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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, 2004
Commission File No. 001-13499
EQUITY ONE, INC.
----------------
(Exact name of registrant as specified in its charter)
Maryland 52-1794271
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1696 N.E. Miami Gardens Drive
N. Miami Beach, Florida 33179
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 947-1664
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Applicable only to Corporate Issuers:
As of the close of business on November 2, 2004, 73,090,681 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. Financial Statements Page
Condensed Consolidated Balance Sheets
As of September 30, 2004 and December 31, 2003 (unaudited)...................................... 1
Condensed Consolidated Statements of Operations
For the three and nine month periods ended September 30, 2004 and 2003 (unaudited).............. 3
Condensed Consolidated Statements of Comprehensive Income
For the three and nine month periods ended September 30, 2004 and 2003 (unaudited).............. 5
Condensed Consolidated Statement of Stockholders' Equity
For the nine month period ended September 30, 2004 (unaudited).................................. 6
Condensed Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2004 and 2003 (unaudited)........................ 7
Notes to the Condensed Consolidated Financial Statements (unaudited)............................ 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 37
Item 4. Controls and Procedures......................................................................... 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................ 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................... 40
Item 3. Defaults upon Senior Securities .............................................................. 40
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 40
Item 5. Other Information ............................................................................ 40
Item 6. Exhibits...................................................................................... 41
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
September 30, December 31,
2004 2003
-------------- --------------
ASSETS
PROPERTIES:
Income producing........................................................ $ 1,777,783 $ 1,594,579
Less: accumulated depreciation.......................................... (86,871) (66,406)
-------------- -------------
1,690,912 1,528,173
Construction in progress and land held for development.................. 44,652 74,686
Properties held for sale................................................ 12,232 14,440
-------------- -------------
Properties, net...................................................... 1,747,796 1,617,299
CASH AND CASH EQUIVALENTS................................................... 1,988 966
CASH HELD IN ESCROW......................................................... 8,734 -
ACCOUNTS AND OTHER RECEIVABLES, NET......................................... 12,135 13,492
SECURITIES AVAILABLE FOR SALE................................................ 29,405 -
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES................................ 2,803 2,861
GOODWILL .................................................................... 14,184 14,014
OTHER ASSETS................................................................. 58,211 28,754
-------------- -------------
TOTAL........................................................................ $ 1,875,256 $ 1,677,386
============== =============
(continued)
1
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
September 30, December 31,
2004 2003
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE
Mortgage notes payable..................................................... $ 480,739 $ 459,103
Unsecured revolving credit facilities..................................... 64,000 162,000
Unsecured senior notes payable............................................ 350,000 150,000
--------------- --------------
894,739 771,103
Unamortized premium/discount on notes payable............................. 20,354 24,218
--------------- --------------
Total notes payable.................................................... 915,093 795,321
OTHER LIABILITIES
Accounts payable and accrued expenses..................................... 42,564 25,211
Tenant security deposits.................................................. 8,324 7,706
Other liabilities......................................................... 3,633 5,924
--------------- --------------
Total liabilities...................................................... 969,614 834,162
--------------- --------------
MINORITY INTERESTS........................................................... 1,388 12,672
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - 10,000 shares authorized but unissued.. - -
Common stock, $0.01 par value - 100,000 shares authorized, 72,864 and 69,353
shares issued and outstanding for 2004 and 2003, respectively.......... 728 694
Additional paid-in capital................................................ 903,569 843,678
Retained earnings......................................................... 10,429 -
Accumulated other comprehensive income (loss)............................. 2,104 (122)
Unamortized restricted stock compensation.................................. (11,988) (10,091)
Notes receivable from issuance of common stock............................. (588) (3,607)
--------------- --------------
Total stockholders' equity.............................................. 904,254 830,552
--------------- --------------
TOTAL........................................................................ $1,875,256 $1,677,386
=============== ==============
(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, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
RENTAL REVENUE:
Minimum rents ..................................... $ 44,851 $ 37,217 $ 129,034 $ 99,305
Expense recoveries ................................ 12,865 10,243 35,686 27,902
Termination fees .................................. 210 300 618 787
Percentage rent payments .......................... 282 307 1,899 1,679
--------- --------- --------- ---------
Total rental revenue ........................... 58,208 48,067 167,237 129,673
--------- --------- --------- ---------
COSTS AND EXPENSES:
Property operating expenses ....................... 15,656 13,263 43,880 35,911
Rental property depreciation and amortization ..... 9,005 7,231 25,934 18,654
General and administrative expenses ............... 3,722 2,737 10,980 7,936
--------- --------- --------- ---------
Total costs and expenses ...................... 28,383 23,231 80,794 62,501
--------- --------- --------- ---------
INCOME BEFORE OTHER INCOME AND EXPENSES, DISCONTINUED
OPERATIONS AND MINORITY INTEREST .................. 29,825 24,836 86,443 67,172
OTHER INCOME AND EXPENSES:
Interest expense .................................. (12,172) (9,920) (34,156) (27,819)
Amortization of deferred financing fees ........... (379) (230) (990) (764)
Investment income ................................. 1,210 66 1,612 940
Other income ...................................... 174 48 296 138
Loss on extinguishment of debt .................... -- -- -- (513)
--------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND MINORITY
INTEREST .......................................... 18,658 14,800 53,205 39,154
--------- --------- --------- ---------
DISCONTINUED OPERATIONS:
Income from rental properties sold or held for sale 67 1,467 3,145 4,314
Gain on disposal of income producing properties ... 12,215 1,209 13,767 3,083
--------- --------- --------- ---------
Income from discontinued operations ............. 12,282 2,676 16,912 7,397
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST ...................... 30,940 17,476 70,117 46,551
MINORITY INTEREST .................................... (239) (227) (642) (606)
--------- --------- --------- ---------
NET INCOME ........................................... $ 30,701 $ 17,249 $ 69,475 $ 45,945
========= ========= ========= =========
(continued)
3
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE
Income before discontinued operations $ 0.26 $ 0.23 $ 0.76 $ 0.67
Income from discontinued operations.... 0.17 0.04 0.24 0.13
---------- ---------- ---------- ----------
Total basic earnings per share ...... $ 0.43 $ 0.27 $ 1.00 $ 0.80
========== ========== ========== ==========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE .............. 70,626 63,777 69,820 57,348
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Income before discontinued operations $ 0.26 $ 0.23 $ 0.74 $ 0.66
Income from discontinued operations.... 0.17 0.04 0.24 0.13
---------- ---------- ---------- ----------
Total diluted earnings per share..... $ 0.43 $ 0.27 $ 0.98 $ 0.79
========== ========== ========== ==========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE ............ 72,327 65,523 71,525 58,977
========== ========== ========== ==========
(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, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET INCOME............................................$ 30,701 $ 17,249 $ 69,475 $ 45,945
