 29,520 -- 353 -- -- -- 353
Common shares issued under Restricted
stock plan 49,000 -- 838 -- -- -- 838
Purchases and retirement of common
shares (1,000) -- -- (15) -- -- (15)
Reduction in Treasury Shares -- -- (3,507) 3,507 -- -- --
Deemed purchase of commmon shares in
connection with organization of
unconsolidated joint venture (272,727) (2) (4,293) -- -- -- (4,295)
Unamortized restricted stock
compensation and notes from officers
for purchases of common stock -- -- -- -- -- (994) (994)
--------- ----- ---------- -------- ---------- ------- ---------
BALANCES-- OCTOBER 31, 1997 5,167,495 $ 51 $ 117,763 -- $ (28,530) $ (994) $ 88,290
========= ===== ========== ======== ========== ======= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying financial statements include the accounts of HRE Properties,
Inc., a Maryland Corporation, as successor by merger to HRE Properties, a
Massachusetts business trust (the "Trust"). On March 12, 1997, the shareholders
of HRE Properties approved a plan of reorganization of the Trust from a
Massachusetts business trust to a corporation organized in Maryland. The plan of
reorganization was effected by means of a merger of the Trust into HRE
Properties, Inc. (the "Company"). As a result of the plan of reorganization, the
Trust was merged with and into the Company, the separate existence of the Trust
ceased, the Company was the surviving entity in the merger and each issued and
outstanding common share of beneficial interest of the Trust was converted into
one share of Common Stock, par value $.01 per share, of the Company. This change
resulted in the transfer of $3,507,000 from the treasury shares account to the
common stock account at the time of the merger. Prior to the merger, the Company
had no assets or liabilities and conducted no operations other than those
incident to its organization and the merger. Pursuant to the merger, all
properties, assets, liabilities and obligations of the Trust became the
properties, assets, liabilities and obligations of the Company.
BUSINESS
HRE Properties, Inc., a real estate investment trust, is engaged in the
acquisition, ownership and management of commercial real estate, primarily
neighborhood and community shopping centers in the northeastern part of the
United States. Other assets include office and retail buildings and industrial
properties. The Company's major tenants include supermarket chains, other
retailers who sell basic necessities and multi-national industrial corporations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HRE Properties,
Inc. (the "Company"), its wholly-owned subsidiary, and joint ventures in which
the Company has the ability to control the affairs of the venture. The
unconsolidated joint venture is accounted for by the equity method of
accounting. Under the equity method, only the Company's net investment and
proportionate share of income or loss of the unconsolidated joint venture is
reflected in the financial statements. All significant intercompany transactions
and balances have been eliminated in consolidation.
ACCOUNTING FOR LEASES
The Company accounts for its leases of real property in accordance with the
provisions of Financial Accounting Standards Statement No. 13, "Accounting for
Leases," as amended. This Statement sets forth specific criteria for determining
whether a lease should be accounted for as an operating lease or a direct
financing lease. In general, the financing lease method applies where property
is under long-term lease to a creditworthy tenant and the present value of the
minimum required lease payments at the inception of a lease is at least 90% of
the market value of the property leased. Other leases are accounted for as
operating leases.
FEDERAL INCOME TAXES
The Company believes it qualifies and intends to continue to qualify as a real
estate investment trust under Sections 856-860 of the Internal Revenue Code
(IRC). Under those sections, a trust, among other things, that distributes at
least 95% of its real estate trust taxable income will not be taxed on that
portion of its taxable income which is distributed. The Company intends to
distribute all of its taxable income for the fiscal years through 1997 in
accordance with the provisions of Section 858 of the IRC. Accordingly, no
provision has been made for Federal income taxes in the accompanying
consolidated financial statements.
Taxable income of the Company prior to the dividends paid deduction for the
years ended October 31, 1997, 1996 and 1995 was approximately $9,500,000,
$5,200,000, and $3,600,000, respectively. Taxable income in fiscal 1996 and 1995
was reduced through the utilization of available capital loss carry-overs of
$2,600,000 and $2,900,000, respectively. The difference between net income for
financial reporting purposes and taxable income results from, among other
things, differences in adjusted bases for capital gains and losses and different
methods of accounting for leases, depreciable lives related to the properties
owned and investments in joint ventures.
DEPRECIATION AND AMORTIZATION
The Company uses the straight-line method for depreciation and amortization.
Properties owned and properties available for sale are depreciated over the
estimated useful lives of the properties, which range from 30 to 45 years.
Tenant improvements, deferred leasing costs and leasehold improvements are
amortized over the life of the
25
related leases. All other deferred charges are amortized over the terms of the
agreements to which they relate.
PROPERTIES AVAILABLE FOR SALE
A property is classified as available for sale upon determination by the Board
of Directors that the property is to be marketed for sale in the normal course
of business over the next several years.
In March 1995, the Financial Accounting Standards Board issued Statement No. 121
(the "Statement") on accounting for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to assets to be held and used.
