UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission File No. 001-13499
EQUITY ONE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
1696 N.E. Miami Gardens Drive
N. Miami Beach, Florida 33179
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(Address of Principal Executive Offices)
(305) 947-1664
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(Issuer's Telephone Number, Including Area Code)
Maryland 52-1794271
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
- --------------------------------------------------------------------------------
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Act of 1934 during the past 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
Applicable only to Corporate Issuers: As of the close of business on November 8,
2002, 34,513,618 shares of the Company's common stock, par value $0.01 per
share, were issued and outstanding.
EQUITY ONE, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements Page
-------
Condensed Consolidated Balance Sheets-
As of September 30, 2002 and December 31, 2001 (unaudited) ....... 1
Condensed Consolidated Statements of Operations-
For the three-month and nine-month periods ended
September 30, 2002 and 2001 (unaudited) .......................... 3
Condensed Consolidated Statements of Comprehensive Income-
For the three-month and nine-month periods ended
September 30, 2002 and 2001 (unaudited) .......................... 5
Condensed Consolidated Statements of Stockholders' Equity-
For the nine-month period ended September 30, 2002 (unaudited) ... 6
Condensed Consolidated Statements of Cash Flows-
For the nine-month periods ended September 30, 2002 and 2001
(unaudited) ...................................................... 7
Notes to the Condensed Consolidated Financial Statements
(unaudited) ................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risks ...... 29
Item 4. Controls and Procedures .......................................... 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 30
Item 2. Changes in Securities and Use of Proceeds ........................ 30
Item 3. Defaults upon Senior Securities .................................. 30
Item 4. Submission of Matters to a Vote of Security Holders .............. 30
Item 5. Other Information ................................................ 30
Item 6. Exhibits and Reports on Form 8-K ................................. 30
Signatures ................................................................ 31
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- ---------------
ASSETS
RENTAL PROPERTY:
Land, buildings and equipment................................................ $ 646,215 $ 605,820
Building improvements........................................................ 20,098 17,513
Land held for development.................................................... 28,974 23,420
Construction in progress..................................................... 8,491 5,416
-------------- -------------
703,778 652,169
Less: accumulated depreciation............................................... (37,445) (28,031)
Property held for sale....................................................... 5,444 3,549
-------------- -------------
Rental property, net............................................................ 671,777 627,687
CASH AND CASH EQUIVALENTS....................................................... 1,410 906
CASH HELD IN ESCROW ............................................................ - 1,715
SECURITIES AVAILABLE FOR SALE................................................... 1,066 1,681
ACCOUNTS AND OTHER RECEIVABLES, NET............................................. 4,828 5,564
NOTES RECEIVABLE................................................................ 12,841 9,697
DEPOSITS........................................................................ 9,965 6,219
INVESTMENTS IN JOINT VENTURES................................................... 7,548 7,742
DEFERRED EXPENSES, NET.......................................................... 4,974 3,883
GOODWILL, NET................................................................... 2,276 1,281
OTHER ASSETS.................................................................... 1,883 2,161
-------------- -------------
TOTAL........................................................................... $ 718,568 $ 668,536
============== =============
(Continued)
1
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE
Mortgage notes payable............................................... $ 307,713 $ 345,047
Revolving credit facilities.......................................... 36,507 27,409
--------------- -------------
Total notes payable................................................ 344,220 372,456
OTHER LIABILITIES
Accounts payable and accrued expenses................................ 16,168 8,987
Tenants' security deposits........................................... 4,293 4,090
Minority interest in equity of consolidated subsidiaries............. 3,869 3,869
Other liabilities.................................................... 368 867
--------------- -------------
Total liabilities.................................................. 368,918 390,269
--------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value - 10,000 shares authorized but
unissued.............................................................
Common stock, $0.01 par value - 100,000 shares authorized, 34,375
and 28,781 shares issued and outstanding for 2002 and 2001,
respectively....................................................... 344 288
Additional paid-in capital........................................... 353,436 283,619
Retained earnings.................................................... 8,007 1,808
Accumulated other comprehensive loss................................. (25) (34)
Unamortized restricted stock compensation............................ (5,000) (1,836)
Notes receivable from issuance of common stock....................... (7,112) (5,578)
--------------- -------------
Total stockholders' equity......................................... 349,650 278,267
--------------- -------------
TOTAL.................................................................. $ 718,568 $ 668,536
=============== =============
(Concluded)
See accompanying notes to the condensed consolidated financial
statements.
2
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- -------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- ----------------------------------
2002 2001 2002 2001
------------------- --------------- --------------- ---------------
RENTAL INCOME:
Minimum rents................................. $ 19,632 $ 14,536 55,833 $ 41,104
Expense recoveries............................ 5,590 4,159 16,824 12,151
Percentage rent payments...................... 112 150 1,327 928
------------------- --------------- --------------- ---------------
Total rental income......................... 25,334 18,845 73,984 54,183
MANAGEMENT FEES.................................. 48 243 183 799
INVESTMENT INCOME................................ 451 475 1,256 1,443
------------------- --------------- --------------- ---------------
Total revenues.............................. 25,833 19,563 75,423 56,425
------------------- --------------- --------------- ---------------
COSTS AND EXPENSES:
Property operating expenses................... 7,462 5,909 21,800 16,567
Interest and amortization of deferred
financing fees.............................. 5,369 5,337 17,178 16,101
Rental property depreciation and amortization. 3,484 2,635 10,109 7,657
General and administrative expenses........... 1,441 912 5,011 2,454
------------------- --------------- --------------- ---------------
Total costs and expenses.................... 17,756 14,793 54,098 42,779
------------------- --------------- --------------- ---------------
INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURES,
GAIN ON EXTINGUISH-MENT OF DEBT, LOSS ON SALE
OF REAL ESTATE, MINORITY INTEREST IN EARNINGS
OF CONSOLIDATED SUBSIDIARY, INCOME TAXES,
MINORITY INTEREST IN CEFUS AND DISCONTINUED
OPERATIONS.................................... 8,077 4,770 21,325 13,646
EQUITY IN INCOME OF JOINT VENTURES............... 126 155 436 454
GAIN ON EXTINGUISHMENT OF DEBT................... 1,520 - 1,520 -
LOSS ON SALE OF REAL ESTATE...................... - (609) - (609)
MINORITY INTEREST IN EARNINGS OF CONSOLIDATED
SUBSIDIARY.................................... (25) (25) (76) (74)
------------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST IN
CEFUS AND DISCONTINUED
OPERATIONS.................................... 9,698 4,291 23,205 13,417
------------------- --------------- --------------- ---------------
INCOME TAX BENEFIT
Current....................................... - 407 - 593
Deferred...................................... - 1,853 - 374
------------------- --------------- --------------- ---------------
Total income tax benefit ................... - 2,260 - 967
------------------- --------------- --------------- ---------------
INCOME BEFORE MINORITY INTEREST IN CEFUS AND
DISCONTINUED OPERATIONS....................... 9,698 6,551 23,205 14,384
MINORITY INTEREST IN CEFUS....................... - (896) - (1,627)
------------------- --------------- --------------- ---------------
INCOME FROM CONTINUING OPERATIONS................ 9,698 5,655 23,205 12,757
------------------- --------------- --------------- ---------------
(Continued
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- -------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
DISCONTINUED OPERATIONS
Income from rental properties sold or held for
sale........................................ 137 171 1,232 868
Gain on disposal of real estate............... 1,091 - 8,194 -
--------------- --------------- -------------- --------------
Total income from discontinued operations... 1,228 171 9,426 868
--------------- --------------- -------------- --------------
NET INCOME....................................... $ 10,926 $ 5,826 $ 32,631 $ 13,625
=============== =============== ============== ==============
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE
Income from continuing operations............. $ 0.28 $ 0.26 $ 0.72 $ 0.63
Income from discontinued operations........... 0.04 0.01 0.29 0.04
--------------- --------------- -------------- --------------
Total basic earnings per share.............. $ 0.32 $ 0.27 $ 1.01 $ 0.67
=============== =============== ============== ==============
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE...................... 33,926 21,304 32,195 20,343
=============== =============== ============== ==============
DILUTED EARNINGS PER SHARE
$ 0.63
Income from continuing operations.............. $ 0.28 $ 0.26 $ 0.71 0.62
Income from discontinued operations............ 0.04 0.01 0.29 0.04
--------------- --------------- -------------- --------------
Total diluted earnings per share............ $ 0.32 $ 0.27 $ 1.00 $ 0.66
=============== ============== ============== ==============
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE.................... 34,785 21,948 32,956 20,941
=============== ============== ============== ==============
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
4
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income...................................... $ 10,926 $ 5,826 $ 32,631 $ 13,625
Other comprehensive income:
Net unrealized holding (loss) gain on
securities available for sale.............. (19) (35) 9 200
---------- ---------- ---------- ----------
Comprehensive income............................. $ 10,907 $ 5,791 $ 32,640 $ 13,825
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- --------------------------------------------------------------------------------
Notes
Un- Receivable
Accu- amortized From
mulated Other Restricted Issuance Total
Comprehen- Stock of Stock-
Common Paid-in Retained sive (Loss)/ Com- Common Holders'
Stock Capital Earnings Income pensation Stock Equity
------ ---------- --------- -------------- ---------- --------- ---------
Balance, January 1, 2002 .. $ 288 $ 283,619 $ 1,808 $ (34) $ (1,836) $ (5,578) $278,267
Issuance of common stock .. 56 71,206 - - (3,164) (1,534) 66,564
Stock issuance costs ...... - (1,389) - - - - (1,389)
Net income ................ - - 32,631 - - - 32,631
Net unrealized holding .... -
gain on securities
available for sale ..... - - - 9 - - 9
Dividends paid ............ - - (26,432) - - - (26,432)
------ --------- --------- --------- --------- --------- --------
Balance, September 30,
2002 ................... $ 344 $ 353,436 $ 8,007 $ (25) $ (5,000) $ (7,112) $349,650
====== ========= ========= ========= ========= ========= ========
See accompanying notes to the condensed consolidated financial statements.
