10-Q 1 g71151e10-q.txt IRT PROPERTY COMPANY 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____________ to ________________ Commission File Number 1-7859 -------------------- IRT PROPERTY COMPANY -------------------- (Exact name of registrant as specified in its charter) Georgia 58-1366611 -------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 Galleria Parkway, Suite 1400 Atlanta, Georgia 30339 ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (770) 955-4406 ------------------------------------------------------------- (Registrant's telephone number, including area code) N/A ------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 14, 2001 -------------------------- ------------------------------ Common Stock, $1 Par Value 30,472,430 Shares 1 2 CERTAIN INFORMATION CONTAINED IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. READERS OF THIS REPORT SHOULD BE AWARE THAT THERE ARE VARIOUS FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS MADE HEREIN. THIS INFORMATION IS FURTHER QUALIFIED BY THE SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS AND THE INFORMATION IN THE SECTION ENTITLED "RISK FACTORS" CONTAINED IN THE IRT PROPERTY COMPANY ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000, WHICH ARE INCORPORATED HEREIN BY REFERENCE. 2 3 Item 1. Financial Statements IRT PROPERTY COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share amounts)

The accompanying notes are an integral part of these consolidated balance sheets. 3 4 IRT PROPERTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Three and Six Months Ended June 30, 2001 and 2000 (Unaudited) (In thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated statements. 4 5 IRT PROPERTY COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three and Six Months Ended June 30, 2001 and 2000 (Unaudited) (In thousands)

The accompanying notes are an integral part of these consolidated statements. 5 6 IRT PROPERTY COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001 and 2000 (Dollars in thousands, except per share amounts) 1. Unaudited Financial Statements These consolidated financial statements for interim periods are unaudited and should be read in conjunction with the Company's Report on Form 10-K for the year ended December 31, 2000. The accompanying consolidated financial statements include the accounts of IRT Property Company and its wholly-owned subsidiaries, IRT Management Company ("IRTMC"), VW Mall, Inc., IRT Alabama, Inc. ("IRTAL") and IRT Capital Corporation II ("IRTCCII"), and its majority-owned subsidiary, IRT Partners L.P. ("LP") (collectively, the "Company"). Intercompany transactions and balances have been eliminated in the consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to a fair presentation of the financial statements as of June 30, 2001 and 2000 have been recorded. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for future interim periods or for the full year. As of December 31, 2000, the Company's investment in IRT Capital Corporation ("IRTCC") and IRTCCII was accounted for under the equity method of accounting. In January 2001, IRTCC was dissolved and the Company's investment in IRTCC was eliminated. In March 2001, the Company purchased the remaining voting and non-voting common stock of IRTCCII, making IRTCCII a wholly-owned subsidiary. See Note 8. 2. Investment in and Advances to Unconsolidated Affiliates As of June 30, 2001, LP, IRTCCII, IRTAL and IRTMC guaranteed the Company's indebtedness under the Company's existing unsecured revolving term loan and its other senior debt. The guarantees are joint and several and full and unconditional.

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8 9 NOTES: (1) For the three and six months ended June 30, 2001, includes IRTMC, IRTAL, and IRTCCII. As of the year ended December 31, 2000 and for the three and six months ended June 30, 2000, includes IRTMC and IRTAL. 3. Earnings Per Share Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. The effects of the conversion of the operating partnership units held by the minority interest are dilutive for the six months ended June 30, 2001 and the three and six months ended June 30, 2000 and have been included in the calculation of diluted earnings per share for those periods. The effects of the conversion of the operating partnership units have been excluded from the three months ended June 30, 2001 as they are anti-dilutive. For the three and six months ended June 30, 2001 and the six months ended June 30, 2000, the effects of the conversion of the 7.3% debentures have been included in the calculation of diluted earnings per share as they are dilutive. The effects of the conversion of such debentures have been excluded from the calculation of diluted earnings per share for the three months ended June 30, 2000 as they were anti-dilutive for that period. The effects of certain stock options and non-vested restricted stock, using the treasury stock method, have been included in the calculation of diluted earnings per share, as they are dilutive. 9 10