The Statement also establishes accounting standards for long-lived assets and
certain identifiable intangibles to be disposed of. The Company adopted the
Statement on November 1, 1996. Adoption of the statement had no effect on the
financial position or operations of the Company. It is the Company's policy to
reclassify properties available for sale as assets to be disposed of pursuant to
the statement upon determination that such properties will be sold within one
year.
CAPITALIZATION
The Company capitalizes all direct costs relating to the acquisition of real
estate investments and costs relating to improvements to properties. The Company
also capitalizes all direct costs relating to its successful leasing activities.
INCOME RECOGNITION
Revenues from operating and finance leases include revenues from properties
owned and properties available for sale. Rental income is generally recognized
based on the terms of leases entered into with tenants. Rental income from
leases with scheduled rent increases is recognized on a straight-line basis over
the lease term. Additional rents which are provided for in leases, are
recognized as income when earned and their amounts can be reasonably estimated.
Interest income is recognized as it is earned. Gains and losses on sales of
properties are recorded when the criteria for recognizing such gains or losses
under generally accepted accounting principles have been met.
STATEMENTS OF CASH FLOWS
The Company considers short-term investments with original maturities of 90 days
or less to be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements requires management to make use of
estimates and assumptions that affect amounts reported in the financial
statements as well as certain disclosures. Actual results could differ from
those estimates.
REAL ESTATE INVESTMENT IMPAIRMENT
The Company's real estate investments are recorded at depreciated historical
cost. The Company periodically reviews each of its investments for declines in
net realizable values, to amounts below recorded balances, based on its present
investment strategies. When the Company determines that a property is recorded
at amounts in excess of net realizable value, a writedown is recorded to reflect
the property at its fair value . Future changes in investment strategies and
other circumstances may affect estimates of net realizable values and therefore
the carrying amount of investments.
NET INCOME PER COMMON SHARE
Computations of net income per common share are based on the weighted average
number of common shares outstanding during the respective periods. The
additional shares issuable upon exercise of stock options (see Note 8) have not
been included in the computations since their effect is immaterial.
26
(2) REAL ESTATE INVESTMENTS
The Company's investments in real estate were composed of the following at
October 31, 1997 and 1996 (in thousands):
Properties Investment in Mortage
Properties Available for Unconsolidated Notes 1997 1996
Owned Sale Joint Venture Receivable TOTALS Totals
- ---------------------- ------------- --------------- ---------------- ------------ ----------- ------------
Retail $92,706 $6,220 $8,920 $3,605 $111,451 $106,728
Office 1,479 8,573 --- --- 10,052 9,371
Distribution --- 6,734 --- --- 6,734 7,769
Undeveloped Land 304 800 --- --- 1,104 1,104
--- --- --- --- ----- -----
$94,489 $22,327 $8,920 $3,605 $129,341 $124,972
======= ======= ====== ====== ======== ========
The Company's investments at October 31, 1997, consisted of equity interests in
20 properties which are located in various regions throughout the United States
and mortgage notes. The following is a summary of the geographic locations of
the Company's investments at October 31, 1997 and 1996 (in thousands):
1997 1996
- ------------------------------- ------------------------- --------------------
Northeast $96,816 $90,649
Southeast 12,593 14,137
Midwest 10,879 10,418
Rocky Mountain 800 800
Southwest 6,373 7,015
Pacific Coast 1,880 1,953
----- -----
$129,341 $124,972
======== ========
(3) PROPERTIES OWNED
The components of properties owned were as follows (in thousands):
1996 1996
- ------------------------------- ------------------------- --------------------
Land $18,862 $17,068
Buildings and improvements 91,329 84,034
------ ------
110,191 101,102
Accumulated depreciation (15,702) (12,822)
-------- --------
$94,489 $88,280
======= =======
Space at properties owned by the Company is generally leased to various
individual tenants under short and intermediate term leases which are accounted
for as operating leases.
Minimum rental payments on noncancellable operating leases become due as
follows: ; 1998 - $16,128,000; 1999 - $15,458,000; 2000 - $14,272,000; 2001 -
$11,933,000; 2002 - $10,056,000 and thereafter - $62,935,000.
In addition to minimum rental payments, certain tenants are required to pay
additional rental amounts based on increases in property operating expenses
and/or their share of the costs of maintaining common areas. Certain of the
Company's leases provide for the payment of additional rent based on a
percentage of the tenant's revenues. Such additional rents are included in
rental income and aggregated approximately $3,778,000, $281,000, and $483,000,
in 1997, 1996 and 1995, respectively.
In November 1996, the Company negotiated a settlement with one of its tenants to
recover, among other things, unpaid additional percentage rents including
interest totalling $3.25 million. In accordance with the terms of its lease, the
tenant was required to aggregate the sales of all its stores in a specified
radius when computing percentage rent due the Company. The settlement was
received during fiscal 1997 and has been recorded as additional operating lease
income in the accompanying 1997 consolidated statement of income.