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized holding gain on securities
available for sale.............................. 3,970 - 3,970 47
Change in fair value of cash flow hedges.......... 3,104 (1,995) 1,744) (1,995)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME..................................$ 37,775 $ 15,254 $ 71,701 $ 43,997
========== ========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
5
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Notes
Accumulated Unamortized Receivable
Additional Other Restricted from Total
Common Paid-In Retained Comprehensive Stock Issuance of Stockholders
Stock Capital Earnings Income/(Loss) Compensation Common Stock Equity
-------- ---------- --------- ----------- ------------ ------------ ------------
BALANCE,
JANUARY 1, 2004............ $ 694 $ 843,678 $ - $ (122) $ (10,091) $ (3,607) $ 830,552
Issuance of common stock 34 60,638 - - (1,897) - 58,775
Stock issuance costs...... - (166) - - - - (166)
Repayment of notes
receivable from issuance
of common stock.......... - - - - - 3,019 3,019
Net income................ - - 69,475 - - - 69,475
Dividends paid............ - (581) (59,046) - - - (59,627)
Other comprehensive income
(loss)................... - - - 2,226 - - 2,226
-------- ---------- --------- ----------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 2004......... $ 728 $ 903,569 $ 10,429 $ 2,104 $ (11,988) $ (588) $ 904,254
======== ========== ========= =========== =========== =========== ===========
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, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
OPERATING ACTIVITIES:
Net income............................................................... $ 69,475 $ 45,945
Adjustments to reconcile net income to net cash provided by operating
activities:
Straight line rent adjustment.......................................... (2,715) (1,212)
Provision for losses on accounts receivable............................ 561 359
Amortization of premium/discount on notes payable...................... (3,693) (2,465)
Amortization of deferred financing fees................................ 990 764
Amortization of deferred financing fees included in discontinued
operations............................................................. 89 90
Rental property depreciation and amortization.......................... 25,934 18,654
Rental property depreciation and amortization included in discontinued
operations.......................................................... 864 1,052
Amortization of restricted stock....................................... 3,800 1,851
Equity in losses of joint ventures..................................... 58 117
Gain on sale of securities............................................. (593) (9)
Loss on extinguishment of debt......................................... - 623
Gain on disposal of real estate........................................ (13,767) (3,083)
Minority interests..................................................... 642 606
Changes in assets and liabilities:
Accounts and other receivables........................................ 950 (1,460)
Other assets.......................................................... (15,034) (6,438)
Accounts payable and accrued expenses................................. 15,793 5,975
Tenant security deposits.............................................. 618 503
Other liabilities..................................................... (741) (283)
---------- ----------
Net cash provided by operating activities................................. 83,231 61,589
---------- ----------
INVESTING ACTIVITIES:
Additions to and purchases of properties............................... (140,741) (130,520)
Additions to construction in progress.................................. (19,567) (8,927)
Proceeds from disposal of properties and joint venture interests....... 51,701 13,733
(Increase) decrease in cash held in escrow............................. (8,734) 12,897
Distributions received from joint ventures............................. - 940
Proceeds from repayment of notes receivable............................ 6,080 2,808
Proceeds from sale of securities available for sale.................... 5,814 977
Increase in deferred leasing costs..................................... (5,522) (2,719)
Cash used to purchase securities available for sale.................... (30,653) -
Cash used in the purchase of IRT....................................... - (189,382)
Cash acquired in the IRT acquisition................................... - 1,756
---------- ----------
Net cash used in investing activities..................................... (141,622) (298,437)
---------- ----------
(Continued)
7
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
FINANCING ACTIVITIES:
Repayment of mortgage notes payable.................................... $ ( 23,122) $ (54,369)
Net (repayment) borrowings under revolving credit facilities........... (98,000) 107,000
Proceeds from senior debt offering..................................... 199,750 -
Increase in deferred financing costs................................... (3,066) (1,075)
Proceeds from stock subscription and issuance of common stock.......... 41,116 232,544
Stock issuance costs................................................... (166) (1,660)
Repayment of notes receivable from issuance of common stock............ 3,019 3,505
Cash dividends paid to stockholders.................................... (59,627) (51,373)
Distributions to minority interests.................................... (491) (668)
---------- ----------
Net cash provided by financing activities................................. 59,413 233,904
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 1,022 (2,944)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 966 2,944
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 1,988 $ -
========== ==========
(Continued)
8
EQUITY ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Nine Months Ended
September 30,
-----------------------
2004 2003
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized...................... $ 30,905 $ 27,003
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized holding gain on securities available for sale..... $ 3,970 $ 47
========== ==========
Change in fair value of cash flow hedges............................... $ (1,744) $ (1,995)
========== ==========
Issuance of restricted stock........................................... $ 5,448 $ 7,534
========== ==========
Note receivable from sale of property and joint venture interest....... $ 4,700 $ 6,762
========== ==========
The Company acquired and assumed various mortgage notes in connection with the
acquisition of rental properties:
Fair value of rental property and other assets acquired.............. $ 92,735 $ 50,463
Assumption of mortgage notes payable................................. (44,758) (27,502)
Fair value adjustment of mortgage notes payable...................... (182) (3,182)
---------- ----------
Cash paid for rental properties...................................... $ 47,795 $ 19,779
========== ==========
The Company issued senior unsecured notes:
Face value of notes.................................................. $ 200,000
Discount............................................................. (250)
----------
Cash received........................................................ $ 199,750
==========
The Company acquired all of the outstanding common stock of IRT for $763,047,
including transaction costs:
Fair value of assets acquired, including goodwill.................... $ 763,047
Assumption of liabilities, unsecured senior notes and mortgage
notes payable....................................................... (319,598)
Fair value adjustment of unsecured senior notes and mortgage
notes payable....................................................... (22,330)
Common stock issued.................................................. (231,737)
----------
Cash paid for IRT acquisition, including transaction costs........... $ 189,382
==========
(Concluded)
See accompanying notes to the condensed consolidated financial statements.
9
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In thousands, except per share and square feet amounts)
1. Organization
------------
Equity One, Inc. operates as a self-managed real estate investment trust
("REIT") that principally acquires, renovates, develops and manages community
and neighborhood shopping centers located predominantly in high growth markets
in the southern United States and in the Boston, Massachusetts metropolitan
area. These shopping centers are primarily anchored by national and regional
supermarket chains or other necessity-oriented retailers such as drug stores or
discount retail stores.
The condensed consolidated financial statements include the accounts of
Equity One, Inc. and its wholly-owned subsidiaries, including those partnerships
of which it has financial and operating control. Equity One, Inc. and its
subsidiaries are hereinafter referred to as "the consolidated companies" or "the
Company." The Company has a 50% investment in two joint ventures of which the
Company is not the primary beneficiary and, accordingly, uses the equity method
of accounting for these joint ventures.