6
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
2002 2001
------------------ -----------------
OPERATING ACTIVITIES:
Net income .................................................................. $ 32,631 $ 13,625
Adjustments to reconcile net income to net cash provided by
operating activities:
Rental property depreciation and amortization ......................... 10,333 7,235
Amortization of deferred financing fees ............................... 582 887
Provision for losses on accounts receivable ........................... (258) 160
(Gain) loss on disposal of real estate ................................ (8,194) 609
Gain on securities available for sale ................................. (13) -
Gain on debt extinguishment ........................................... (1,520) -
Equity in income of joint ventures .................................... (436) (454)
Minority interest in earnings of consolidated subsidiary .............. 76 74
Minority interest in CEFUS ............................................ - 1,627
Deferred income tax benefit ........................................... - (374)
Changes in assets and liabilities:
Accounts and other receivables ........................................ 676 (1,915)
Deposits .............................................................. (3,646) (1,414)
Other assets .......................................................... (993) (2,106)
Accounts payable and accrued expenses ................................. 6,880 (752)
Tenants' security deposits ............................................ 203 279
Other liabilities ..................................................... (400) (518)
-------- --------
Net cash provided by operating activities ........................... 35,921 16,963
-------- --------
INVESTING ACTIVITIES:
Additions to and purchase of rental property ................................ (68,706) (10,389)
Proceeds from disposal of rental property ................................... 19,468 20,695
Sale (purchase) of securities available for sale ............................ 637 (1)
Cash held in escrow ......................................................... 1,715 (8,070)
Repayments of notes receivable .............................................. 669 -
Distributions received from joint ventures .................................. 630 55
Cash acquired in acquisitions ............................................... - 51
Due from/to affiliated entities ............................................ - 1,614
Cash used in the purchase of UIRT ........................................... - (32,876)
-------- --------
Net cash used in investing activities ............................... (45,587) (28,921)
-------- --------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable ........................................ (41,911) (17,904)
Borrowings under mortgage notes payable ..................................... 6,097 4,700
Net borrowings under revolving credit facilities ............................ 9,098 15,844
Restricted cash ............................................................. - 4,273
Deferred financing costs .................................................... (1,102) -
Due to affiliates ........................................................... - (2,111)
Stock subscription and issuance of common stock ............................. 65,828 21,207
Stock issuance costs ........................................................ (1,332) (1,231)
Cash dividends paid to stockholders ......................................... (26,432) (10,850)
Distributions to minority interest .......................................... (76) (80)
-------- --------
Net cash provided by financing activities .......................... 10,170 13,848
-------- --------
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2002 2001
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......................................$ 504 $ 1,890
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 906 2,347
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................$ 1,410 $ 4,237
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized..........................$ 17,241 $ 15,102
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gain on securities available for sale................$ 9 $ 200
============= =============
Issuance of restricted stock..............................................$ 3,900 $ 1,346
============= =============
Common stock issued for notes receivable..................................$ 1,534 $ 5,033
============= =============
Notes receivable from sale of property....................................$ 3,900
=============
The Company acquired all of the capital stock of UIRT for $67,824,
including transaction cost:
Fair value of assets acquired...................................................... $ 147,691
Liabilities assumed................................................................ (83,337)
Common stock issued................................................................ (31,478)
-------------
Cash paid for capital stock........................................................ $ 32,876
=============
(Concluded)
8
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
(In Thousands, Except Per Share and Square Feet Amounts)
- --------------------------------------------------------------------------------
1. Organization
Equity One, Inc., along with its related subsidiaries and joint ventures
(collectively, the "Company"), was formed in 1992 for the purpose of holding
various real estate investments. The Company operates as a fully integrated,
self-managed, real estate investment trust ("REIT").
As of September 30, 2002, the Company owned a total of 88 properties,
primarily located in metropolitan areas of Florida and Texas, encompassing 56
supermarket-anchored shopping centers, eight drug store-anchored shopping
centers, 18 other retail-anchored shopping centers, three commercial properties,
and three retail developments, as well as interests in four joint ventures which
own and operate commercial real estate properties.
On September 20, 2001, the Company completed the acquisition of Centrefund
Realty (U.S.) Corporation ("CEFUS") from First Capital Realty Inc., formerly
known as Centrefund Realty Corporation, for approximately $281,000 (including
assumed debt). As provided for in the stock exchange agreement, the Company
issued 10,500 shares of its common stock to subsidiaries of First Capital Realty
Inc. and assumed approximately $149,021 of CEFUS's outstanding debt. The
acquisition of CEFUS was partially accounted for on a "push-down" basis and
partially in a manner similar to a pooling of interests, due to the acquisition
by Gazit Globe (1982) Ltd., the Company's majority shareholder, of a 68.07%
controlling interest in Centrefund Realty Corporation on August 18, 2000.
The Company's results for the three-month and nine-month periods ended
September 30, 2001 have been restated to incorporate the results of CEFUS for
the period of January 1, 2001 to September 19, 2001. The restatement
consolidates the operations of Equity One and CEFUS from January 1, 2001 to
September 19, 2001, subject to a 31.93% minority interest in CEFUS (the "CEFUS
Accounting Treatment"). During the period from January 1, 2001 to September 19,
2001, CEFUS operated under the control of Centrefund Realty Corporation as a
C-corporation and recorded current and deferred income taxes in connection with
its operations. These taxes are reflected on the Company's financial statements
by way of the CEFUS Accounting Treatment. Effective September 20, 2001, the
Company no longer recorded any provision for income taxes consistent with its
acquisition of 100% of CEFUS, and the operation of CEFUS as a qualified REIT
subsidiary. In addition, with the Company's September 20, 2001 acquisition of
100% of CEFUS, the Company eliminated the 31.93% minority interest in CEFUS, and
recorded the issuance of 10,500 shares of its common stock.
9
The effect of the CEFUS Accounting Treatment on the condensed consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 2001 is as follows:
Nine Months
Ended
Three Months Ended September 30,
September 30, 2001 2001
------------------ ------------------
REVENUES:
Equity One...................... $ 11,725 $ 30,666
CEFUS .......................... 7,838 25,759
------------------ ------------------
Total revenues ..................... $ 19,563 $ 56,425
================== ==================
NET INCOME:
Equity One ..................... $ 3,916 $ 10,157
CEFUS .......................... 1,910 3,468
------------------ ------------------
Total net income.................... $ 5,826 $ 13,625
================== ==================
On September 21, 2001, the Company completed the acquisition of United
Investors Realty Trust ("UIRT"), a Texas-based REIT, for approximately $147,691
(including assumed debt). As a result of the transaction with UIRT, the Company
issued 2,896 shares of its common stock and paid $32,876 in cash consideration
to former UIRT shareholders and assumed approximately $79,867 of UIRT's
outstanding debt. The acquisition of UIRT was accounted for using the purchase
method and the results of UIRT are included in the Company's financial
statements from the date of its acquisition.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company's management in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X of the U.S. Securities and Exchange Commission (the "SEC").
Accordingly, these unaudited condensed consolidated financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. The results of operations for the
three-month and nine-month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the full year. These
unaudited condensed consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in this Form 10-Q and the Company's audited
financial statements and related footnotes, included in the Company's 2001
Annual Report on Form 10-K/A filed with the SEC on March 18, 2002.
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
All significant intercompany transactions and balances have been eliminated
in consolidation.
Certain amounts as previously reported have been reclassified to conform to
the current period's presentation.
10
3. Rental Property
Income producing property is stated at cost and includes all costs related
to acquisition, development and construction, including tenant improvements,
interest incurred during development, costs of pre-development and certain
direct and indirect costs of development. Costs incurred during the
predevelopment stage are capitalized once management has identified a site,
determined that the project is feasible and it is probable that the Company is
able to proceed with the project. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Significant renovations
and improvements, which improve or extend the useful life of assets, are
capitalized.
Income producing properties are individually evaluated for impairment when
various conditions exist that may indicate that it is probable that the sum of
expected future cash flows (on an undiscounted basis) from a property are less
than its historical net cost basis. Upon determination that a permanent
impairment has occurred, the Company records an impairment charge equal to the
excess of historical cost basis over fair value. In addition, the Company writes
off costs related to predevelopment projects when it determines that it will no
longer pursue the project.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
Buildings 30-40 years
Building improvements 5-20 years
Tenant Improvements Over the terms of the related lease
Equipment 5-7 years
Total interest expense capitalized to land held for development and
construction in progress was $576 and $346 for the three months ended September
30, 2002 and 2001, respectively, and $1,755 and $1,040 for the nine months ended
September 30, 2002 and 2001, respectively.
4. Property Held for Sale
As of September 30, 2002, one rental retail property and one land parcel
were classified as property held for sale. These properties have an aggregate
gross leasable area of 107 square feet and an aggregate book value of $5,444,
net of accumulated depreciation of $101.
As of December 31, 2001, one rental retail property and one office building
were classified as property held for sale. These properties had an aggregate
gross leasable area of 276 square feet and an aggregate book value of $3,549,
net of accumulated depreciation of $287.