The Company acquired an interest in the Eastchester Mall, a 68,000 square foot
retail property in Eastchester, New York. The Company's interest is as the sole
general partner. The Company contributed $375,000 for its interest and the
former owner contributed the property subject to a $5 million first mortgage in
return for a limited partner interest. The limited partner is entitled to
distributions of cash flow from the property and after three years may put its
interest to the Company for a combination of cash and common stock of the
Comany. After 10
27
years, the Company has the option to purchase the limited partner's interest in
the partnership for the amounts noted above.
In order to preserve the tax position of the limited partner, the partnership
agreement places certain restrictions on the sale or refinancing of the property
without the limited partner's consent. The limited partner's interest in the
partnership is reflected in the accompanying consolidated financial statements
as minority interest.
The acquisition of the interest in the property and the assumption of the first
mortgage by the partnership represent noncash investing and financing activities
and therefore are not included in the accompanying consolidated statement of
cash flows.
(4) PROPERTIES AVAILABLE FOR SALE
In fiscal 1995, the Board of Directors authorized a plan to sell all of the
non-core properties of the Company over a period of several years. The non-core
properties consist of all of the Company's distribution and service properties,
its office properties (with the exception of its headquarters), and certain
retail properties located outside of the Northeast region of the United States.
These properties, having a net carrying amount of $22,327,000 at October 31,
1997 ( $32,986,000 in October 31, 1996) have been classified as Properties
Available for Sale in the accompanying consolidated financial statements. As a
result of this change in investment strategy, the Company recorded a charge of
$7,000,000 in the 1995 consolidated statement of income to write-down the
carrying value of the properties available for sale to their respective
estimated net realizable values.
At October 31, 1997 and 1996, properties available for sale consisted of the
following (in thousands):
1997 1996
- ------------------------------------------- ------------------ ----------------
Properties available for sale subject to:
Operating leases $16,194 $ 25,832
Direct financing leases 6,133 7,154
----- -----
$22,327 $32,986
======= =======
OPERATING LEASES
The components of properties available for sale subject to operating leases were
as follows (in thousands):
1997 1996
- ------------------------------------------- ----------------- ----------------
Land $2,985 $6,675
Buildings and improvements 21,160 32,871
------ ------
24,145 39,546
Accumulated depreciation (7,951) (13,714)
------- --------
$16,194 $25,832
======= =======
28
DIRECT FINANCING LEASES
The components of properties available for sale subject to direct financing
leases were as follows (in thousands):
1997 1996
- -------------------------------------------------------------- ------------------------- ------------------
Total minimum lease payments to be received $4,432 $ 5,900
Assumed residual values of leased property 2,389 2,404
Unearned income (688) (1,150)
----- -------
Investment in property subject to direct financing leases $6,133 $7,154
====== ======
Original cost of property subject to direct financing leases $16,276 $16,276
======= =======
Assumed residual values are based upon a depreciated cost concept using
estimated useful lives and thus do not contain an element of appreciation which
may result by reason of inflation or other factors.
Minimum lease payments receivable on direct financing leases become due as
follows: $1,468,000 in 1998, $1,468,000 in 1999, $1,299,000 in 2000 and $197,000
in 2001.
In fiscal 1997, the Company exercised an option to purchase a non-core retail
property containing 117,500 square feet of leasable space for an aggregate
purchase price of $2,430,000.
SALES OF PROPERTIES
In fiscal 1996, the Company sold three properties for a net gain on sales of
properties of $6,341,000.
In fiscal 1995 the Company sold four industrial properties for gains on sales of
properties of $7,567,000.
(5) INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
On November 22, 1996, the Company formed Countryside Square Limited Partnership
(the "Partnership") with certain shareholders of the Company. The purpose of the
partnership is to own, manage and redevelop the Countryside Square shopping
center in Clearwater, Florida. The Company, as the general partner, contributed
the shopping center at its net carrying amount (which amount approximated its
fair value of $13 million), and the limited partners, including Kimco Realty
Corp. who manages the property, contributed 600,000 common shares of the Company
to the Partnership. The partnership agreement provides for the limited partners
to receive an annual cash preference from available cash of the Partnership, as
defined. Upon liquidation, proceeds from the sale of the partnership assets are
to be distributed to the partners as follows: first, $12 million to the limited
partners, next, $25 million to the Company and the balance to the partners in
proportion to the respective partnership interests. The property may be sold at
any time after the third year of operation and the Company has a right of first
refusal on the sale of the property.
The partners are not obligated to make any additional capital contributions,
however, to the extent that there is a shortfall in cash available for
distributions, the general partner may elect to sell the common shares of the
Company held by the Partnership in an amount equal to the shortfall amount, or
contribute such shortfall amount to the Partnership.
The Company has accounted for its proportionate interest in the common shares of
the Company owned by the Partnership as a deemed purchase and retirement of 272,
727 common shares. Acccordingly, the Company has reduced its investment in
unconsolidated joint venture and stockholders' equity by $4,295,000.
Additionally, the Company's equity in earnings of the Partnership is reflected
after eliminating its proportionate share of dividend income recorded by the
partnership in connection with its interest in the common shares of the Company.