As of September 30, 2004, the Company's portfolio of neighborhood shopping
centers is located in twelve states in the southern United States and consists
of 182 properties, encompassing 127 supermarket-anchored shopping centers, 9
drug store-anchored shopping centers, 41 other retail-anchored shopping centers,
one self-storage facility, one industrial property, and three retail
developments, as well as non-controlling interests in two joint ventures which
own commercial real estate property. In October 2004, the Company completed the
acquisition of six retail properties in the Boston, Massachusetts metropolitan
area, totaling 391 square feet for total consideration of $119,800, including
the assumption of $12.100 of mortgage indebtedness.
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 and nine month periods ended September 30, 2004 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 elsewhere in this Form 10-Q and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements and related footnotes, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003,
filed with the SEC on March 15, 2004.
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. IRT Merger
----------
On February 12, 2003, the Company completed a statutory merger with IRT
Property Company ("IRT"). The Company entered into the merger to acquire 93
properties comprising an aggregate of approximately 10,041,000 square feet of
gross leasable area and to create one of the largest shopping center REITs
focusing on the southeastern United States. The merger provided the Company with
a unique business opportunity to increase its portfolio of properties and
enhance its core portfolio by broadening its concentration in existing markets
and expanding into new markets. This provided the Company with a more stable
earnings stream as a majority of the properties are in high-growth areas of the
southeastern United States. The Company's board of directors a leading shopping
center REIT and provide synergies because of the Company's experience,
geographic locations, greater market capitalization, opportunity for further
growth and liquidity. These factors contributed to a purchase price that
resulted in $11,738 of goodwill. The acquisition of IRT was accounted for using
the purchase method and the results of IRT are included in the Company's
financial statements since the date of its acquisition. The aggregate purchase
price for the acquisition was $763,047 (including transaction costs and assumed
debt), consisting of the payment of $189,382 in cash, the issuance of 17,490
shares of the Company's common stock valued at $231,737 and the assumption of
$341,928 of outstanding debt, premium on notes payable, and other liabilities.
The value of the Company's common stock was determined based on the average
market price over the 3-day period before and after the terms of the acquisition
were agreed to and announced. There were no contingent payments, options, or
commitments specified in the agreement.
4. 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 predevelopment 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.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
Land improvements 40 years
Buildings 30-40 years
Building improvements 5-40 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 $676 and $715 for the three months ended September
30, 2004 and 2003, respectively, and $2,208 and $1,982 for the nine months ended
September 30, 2004 and 2003, respectively.
5. Business Combinations
---------------------
The Company is actively pursuing acquisition opportunities and will not be
successful in all cases; costs incurred related to these acquisition
opportunities are expensed when it is probable that the Company will not be
successful in the acquisition. The results of operations of any acquired
property are included in the Company's financial statements as of the date of
its acquisition.
11
The Company allocates the purchase price of acquired companies and
properties to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. Fair value is defined as the
amount at which that asset could be bought or sold in a current transaction
between willing parties (other than in a forced or liquidation sale). In order
to allocate the purchase price of acquired companies and properties to the
tangible and intangible assets acquired, the Company identifies and estimates
the fair value of the land, buildings and improvements, reviews the leases to
determine the existence of, and estimates the fair value of, any contractual or
other legal rights and investigates the existence of, and estimates the fair
value of, any other identifiable intangible assets. Such valuations require
management to make significant estimates and assumptions, especially with
respect to intangible assets.
The cost approach is used as the primary method to estimate the fair value
of the buildings, improvements and other assets. The cost approach is based upon
the current costs to develop the particular asset in that geographic location,
less an allowance for physical and functional depreciation. The assigned value
for buildings and improvements is based on an as if vacant basis. The market
value approach is used as the primary method to estimate the fair value of the
land. The determination of the fair value of contractual intangibles is based on
the costs incurred to originate a lease, including commissions and legal costs,
excluding any new leases negotiated in connection with the purchase of a
property. In-place lease values are based on management's evaluation of the
specific characteristics of each lease and the Company's overall relationship
with each tenant. Among the factors considered in the allocation of these values
include the nature of the existing relationship with the tenant, the tenant's
credit quality, the expectation of lease renewals, the estimated carrying costs
of the property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. Estimated carrying costs include
real estate taxes, insurance, other property operating costs and estimates of
lost rentals at market rates during the hypothetical expected lease-up periods,
given the specific market conditions. Above-market, below-market and in-place
lease values are determined based on the present value (using a discount rate
reflecting the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the leases negotiated
and in-place at the time of acquisition and (ii) management's estimate of fair
market lease rates for the property or equivalent property, measured over a
period equal to the remaining non-cancelable term of the lease. The value of
contractual intangibles is amortized over the remaining term of each lease.
Other than as discussed above, the Company has determined that its real estate
properties do not have any other significant identifiable intangible assets.
Critical estimates in valuing certain of the intangible assets and the
assumptions of what marketplace participants would use in making estimates of
fair value include, but are not limited to: future expected cash flows,
estimated carrying costs, estimated origination costs, lease up periods and
tenant risk attributes, as well as assumptions about the period of time the
acquired lease will continue to be used in the Company's portfolio and discount
rates used in these calculations. Management's estimates of fair value are based
upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable. Assumptions may not always reflect unanticipated events and
changes in circumstances may occur. In making such estimates, management uses a
number of sources, including appraisals that may be obtained in connection with
the acquisition or financing of the respective property or other market data.
Management also considers information obtained in its pre-acquisition due
diligence and marketing and leasing activities in estimating the fair value of
tangible and intangible assets acquired.
12
The Company has completed the following individual property
acquisitions:
2004 Acquisition Activity
Square Purchase
Date Purchased Property Name City State Feet/Acres Price
- ------------------- -------------------------- ------------- ------- ------------ ----------
Feb. 3, 2004 Bluebonnet Outparcel Baton Rouge LA 0.9 acres $ 500
Feb. 4, 2004 Pavilion Shopping Center Naples FL 161,245 24,200
March 24, 2004 Village Center Southland TX 118,092 17,475
March 24, 2004 Creekside Plaza Arlington TX 101,016 14,025
March 31, 2004 Sparkleberry Square Columbia SC 339,051 45,150
March 31, 2004 Venice Shopping Center Venice FL 111,934 6,447
---------
First Quarter Total............................................................ 107,797
---------
April 8, 2004 Windy Hill N. Myrtle Beach SC 64,465 2,895
April 29, 2004 Hamilton Outparcel Buford GA 0.64 acres 425
May 27, 2004 Medical & Merchants Jacksonville FL 152,761 21,980
June 2, 2004 Westgate Marketplace Houston TX 298,354 47,100
---------
Second Quarter Total............................................................ 72,400
---------
Total................................................................... $ 180,197
=========
There were no acquisitions during the third quarter of 2004.