5. Investments in Joint Ventures
A summary of the Company's investments in joint ventures at September 30,
2002 and December 31, 2001 is as follows (all investments in unconsolidated
entities are accounted for under the equity method):
September 30, December 31,
Entity Location Ownership 2002 2001
- -------------------------------- ------------------------- -------------- ---------------- ---------------
PG Partners Palm Beach Gardens, FL 50.0% $ 2,853 $ 2,937
Parcel F, LLC Palm Beach Gardens, FL 50.0% 228 228
Oaksquare JV Gainesville, FL 50.0% 1,331 1,452
CDG (Park Place) LLC Plano, TX 50.1% 3,136 3,125
---------------- ---------------
Investments in joint ventures $ 7,548 $ 7,742
================ ===============
11
A summary of unaudited financial information for all joint ventures being
reported on the equity method of accounting is as follows:
As of As of
September 30, December 31,
2002 2001
-------------- --------------
Assets:
Rental properties, net........... $ 47,649 $ 47,771
Cash and cash equivalents........ 687 368
Other assets..................... 991 888
-------------- -------------
Total assets..................... $ 49,327 $ 49,027
============== =============
Liabilities and Ventures' Equity:
Mortgage notes................... $ 44,695 $ 43,816
Other liabilities................ 679 1,018
Ventures' equity................. 3,953 4,193
-------------- -------------
Total ........................... $ 49,327 $ 49,027
============== =============
The Company's investments in joint ventures, as reported on the condensed
consolidated balance sheets, differ from its proportionate share of the joint
ventures' underlying net assets due to basis differentials. This basis
differential of approximately $5,000 as of September 30, 2002 and December 31,
2001 is being depreciated over the useful lives of the related assets.
As of September 30, 2002, the Company has guaranteed the mortgage note
payable of $15,000 for one of its joint ventures.
Three months Ended Nine months Ended
September 30, September 30,
--------------------- ------------------
2002 2001 2002 2001
-------- ------- ------- -------
Revenues:
Rental revenues ......................... $ 1,793 $1,446 $5,376 $4,713
Other revenues .......................... (24) 35 10 124
------- ------ ------ ------
Total revenues ........................ 1,769 1,481 5,386 4,837
------- ------ ------ ------
Expenses:
Operating expenses ...................... 425 301 1,250 1,088
Interest expense ........................ 733 759 2,207 2,406
Depreciation ............................ 304 77 931 247
Other expense ........................... 55 34 126 187
------- ------ ------ ------
Total expense ......................... 1,517 1,171 4,514 3,928
------- ------ ------ ------
Net Income .................................. $ 252 $ 310 $ 872 $ 909
======= ====== ====== ======
The Company's equity in income of joint ..... $ 126 $ 155 $ 436 $ 454
ventures ======= ====== ====== ======
Significant accounting policies used by the unconsolidated joint ventures
are similar to those used by the Company.
12
6. Borrowings
Each of the existing mortgage loans is secured by a mortgage on one or more
of certain of the Company's properties. Certain of the mortgage loans involving
an aggregate principal balance of approximately $59,000, contain prohibitions on
transfers of ownership which may have been violated by the Company's previous
issuances of common stock or in connection with past acquisitions and may be
violated by transactions involving the Company's capital stock in the future. If
a violation were established, it could serve as a basis for a lender to
accelerate amounts due under the affected mortgage. To date, no lender has
notified the Company that it intends to accelerate its mortgage. Nevertheless,
the Company is in the process of obtaining the necessary consents from the
lenders. Based on discussions with various lenders, current credit market
conditions and other factors, the Company believes that such consents will be
obtained or that the mortgages will not be accelerated. Accordingly, the Company
believes that the ultimate outcome of this matter will not have a material
adverse impact on the Company's results of operations or financial condition.
7. Stockholders' Equity and Earnings Per Share
The following table reflects the change in number of shares of common stock
outstanding for the nine months ended September 30, 2002:
Common Options
Stock Exercised Total
----------- ----------- ----------
Board of Directors/Corporate Secretary........ 13 * 5 18
Officers...................................... 253 * 161 414
Employees..................................... 7 * 8 15
Security offerings........................... 4,138 4,138
Dividend Reinvestment Plan 1,009 1,009
----------- ----------- ----------
Total...................................... 5,420 174 5,594
=========== =========== ==========
* Reflects shares of "restricted stock" which are subject to forfeiture and
vest over a period of two to five years.
The following table sets forth the computation of basic and diluted shares
used in computing earnings per share for the three-month and nine-month periods
ended September 30, 2002 and 2001:
Three months Ended Nine months Ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
-------- ------- ------- -------
Denominator for basic earnings per share - weighted
average shares ................................... 33,926 21,304 32,195 20,343
Walden Woods Village, Ltd............................ 94 94 94 94
Unvested restricted stock ........................... 389 210 268 184
Convertible partnership units ....................... 262 262 262 262
Stock options (using treasury method)................ 114 78 137 58
-------- ------- ------- -------
Subtotal.......................................... 859 644 761 598
-------- ------- ------- -------
Denominator for diluted earnings per share - weighted
average shares.................................... 34,785 21,948 32,956 20,941
======== ======= ======= =======
For the three-month and nine-month periods ended September 30, 2001, basic
and diluted earnings per share have been adjusted so that the weighted average
number of shares used in those calculations include the effect of the assumed
issuance on August 18, 2000 of 68.07% of the 10,500 shares which were issued in
connection with the CEFUS acquisition on September 20, 2001. This adjustment is
in accordance with the CEFUS Accounting
13
Treatment described in Note 1 and has the effect of increasing the number of
basic and diluted weighted average shares by 6,370 and 6,886 shares for the
three-month and nine-month periods ended September 30, 2001, respectively.
8. Accounting for Stock Options
The Company applies the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in measuring stock-based compensation, including
options. Accordingly, no compensation expense has been recognized for options
granted under the Company's compensation plan as no grants were made at less
than market value. Had compensation expense been determined based upon the fair
value at the grant date for awards under the Plan consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share on a pro forma basis would have been:
Three months Ended Nine months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Income As reported........ $ 10,926 $ 5,826 $ 32,631 $ 13,625
Pro forma.......... 10,507 5,758 32,074 13,420
Basic earnings per share As reported........ $ 0.32 $ 0.27 $ 1.01 $ 0.67
Pro forma.......... 0.31 0.27 1.00 0.66
Diluted earnings per share As reported........ $ 0.32 $ 0.27 $ 1.00 $ 0.66
Pro forma.......... 0.30 0.27 0.98 0.65
9. Loans to Executives
As of September 30, 2002, the Company has loaned $7,112 to various
executives in connection with their exercise of options to purchase shares of
the Company's common stock. The notes bear interest at rates ranging from 5% to
6.35%. Interest only is payable quarterly and the principal is due between 2006
and 2009.
10. Minority Interest
On January 1, 1999, a wholly owned subsidiary of the Company, Equity One
(Walden Woods) Inc. (the "Walden Woods General Partner"), entered into a limited
partnership as a general partner. An income producing shopping center was
contributed by its owners (the "Walden Woods Minority Partners"), and the Walden
Woods General Partner contributed 93.656 shares of Company common stock to the
limited partnership at an agreed-upon price of $10.30 per share. Based on this
per share price and the net asset value of the property contributed by the
Walden Woods Minority Partners, each of the partners received 93.656 limited
partnership units. The Company and the Walden Woods Minority Partners have
entered into an agreement (the "Redemption Agreement") whereby the Walden Woods
Minority Partners can request that the Company purchase either their limited
partnership units or any shares of Company common stock which they have received
in exchange for their limited partnership units at a price of $10.30 per unit or
per share no earlier than two years, nor later than fifteen years, after the
exchange date of January 1, 1999. As a result of the Redemption Agreement, the
minority interest has been presented as a liability. In addition, under the
terms of the limited partnership agreement, the Walden Woods Minority Partners
do not have an interest in the common stock of the Company except to the extent
of dividends declared on such common stock. Accordingly, a preference in
earnings has been allocated to the Walden Woods Minority Partners to the extent
of the dividends declared. The 93.656 shares of common stock of the Company held
by the consolidated limited partnership are not considered outstanding in the
calculation of basic earning per share.
On December 5, 2000, a wholly owned subsidiary of the Company, Equity One
(North Port) Inc., entered into a limited partnership (the "Shoppes of North
Port, Ltd.") as a general partner. An income producing shopping center was
contributed by its owners (the "North Port Minority Partners") and the Company
contributed an income producing property to a limited liability company wholly
owned by the Shoppes of North Port, Ltd. Both the North
14
Port Minority Partners and the general partner were issued 261.850 operating
partnership units ("OPUs") based on the net value of the properties contributed.
The North Port Minority Partners can redeem their OPUs for the Company's common
stock on a one-for-one basis or for cash at an agreed upon price of $11.00 per
share no earlier than December 10, 2001, nor later than three and one half years
thereafter. Accordingly, the minority interest has been presented as a liability
in the accompanying condensed consolidated balance sheets. The North Port
Minority Partners receive a preferred quarterly distribution equal to a 9.0%
annual return on their initial capital contribution. This amount is reflected as
interest expense in the condensed consolidated financial statements.
For the period from August 18, 2000 until the closing of the acquisition of
CEFUS on September 20, 2001, the Company recorded the 31.93% minority interest
in CEFUS described in Note 1 to reflect the 31.93% of CEFUS that Gazit-Globe
(1982) Ltd., the Company's majority shareholder, did not own in Centrefund
Realty Corporation, the then 100% owner of CEFUS. On September 20, 2001, the
31.93% minority interest in CEFUS was eliminated by virtue of the Company's
acquisition of 100% of CEFUS.
11. Dispositions
The Company has adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective January 1, 2002, and has included the
operations of properties sold and held for sale, as well as the gain on sale of
sold properties, as discontinued operations for all periods presented. The
Company expects to reclassify historical operating results whenever necessary in
order to comply with the requirements of SFAS No. 144.
