UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
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 1-09349
SIZELER PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
| MARYLAND | 72-1082589 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 2542 WILLIAMS BOULEVARD, KENNER, LOUISIANA | 70062 | |
| (Address of principal executive offices) | (Zip code) | |
Registrant’s telephone number, including area code: (504) 471-6200
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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).
| Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
21,469,074 shares of Common Stock ($.0001 Par Value) were outstanding as of November 1, 2006.
Sizeler Property Investors, Inc. and Subsidiaries
INDEX
| Page | ||||
| Item 1. |
Financial Statements | |||
| Consolidated Balance Sheets | 3 | |||
| Consolidated Statements of Income | 4 | |||
| Consolidated Statements of Cash Flows | 5 | |||
| Notes to Consolidated Financial Statements | 6 – 11 | |||
| Report of Independent Registered Public Accounting Firm | 12 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 - 20 | ||
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 20 | ||
| Item 4. |
Controls and Procedures | 20 | ||
| Item 1. |
Legal Proceedings | 20 | ||
| Item 1a. |
Risk Factors | 21 | ||
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 21 | ||
| Item 3. |
Defaults upon Senior Securities | 21 | ||
| Item 4. |
Submission of Matters to a Vote of Security Holders | 21 | ||
| Item 5. |
Other Information | 21 | ||
| Item 6. |
Exhibits | 21 | ||
| 22 | ||||
2
FINANCIAL INFORMATION
SIZELER PROPERTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30 2006 (Unaudited) |
December 31 (Audited) |
|||||||
| ASSETS |
||||||||
| Real estate investments: (Note C) |
||||||||
| Land |
$ | 42,691,000 | $ | 46,411,000 | ||||
| Buildings and improvements, net of accumulated depreciation of $112,066,000 in 2006 and $120,301,000 in 2005 |
202,914,000 | 222,064,000 | ||||||
| Construction in progress |
4,962,000 | 3,192,000 | ||||||
| Land held for development or sale |
6,757,000 | 9,658,000 | ||||||
| Investment in real estate partnership |
931,000 | 917,000 | ||||||
| 258,255,000 | 282,242,000 | |||||||
| Cash and cash equivalents |
1,425,000 | 5,787,000 | ||||||
| Accounts receivable and accrued revenue, net of allowance for doubtful accounts of $173,000 in 2006 and $443,000 in 2005 |
4,206,000 | 6,904,000 | ||||||
| Notes receivable |
1,120,000 | 1,180,000 | ||||||
| Prepaid expenses and other assets |
5,169,000 | 6,094,000 | ||||||
| Total Assets |
$ | 270,175,000 | $ | 302,207,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| LIABILITIES |
||||||||
| Mortgage notes payable (Note D) |
$ | 82,261,000 | $ | 83,897,000 | ||||
| Bank notes payable |
2,020,000 | 25,995,000 | ||||||
| Accounts payable and accrued expenses |
6,901,000 | 5,131,000 | ||||||
| Tenant deposits and advance rents |
918,000 | 851,000 | ||||||
| Total Liabilities |
92,100,000 | 115,874,000 | ||||||
| SHAREHOLDERS’ EQUITY |
||||||||
| Series A preferred stock, 40,000 shares authorized, none issued |
— | — | ||||||
| Series B preferred stock, par value $0.0001 per share, liquidation preference $25 per share, 2,476,000 shares authorized, shares issued and outstanding — 247,000 in 2006 and 326,000 in 2005 |
1,000 | 1,000 | ||||||
| Common stock, par value $0.0001 per share, 51,484,000 shares authorized, shares issued and outstanding — 21,469,000 in 2006 and 21,154,000 in 2005 |
1,000 | 1,000 | ||||||
| Excess stock, par value $0.0001 per share, 16,000,000 authorized, none issued |
— | — | ||||||
| Additional paid-in capital |
256,285,000 | 255,475,000 | ||||||
| Accumulated other comprehensive gain |
— | 55,000 | ||||||
| Cumulative net income |
71,325,000 | 73,405,000 | ||||||
| Cumulative distributions paid |
(149,537,000 | ) | (142,604,000 | ) | ||||
| Total Shareholders’ Equity |
178,075,000 | 186,333,000 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 270,175,000 | $ | 302,207,000 | ||||
See notes to consolidated financial statements.