The Company's allocation of the purchase price for the acquisitions
consummated during 2004 is preliminary and is subject to change. The Company is
in the process of obtaining additional market data related to the fair value of
the land, real property and in-place leases. Management does not believe that
any adjustment would have a material effect on the Company's financial position
or results of operations.
6. Property Held for Sale
----------------------
As of September 30, 2004, four properties were held for sale with a net
book value of $12,232 and comprising 493 gross leasable square feet, of which
three of the properties were sold in October 2004 for total consideration of
$17,250, comprising an aggregate of 299 square feet of gross leasable area.
7. Investments in and Advances to Joint Ventures
---------------------------------------------
The following is a summary of the Company's investments in unconsolidated
joint ventures at September 30, 2004 and December 31, 2003 (all investments in
unconsolidated entities are accounted for under the equity method as the Company
has determined it is not the primary beneficiary):
September 30, December 31,
Entity Location Ownership 2004 2003
- ------------------ ----------------------- ------------- -------------- --------------
PG Partners Palm Beach Gardens, FL 50.0% $ 2,575 $ 2,633
Parcel F, LLC Palm Beach Gardens, FL 50.0% 228 228
-------------- --------------
Total investments in and advances to joint ventures........... $ 2,803 $ 2,861
============== ==============
13
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, 2004 December 31, 2003
------------------ -----------------
Assets:
Rental properties, net.................... $ 16,450 $ 16,688
Other assets............................... 364 457
------------------ -----------------
Total assets............................... $ 16,814 $ 17,145
================== =================
Liabilities and Ventures' Equity:
Mortgage notes............................. $ 12,794 $ 12,878
Other liabilities.......................... 70 90
Ventures' equity........................... 3,950 4,177
------------------ -----------------
Total ..................................... $ 16,814 $ 17,145
================== =================
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 and advances. The
basis differential of approximately $1,000 is being depreciated over the useful
lives of the related assets.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Rental revenues.......................... $ 559 $ 516 $ 1,709 $ 1,677
------------ ------------ ------------ ------------
Total revenues......................... 559 516 1,709 1,677
------------ ------------ ------------ ------------
Expenses:
Operating expenses....................... 181 194 533 595
Interest expense......................... 280 282 835 838
Depreciation............................. 129 140 390 415
Other expense............................ 28 8 65 64
------------ ------------ ------------ ------------
Total expenses........................ 618 624 1,823 1,912
------------ ------------ ------------ ------------
Net loss..................................... $ (59) $ (108) $ (114) $ (235)
============ ============ ============ ============
The Company's equity in losses from joint
ventures reflected in discontinued
operations ............................... $ (30) $ (54) $ (58) $ (117)
============ ============ ============ ============
Significant accounting policies used by the unconsolidated joint ventures
are similar to those used by the Company. The rental property owned by PG
Partners is held for sale and the Company's equity in the operations of the
property is reflected in discontinued operations.
8. Borrowings
----------
The following is a summary of the Company's borrowings consisting of
mortgage notes payable, unsecured senior notes payable and unsecured revolving
credit facilities:
September 30, December 31,
2004 2003
-------------- --------------
Mortgage Notes Payable
Fixed rate mortgage loans.......................... $ 480,739 $ 459,103
Unamortized net premium on mortgage notes
payable......................................... 10,633 11,779
-------------- --------------
Total......................................... $ 491,372 $ 470,882
============== ==============
14
Each of the existing mortgage loans is secured by a mortgage on one or more
of the Company's properties. Certain of the mortgage loans involving an
aggregate principal balance of approximately $160,842 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. The Company is
in the process of seeking consents from the lenders to address these issues. In
the event that the requested assurances or consents are not obtained and the
mortgage holders declare defaults under the mortgage documents, we will, if
required, prepay the remaining mortgage from existing resources, refinancing of
such mortgages, borrowings under our other lines of credit or other sources of
financing. Based on discussions with various lenders, current credit market
conditions and other factors, the Company believes that the mortgages will not
be accelerated. Accordingly, the Company believes that the violations of these
prohibitions will not have a material adverse impact on the Company's results of
operations or financial condition.
September 30, December 31,
2004 2003
-------------- --------------
Unsecured Senior Notes Payable
7.77% Senior Notes, due 4/1/06..................... $ 50,000 $ 50,000
7.25% Senior Notes, due 8/15/07.................... 75,000 75,000
3.875% Senior Notes, due 4/15/09................... 200,000 -
7.84% Senior Notes, due 1/23/12.................... 25,000 25,000
Unamortized net premium on unsecured senior
notes payable................................... 9,721 12,439
-------------- --------------
Total......................................... $ 359,721 $ 162,439
============== ==============
The indentures under which the notes were issued have several covenants
which limit the Company's ability to incur debt; require the Company to maintain
unencumbered asset ratios and limit the Company's ability to consolidate, sell,
lease, or convey substantially all of its assets to, or merge with any other
entity. These notes have also been guaranteed by most of the Company's
subsidiaries including IRT Partners L.P. ("LP"). The interest rate on the 7.77%
senior notes is subject to a 50 basis point increase if the Company does not
maintain an investment grade debt rating.
September 30, December 31,
2004 2003
--------------- ---------------
Unsecured Revolving Credit Facilities
Wells Fargo................................... $ 64,000 $ 162,000
City National Bank............................ - -
--------------- ---------------
Total....................................... $ 64,000 $ 162,000
=============== ===============
The Company entered into a $340,000 unsecured revolving credit facility
with a syndicate of banks for which Wells Fargo Bank, National Association is
the sole lead arranger and administrative agent. This facility bears interest at
the Company's option at (i) LIBOR plus 0.65% to 1.35%, depending on the credit
ratings of the Company's senior unsecured long term notes or (ii) at the greater
of (x) Wells Fargo's prime rate and (y) the Federal Funds Rate plus 0.5%. The
facility is guaranteed by most of the Company's subsidiaries. Based on the
Company's current rating, the LIBOR spread is 1.0%. The facility also includes a
competitive bid option which allows the Company to conduct auctions among the
participating banks for borrowings in an amount not to exceed $170,000, a
$35,000 swing line facility for short term borrowings, a $20,000 letter of
credit commitment and may, at the request of the Company, be increased up to a
total commitment of $400,000. The facility expires February 12, 2006 with a
one-year extension option. In addition, the facility contains customary
covenants, including financial covenants
15
regarding debt levels, total liabilities, interest coverage, EBITDA coverage
ratios, unencumbered properties, permitted investments and others. The facility
also prohibits stockholder distributions in excess of 95% of funds from
operations calculated at the end of each fiscal quarter for the four fiscal
quarters then ending. Notwithstanding this limitation, the Company can make
stockholder distributions to avoid income taxes on asset sales. If a default
under the facility exists, the Company's ability to pay dividends would be
limited to the amount necessary to maintain the Company's status as a REIT
unless the default is a payment default or bankruptcy event in which case the
Company would be prohibited from paying any dividends. As of September 30, 2004,
the Company had $64,000 outstanding on this credit facility. The weighted
average interest rate as of September 30, 2004 was 2.126%.