The following table reflects properties being reported in discontinued
operations for the three-month and nine-month periods ended September 30, 2002
and 2001:
Gross Sales Price
-------------------
Square Feet/ Under
Property Location Date Sold Acres (ac) Sold Contract
--------------- ----------------- ---------- ------------ -------- --------
Equity One Office Miami Beach, FL February 28,780 $ 6,050
Olive land Miami, FL February 6.79ac 1,900
Benbrook Fort Worth, TX February 247,422 2,590
Monclair apartments Miami Beach, FL June 9,375 2,450
Shops of Westbury Miami, FL July 33,706 5,200
Forest Edge Orlando, FL July 68,631 3,475
Northwest Crossing Dallas, TX September 33,366 2,350
Mariners outparcel Spring Hill, FL -- .6ac $ 500
McMinn Plaza Athens, TN -- 107,200 6,000
--------- -------
$24,015 $ 6,500
========= =======
12. Acquisitions
The following table reflects properties acquired since January 1, 2002:
Square Feet/
Property Location Date Purchased Acres (ac) Purchase Price
--------------- ----------------- -------------- ------------ -------------
Eckerds Melbourne, FL February 10,908 $ 2,479
Eckerds Leesburg, FL February 12,739 3,677
Coral Way S.E. Miami, FL February 8.5ac 2,000
Olive land Miami, FL February 6.79ac 1,000
Homestead retail land Homestead, FL May 12.1ac 1,800
Blanco Village San Antonio, TX May 108,325 18,800
Meadows Miami, FL May 75,524 8,925
Salerno Village Stuart, FL May 58,804 2,600
Eastwood Orlando, FL June 69,037 8,630
Shoppes of Ibis West Palm Beach, FL July 79,420 9,250
-------------
$ 59,161
=============
15
13. Debt Extinguishment
The Company settled an outstanding mortgage note payable at less than face
value in July 2002. The Company has adopted SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, and is reporting the $1.5 million gain on extinguishment of debt as
part of ordinary income as it no longer meets the criteria for extraordinary
gain (loss) accounting treatment.
14. New Accounting Pronouncements and Changes
In June 2001, FASB approved the issuance of SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These
standards established accounting and reporting for business combinations. SFAS
No. 141 requires all business combinations entered into subsequent to June 30,
2001 to be accounted for using the purchase method of accounting. SFAS No. 142
provides that goodwill and other intangible assets with indefinite lives will
not be amortized, but will be tested for impairment at least annually. The
Company adopted SFAS No. 142 on January 1, 2002 and no longer amortizes
goodwill. The Company has performed a transitional impairment test of the
goodwill and other intangible assets as of January 1, 2002 and has determined
that the assets are not impaired. For the three-month and nine-month periods
ended September 30, 2001, goodwill amortization was $18 and $53, respectively.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes, but does not replace, SFAS No.
121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of, as
well as other earlier related pronouncements, either in whole or in part. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years, although
earlier application is encouraged. The Company has adopted SFAS No. 144
effective January 1, 2002 and has reflected the operations of property held for
sale and disposed of properties as discontinued operations, along with any gain
on dispositions.
In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
which rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also
rescinds FASB Statement No. 44, Accounting for Intangible Assets or Motor
Carriers, and amends FASB Statement No. 13, Accounting for Leases. Finally SFAS
No. 145 amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions related to the rescission of FASB Statement
No. 4 and its amendment Statement No. 64 are effective for fiscal years
beginning after May 15, 2002. The Company has adopted SFAS No. 145 and has
reflected gains (loses) from extinguishment of debt as part of ordinary income.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of this Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company has not yet completed its evaluation of the impact of
adopting this Statement.
Effective January 1, 2002, the Company commenced capitalizing internal
leasing costs in accordance with SFAS No. 91, Nonrefundable Fees & Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases. The leasing costs are capitalized as deferred expenses and are being
amortized over the terms of the leases.
15. Commitments and Contingencies
As of September 30, 2002, the Company has pledged letters of credit
totaling $1,128 as additional security for certain financings and other
activities.
16
The Company is subject to litigation in the normal course of business, none
of which in the opinion of management will have a material adverse effect on the
financial condition or results of operations of the Company.
16. Subsequent Events
The Company has entered into separate mortgage notes payable secured by
three properties for an aggregate borrowing of $18,425. The properties were
previously unencumbered.
The Company has entered into an agreement to purchase a retail center,
comprising 333,000 square feet, located in the City of Delray Beach, Florida for
$52,770, which, subject to customary conditions precedent, is expected to close
in December 2002. In connection with the proposed acquisition, the Company
anticipates entering into a 5.28% fixed rate mortgage financing of $36,000 for
which it has obtained a commitment.
The Company has entered into an agreement to purchase a retail center,
comprising 89,000 square feet, located in Houston, Texas for $10,325, which
subject to customary conditions precedent, is expected to close in December
2002. In connection with the proposed acquisition, the Company anticipates
entering into a 5.07% fixed rate mortgage financing of $7,425 for which it has
obtained a commitment.
In November 2002, the Company completed the sale of the McMinn Plaza retail
center located in Athens, Tennessee.
On October 28, 2002, the Company and IRT Property Company ("IRT") executed
a merger agreement pursuant to which the Company will acquire IRT. In connection
with the merger, each IRT shareholder may elect to receive for each share of IRT
common stock either $12.15 in cash or 0.9 shares of the Company's common stock,
or a combination thereof. The terms of the merger agreement further provide that
the holders of no more than 50% of IRT's outstanding common stock may elect to
receive cash.
The Company intends to finance the cash portion of the acquisition through
the private placement of up to 6,900 shares of its common stock at a price of
$13.30 per share, which could be adjusted to a maximum of $13.50 per share. The
balance of the cash consideration, if any, is expected to be funded from
available credit facilities. Assuming a 50% cash election by the IRT
shareholders and a closing price of the Company's common stock of $13.59 per
share, the transaction values IRT at $730,000, including the assumption of
$297,000 of IRT debt and transaction costs.
IRT is an owner, operator, redeveloper and developer of neighborhood and
community shopping centers throughout the southeastern United States. As of
September 30, 2002, IRT's portfolio consisted of 89 shopping centers, three
shopping center investments, two development properties, one industrial property
and three mortgage loans. The 89 shopping centers and the three shopping center
investments total approximately 9.8 million square feet of retail space and are
located in eleven southeastern states. IRT shopping centers are anchored by
necessity-oriented retailers such as supermarkets, drug stores, national value
retailers and department stores.
Completion of the transaction, which is expected to take place in the first
quarter of 2003, is subject to the approval of the Company's and IRT's
shareholders and other customary conditions. The boards of each of IRT and the
Company have unanimously approved the transaction. Additionally, holders of
approximately 75% of the Company's common stock and approximately 8% of IRT's
common stock have agreed to vote their shares in favor of the transactions
contemplated by the merger. On the 4th business day prior to the shareholder
meetings, the Company holders may withdraw their voting support, and IRT's board
may withdraw its merger recommendation, if the Company's weighted average stock
price for the 30 preceding trading days is less than $12.06 or less than $11.00
for the three preceding trading days. In addition, on the 4th business day prior
to the shareholder meetings the Company holders may withdraw their voting
support if IRT's weighted average stock price for the 30 preceding trading days
is less than $10.935 or less than $9.935 for the three preceding trading days.
No assurances can be given by the Company that the merger will be
consummated according to the terms set forth in the merger agreement, if at all.
Either IRT or the Company may terminate the merger agreement if the merger is
not consummated by March 31, 2003. IRT will be required to pay a $15 million
break-up fee to the Company in the event that IRT enters into an agreement for a
superior transaction or if, under certain circumstances, IRT's board withdraws
its recommendation for the transaction.
17
On October 31, 2002, Janet Herszenhorn, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, filed a putative
class action lawsuit in the Superior Court of Cobb County, Georgia, against IRT,
the Company, and each of the directors of IRT. The complaint alleges, among
other things, that IRT and its individual directors breached their fiduciary
duties by agreeing to the merger between the Company and IRT. The complaint
seeks injunctive relief, an order enjoining consummation of the merger and
unspecified damages.
On October 31, 2002, John Greaves, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, also filed a
putative class action lawsuit in the Superior Court of Cobb County, Georgia,
against IRT, each of the directors of IRT and the Company. The complaint
alleges, among other things, that IRT and its individual directors breached
their fiduciary duties by agreeing to the merger between the Company and IRT and
that Equity One aided and abetted such breach. The complaint seeks injunctive
relief, an order enjoining consummation of the merger and unspecified damages.
Although the Company believes (and has been advised by IRT that it
believes) that these suits are without merit and (together with IRT and the
directors of IRT) intends to defend itself vigorously, there can be no assurance
that the pending litigation will not interfere with the consummation of the
merger. The Company and IRT do not expect that these suits will interfere with
the scheduling of their respective shareholder meetings or the consummation of
the merger, if approved.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
The following discussion should be read in conjunction with the Company's
Unaudited Condensed Consolidated Financial Statements, including the notes
thereto, which are included elsewhere herein and the Company's audited
Consolidated Financial Statements and notes thereto for the year ended December
31, 2001 and Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing in the Company's Form 10-K/A. The results of
operations for an interim period may not give a true indication of results for
the year.
On October 28, 2002, the Company and IRT Property Company ("IRT") executed
a merger agreement pursuant to which the Company will acquire IRT. In connection
with the merger, each IRT shareholder may elect to receive for each share of IRT
common stock either $12.15 in cash or 0.9 shares of the Company's common stock,
or a combination thereof. The terms of the merger agreement further provide that
the holders of no more than 50% of IRT's outstanding common stock may elect to
receive cash.
The Company intends to finance the cash portion of the acquisition through
the private placement of up to 6,900 shares of its common stock at a price of
$13.30 per share, which could be adjusted to a maximum of $13.50 per share. The
balance of the cash consideration, if any, is expected to be funded from
available credit facilities. Assuming a 50% cash election by the IRT
shareholders and a closing price of the Company's common stock of $13.59 per
share, the transaction values IRT at $730 million, including the assumption of
$297 million of IRT debt and transaction costs.