The contribution of the property into the Partnership and the deemed purchase of
common shares by the Company represent noncash investing and financing
activities and therefore are not included in the accompanying 1997 consolidated
statement of cash flows.
29
(6) MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable consist of fixed rate mortgages. The components of the
mortgage notes receivable at October 31, 1997 and 1996 were as follows (in
thousands):
1997 1996
- ----------------------------------------------------------- ---------- ---------
Remaining principal balance $4,532 $4,690
Unamortized discounts to reflect market interest rates
at time of acceptance of notes (927) (984)
----- -----
$3,605 $3,706
At October 31, 1997, principal payments on mortgage notes receivable become due
as follows: 1998 - $173,000; 1999 - $189,000; 2000 - $206,000; 2001 - $160,000;
2002 - $153,000; thereafter - $ 3,651,000.
At October 31, 1997, the remaining principal balance was related to mortgage
notes from two borrowers. The amount due from the largest individual borrower at
October 31, 1997 was $2,280,000. The contractual interest rates on mortgage
notes receivable range from 12% to 14%.
(7) MORTGAGE NOTES PAYABLE AND LINES OF CREDIT
At October 31, 1997, the Company had eight nonrecourse mortgage notes payable
totalling $43,687,000 ($39,798,000 at October 31, 1996) which are due in
installments over various terms extending to the year 2007 and which bear
interest at rates ranging from 7.5% to 9.75%. The mortgage notes payable are
collateralized by real estate investments having a net carrying value of $75.2
million as of October 31, 1997.
Scheduled principal payments during the next five years are as follows: 1998 - $
10,433,000; 1999 - $14,380,000; 2000 - $423,000; 2001 - $6,457,000; 2002 -
$7,392,000 and thereafter-- $4,602,000.
The Company also has available $15 million in unsecured lines of credit.
Extensions of credit under one of the lines of credit in the amount of $10
million is subject to the bank's satisfaction of certain conditions, including
the intended use of proceeds. The lines of credit expire in fiscal 1998 and bear
interest at rates tied to the prime rate or LIBOR. A condition for one of the
credit lines in the amount of $5 million requires the Company to maintain a
compensating balance of $525,000. The Company had no outstanding borrowings
under either line of credit at October 31, 1997 and 1996.
Interest paid for the years ended October 31, 1997, 1996, and 1995 was
$3,350,000, $4,945,000 and $5,304,000 respectively.
(8) STOCKHOLDERS' EQUITY
The Company has a stock option plan under which 424,145 common shares are
reserved for issuance to key employees and non-employee Directors of the
Company. Options are granted at fair market value on the date of the grant, have
a duration of ten years from the date of grant and are generally exercisable in
installments over a maximum period of four years from the date of grant.
30
A summary of stock option transactions during the periods covered by these
financial statements is as follows:
Year ended October, 31 1997 1996 1995
- ---------------------- ------------------------ ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
Balance at beginning of period 440,082 $ 14.36 376,248 $ 14.50 331,082 $ 15.43
Granted 6,000 $ 16.75 90,500 $ 14.66 81,500 $ 14.00
Exercised (29,520) $ 11.96 -- -- (6,668) $ 11.45
Canceled/Forfeited -- -- (26,666) $ 17.45 (29,666) $ 20.65
-------- --------- --------
Balance at end of period 416,562 $ 13.95 440,082 $ 14.36 376,248 $ 14.50
Exercisable 298,000 285,330 232,123
Weighted average fair value of
options granted during the year $2.39 $2.01 $1.29
At October 31, 1997, the exercise price of shares under option ranged from
$11.38 to $25.50, with a weighted average price of $13.95. Expiration dates
range from November 1997, through April 2007 and the weighted average remaining
contractual life of these options is 5.7 years.
The fair value for these options was estimated as of the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended October 31, 1997, 1996 and 1995:
Year ended October 31,
----------------------
1997 1996 1995
---- ---- ----
Risk-free interest rate 7.09% 7.15% 6.52%
Expected Dividend yield 7.6% 7.5% 8.3%
Expected Volatility 26.5% .25.7% 22.4%
Weighted average option life 10 years 10 years 10 years
The Black-Scholes option pricing model was developed for use in estimating the
fair market value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's stock option plan has characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the above stock option plan.
Stock appreciation rights may be issued in tandem with the stock options, in
which case, either the option or the right can be exercised. Such rights entitle
the grantee to payment in cash or a combination of common shares and cash equal
to the increase in the value of the shares covered by the option to which the
stock appreciation right is related. The plan limits the value of the stock
appreciation rights to 150% of the option price for the related shares. The
excess of the market price of the shares over the exercise price of vested
options is charged to expense. For the years ended October 31, 1997, 1996 and
1995, there were no amounts charged to expense.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123"). Accordingly, no compensation expense has been recognized for the options
described above. Had compensation cost for these options been determined based
on the fair value on the grant date consistent with the provisions of SFAS 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
31
Net Income Net Income
(in thousands) Per Share
- --------------------------------------- --------------------- ------------------
Year ending October 31, 1997 $8,575 $1.67
Year ending October 31, 1996 $10,089 $1.88
Year ending October 31, 1995 $3,759 $0.70
The Board of Directors adopted a Preferred Share Purchase Rights Plan in 1988
and declared a dividend distribution of one preferred share purchase right for
each outstanding common share. The Plan was amended in 1996 to increase the
beneficial ownership threshold which triggers the exercisability of the rights.