The Company also has a $5,000 unsecured credit facility with City National
Bank of Florida, of which there was no outstanding balance as of September 30,
2004. This facility also provides collateral for $1,378 in outstanding letters
of credit.
As of September 30, 2004, the availability under the various credit
facilities was approximately $119,274, net of outstanding balances and letters
of credit.
9. Consolidating Financial Information
-----------------------------------
Most of the Company's subsidiaries, including LP, which became a wholly
owned subsidiary of the Company in 2004 and is included in Guarantors for the
2004 periods presented below have guaranteed the Company's indebtedness under
the unsecured senior notes and revolving credit facility. The guarantees are
joint and several and full and unconditional.
Guarantors
Equity One, Combined Non Eliminating Consolidated
Condensed Balance Sheet Inc. Subsidiaries Guarantors Entries Equity One
---------- ------------ ------------ ------------ ------------
As of September 30, 2004
ASSETS
Properties, net ............... $ 510,032 $ 835,527 $ 402,237 $ -- $ 1,747,796
Investment in affiliates ...... 435,752 -- -- (435,752) --
Other assets .................. 79,343 30,324 17,793 -- 127,460
---------- ---------- ---------- ----------- ------------
Total ....................... $1,025,127 $ 865,851 $ 420,030 $ (435,752) $ 1,875,256
========== ========== ========== =========== ============
LIABILITIES
Mortgage notes payable ........ $ 72,019 $ 208,049 $ 200,671 $ -- $ 480,739
Unsecured revolving credit
facilities .................. 64,000 -- -- -- 64,000
Unsecured senior notes payable 350,000 -- -- -- 350,000
Unamortized premium/discount on
notes payable ............... 10,460 9,727 167 -- 20,354
Other liabilities ............. 20,964 21,975 11,582 -- 54,521
---------- ---------- ---------- ----------- ------------
Total liabilities ........... 517,443 239,751 212,420 -- 969,614
MINORITY INTERESTS ............... -- -- -- 1,388 1,388
STOCKHOLDERS' EQUITY ............. 507,684 626,100 207,610 (437,140) 904,254
---------- ---------- ---------- ----------- ------------
Total ......................... $1,025,127 $ 865,851 $ 420,030 $ (435,752) $ 1,875,256
========== ========== ========== =========== ============
16
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Eliminating Consolidated
Condensed Balance Sheet One, Inc. Subsidiaries LP tors Entries Equity One
------------ ----------- ---------- ------------ ------------ -------------
As of December 31, 2003
ASSETS
Properties, net.................. $ 526,136 $ 561,455 $ 187,132 $ 342,576 $ - $ 1,617,299
Investment in affiliates......... 435,752 - - - (435,752) -
Other assets..................... 22,865 21,926 2,940 12,356 - 60,087
------------ ----------- ---------- ------------ ------------ ------------
Total ......................... $ 984,753 $ 583,381 $ 190,072 $ 354,932 $ (435,752) $ 1,677,386
============ =========== ========== ============ ============ ============
LIABILITIES
Mortgage notes payable........... $ 74,726 $ 171,230 $ 34,400 $ 178,747 $ - $ 459,103
Unsecured revolving credit
facilities..................... 162,000 - - - - 162,000
Unsecured senior notes payable... 150,000 - - - 150,000
Unamortized premium on notes
payable........................ 13,505 5,950 4,661 102 - 24,218
Other liabilities................ 13,000 15,522 1,780 8,539 - 38,841
------------ ----------- ---------- ------------ ------------ ------------
Total liabilities.............. 413,231 192,702 40,841 187,388 - 834,162
MINORITY INTERESTS................. - - - - 12,672 12,672
STOCKHOLDERS' EQUITY............... 571,522 390,679 149,231 167,544 (448,424) 830,552
------------ ----------- ---------- ------------ ------------ ------------
Total.............................. $ 984,753 $ 583,381 $ 190,072 $ 354,932 $ (435,752) $ 1,677,386
============ =========== ========== ============ ============ ============
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- --------------- ------------- --------------
For the three months ended
September 30, 2004
RENTAL REVENUE:
Minimum rents............................... $ 12,263 $ 21,419 $ 11,169 $ 44,851
Expense recoveries.......................... 2,946 6,241 3,678 12,865
Termination fees............................ 26 93 91 210
Percentage rent payments.................... 68 146 68 282
------------ --------------- ------------- --------------
Total rental revenue...................... 15,303 27,899 15,006 58,208
------------ --------------- ------------- --------------
COSTS AND EXPENSES:
Property operating expenses................. 3,790 7,435 4,431 15,656
Rental property depreciation and
amortization.............................. 2,494 4,465 2,046 9,005
General and administrative expenses......... 3,732 (10) - 3,722
------------ --------------- ------------- --------------
Total costs and expenses.................. 10,016 11,890 6,477 28,383
------------- --------------- ------------- =-------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST.................................... 5,287 16,009 8,529 29,825
17
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- --------------- ------------- --------------
For the three months ended
September 30, 2004 (continued)
OTHER INCOME AND EXPENSES:
Interest expense............................ (4,813) (3,268) (4,091) (12,172)
Amortization of deferred financing fees..... (295) (38) (46) (379)
Investment income........................... 1,152 52 6 1,210
Other income................................ 150 24 - 174
------------- --------------- ------------- --------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST........................... 1,481 12,779 4,398 18,658
------------- --------------- ------------- --------------
DISCONTINUED OPERATIONS
Income (loss) from rental properties sold
or held for sale......................... 240 (134) (39) 67
Gain on disposal of income producing
properties................................ 1,130 4,888 6,197 12,215
------------- --------------- ------------- --------------
Total income from discontinued
operations............................ 1,370 4,754 6,158 12,282
------------- --------------- ------------- --------------
INCOME BEFORE MINORITY INTEREST................ 2,851 17,533 10,556 30,940
MINORITY INTEREST.............................. - (223) (16) (239)
------------- --------------- ------------- --------------
NET INCOME..................................... $ 2,851 $ 17,310 $ 10,540 $ 30,701
============= =============== ============= ==============
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
------------ ------------ ---------- --------- -----------
For the three months ended
September 30, 2003
RENTAL REVENUE:
Minimum rents.............................. $ 12,033 $ 11,841 $ 4,660 $ 8,683 $ 37,217
Expense recoveries......................... 3,038 2,875 1,417 2,913 10,243
Termination fees........................... 107 23 17 153 300
Percentage rent payments................... 194 81 23 9 307
------------ ------------ ---------- --------- -----------
Total rental revenue..................... 15,372 14,820 6,117 11,758 48,067
------------ ------------ ---------- --------- ----------
COSTS AND EXPENSES:
Property operating expenses................ 4,088 3,698 1,723 3,754 13,263
Rental property depreciation and
amortization............................. 2,337 2,464 799 1,631 7,231
General and administrative expenses........ 2,694 27 16 - 2,737
------------ ------------ --------- --------- -----------
Total costs and expenses................. 9,119 6,189 2,538 5,385 23,231
------------ ------------ --------- --------- -----------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................... 6,253 8,631 3,579 6,373 24,836
18