IRT is an owner, operator, redeveloper and developer of neighborhood and
community shopping centers throughout the southeastern United States. As of
September 30, 2002, IRT's portfolio consisted of 89 shopping centers, three
shopping center investments, two development properties, one industrial property
and three mortgage loans. The 89 shopping centers and the three shopping center
investments total approximately 9.8 million square feet of retail space and are
located in eleven southeastern states. IRT shopping centers are anchored by
necessity-oriented retailers such as supermarkets, drug stores, national value
retailers and department stores.
Completion of the transaction, which is expected to take place in the first
quarter of 2003, is subject to the approval of the Company's and IRT's
shareholders and other customary conditions. The boards of each of IRT and the
Company have unanimously approved the transaction. Additionally, holders of
approximately 75% of the Company's common stock and approximately 8% of IRT's
common stock have agreed to vote their shares in favor of the transactions
contemplated by the merger. On the 4th business day prior to the shareholder
meetings, the
18
Company holders may withdraw their voting support, and IRT's board may withdraw
its merger recommendation, if the Company's weighted average stock price for the
30 preceding trading days is less than $12.06 or less than $11.00 for the three
preceding trading days. In addition, on the 4th business day prior to the
shareholder meetings the Company holders may withdraw their voting support if
IRT's weighted average stock price for the 30 preceding trading days is less
than $10.935 or less than $9.935 for the three preceding trading days.
No assurances can be given by the Company that the merger will be
consummated according to the terms set forth in the merger agreement, if at all.
Either IRT or the Company may terminate the merger agreement if the merger is
not consummated by March 31, 2003. IRT will be required to pay a $15 million
break-up fee to the Company in the event that IRT enters into an agreement for a
superior transaction or if, under certain circumstances, IRT's board withdraws
its recommendation for the transaction.
On October 31, 2002, Janet Herszenhorn, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, filed a putative
class action lawsuit in the Superior Court of Cobb County, Georgia, against IRT,
the Company, and each of the directors of IRT. The complaint alleges, among
other things, that IRT and its individual directors breached their fiduciary
duties by agreeing to the merger between the Company and IRT. The complaint
seeks injunctive relief, an order enjoining consummation of the merger and
unspecified damages.
On October 31, 2002, John Greaves, an individual stockholder of IRT,
purporting to represent a class of holders of IRT common stock, also filed a
putative class action lawsuit in the Superior Court of Cobb County, Georgia,
against IRT, each of the directors of IRT and the Company. The complaint
alleges, among other things, that IRT and its individual directors breached
their fiduciary duties by agreeing to the merger between the Company and IRT and
that Equity One aided and abetted such breach. The complaint seeks injunctive
relief, an order enjoining consummation of the merger and unspecified damages.
Although the Company believes (and has been advised by IRT that it
believes) that these suits are without merit and (together with IRT and the
directors of IRT) intends to defend itself vigorously, there can be no assurance
that the pending litigation will not interfere with the consummation of the
merger. The Company and IRT do not expect that these suits will interfere with
the scheduling of their respective shareholder meetings or the consummation of
the merger, if approved.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations provides additional information related to the Company's condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
and if necessary, adjusts its estimates and judgments, including those related
to real estate and development assets, revenue recognition in conjunction with
providing development, leasing and management services and equity in earnings of
unconsolidated joint ventures. A summary of the Company's accounting policies
and procedures are included in the December 31, 2001 consolidated financial
statements and notes thereto. Management believes that the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.
Real Estate and Development Assets
The Company capitalizes acquisition and construction costs, property taxes,
interest and other miscellaneous costs that are directly identifiable with a
project, from pre-acquisition until the time that construction is complete and
the development is ready for its intended use, in accordance with SFAS No. 67
and SFAS No. 34. The Company allocates the capitalized project costs to the
various components of the project based on the components' relative fair value.
The Company's cost allocation method requires the use of management estimates
regarding the fair market value of each project component. Management bases its
estimates on current market appraisals, comparable sales, existing sale and
purchase contracts, historical experience, and various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the fair market value of real estate
assets. Actual results may differ from these estimates
19
and anticipated returns on a project, as well as the gain or loss on disposition
of the individual project components, could vary significantly from estimated
amounts.
Management reviews long-lived assets used in operations for impairment when
there is an event or change in circumstances that indicates that the carrying
amount of the asset may not be recoverable and the future undiscounted cash
flows expected to be generated by the asset are less than its carrying amount.
If such asset is considered to be impaired, the Company records impairment
losses and reduces the carrying amount of the impaired asset to an amount that
reflects the fair value of the asset at the time impairment is evident. The
Company's impairment review process relies on management's judgment regarding
the indicators of impairment, the remaining life of the asset used to generate
the asset's undiscounted cash flows, and the fair value of the asset at a
particular point in time. Management uses historical experience, current market
appraisals and various other assumptions to form the basis for making judgments
about the impairment of real estate assets. Under different assumptions or
conditions, the asset impairment analysis may yield a different outcome, which
would alter the Company's ultimate return on its assets, as well as the gain or
loss on the eventual disposition of the asset.
Revenue Recognition
The Company, as lessor, has retained substantially all the risks and
benefits of property ownership and accounts for its leases as operating leases.
Revenue from percentage rent is recognized when tenants' reported sales have
reached certain levels specified in the respective leases. Recoveries from
tenants for real estate taxes and other operating expenses are recognized as
revenue in the period when the applicable costs are incurred.
Investments in Unconsolidated Joint Ventures
The Company does not consider itself to be in control of joint ventures
when major business decisions require the approval of at least one other
managing equity owner. Accordingly, the Company accounts for its joint ventures
in which it does not retain unilateral control under the equity method.
The Company calculates the equity in income or loss earned from its
unconsolidated joint ventures based on its estimate of each equity owner's
economic ownership which is estimated based on anticipated stabilized cash flows
as they would be allocated to each equity owner based on how cash flow is
distributed. Generally, under the terms of the respective joint venture
agreements, net ordinary cash flow is distributed to each equity owner in
accordance with such owner's equity ownership percentages.
Accounting for Stock Options
The Company applies the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in measuring stock-based compensation, including
options. Accordingly, no compensation expense has been recognized for options
granted under the Company's compensation plan as no grants were made at less
than market value. In accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, compensation expense would be recognized based upon the fair value
of the award at the grant date.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 Compared To Three Months Ended September
30, 2001
Total revenues increased by $6.3 million, or 32.1%, to $25.8 million for
the three months ended September 30, 2002 from $19.6 million for the comparable
period of 2001. This increase was due to an increase in revenues of $4.7 million
relating to properties acquired in the UIRT transaction in September 2001, and
an increase of $2.3 million as a result of the acquisition of six shopping
centers and two drugstores, offset by a decline in third party management fees
and investment income of $219,000 and a decrease in all other property revenues
of $446,000.
Property operating expenses increased by $1.6 million, or 26.3%, to $7.5
million for the three months ended September 30, 2002 from $5.9 million for the
comparable period of 2001. This increase was due to an increase in operating
expenses of $1.3 million relating to properties acquired in the UIRT
transaction. Operating
20
expenses also increased by $576,000 as a result of the acquisitions of the eight
properties mentioned above, and other property operating expenses declined by
$349,000.
Interest and amortization of deferred financing fees increased by $32,000,
or 0.6%, to $5.4 million for the three months ended September 30, 2002 from $5.3
million for the comparable period of 2001. This increase was primarily due to an
increase in interest expense of $1.1 million relating to the assumption of
mortgages in the acquisition of UIRT. In addition, interest increased $353,000
from the closing of two new loans, $221,000 from higher average balances on the
revolving line of credit facilities and $49,000 from deferred loan amortization.
These increases were partially offset by the repayment of nine loans reducing
interest by $848,000, an increase in capitalized interest of $230,000 related to
increased development activity, a decline of $220,000 due to lower interest
rates for variable rate mortgages and reduced interest on all other loans of
$373,000.
Rental property depreciation and amortization increased by $849,000, or
32.2%, to $3.5 million for the three months ended September 30, 2002 from $2.6
million for the comparable period of 2001. This increase was primarily due to an
increase in depreciation of $501,000 relating to properties acquired in the UIRT
transaction and a $348,000 increase related to other property acquisitions and
capital improvements.
General and administrative expenses increased by $529,000, or 58.0%, to
$1.4 million for the three months ended September 30, 2002 from $912,000 for the
comparable period of 2001. The primary reason for the increase in general and
administrative expenses relates to our growth, as reflected by an increase in
compensation and employee related expenses of $473,000, professional fees
increased by $73,000, printing and public relations increased by $48,000, and
all other expenses decreased by $65,000.
During 2001, we recorded minority interest in CEFUS of $896,000, a current
and deferred income tax benefit of $2.3 million and a loss on the sale of real
estate of $609,000 related to CEFUS. Upon the acquisition of CEFUS in the third
quarter of 2001, we no longer record the minority interest in CEFUS and current
and deferred income taxes. During 2002, we reported a gain on extinguishment of
debt of $1.5 million. All other income items primarily relate to earnings from
joint ventures.
The income from properties sold and from the properties held for sale as of
September 30, 2002 is reflected as discontinued operations for the three-month
periods ended September 30, 2002 and 2001. The three properties sold in the
three months ended September 30, 2002 produced a gain of $1.1 million and the
properties sold and held for sale as of September 30, 2002 resulted in income
from discontinued operations of $137,000 for 2002 and $171,000 for 2001.
As a result of the foregoing, net income increased by $5.1 million, or
87.5%, to $10.9 million for the three months ended September 30, 2002 compared
to $5.8 million for the comparable period in 2001.