10 11 4. Rental Properties

In connection with the sale of Ft. Walton Beach Plaza, the Company received a note for a second mortgage in the amount of $250. The note bears interest at 7.0%, payable monthly, and the entire principal balance of the note is due on July 1, 2003. Old Phoenix National Bank was classified and accounted for as a direct financing lease. 5. Mortgage Notes Payable On April 19, 2001, the Company obtained non-recourse, secured loans totaling $20,740, on three shopping centers at a weighted average fixed interest rate of 7.17%. The loans are due and payable in ten years and the principal amortization is based on a thirty year amortization schedule. Costs associated with obtaining the secured loans totaled $366 and are being amortized over the term of the loan. 6. 7.3% Convertible Subordinated Debentures Based upon the $11.25 conversion price, 2,068,889 authorized but unissued common shares have been reserved for possible issuance if the remaining $23,275 of debentures outstanding on June 30, 2001 are converted. 7. Senior Notes On March 23, 2001, the Company established a Medium Term Note Program (the "MTN Program"), pursuant to the Company's shelf registration statement filed in January 2001, pursuant to which the Company may from time to time issue and sell up to $100,000 of medium term notes (the "Medium Term Notes"). The Medium Term Notes have a maturity of nine months or more from the date of issuance and are unconditionally guaranteed as to the payment of principal, premium, if any, and interest, if any, by each of LP, IRTMC, IRTAL and IRTCCII. 11 12 On March 29, 2001, pursuant to the MTN Program, the Company issued $50,000 of 7.77% senior notes due April 1, 2006. Interest on these senior notes is payable semi-annually on April 1 and October 1. Costs associated with the issuance of these senior notes totaled approximately $672 and are being amortized over the life of the notes. Proceeds of these notes were used to repay the $50,000 of 7.45% senior notes that matured April 1, 2001. 8. Investment in Joint Venture IRTCII, a taxable subsidiary, was formed under the laws of Georgia in 1999. IRTCCII has the ability to develop properties, buy and sell properties, provide equity to developers and perform third party management, leasing and brokerage. As of December 31, 2000, the Company accounted for IRTCCII under the equity method of accounting, as the Company held 96% of the non-voting common stock and 1% of the voting common stock. The remaining voting common stock was held by an officer and a director of the Company. In March 2001 the Company purchased the remaining non-voting and voting common stock from such officer and director for approximately $2, which was the initial investment amount of such officer and director. As a result, as of June 30, 2001, IRTCCII is a wholly-owned taxable subsidiary of the Company. 9. Treasury Stock On January 16, 2001, the Company completed the $25,000 stock repurchase program authorized by the Board of Directors in November 1999. The Company repurchased a total of 3,028,276 shares at an average price of $8.26 per share. 10. Commitments and Contingencies Certain of the Company's properties have environmental concerns that have been or are being addressed. The Company maintains limited insurance coverage for this type of environmental risk. Although no assurance can be given that Company properties will not be affected adversely in the future by environmental problems, the Company presently believes that there are no environmental matters that are reasonably likely to have a material adverse effect on the Company's financial position. 12 13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in thousands) Material Changes in Financial Condition. During the six months ended June 30, 2001, the Company: - obtained cash proceeds of $50,000 from the issuance of the 7.77% senior unsecured notes, - obtained cash proceeds of $20,740 from obtaining non-recourse, secured loans on three shopping centers at a weighted average fixed interest rate of 7.17%. - obtained cash proceeds of approximately $11,260 upon the sales of four properties and recognized a gain of approximately $2,498 for financial reporting purposes, - obtained cash proceeds of approximately $931 upon the sales of two outparcels and recognized a gain of approximately $745 for financial reporting purposes, and - obtained cash, net of assets acquired, of $177 in the purchase of IRTCCII stock. During the six months ended June 30, 2001, the Company utilized funds of: - approximately $14,261 to pay dividends to the holders of the Company's common stock, - approximately $405 to repurchase outstanding shares of the Company's common stock, - approximately $1,989 for development of land and properties, - approximately $3,426 for capital expenditures relating to operating properties, - approximately $7,903 for the acquisition of a shopping center investment, - approximately $1,078 for deferred financing costs in connection with the issuance of the 7.77% Senior Notes and the $20,740 of secured loans, and - $19,000 to repay a portion of the outstanding balance of the unsecured line of credit. During the six months ended June 30, 2000, the Company: - obtained cash proceeds of approximately $11,660 from the sale of two properties and recognized a gain of approximately $2,738 for financial reporting purposes. During the six months ended June 30, 2000, the Company utilized funds of: - approximately $14,968 to pay dividends to the holders of the Company's common stock, - approximately $8,318 to repurchase 1,030,501 shares of the Company's common stock, - approximately $3,520 to repay a 7.75% mortgage at its scheduled maturity, 13 14 - approximately $2,214 to fund a loan for a co-development project, - approximately $3,382 for capital expenditures and tenant improvements, and - approximately $1,650 for advances to IRTCCII for further development of land and properties acquired in 1999. Material Changes in Results of Operations. During the three and six months ended June 30, 2001, rental income from the Company's portfolio of shopping center investments: - decreased approximately $150 and $28, respectively, for the core portfolio, - increased approximately $816 and $1,273, respectively, due