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
------------ ------------ ---------- --------- -----------
For the three months ended
September 30, 2003
OTHER INCOME AND EXPENSES:
Interest expense........................... (5,572) (71) (733) (3,544) (9,920)
Amortization of deferred financing fees.... (32) (154) - (44) (230)
Investment income.......................... (64) 128 - 2 66
Other income (expense)..................... 176 (128) - - 48
------------ ------------- -------- --------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST.......................... 761 8,406 2,846 2,787 14,800
------------ ------------- -------- --------- -----------
DISCONTINUED OPERATIONS
Income from rental properties sold or held
for sale................................ 563 704 - 200 1,467
Gain on disposal of income producing
properties............................... - 1,209 - - 1,209
------------ ------------- -------- --------- -----------
Total income from discontinued
operations........................... 563 1,913 - 200 2,676
------------ ------------- -------- --------- -----------
INCOME BEFORE MINORITY INTEREST............... 1,324 10,319 2,846 2,987 17,476
MINORITY INTEREST............................. - (25) (164) (38) (227)
------------ ------------- -------- --------- -----------
NET INCOME.................................... $ 1,324 $ 10,294 $ 2,682 $ 2,949 $ 17,249
============ ============= ======== ========= ===========
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- --------------- -------------- -------------
For the nine months ended
September 30, 2004
RENTAL REVENUE:
Minimum rents............................... $ 36,774 $ 61,604 $ 30,656 $ 129,034
Expense recoveries.......................... 8,688 17,372 9,626 35,686
Termination fees............................ 176 252 190 618
Percentage rent payments.................... 353 806 740 1,899
----------- --------------- -------------- --------------
Total rental revenue...................... 45,991 80,034 41,212 167,237
----------- --------------- -------------- --------------
COSTS AND EXPENSES:
Property operating expenses................. 10,562 21,109 12,209 43,880
Rental property depreciation and
amortization.............................. 7,316 12,836 5,782 25,934
General and administrative expenses......... 10,901 79 - 10,980
----------- --------------- -------------- -------------
Total costs and expenses.................. 28,779 34,024 17,991 80,794
----------- --------------- -------------- -------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST.................................... 17,212 46,010 23,221 86,443
19
Guarantors
Equity One, Combined Non Consolidated
Condensed Statement of Operations Inc. Subsidiaries Guarantors Equity One
------------- -------------- ------------- -------------
For the nine months ended
September 30, 2004 (continued)
OTHER INCOME AND EXPENSES:
Interest expense............................ 12,907) (9,849) (11,400) (34,156)
Amortization of deferred financing fees..... (741) (114) (135) (990)
Investment income........................... 1,378 220 14 1,612
Other income................................ 158 138 - 296
------------- -------------- ------------ -------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST............................ 5,100 36,405 11,700 53,205
------------- -------------- ------------ -------------
DISCONTINUED OPERATIONS
Income from rental properties sold or held
for sale................................. 1,756 1,000 389 3,145
Gain on disposal of income producing
properties................................ - 5,537 8,230 13,767
------------- -------------- ------------ -------------
Total income from discontinued operations 1,756 6,537 8,619 16,912
------------- -------------- ------------ -------------
INCOME BEFORE MINORITY INTEREST................ 6,856 42,942 20,319 70,117
MINORITY INTEREST.............................. - (596) (46) (642)
------------- -------------- ------------ -------------
NET INCOME..................................... $ 6,856 $ 42,346 $ 20,273 $ 69,475
============= ============== ============ =============
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
----------- ------------ ---------- --------- -----------
For the nine months ended
September 30, 2003
RENTAL REVENUE:
Minimum rents.............................. $ 30,741 $ 33,066 $ 11,797 $ 23,701 $ 99,305
Expense recoveries......................... 7,063 9,740 3,370 7,729 27,902
Termination fees........................... 180 362 22 223 787
Percentage rent payments................... 467 403 303 506 1,679
----------- ------------ --------- --------- -----------
Total rental revenue..................... 38,451 43,571 15,492 32,159 129,673
----------- ------------ --------- --------- -----------
COSTS AND EXPENSES:
Property operating expenses................ 9,837 11,849 4,405 9,820 35,911
Rental property depreciation and
amortization............................. 5,317 6,967 1,949 4,421 18,654
General and administrative expenses........ 7,973 (53) 16 - 7,936
----------- ------------- -------- --------- -----------
Total costs and expenses................. 23,127 18,763 6,370 14,241 62,501
----------- ------------- -------- --------- -----------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST................................... 15,324 24,808 9,122 17,918 67,172
20
Guarantors
-------------------------
IRT Non
Equity Combined Partners, Guaran- Consolidated
Condensed Statement of Operations One, Inc. Subsidiaries LP tors Equity One
----------- ------------ ---------- --------- -----------
For the nine months ended
September 30, 2003 (continued)
OTHER INCOME AND EXPENSES:
Interest expense........................... (9,301) (5,975) (1,905) (10,638) (27,819)
Amortization of deferred financing fees.... (457) (158) (1) (148) (764)
Investment income.......................... 335 515 71 19 940
Other income (expense)..................... 17 127 - (6) 138
Equity in loss of joint ventures........... - (513) - - (513)
----------- ------------ ---------- --------- -----------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST............................ 5,918 18,804 7,287 7,145 39,154
----------- ------------ ---------- --------- -----------
DISCONTINUED OPERATIONS
Income from rental properties sold or held
for sale................................ 1,641 2,104 - 569 4,314
Gain on disposal of income producing
properties............................... - 2,613 - 470 3,083
----------- ------------ ---------- --------- -----------
Total income from discontinued
operations............................. 1,641 4,717 - 1,039 7,397
----------- ------------ ---------- --------- -----------
INCOME BEFORE MINORITY INTEREST............... 7,559 23,521 7,287 8,184 46,551
MINORITY INTEREST............................. - (76) (412) (118) (606)
----------- ------------ ---------- --------- -----------
NET INCOME.................................... $ 7,559 $ 23,445 $ 6,875 $ 8,066 $ 45,945
=========== ============ ========== ========= ===========
10. Stockholders' Equity and Earnings Per Share
The following table reflects the change in number of shares of common stock
issued for the nine months ended September 30, 2004:
Common Options
Stock Exercised Total
---------- ----------- ----------
Board of Directors.......................... 13* 3 16
Officers..................................... 242* 298 540
Employees and other......................... 12* 174 186
Exercise of OP units........................ 734 - 734
Dividend Reinvestment and Stock Purchase Plan 1,941 - 1,941
---------- ----------- ----------
Total.................................. 2,942 475 3,417
=========== ========== ==========
* Reflects shares of "restricted stock" which are subject to forfeiture and vest
over periods from one to four years.