Nine Months Ended September 30, 2002 Compared To Nine Months Ended September 30,
2001
Total revenues increased by $19.0 million, or 33.7%, to $75.4 million for
the nine months ended September 30, 2002 from $56.4 million for the comparable
period of 2001. This increase was primarily due to an increase in revenues of
$15.9 million relating to properties acquired in the UIRT transaction in
September 2001 and an increase of $4.0 million as a result of the acquisition of
six shopping centers and two drugstores, offset by a decline in third party
management fees and investment income of $803,000 and a decrease in other
revenues of $68,000.
Property operating expenses increased by $5.2 million, or 31.6%, to $21.8
million for the nine months ended September 30, 2002 from $16.6 million for the
comparable period of 2001. This increase was primarily due to an increase in
operating expenses of $4.5 million relating to properties acquired in the UIRT
transaction. Operating expenses also increased by $1.0 million as a result of
the acquisitions mentioned above. All other property operating expenses
decreased by $253,000.
Interest and amortization of deferred financing fees increased by $1.1
million, or 6.7%, to $17.2 million for the nine months ended September 30, 2002
from $16.1 million for the comparable period of 2001. This increase was
primarily due to an increase in interest expense of $3.5 million relating to the
assumption of mortgage loans in the acquisition of UIRT. In addition, interest
increased $867,000 from the closing of two new loans and increased $616,000 from
higher average balances on the revolving credit facilities. These increases were
partially offset by the
21
repayment of nine loans reducing interest by $1.9 million, an increase in
capitalized interest of $715,000 related to increased development activity, a
decline of $599,000 due to lower interest rates for variable rate mortgages,
reduced deferred loan fee amortization of $309,000 and reduced interest on all
other loans of $419,000.
Rental property depreciation and amortization increased by $2.5 million, or
32.0%, to $10.1 million for the nine months ended September 30, 2002 from $7.7
million for the comparable period of 2001. This increase was primarily due to an
increase in depreciation of $1.8 million relating to the acquisition of UIRT and
a $700,000 increase related to acquisitions and capital improvements.
General and administrative expenses increased by $2.6 million, or 104.2%,
to $5.0 million for the nine months ended September 30, 2002 from $2.5 million
for the comparable period of 2001. The primary reason for the increase in
general and administrative expense relates to our growth, as reflected by an
increase in compensation and employee related expenses of $1.4 million,
professional fees increased by $314,000, previously capitalized preacquisition
due diligence costs for projects that did not materialize were written off
totaling $695,000, printing and public relations increased by $140,000, and all
other expenses increased by $51,000.
During 2001, we recorded minority interest in CEFUS of $1.6 million, a
current and deferred income tax benefit of $967,000 and a loss on the sale of
real estate of $609,000 related to CEFUS. Upon the acquisition of CEFUS in the
third quarter of 2001, we no longer record minority interest in CEFUS and
current and deferred income taxes. During 2002, we recorded a gain on
extinguishment of debt of $1.5 million. All other income items primarily relate
to earnings from joint ventures.
The income from properties sold and the properties held for sale as of
September 30, 2002 is reflected as discontinued operations for the nine-month
periods ended September 30, 2002 and 2001. The properties sold in the nine-month
period ended September 30, 2002 produced a gain of $8.2 million and the
properties sold and held for sale as of September 30, 2002 resulted in income
from discontinued operations of $1.2 million for 2002 and $868,000 for 2001.
As a result of the foregoing, net income increased by $19.0 million, or
139.5%, to $32.6 million for the nine months ended September 30, 2002 compared
to $13.6 million for the comparable period in 2001.
FUNDS FROM OPERATIONS
We consider Funds From Operations ("FFO") to be a widely used and
appropriate supplemental measure of performance for an equity REIT that provides
a relevant basis for comparison among REITs. FFO as defined by the National
Association of Real Estate Investment Trusts ("NAREIT") means income (loss)
before minority interest (determined in accordance with accounting principles
generally accepted in the United States of America ("GAAP")), excluding
extraordinary items, gains or losses from sales of operating properties and
deferred income taxes, plus real estate related depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures. We
present FFO to assist investors in analyzing our performance. Our method of
calculating FFO may be different from methods used by other REITs and,
accordingly, may not be comparable to such other REITS. FFO (i) does not
represent cash flows from operations as defined by GAAP, (ii) is not indicative
of cash available to fund all cash needs and liquidity, including the ability to
make distributions to stockholders and (iii) should not be considered as an
alternative to net income (determined in accordance with GAAP) for purposes of
evaluating our operating performance.
22
The following table illustrates the calculation of FFO for the three-month
and nine-month periods ended September 30, 2002 and 2001:
Three-Months Ended Nine-months Ended
September 30, September 30,
------------------------- ------------------------
2002 2001 2002 2001
----------- ---------- ----------- ---------
(in thousands) (in thousands)
Net income .................................................... 10,926 $ 5,826 $ 32,631 $ 13,625
Adjustments:
Depreciation of real estate assets ......................... 3,445 2,658 10,081 7,757
Amortization of capitalized leasing fees ................... 87 60 223 147
(Gain) loss on disposal of real estate ..................... (1,091) 609 (8,194) 609
Minority interest in earnings of consolidated subsidiary ... 25 25 76 74
Other Items:
Interest on convertible partnership units .................. 64 64 194 194
Deferred income tax benefit ................................ - (1,853) - (374)
Share of joint venture real estate depreciation 2
.................... 15 18 466 74
Minority interest share of FFO adjustments ................. - (4) - (1,369)
----------- ----------- ----------- -----------
Funds from operations ......................................... $ 13,608 $ 7,403 $ 35,477 $ 20,737
=========== =========== =========== ===========
FFO increased by $6.2 million, or 83.8%, to $13.6 million for the three
months ended September 30, 2002, from $7.4 million for the comparable period of
2001. FFO increased by $14.7 million, or 71.1%, to $35.5 million for the nine
months ended September 30, 2002, from $20.7 million for the comparable period of
2001. The increase was primarily the result of the inclusion of the properties
acquired in the UIRT transaction and the recognition of a $1.5 million Gain on
Extinguishment of Debt for the current periods, and the other changes in income
described above.
The effect of the CEFUS Accounting Treatment on the calculation of FFO for
the three-month and nine-month periods ended September 30, 2001 (unaudited) is
as follows:
Three months Nine months
ended ended
September 30, September 30,
2001 2001
------------ ------------
(in thousands)
FUNDS FROM OPERATIONS:
Equity One ....................... $ 5,485 $ 14,351
CEFUS ............................ 1,918 6,386
------------ ------------
Total funds from operations .......... $ 7,403 $ 20,737
============ ============
CASH FLOW
Net cash provided by operations of $35.9 million for the nine months ended
September 30, 2002 included: (i) net income of $32.6 million, (ii) a net
increase in cash flow of $570,000 million due to non-cash items such as
depreciation and amortization, offset by gains on sale of real estate, and (iii)
a net increase in cash due to changes in operating assets and liabilities of
$2.7 million, compared to net cash provided by operations of $17.0 million for
the
23
nine months ended September 30, 2001, which included (i) net income of $13.6
million, (ii) a net increase in cash flow of $9.8 million due to non-cash items
such as depreciation and minority interest in CEFUS, and (iii) a net decrease in
cash due to changes in operating assets and liabilities of $6.4 million.
Net cash used in investing activities of $45.6 million for the nine months
ended September 30, 2002 included: (i) the acquisition of two drugstores, five
shopping centers and three parcels of land for $59.4 million, (ii) construction,
development and other capital improvements of $9.3 million, and offset by (iii)
proceeds from the sale of seven properties of $19.5 million, of which $8.4
million was escrowed for a tax free exchange and was subsequently released in
connection with the aforementioned acquisitions, (iv) proceeds from escrow of
$1.7 million, and (v) other sources of $1.9 million, compared to net cash used
in investing activities of $28.9 million for the nine months ended September 30,
2001 which included: (i) the purchase of one property for $2.9 million, (ii)
improvements to rental properties and construction expenditures relating to
development projects totaling $7.5 million, (iii) cash used for the acquisition
of UIRT of $32.9 million, (vi) reduction in cash held in escrow of $8.0 million,
offset by (v) proceeds from the sale of one property of $20.7 million, (vii)
proceeds from reduction of affiliated debt of $1.6 million, and (viii) and
proceeds from other sources of $105,000.
Net cash provided by financing activities of $10.2 million for the nine
months ended September 30, 2002 included: (i) new mortgage note borrowings of
$6.1 million, (ii) net borrowings on revolving credit facilities of $9.1
million, and (iii) net proceeds from issuance of common stock of $64.5 million,
offset by (iv) the repayment of ten loans for $37.7 million and monthly
principal payments on mortgage notes of $4.2 million, (v) cash dividends paid to
common stockholders of $26.4 million, and (vi) other miscellaneous uses of $1.2
million, compared to net cash provided by financing activities of $13.8 million
for the nine months ended September 30, 2001 which included: (i) borrowings
under mortgage notes of $4.7 million, (ii) net borrowings under the revolving
credit facilities of $15.8 million, (iii) net proceeds from issuance of common
stock of $20.0 million, (iv) increase in restricted cash of $4.2 million, (v)
principal payments on mortgage notes of $17.9 million, (vi) cash dividend paid
to common stockholders of $10.8 million, (vii) reduction of obligations to
affiliates of $2.1 million, and (viii) other miscellaneous uses of $80,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal demands for liquidity are maintenance expenditures,
repairs, property taxes and tenant improvements relating to rental properties,
acquisition and development activities, debt service and repayment obligations
and distributions to its stockholders. The principal sources of funding for the
Company's operations are operating cash flows, the issuance of equity
securities, the placement of mortgage loans and periodic borrowings under the
Company's revolving credit facilities.