to the acquisition of a shopping center in 2000 and one in the second quarter of 2001, and - decreased approximately $381 and $771, respectively, due to sales of three investments in 2001 and five investments in 2000. During the three and six months ended June 30, 2000, compared to the corresponding periods of 1999, rental income from the Company's portfolio of shopping center investments: - increased approximately $361 and $706, respectively, for the core portfolio, - increased approximately $0 and $502, respectively, due to the acquisition of two shopping centers in the first quarter of 1999, and - decreased approximately $683 and $1,278, respectively, due to sales of two investments in 2000 and four in 1999. Percentage rentals received from shopping center investments, excluding percentage rentals received from the two Wal-Mart investments classified as direct financing leases, totaled approximately $224 and $221 during the three months ended June 30, 2001 and 2000, respectively, and $817 and $820 during the six months ended June 30, 2001 and 2000, respectively. Percentage rental income is recorded upon collection based on the tenants' lease year end. Interest income during the three and six months ended June 30, 2001 decreased $117 and $200, respectively, due primarily to the interest charged to previously unconsolidated affiliates offset by interest accrued on development loans. During the three and six months ended June 30, 2001, operating expenses related to the Company's portfolio of real estate investments: - increased approximately $248 and $706, respectively, for the core portfolio, - increased approximately $210 and $367, respectively, due to the acquisition of a shopping center in 2000 and one in the second quarter of 2001, and 14 15 - decreased approximately $65 and $178 due to sales of three investments in 2001 and five investments in 2000. During the three and six months ended June 30, 2000, operating expenses related to the Company's portfolio of real estate investments: - increased approximately $275 and $388, respectively, for the core portfolio, - increased approximately $0 and $125, respectively, due to the acquisition of two shopping centers in 1999, and - decreased approximately $181 and $311, respectively, due to the sales of two properties in 2000 and four in 1999. During the three and six months ended June 30, 2001, interest expense on mortgages increased approximately $262 and $196 primarily due to the addition in the second quarter of 2001 of the non-recourse, secured loans totaling $20,740, on three shopping centers at a weighted average fixed interest rate of 7.17%. The loans are due and payable in ten years and principal amortization is based on a thirty year amortization schedule. Interest expense on bank indebtedness decreased approximately $57 for the three months ended and increased $88 for the six months ended June 30, 2001, respectively. The Company had average borrowings of approximately $42,705 and $20,768 at effective interest rates of 6.88% and 7.6%, under its bank credit facility during the three months ended June 30, 2001 and 2000, respectively. The Company had average borrowings of approximately $24,251 and $20,505 at an effective interest rates of 7.3% for the six months ended June 30, 2001 and 2000, respectively. The Company incurred commitment fees of approximately $100 and $101 in 2001 and 2000, respectively, which are included in this interest expense. The net increase of $261 and $413 in depreciation expense for the three and six months ended June 30, 2001 was due to the acquisition of a real estate investment in the fourth quarter of 2000 and one in the second quarter of 2001, net of the effect of the disposition of three properties in the second quarter of 2001 and five properties in 2000. The net increase in general and administrative expense of approximately $224 and $414 for the three and six months ended June 30, 2001 was primarily due to an increase in development expenditures. 15 16 Funds from Operations. The Company defines funds from operations, consistent with the National Association of Real Estate Investment Trusts ("NAREIT") definition of such term, as net earnings on real estate less gains (losses) on sales of properties and extraordinary items plus depreciation and amortization of capitalized leasing costs. Interest and amortization of issuance costs related to convertible subordinated debentures and minority interest expenses ("OP Units") are added back to funds from operations when assumed conversion of the debentures and OP Units is dilutive. Conversion of the debentures and OP Units is dilutive and therefore assumed for the three and six months ended June 30, 2001 and 2000. Management believes funds from operations should be considered along with, but not as an alternative to, net income as defined by generally accepted accounting principles as a measure of the Company's operating performance. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.

(*) Net of amounts attributable to minority interests 16 17 Additional Information: The following data is presented with respect to amounts incurred for improvements to the Company's real estate investments, for the straight line rent adjustment, for leasing fees paid and for principal amortization of mortgage notes payable during the three and six months ended June 30, 2001 (in thousands)

** Includes tenant improvements and capital expenditures to prepare spaces for leasing. Excludes expansions. 17 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. The Company filed a Report on Form 8-K dated March 30, 2001 relating to the sale of $50,000,000 of its 7.77% Fixed Rate Senior Notes due 2006 (the "Notes") pursuant to the Company's $100,000,000 Medium Term Note Program (the "MTN Program"). No other reports on Form 8-K were filed by the Company during the quarter ended March 31, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. IRT PROPERTY COMPANY Date: August 14, 2001 /s/ Thomas H. McAuley ------------------------------------ Thomas H. McAuley President & Chief Executive Officer Date: August 14, 2001 /s/ James G. Levy ------------------------------------ James G. Levy Executive Vice President & Chief Financial Officer 18

IRT PROPERTY CO 10-Q