The rights, which expire on November 13, 1998, are not currently exercisable.
When they are exercisable, the holder will be entitled to purchase from the
Company one one-hundredth of a share of a newly-established Series A
Participating Preferred Stock at a price of $65 per one one-hundredth of a
preferred share, subject to certain adjustments. The rights will become
exercisable 10 days after a person or group either acquires 25% ("acquiring
person") or more of the Company's shares, or announces an offer the consummation
of which would result in such person or group owning 30% or more of the shares.
Following any such 25% acquisition, shareholders other than the acquiring person
will be entitled to use the rights to purchase common shares of the Company at
50% of market value.
If the Company is involved in a merger or other business combination at any time
after the rights become exercisable, the rights will be modified to entitle a
holder other than the acquiring person to purchase a number of shares of common
stock of the acquiring company having a market value of twice the exercise price
of each right.
In March, 1997, the stockholders of the Company approved a Restricted Stock Plan
providing for the grant of restricted stock awards to key employees of the
Company. The Plan allows for restricted stock awards of up to 250,000 common
shares of the Company. During 1997, the Company awarded 49,000 restricted shares
to certain key employees as an incentive for future services. The shares vest
over five years. Dividends are paid as declared. The market value of shares
awarded has been recorded as Unamortized restricted stock compensation and is
shown as a separate component of stockholder's equity. Unamortized restricted
stock compensation is being amortized to expense over the five year vesting
period. For the year ended October 31, 1997, $157,000 was charged to expense.
During fiscal 1997, certain officers exercised stock options and provides notes
to the Company. The notes, in the amount of $267,000 are full recourse
promissory notes bearing interest at the prime rate +1/2% and are collateralized
by the stock issued upon exercise of the stock options. Interest is payable
semi-annually and the principal is due in 2002. Such notes are shown in
Stockholders Equity in the accompanying balance sheet as Notes receivable from
officers/stockholders.
The Company maintains a 401(K) retirement plan covering substantially all
officers and employees which permits participants to defer up to a maximum of
10% of their compensation. The Company may make an annual contribution to the
plan as determined by the Board of Directors. For the years ended October 31,
1997, 1996 and 1995, the Company contributed $47,000, $58,000 and $46,000
respectively to the plan.
The Company's Board of Directors have authorized a program to purchase up to one
million of the Company's common shares periodically. The Company purchased and
retired 1,000 common shares is fiscal 1997 (40,700 common shares in 1996) under
this program.
(9) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management
using available market information and appropriate valuation methodologies.
Considerable judgement is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Cash and cash equivalents, rents receivable, interest receivable, accounts
payable and accrued expenses and other liabilities are carried at amounts which
reasonably approximate their fair values.
The estimated fair value of mortgage notes receivable collateralized by real
property is based on discounting the future cash flows at a year-end risk
adjusted lending rate that the Company would utilize for loans of
32
similar risk and duration. At October 31, 1997 and 1996, the estimated aggregate
fair value of the mortgage notes receivable was $3,400,000 and $3,900,000
respectively.
Mortgage notes payable with aggregate carrying values of $43,687,000 and
$39,798,000 have estimated aggregate fair values of $42,300,000 and $40,000,000
at October 31, 1997 and 1996 respectively. Estimated fair value is based on
discounting the future cash flows at a year-end risk adjusted lending rate
currently available to the Company for issuance of debt with similar terms and
remaining maturities.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and current
estimates of fair value may differ significantly from the amounts presented
herein.
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended October 31,
1997 and 1996 are as follows (in thousands, except per share data):
YEAR ENDED OCTOBER 31, 1997 Year Ended October 31, 1996
--------------------------- ---------------------------
QUARTER ENDED Quarter Ended
------------- -------------
JAN 31 APR 30 JULY 31 OCT 31 Jan 31 Apr 30 July 31 Oct 31
------ ------ ------- ------ ------ ------ ------- ------
Revenues $ 8,556 $ 5,165 $ 5,805 $ 5,301 $ 6,154 $ 6,076 $ 5,955 $ 6,247
======= ======= ======= ======= ======= ======= ======= =======
Operating Income (1) $ 4,364 $ 1,180 $ 1,821 $ 1,224 $ 778 $ 914 $ 1,053 $ 1,185
Gains (losses) on sales of
properties -- -- -- -- 6,252 -- 389 (300)
------- ------- ------- ------- ------- ------- ------- -------
Net Income $ 4,364 $ 1,180 $ 1,821 $ 1,224 $ 7,030 $ 914 $ 1,442 $ 885
======= ======= ======= ======= ======= ======= ======= =======
Per share:
Net Income $ .86 $ .23 $ .35 $ .23 $ 1.31 $ .17 $ .26 $ .17
======= ======= ======= ======= ======= ======= ======= =======
(1) Quarter ended January 31, 1997 results include a one-time amount of $3.25
million received in settlement of unpaid percentage rents from a tenant (see
Note 3).