21
The following table sets forth the computation of basic and diluted shares
used in computing earnings per share for the three and nine month periods ended
September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Denominator for basic earnings per share
- weighted average shares ................ 70,626 63,777 69,820 57,348
----------- ----------- ------------ ------------
Walden Woods Village, Ltd.................... 94 94 94 94
Unvested restricted stock ................... 600 492 572 592
Convertible partnership units ............... 623 734 697 619
Stock options (using treasury method)........ 384 426 342 324
----------- ----------- ------------ ------------
Subtotal.................................. 1,701 1,746 1,705 1,629
----------- ----------- ------------ ------------
Denominator for diluted earnings per share
- weighted average shares................. 72,327 65,523 71,525 58,977
=========== =========== ============ ============
11. 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,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Income As reported.............................. $ 30,701 $ 17,249 $ 69,475 $ 45,945
Stock based employee compensation
expense included in reported net
income................................ - - - -
Total stock based employee compensation
expense determined under fair value
based method forall awards............ 190 278 574 614
------------ ------------ ------------ ------------
Pro forma................................ $ 30,511 $ 16,971 $ 68,901 $ 45,331
============ ============ ============ ============
Basic earnings
per share As reported.............................. $ 0.43 $ 0.27 $ 1.00 $ 0.80
============ ============ ============ ============
Pro forma................................ $ 0.43 $ 0.27 $ 0.99 $ 0.79
============ ============ ============ ============
Diluted earnings
per share As reported.............................. $ 0.43 $ 0.27 $ 0.98 $ 0.79
============ ============ ============ ============
Pro forma................................ $ 0.42 $ 0.26 $ 0.97 $ 0.78
============ ============ ============ ============
12. Loans to Executives
-------------------
As a result of certain provisions of the Sarbanes-Oxley Act of 2002, the
Company is generally prohibited from making loans to directors and executive
officers. Prior to the adoption of the Sarbanes-Oxley Act of 2002, the Company
had loaned $7,112 to various executives in connection with their
22
exercise of options to purchase shares of the Company's common stock of which
$6,524 has been repaid as of September 30, 2004. The outstanding notes bear
interest at a rate of 5% per annum. Interest only is payable quarterly and the
principal amount of each of the notes is due in June 2007. In accordance with
the provisions of the Sarbanes-Oxley Act of 2002, there have been no material
modifications to any of the terms of the loans granted to our executives.
13. Minority Interest
-----------------
On December 30, 1998, a wholly owned subsidiary of the Company, Equity One
(Walden Woods) Inc. (the "Walden Woods General Partner"), formed a limited
partnership, in which a retail 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 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, the limited 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 in the
accompanying condensed consolidated balance sheet. 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 earnings 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. The North Port Minority Partners had the
right to 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. During July 2003, the
North Port Minority Partners redeemed their OPUs in exchange for 261.850 shares
of the Company's common stock.
The Company is the general partner of IRT Partners L.P. ("LP") and
maintains an indirect partnership interest through its wholly-owned subsidiary,
IRT Management Company. LP was formed in order to enhance the acquisition
opportunities of the Company through a downREIT structure. This structure offers
potential sellers of properties the ability to make a tax-deferred sale of their
real estate properties in exchange for limited partnership units ("OP Units") of
LP. During September 2004, the Limited Partners' OP Units were redeemed in
exchange for 734.266 shares of the Company's common stock. LP is now a wholly
owned subsidiary of the Company.
The Company also has a controlling general partnership interest (75%
interest) in Venice Plaza and records a minority interest for the limited
partners' share of equity.
14. Dispositions
------------
The following table reflects the properties sold during 2004 and 2003:
Square Feet/ Gross Sales Gain (Loss)
Property Location Date Sold Acres Price On Sale
- --------------------------- ---------------- ---------- ------------ ----------- -----------
2004 Dispositions
- ---------------------------
Southwest Walgreens........ Phoenix, AZ February 93,402 $ 6,650 $ 2,035
----------- -----------
First quarter 2004......................................................... 6,650 2,035
----------- -----------
Watson Central............ Warner Robbins, GA June 227,747 6,000 (483)
----------- -----------
23
Square Feet/ Gross Sales Gain (Loss)
Property (continued) Location Date Sold Acres Price On Sale
- --------------------------- ---------------- ---------- ------------ ----------- -----------
Second quarter 2004........................................................ $ 6,000 $ (483)
----------- -----------
Plaza Del Rey.............. Miami, FL July 50,146 9,000 6,197
Forrest Gallery............ Tullahoma, TN July 214,450 10,500 1,560
Epsilon.................... West Palm Beach, FL August 18,707 2,650 1,176
Millervillage.............. Baton Rouge, LA September 94,559 2,700 1,130
Plymouth Park (4 properties) Irving, TX September 728,566 24,000 2,152
----------- -----------
Sale of income producing properties........................................ 48,850 12,215
Miramar Outparcel.......... Miramar, FL August 2.0 acres 1,500 158
----------- -----------
Third quarter 2004......................................................... 50,350 12,373
----------- -----------
Total for 2004 ......................................................... $ 63,000 $ 13,925
=========== ===========
Square Feet/ Gross Sales Gain (Loss)
Property Location Date Sold Acres Price On Sale
- --------------------------- --------------- ---------- ------------ ----------- -----------
2004 Dispositions
- ---------------------------
Eckerd..................... Leesburg, FL March 12,739 $ 4,050 $ 326
Eckerd..................... Melbourne, FL March 10,908 2,715 177
----------- -----------
First quarter 2003......................................................... 6,765 503
----------- -----------
Pompano.................... Pompano Beach, FL April 80,697 3,400 470
Huntcrest out parcels...... Huntcrest, GA May 2.94 acres 1,686 -
Oak Square Joint Venture... Gainesville, FL June n/a 2,230 901
----------- -----------
Second Quarter 2003........................................................ 7,316 1,371
----------- -----------
CDG (Park Place) LLC JV.... Plano, TX September n/a 4,434 1,209
----------- -----------
Third quarter 2003......................................................... 4,434 1,209
----------- -----------
Heritage Walk.............. Milledgeville, GA November 159,991 10,000 -
Stadium Plaza.............. Phenix City, AL December 70,475 4,800 -
----------- -----------
Total for 2003 ......................................................... $ 33,315 $ 3,083
=========== ===========
The Company classified the results of operations from the properties sold
during 2003 and 2004 and held for sale at September 30, 2004 as income from
discontinued operations in the accompanying condensed consolidated statements of
operations. The condensed consolidated statements of operations for these
properties are shown below:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ --------------
Rental revenue................................ $ 1,765 $ 3,035 $ 7,550 $ 8,837
------------ ------------ ------------ --------------
Property operating expenses................... 1,124 939 2,658 2,672
Rental property depreciation and
amortization............................... 271 343 864 1,052
------------ ------------ ------------ --------------
Total expenses................................ 1,395 1,282 3,522 3,724
------------ -------------- ------------ --------------
Interest expense.............................. (243) (378) (735) (1,107)
Amortization of deferred financing fees....... (30) (29) (89) (90)
Equity in income of joint ventures............ (30) 121 (59) 508
Loss on extinguishment of
debt.......................................... - - - (110)
------------ ------------ ------------ --------------
Income from discontinued operations........... $ 67 $ 1,467 $ 3,145 $ 4,314
============ ============ ============ ==============
24
15. Debt Extinguishment
-------------------
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 loss on extinguishment of debt as part of ordinary income as it no
longer meets the criteria for extraordinary gain (loss) accounting treatment.