As of September 30, 2002, we had a $10.4 million revolving credit agreement
secured by four properties with City National Bank of Florida. This facility
accrues interest at 2.25% over the thirty-day LIBOR rate, payable monthly, and
adjusted every nine months. This facility matures May 4, 2003, with an option to
extend for two additional 364-day periods. This facility has been used to
provide a $1.0 million letter of credit in connection with the Pine Island/Ridge
Plaza financing, $74,000 of other letters of credit and to support approximately
$156,000 in escrows for property taxes on the properties constituting its
collateral, thereby reducing its gross availability to approximately $9.2
million.
As of September 30, 2002, we had a $30.0 million revolving line of credit
with Bank Leumi Le-Israel B.M. This facility accrues interest at 1.25% over the
30 or 90-day LIBOR rate, at our option, and is payable monthly or quarterly
depending on our rate selection. The facility matures on March 17, 2003. Under
the Bank Leumi credit agreement, we agreed not to mortgage or encumber seven of
our properties.
On February 27, 2002, we entered into a revolving credit facility with
Wells Fargo under which we may borrow up to $29.4 million. On July 31, 2002, we
increased the availability by $11.9 million up to $41.3 million, against a
borrowing base of six properties pledged to secure the facility. Borrowings
under the facility will bear interest at LIBOR plus a margin ranging from 1.15%,
if the ratio of our total liabilities to gross asset value is less than 0.5, to
1.50% if the ratio of our total liabilities to gross asset value is or exceeds
0.60. The entire principal amount is due February 26, 2005. This facility also
prohibits stockholder distributions in excess of 95% of our funds from
operations calculated at the end of each fiscal quarter for the four fiscal
quarters then ending. Notwithstanding this limitation, we can make stockholder
distributions to avoid income taxes on asset sales. If a default under the
24
facility exists, our ability to pay dividends would be limited to the amount
necessary to maintain our status as a REIT. The facility also contains financial
covenants that require us to maintain among other things:
o A consolidated net worth of not less than $251.4 million plus 90% of net
proceeds of equity issuances;
o A ratio of total liabilities to gross asset value of not more than 0.65;
o A ratio of EBITDA to interest expense of not less than 1.90;
o A ratio of EBITDA to fixed charges of not less than 1.65; and
o An occupancy rate on properties in the borrowing base of not less than 85%.
As of September 30, 2002, we were in compliance with each of these
covenants...
Our revolving credit facility balances as of September 30, 2002 and
December 31, 2001 consisted of the following:
September 30, December 31,
2002 2001
------------ ------------
(in thousands)
Revolving Credit Facilities
City National Bank ......................................... $ 2,507 $ 1,409
Bank Leumi ................................................. - 26,000
Wells Fargo ................................................ 34,000 N/A
------------ -----------
Total revolving credit facilities ................ $ 36,507 $ 27,409
============ ============
The amount available under the various revolving credit facilities is $44.0
million as of September 30, 2002, out of commitments totaling $81.8 million.
Our mortgage note balances as of September 30, 2002 and December 31, 2001
consisted of the following:
September 30, December 31,
2002 2001
----------- ------------
(in thousands)
Mortgage Notes Payable
Fixed rate mortgage loans ............................. $ 283,078 $ 296,887
Variable rate mortgage loans .......................... 24,635 48,160
Total mortgage notes payable ...................... $ 307,713 $ 345,047
=========== ===========
Each of our mortgage loans is secured by a mortgage on one or more of our
properties. Certain of the mortgage loans involving an aggregate principal
balance of approximately $59.0 million on September 30, 2002, contain
prohibitions on transfers of ownership which may have been violated by our
previous issuances of common stock or in connection with past acquisitions and
may be violated by transactions involving our capital stock in the future. If a
violation were established, it could serve as a basis for a lender to accelerate
amounts due under the affected mortgage. To date, no lender has notified the
Company that it intends to accelerate its mortgage. Nevertheless, we are in the
process of obtaining the necessary consents from the lenders. Based on
discussions with the remaining lenders, current credit market conditions and
other factors, we believe that such consents will be obtained or that the
mortgages would not be accelerated. Accordingly, we believe that the ultimate
outcome of this matter will not have a material adverse impact on our results of
operations or financial condition.
25
As of September 30, 2002, our total debt of $344.2 million less our cash
and cash equivalents, cash held in escrow and securities available for sale, or
$341.7 million, divided by our gross real estate assets of $709.3 million
equaled 48.2%.
As of September 30, 2002, the balances due on our mortgage loans (excluding
revolving credit facilities) were as follows:
Balance Due Including
Year Ending Scheduled Amortization
------------------- ----------------------
2002....................... $ 1,392
2003....................... 5,814
2004....................... 30,882
2005....................... 26,177
2006....................... 32,872
Thereafter................. 210,576
-----------
Total.................. $ 307,713
===========
Our debt level could subject us to various risks, including the risk that
our cash flows will be insufficient to meet required payments of principal and
interest, and the risk that the resulting reduced financial flexibility could
inhibit our ability to develop or improve our rental properties, withstand
downturns in our rental income or take advantage of business opportunities. In
addition, because we currently anticipate that only a small portion of the
principal of our indebtedness will be repaid prior to maturity, it is expected
that it will be necessary to refinance the majority of our debt. Accordingly,
there is a risk that such indebtedness will not be able to be refinanced or that
the terms of any refinancing will not be as favorable as the terms of our
current indebtedness.
Subsequent to September 30, 2002, we entered into various financing,
property acquisitions and merger transaction agreements, which are further
described in the "Notes to the Condensed Consolidated Financial Statements,
Footnote 16, Subsequent Events."
We may enter into interest rate swap, lock and other instruments in order
to reduce the exposure to interest rate fluctuations. In anticipation of the
acquisition of the retail center located in the City of Delray Beach, Florida,
we entered into a $30 million notional amount interest rate lock agreement. Due
to market conditions in interest rates, we terminated the agreement at a loss of
$224,000 and subsequently obtained a committment for a lower fixed rate mortgage
loan. The Company has not entered into any other interest rate risk agreements.
However, there can be no assurances that we will not employ the use of interest
rate risk instruments in the future. The Company does not enter into derivative
instruments for speculative purposes.
We commenced development in March 2002 of an 84,000 square foot
supermarket-anchored shopping center on a parcel of land located at the
southeast corner of S.W. 147th Avenue and Coral Way in Miami-Dade County,
Florida. We anticipate the cost of development to be approximately $10.0
million. To date, we have incurred $2.0 million to purchase the parcel of land
and $3.2 million in development and construction costs. We expect to commence
development in late 2002 of a 25,000 square foot drug-store anchored shopping
center on a parcel of land we already own at the northeast corner of S.W. 147th
Avenue and Coral Way in Miami-Dade County, Florida at a total cost of $2.5
million. We expect to commence development in late 2002 of an additional 114,000
square feet at our Skylake Shopping Center in Miami-Dade County, Florida at a
total cost of $5.5 million. We are commencing a major renovation of Oakbrook
Square Shopping Center, located in Palm Beach Gardens, Florida including the
demolition of existing space, construction of new space and conversion of the
Jacobson's space to a multi-tenant facility for a total estimated cost of $3.0
million. We are also committed to a major renovation of University Mall in
Pembroke Pines, Florida at an estimated cost of $5.0 million. We intend to
redevelop the Salerno Village Shopping Center in Stuart, Florida with a new
supermarket and other related improvements at an estimated cost of $5 million.
We expect to fund the costs of these development projects with cash flows from
operations and borrowings under our various revolving credit facilities.
26
On January 18, 2002, we completed a private placement of 688,000 shares of
our common stock to a limited number of accredited investors. In connection with
the private placement, we sold an aggregate of 344,000 shares of our common
stock at a price of $12.80 per share to unaffiliated investors and 344,000
shares of our common stock at price of $13.05 per share to investors that are
affiliates of ours. The net proceeds of $8.9 million from the private placement
were used for general corporate purposes.
On January 23, 2002, we filed a universal shelf registration statement with
the Securities and Exchange Commission, which will permit us, from time to time,
to offer and sell various types of securities, including common stock, preferred
stock, debt securities, depositary shares and warrants, up to a value of $250
million. The registration statement provides us additional flexibility in
accessing capital markets to fund future growth and for general corporate
purposes. On March 27, 2002, we concluded the underwritten sale of 3,450,000
shares of common stock of a price of $13.25 per share through a group of
underwriters led by Legg Mason Wood Walker. The net proceeds of $42.9 million
from the stock offering were used to repay certain existing indebtedness. As of
September 30, 2002, our remaining availability under the universal shelf
registration statement totaled $204.3 million.
On March 29, 2002, we issued 335,208 shares of our common stock at a price
of $13.425 per share in exchange for $4.5 million of cash dividends pursuant to
our Divided Reinvestment and Stock Purchase Plan.
During the second quarter of 2002, we issued 589,039 shares of common stock
under our Dividend Reinvestment and Stock Purchase Plan at prices ranging from
$13.3153 to $13.9300 per share, in exchange for $29,000 in cash dividends and
$1.1 million of cash proceeds, respectively. The cash proceeds were used for
general corporate purposes.
During the third quarter of 2002, we issued 84,313 shares of common stock
under our Dividend Reinvestment and Stock Purchase Plan at prices ranging from
$12.57 to $13.54 per share, in exchange for $29,000 in cash dividends and $1.1
million of cash proceeds, respectively. The cash proceeds were used for general
corporate purposes. In September 2002, we filed a registration statement on Form
S-3 increasing the number of available shares for the Dividend Reinvestment and
Stock Purchase Plan by 5 million and as of September 30, 2002, our remaining
availability under this plan totaled 5,127,046 shares.