(11) SUBSEQUENT EVENT
On January 8, 1998, the Company sold 350,000 shares of 8.99% Series B Senior
Cumulative Preferred Stock (Preferred Stock) at a price of $100 per share to
institutional investors in a private placement. Net proceeds of the offering of
approximately $33,700,000 are expected to be used to reduce outstanding
indebtedness and make acquisitions.
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of HRE Properties, Inc.:
We have audited the accompanying consolidated balance sheets of HRE Properties,
Inc. (formerly HRE Properties) (the "Company"), and subsidiary as of October 31,
1997 and 1996, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended October 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HRE Properties, Inc. and
subsidiary as of October 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the accompanying
index to financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 8, 1998
34
HRE PROPERTIES, INC.
OCTOBER 31 1997
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(In thousands)
- ------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D
- ------------------------------------------------------------------------------------------------
Initial Cost to Company Cost Capitalized Subsequent
-----------------------
to Aquisition
-------------
Depreciation and Building & Carrying Building &
Location Encumbrances Land Improvements Costs Improvements Land
- ------------------------------------------------------------------------------------------------
REAL ESTATE SUBJECT TO OPERATING LEASES (NOTE (A)):
OFFICE BUILDINGS:
Greenwich, CT $565 $199 $795 $0 $64 $199
Greenwich, CT 0 111 444 0 21 111
Southfield, MI 0 1,000 10,280 0 2,046 1,000
- ----- ------ - ----- -----
565 1,310 11,519 0 2,131 1,310
--- ----- ------ - ----- -----
SHOPPING CENTERS:
Springfield, MA 0 1,372 3,656 0 12,570 1,372
Farmingdale, NY 2,425 1,029 4,174 0 202 1,029
Somers, NY 1,983 821 2,600 0 30 821
Wayne, NJ 9,100 2,492 9,966 0 389 2,492
Eastchester, NY 5,000 1,500 6,128 0 0 1,500
Jonesboro, GA 0 0 2,430 0 0 0
Meriden, CT 14,364 5,000 20,309 0 553 5,000
Danbury, CT 5,861 3,850 15,811 0 994 3,850
Tempe, AZ 0 114 766 0 0 114
Carmel, NY 0 1,763 5,973 0 58 1,763
- ----- ----- - -- -----
38,733 17,941 71,813 0 14,796 17,941
------ ------ ------ - ------ ------
DEPARTMENT STORES:
Tempe, AZ 0 378 1,518 0 970 378
Mesa, AZ 0 440 1,631 0 989 440
- --- ----- - --- ---
0 818 3,149 0 1,959 818
- --- ----- - ----- ---
INDUSTRIAL SERVICE CENTER:
Syracuse, NY 0 253 530 0 0 253
- --- --- - - ---
0 253 530 0 0 253
- --- --- - - ---
MIXED USE FACILITY: RETAIL/OFFICE:
Newington, NH 4,389 421 1,997 0 4,595 421
----- --- ----- - ----- ---
4,389 421 1,997 0 4,595 421
----- --- ----- - ----- ---
LAND:
Newington, NH 0 305 0 0 0 305
Denver, CO 0 799 0 0 0 799
- --- - - - ---
0 1,104 0 0 0 1,104
- ----- - - - -----
$43,687 $21,847 $89,008 $0 $23,481 $21,847
======= ======= ======= == ======= =======
- --------------------------------------------------------------------------------------------------------------------------------
COL. A COL. E COL. F COL. G/H COL. I
- --------------------------------------------------------------------------------------------------------------------------------
Life on which
depreciation for
Amount at which Carried at Close of Period building and
------------------------------------------
Accumulated Date improvements in latest
Depreciation and Building & Depreciation Constructed income statement is
Location Improvements Land (Note (b)) Acquired computed (Note (d))
- --------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE SUBJECT TO OPERATING LEASES (NOTE (A)):
OFFICE BUILDINGS:
Greenwich, CT $859 $1,058 $106 1993 31.5
Greenwich, CT 465 576 50 1994 31.5
Southfield, MI 12,326 13,326 4,755 1983 35
------ ------ -----
13,650 14,960 4,911
------ ------ -----
SHOPPING CENTERS:
Springfield, MA 16,226 17,598 6,040 1970 40
Farmingdale, NY 4,376 5,405 600 1993 31.5
Somers, NY 2,630 3,451 397 1992 31
Wayne, NJ 10,355 12,847 1,347 1992 31
Eastchester, NY 6,128 7,628 0 1997 31
Jonesboro, GA 2,430 2,430 0 1997 31
Meriden, CT 20,862 25,862 2,613 1993 31.5
Danbury, CT 16,805 20,655 1,268 1994 31.5
Tempe, AZ 766 880 34 1996 40
Carmel, NY 6,031 7,794 320 1995 31.5
----- ----- ---
86,609 104,550 12,619
------ ------- ------
DEPARTMENT STORES:
Tempe, AZ 2,488 2,866 1,454 1970 40
Mesa, AZ 2,620 3,060 1,528 1971 40
----- ----- -----
5,108 5,926 2,982
----- ----- -----
INDUSTRIAL SERVICE CENTER:
Syracuse, NY 530 783 181 1973 40
--- --- ---
530 783 181
--- --- ---
MIXED USE FACILITY: RETAIL/OFFICE:
Newington, NH 6,592 7,013 2,960 1979 40
----- ----- -----
6,592 7,013 2,960
----- ----- -----
LAND:
Newington, NH 0 305 0 1981
Denver, CO 0 799 0 1988
- --- -
0 1,104 0
- ----- -
$112,489 $134,336 $23,653
======== ======== =======
35
HRE PROPERTIES, INC.