During 2003, the Company prepaid four mortgages and incurred a loss of $623 on
the early extinguishment of debt of which $110 is reflected in income from
rental properties sold or held for sale.
16. New Accounting Pronouncements and Changes
-----------------------------------------
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ARB 51. FIN 46 was
revised in December 2003. FIN 46 provides guidance on identifying entities for
which control is achieved through means other than through voting rights, or
variable interest entities ("VIE"), and how to determine when and which business
enterprises should consolidate the operating results of a VIE. In addition, FIN
46 requires both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE to make additional disclosures. The
consolidation provisions of FIN 46 are effective immediately for variable
interests in VIEs created after January 31, 2003. For variable interests in VIEs
created before February 1, 2003, the provisions of FIN 46 are effective for the
first interim or annual period ending after December 15, 2003. The Company has
evaluated the effect of FIN 46 and has determined those cases in which it is the
primary beneficiary and has consolidated the operating results of those VIEs.
Where the Company has determined it is not the primary beneficiary of the VIE,
it reports the VIE under the equity method. The adoption of FIN 46 did not
require a change in the accounting treatment of any VIEs owned by the Company.
The Company has not become a party to any VIEs during 2003 or 2004.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which clarifies the accounting
and reporting for derivative instruments, including derivative instruments that
are embedded in contracts. This statement is effective for contracts entered
into or modified after June 30, 2003. The Company adopted this pronouncement
beginning July 1, 2003. The adoption of SFAS No. 149 did not have a material
impact on the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for the classification and measurement of financial
instruments that possess characteristics similar to both liability and equity
instruments. SFAS No. 150 also addresses the classification of certain financial
instruments that include an obligation to issue equity shares. On October 29,
2003, the FASB voted to defer, for an indefinite period, the application of the
guidance in SFAS No. 150. The FASB decided to defer the application of certain
aspects of Statement 150 until it could consider some of the resulting
implementation issues. The Company has adopted certain provisions of SFAS No.
150 which did not have a material impact on the Company's financial condition or
results of operations.
In December 2003, the FASB issued Statement No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits. This
Statement revises employers' disclosures about pension plans and other post
retirement benefit plans. It does not change the measurement or recognition
provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. This Statement retains the
disclosure requirements contained in FASB Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it replaces.
It requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The adoption of SFAS No. 132 (as revised) did not
have a material impact on the Company's financial statements.
25
17. Commitments and Contingencies
-----------------------------
As of September 30, 2004, the Company has pledged letters of credit
totaling $1,433 as additional security for certain financings and other
activities.
The Company is subject to litigation in the normal course of business.
However, none of the litigation outstanding as of September 30, 2004, in the
opinion of management, will have a material adverse effect on the financial
condition or results of operations of the Company.
18. Subsequent Events
-----------------
In October 2004, the Company completed the sale of three properties for
total consideration of $17,250, comprising an aggregate of 299 square
feet of gross leasable area.
In October 2004, the Company completed the acquisition of six retail
properties in the Boston, Massachusetts metropolitan area, totaling 391 square
feet for total consideration of $119,800, including the assumption of $12,100 of
mortgage indebtedness. The Company funded the cash from funds on hand and
borrowings under our existing credit facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, the Company's audited Consolidated
Financial Statements and notes thereto for the year ended December 31, 2003 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003. The results of operations for an interim period may not
give a true indication of results for the entire year.
Unless the context otherwise requires, all references to "we", "our", "us",
"Equity One", and the "Company" in this report refer collectively to Equity One,
Inc. and its subsidiaries, including joint ventures.
Critical Accounting Policies
Our 2003 Annual Report on Form 10-K contains a description of the critical
accounting policies of the Company, including revenue recognition, cost
capitalization, impairment of real estate assets, purchase accounting treatment
for acquisitions, impairment testing of goodwill, and joint venture accounting.
For the three and nine month period ended September 30, 2004, there were no
material changes to these policies.
Overview
During the first nine months of 2004 we executed our business strategy as
follows:
o Increased the average rental rate on 290 lease renewals aggregating
653,000 square feet by 4.2% to $13.59 per square foot;
o Executed 314 new leases totaling 1.2 million square feet at an average
rental rate of $10.74 per square foot, which, net of lost leases,
resulted in net absorption of 83 square feet;
o Acquired 10 properties totaling $180.2 million, adding over 1.3
million square feet of gross leasable area;
o Sold ten non-core properties for $61.5 million and an out parcel for
$1.5 million, generating $18.9 million of gains on sale; and
o Raised $200 million in an unsecured debt offering with a yield of
3.902% of which $100 million was swapped to a floating rate of 6 month
LIBOR in arrears plus 0.4375%.
26
The various factors we use to evaluate our third quarter of 2004 operating
results are as follows:
o Increased the rental rate on 105 lease renewals aggregating 202,000
square feet by 3.9% to $14.50 per square foot;
o Executed 104 new leases totaling 288,000 square feet at an average
rental rate of $12.31 per square foot, which net of lost leases
resulted in net absorption of 4