We believe, based on currently proposed plans and assumptions relating to
our operations, that our existing financial arrangements, together with cash
flows from operations, will be sufficient to satisfy our cash requirements for a
period of at least twelve months. In the event that our plans change, our
assumptions change or prove to be inaccurate or cash flows from operations or
amounts available under existing financing arrangements prove to be insufficient
to fund our expansion and development efforts or to the extent we discover
suitable acquisition targets the purchase price of which exceeds our existing
liquidity, we would be required to seek additional sources of financing. There
can be no assurance that any additional financing will be available on
acceptable terms or at all, and any future equity financing could be dilutive to
existing shareholders. If adequate funds are not available, our business
operations could be materially adversely affected.
We believe that we qualify and intend to continue to qualify as a REIT
under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable
income by all or a portion of our distributions to stockholders. As
distributions have exceeded taxable income, no provision for federal income
taxes has been made. While we intend to continue to pay dividends to our
stockholders, we also will reserve such amounts of cash flow as we consider
necessary for the proper maintenance and improvement of our real estate, while
still maintaining our qualification as a REIT.
INFLATION
Most of our leases contain provisions designed to partially mitigate the
adverse impact of inflation. Such provisions include clauses enabling us to
receive percentage rents based on tenant gross sales above predetermined levels,
which rents generally increase as prices rise, or escalation clauses which are
typically related to increases in the Consumer Price Index or similar inflation
indices. Most of our leases require the tenant to pay its share of operating
expenses, including common area maintenance, real estate taxes and insurance,
thereby reducing our exposure to increases in costs and operating expenses
resulting from inflation.
27
Our financial results are affected by general economic conditions in the
markets in which its properties are located. An economic recession, or other
adverse changes in general or local economic conditions could result in the
inability of some existing tenants to meet their lease obligations and could
otherwise adversely affect our ability to attract or retain tenants. The
properties are typically anchored by supermarkets, drug stores and other
consumer necessity and service retailers, which typically offer day-to-day
necessities rather than luxury items. These types of tenants, in our experience,
generally maintain more consistent sales performance during periods of adverse
economic conditions.
CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS
Certain information included and incorporated by reference in this
Quarterly Report on Form 10-Q may contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or Securities
Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or
Exchange Act, and as such may involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements, which are based on certain assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words "may," "will," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative thereof or other variations thereon or
comparable terminology. Factors, which could have a material adverse effect on
the operations and future prospects of our company, include:
o our inability to identify properties to acquire or our inability to
successfully integrate acquired properties and operations, including our
inability to successfully integrate the business and operations of United
Investors Realty Trust and Centrefund Realty (U.S.) Corporation which we
acquired in the third quarter of 2001.
o the effect of general economic downturns on demand for and rents from
neighborhood and community shopping centers;
o changes in tax laws or regulations, especially those relating to REITs and
real estate in general;
o our failure to continue to qualify as a REIT under U.S. tax laws;
o the number, frequency and duration of tenant vacancies that we experience;
o the time and cost required to solicit new tenants and to obtain lease
renewals from existing tenants on terms that are favorable to us;
o tenant bankruptcies and closings;
o the general financial condition of, or possible mergers or acquisitions
involving, our tenants;
o competition from other real estate companies or from competing shopping
centers or other commercial developments;
o changes in interest rates and national and local economic conditions;
o the continued service of our senior executive officers;
o possible environmental liabilities;
o the availability, cost and terms of financing;
o the time and cost required to identify, acquire, construct or develop
additional properties that result in the returns anticipated or sought;
o the costs required to re-develop or renovate any of our current properties;
o and effect of natural disasters and other casualties;
o the successful completion of our proposed acquisition of IRT;
o our ability to successfully merge IRT's operations into ours;
o the potential impact of increased leverage incurred in connection with the
acquisition of IRT;
o the potential dilution of existing stockholders as a result of the issuance
of our common stock in the acquisition of IRT and related private
placement.
You should also carefully consider any other factors contained in this
quarterly report, including the information incorporated by this quarterly
report. You should not rely on the information contained in any forward-looking
statements, and you should not expect us to update any forward-looking
statements.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The primary market risk to which the Company has exposure is interest rate
risk. Changes in interest rates can affect the Company's net income and cash
flows. As changes in market conditions occur, interest rates can either increase
or decrease and interest expense from the variable component of the Company's
debt balances will move in the same direction. With respect to its investment
portfolio, changes in interest rates generally do not directly affect the
Company's interest income as its investments are predominantly in equity
securities. With respect to its notes receivable, changes in interest rates
generally do not affect the Company's interest income as its notes receivable
are predominantly at fixed-rates for extended terms, and would be unaffected by
any sudden change in interest rates. The Company's mortgage notes payable are
predominantly at fixed-rates for extended terms with a weighted average life of
6.25 years, and fixed rate debt would be unaffected by any sudden change in
interest rates. Because the Company has the intent to hold its fixed rate
existing mortgages to maturity (or until the sale of the associated property),
there is believed to be relatively little interest rate market risk on the
Company's results of operations or its working capital position from such debt.
The Company's possible risk is from increases in long-term real estate mortgage
rates that may occur over a period of several years, as this may decrease the
overall value of its real estate.
We may enter into interest rate swap, lock and other instruments in order
to reduce the exposure to interest rate fluctuations. In anticipation of the
acquisition of the retail center located in the City of Delray Beach, Florida,
we entered into a $30 million notional amount interest rate lock agreement. Due
to market conditions in interest rates, we terminated the agreement at a loss of
$224,000 and subsequently obtained a committment for a lower fixed rate mortgage
loan. The Company has not entered into any other interest rate risk agreements.
However, there can be no assurances that we will not employ the use of interest
rate risk instruments in the future. The Company does not enter into derivative
instruments for speculative purposes.
The Company estimates the fair market value of its long term, fixed rate
mortgage loans using discounted cash flow analysis based on current borrowing
rates for similar types of debt. At September 30, 2002, the fair value of the
fixed rate mortgage loans calculated using a rate of 4.83% was estimated to be
$327,771 compared to the carrying value amount of $283,078. If the weighted
average interest rate on the Company's fixed rate debt were 100 basis points
higher or lower than the current weighted average rate of 7.73%, the fair market
value would be $297,692 and $269,850, respectively.
If the weighted average interest rate on the Company's variable rate debt
were 100 basis points higher or lower, annual interest expense would increase or
decrease by approximately $611,000 based on the Company's variable rate debt
balance on September 30, 2002 totaling $61.1 million.
The Company's objective in managing its exposure to interest rate changes
is to limit the impact of interest rate changes on earnings and cash flows. The
Company may use a variety of financial instruments to reduce its interest rate
risk, including interest rate swap agreements whereby the Company exchanges its
variable interest costs on a defined amount of principal for another party's
obligation to pay fixed interest on the same amount of principal, or interest
rate caps, which will set a ceiling on the maximum variable interest rate the
Company will incur on the amount of debt subject to the cap and for the time
period specified in the interest rate cap. At the present time, the Company has
no such facilities in place.
ITEM 4. CONTROLS AND PROCEDURES
Our principal executive and financial officers have concluded, based on
their evaluation as of a date within 90 days before the filing of this Form
10-Q, that the Company's disclosure controls and procedures under Rule 13a-14 of
the Securities and Exchange Act of 1934 are effective to ensure that information
the Company is required to disclose in the reports that it files or submits
under Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and include controls and procedures designed to ensure that information
the Company is required to disclose in such reports is accumulated and
communicated to management, including the Company's principal executive and
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
29
Subsequent to such evaluation, there were no significant changes in
internal controls or other factors that could significantly affect these
internal controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Company's properties are subject to any
material litigation. The Company and its properties may be subject to routine
litigation and administrative proceedings arising in the ordinary course of
business, which collectively is not expected to have a material adverse affect
on the business, financial condition, results of operations or cash flows of the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Reference is made to the description of the proposed acquisition of IRT set
forth in Part I, Item 2 above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
3.1 Composite Articles of Amendment and Restatement of Equity One, Inc. (1)
3.2 Amended and Restated Bylaws of Equity One, Inc. (2)
*10.1 Second Amendment to Stockholders Agreement.
*99.1 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of
2002.
(b) Reports on Form 8-K:
During the quarterly period ended September 30, 2002, the Company filed the
following report on Form 8-K:
(i) Report on Form 8-K dated July 24, 2002, relating to the Company's
supplemental information, quarterly earnings press release and conference
call for the quarter ended June 30, 2002.
____________________________
(1) Incorporated by reference to the Registrants Quarterly Report filed on Form
10-Q for the second quarter ended June 30, 2002.
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-11 filed November 6, 1997 (Registration No. 333-33977).
* Filed herewith.
30
SIGNATURES
Pursuant to the requirements 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.
Date: November 13, 2002
EQUITY ONE, INC.
/s/ CHAIM KATZMAN
----------------------------------
Chaim Katzman
Chief Executive Officer
(Principal Executive Officer)
/s/ HOWARD M. SIPZNER
----------------------------------
Howard M. Sipzner
Chief Financial Officer
(Principal Accounting and Financial Officer)
31
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, Chaim Katzman, Chief Executive Officer of Equity One, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Equity One, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in a all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ CHAIM KATZMAN
_________________________________
Chaim Katzman
Chief Executive Officer
32
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, Howard M. Sipzner, Chief Financial Officer of Equity One, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Equity One, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in a all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusion about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ HOWARD M. SIPZNER
________________________________
Howard M. Sipzner
Chief Financial Officer
33
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
3.1 Composite Articles of Amendment and Restatement of Equity One, Inc.(1)
3.2 Amended and Restated Bylaws of Equity One, Inc. (2)
*10.1 Second Amendment to Stockholders Agreement.
*99.1 Certification pursuant to Section 906 of the Sarbanes - Oxley Act
of 2002.
____________________________
(1) Incorporated by reference to the Registrants Quarterly Report filed on Form
10-Q for the second quarter ended June 30, 2002.
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-11 filed November 6, 1997 (Registration No. 333-33977).
* Filed herewith.