OCTOBER 31 1997
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
....................................... .......................... .............................
Remaining
Description and Building & Carrying Building & Minimum Lease Residual
Location Encumbrances Land Improvements Costs Improvements Payments Value
- ------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE SUBJECT TO FINANCING
LEASES (NOTE (C)):
INDUSTRIAL DISTRIBUTION CENTERS:
(Leased to Chrysler Corporation)
St. Louis, MO $0 $523 $2,253 $0 $2,363 $1,212 $1,167
Dallas, TX 0 193 2,266 0 4,195 1,868 841
Deferred Lease
Renewal Rights 0 0 0 0 282 0 282
- - - - --- - ---
0 716 4,519 0 6,840 3,080 2,290
- --- ----- - ----- ----- -----
INDUSTRIAL DISTRIBUTION CENTER:
(Leased to Firestone Tire and
Rubber Company)
Albany, GA 0 835 3,343 0 0 1,352 100
- --- ----- - - ----- ---
0 835 3,343 0 0 1,352 100
- --- ----- - - ----- ---
TOTAL REAL ESTATE SUBJECT TO
FINANCING LEASES (NOTE (c)): 0 $1,551 $7,862 0 $6,840 $4,432 $2,390
= ====== ====== = ====== ====== ======
- --------------------------------------------------------------------------------
COL. A COL. F COL. G/H
- --------------------------------------------------------------------------------
Net Investment
in Properties Date
Description and Subject to Constructed
Location Financing Leases or Acquired
- --------------------------------------------------------------------------------
REAL ESTATE SUBJECT TO FINANCING LEASES (NOTE (A)):
INDUSTRIAL DISTRIBUTION CENTERS:
(Leased to Chrysler Corporation)
St. Louis, MO $2,174 1970
Dallas, TX 2,434 1970
Deferred Lease
Renewal Rights 282 1981
---
4,890
-----
INDUSTRIAL DISTRIBUTION CENTER:
(Leased to Firestone Tire and Rubber
Company)
Albany, GA 1,243 1972
-----
1,243
-----
TOTAL REAL ESTATE SUBJECT TO FINANCING
LEASES (NOTE (c)): $6,133
======
36
HRE PROPERTIES, INC.
OCTOBER 31, 1997
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
(In thousands)
- ------------------------------------------------------------------------------------------------------------
NOTES: 1997 1996 1995
---- ---- ----
(A) RECONCILIATION OF REAL ESTATE
OWNED SUBJECT TO OPERATING LEASES
Balance at beginning of year 140,648 $ 154,005 $ 132,085
Property improvements during the year 2,673 5,263 1,816
Property acquired during the year 10,057 880 27,104
Writedown in carrying value of properties -- -- (7,000)
Property contributed to unconsolidated joint venture (19,042) 0 0
Property sold during the year 0 (19,500) --
--------- --------- ---------
Balance at end of year $ 134,336 $ 140,648 $ 154,005
========= ========= =========
(B) RECONCILIATION OF ACCUMULATED DEPRECIATION
Balance at beginning of year $ 26,536 $ 29,935 $ 26,173
Provision during the year charged to income 3,555 4,454 4,099
Property contributed to unconsolidated joint venture (6,438) 0 0
Property sold during the year 0 (7,853) (337)
--------- --------- ---------
0
Balance at end of year $ 23,653 $ 26,536 $ 29,935
========= ========= =========
(C) RECONCILIATION OF REAL ESTATE OWNED SUBJECT TO FINANCING LEASES
Balance at beginning of year $ 7,154 $ 8,108 $ 14,719
Recover of investment in property owned subject to financing leases
(1,021) (954) (1,355)
Property sold during the year -- -- (5,256)
--------- --------- ---------
Balance at end of year $ 6,133 $ 7,154 $ 8,108
========= ========= =========
(d) Tenant improvement costs are depreciated over the life of the related
leases, which range from 3 to 25 years.
(e) The difference between the initial costs to the Company and costs
capitalized subsequent to acquisition and the amount at which carried at
close of period represents accumulated depreciation for the period prior to
classification of these assets as financing leases and accumulated
recoveries for the period thereafter.
(f) The aggregate cost basis for Federal income tax purposes at October 31, 1997
is $145,994,000.
37
HRE PROPERTIES, INC.
OCTOBER 31 1997
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
(In thousands)
- --------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D
- --------------------------------------------------------------------------------------------------------------------
Interest Rate Final Maturity (a))
Description Coupon Effective Date Periodic Payment Terms
- --------------------------------------------------------------------------------------------------------------------
I. FIRST MORTGAGE LOANS ON BUSINESS PROPERTIES (NOTES (C) AND (D)):
Retail Store:
Fall River, MA 9% 14% 1-Apr-13 Payable in monthly installments of $11,920.
Retail Store:
Erie, PA 9% 14% 1-Jul-13 Payable in monthly installments of $10,787.
Retail Store:
Riverside, CA 9% 12% 15-Jan-13 Payable in quarterly installments of $54,313.
Total First Mortgage Loans
II. SECOND MORTGAGE LOAN ON BUSINESS PROPERTY (NOTES (C) AND (D)):
Retail Store:
Riverside, CA 9% 12% 15-Jan-01 Payable in quarterly installments of $21,135
TOTAL MORTGAGE LOANS ON REAL ESTATE
- --------------------------------------------------------------------------------
COL. A COL. E COL. F
- --------------------------------------------------------------------------------
Remaining Face
Amount of Carrying Amount
Mortgages (Note (b)) of Mortgage (Note (a))
Description (In Thousands) (In Thousands)
- --------------------------------------------------------------------------------
I. FIRST MORTGAGE LOANS ON BUSINESS PROPERTIES (NOTES (C) AND (D)):
Retail Store:
Fall River, MA $1,191 $902
Retail Store:
Erie, PA $1,089 $822
Retail Store:
Riverside, CA $2,017 $1,656
------ ------
Total First Mortgage Loans $4,297 $3,380
II. SECOND MORTGAGE LOAN ON BUSINESS
PROPERTY (NOTES (C) AND (D)):
Retail Store:
Riverside, CA $235 $225
---- ----
TOTAL MORTGAGE LOANS ON REAL ESTATE $4,532 $3,605
====== ======
38
HRE PROPERTIES, INC.
OCTOBER 31 1997
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
(In thousands)
NOTES TO SCHEDULE IV Year Ended October 31
---------------------
Reconciliation of Mortgage Loans on Real Estate
1997 1996 1995
---- ---- ----
(A) BALANCE AT BEGINNING OF PERIOD: $3,706 $3,937 $7,763
Deductions during current period:
Prepayment of Mortgage Loan --- (143) ---
Sale of Mortgage Loan --- --- (3,750)
Collections of principal and amortization of discounts (101) (88) (76)
Balance at close of period: $3,605 $3,706 $3,937
====== ====== ======
(b) The aggregate cost basis for Federal income tax purposes is equal to the
face amount of the mortgages
(c) At October 31, 1997 no mortgage loans were delinquent in payment of
currently due principal or interest.
(d) There are no prior liens for any of the Mortgage Loans on Real Estate.
(e) The First Mortgage Loan on this property is held by the Company.
39
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.
HRE PROPERTIES
By: /S/ Charles J. Urstadt
--------------------------
Charles J. Urstadt
Chairman and Chief Executive Officer
Dated: January 22, 1998
40
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/S/ Charles J. Urstadt January 22, 1998
- ----------------------
Charles J. Urstadt
Chairman and Director
(Principal Executive Officer)
/S/ Willing L. Biddle January 22, 1998
- ---------------------
Willing L. Biddle
President and Director
/S/ James R. Moore January 22, 1998
- ------------------
James R. Moore
Executive Vice President - Chief
Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
/S/ E. Virgil Conway January 22, 1998
- --------------------
E. Virgil Conway
Director
/S/ Robert R. Douglass January 22, 1998
- ----------------------
Robert R. Douglass
Director
/S/ Peter Herrick January 22, 1998
Peter Herrick
Director
/S/ George H.C. Lawrence January 22, 1998
- ------------------------
George H. C. Lawrence
Director
/S/ Paul D. Paganucci January 22, 1998
- ---------------------
Paul D. Paganucci
Director
/S/ Charles D. Urstadt January 22, 1998
- ----------------------
Charles D. Urstadt
Director
/S/ James O. York January 22, 1998
- -----------------
James O. York
Director
41
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 8, 1998 included in this Annual Report on Form 10-K for the
year ended October 31, 1997 of HRE Properties, Inc. (formerly HRE Properties)
into its previously filed Registration Statements on Form S-3 (No.33-57119),
Form S-4 (No. 333-19113) and Form S-8 (No.2-93146 and No. 33-41408), and to the
reference to our Firm under the caption "Experts" in said Registration
Statements.
ARTHUR ANDERSEN LLP
New York, New York
January 22, 1998