3
SIZELER PROPERTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| Three Months ended September 30 |
Nine Months ended September 30 |
|||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| OPERATING REVENUE (Note B) |
||||||||||||||||
| Contractual rental income and charges |
$ | 12,727,000 | $ | 11,988,000 | $ | 38,098,000 | $ | 34,733,000 | ||||||||
| Other income |
440,000 | 533,000 | 1,502,000 | 1,505,000 | ||||||||||||
| 13,167,000 | 12,521,000 | 39,600,000 | 36,238,000 | |||||||||||||
| OPERATING EXPENSES (Note B) |
||||||||||||||||
| Real estate taxes |
1,005,000 | 971,000 | 2,903,000 | 2,901,000 | ||||||||||||
| Utilities |
554,000 | 501,000 | 1,487,000 | 1,348,000 | ||||||||||||
| Operations and maintenance |
2,155,000 | 1,860,000 | 6,396,000 | 5,129,000 | ||||||||||||
| Other operating expenses |
892,000 | 1,185,000 | 2,903,000 | 2,983,000 | ||||||||||||
| Administrative expenses (Note E) |
1,114,000 | 1,731,000 | 2,868,000 | 5,263,000 | ||||||||||||
| Proxy contest expenses |
— | 1,074,000 | — | 2,365,000 | ||||||||||||
| Hurricane expenses (Note H) |
(292,000 | ) | 538,000 | 53,000 | 538,000 | |||||||||||
| Restructuring Costs |
825,000 | — | 1,971,000 | — | ||||||||||||
| Depreciation and amortization (Note E) |
3,030,000 | 3,035,000 | 13,310,000 | 8,839,000 | ||||||||||||
| 9,283,000 | 10,895,000 | 31,891,000 | 29,366,000 | |||||||||||||
| OPERATING INCOME |
3,884,000 | 1,626,000 | 7,709,000 | 6,872,000 | ||||||||||||
| Interest expense (Note D) |
1,556,000 | 1,686,000 | 5,250,000 | 6,991,000 | ||||||||||||
| Interest expense - prepayment premium |
— | 2,163,000 | — | 2,163,000 | ||||||||||||
| 1,556,000 | 3,849,000 | 5,250,000 | 9,154,000 | |||||||||||||
| Income (loss) from continuing operations before equity in income of partnership, gain (loss) on sale of real estate and net earnings (losses) from discontinued operations |
2,328,000 | (2,223,000 | ) | 2,459,000 | (2,282,000 | ) | ||||||||||
| Equity in income of partnership |
30,000 | 29,000 | 87,000 | 87,000 | ||||||||||||
| Income (loss) from continuing operations before gain (loss) on sale of real estate and net earnings (losses) from discontinued operations |
2,358,000 | (2,194,000 | ) | 2,546,000 | (2,195,000 | ) | ||||||||||
| Net earnings (losses) from discontinued real estate operations |
(8,000 | ) | (106,000 | ) | 179,000 | 176,000 | ||||||||||
| Gain (loss) on sale of real estate (Note C) |
— | — | (4,805,000 | ) | 15,692,000 | |||||||||||
| NET INCOME (LOSS) |
$ | 2,350,000 | $ | (2,300,000 | ) | $ | (2,080,000 | ) | $ | 13,673,000 | ||||||
| NET INCOME (LOSS) ALLOCATION: |
||||||||||||||||
| Allocable to preferred shareholders |
150,000 | 205,000 | 497,000 | 614,000 | ||||||||||||
| Allocable to common shareholders |
2,200,000 | (2,505,000 | ) | (2,577,000 | ) | 13,059,000 | ||||||||||
| NET INCOME (LOSS) |
$ | 2,350,000 | $ | (2,300,000 | ) | $ | (2,080,000 | ) | $ | 13,673,000 | ||||||
| Net income (loss) from continuing operations per common share - basic and diluted |
$ | 0.10 | $ | (0.11 | ) | $ | 0.10 | $ | (0.16 | ) | ||||||
| Income (loss) from discontinued real estate operations and gain (loss) on sale of real estate-basic and diluted |
(0.00 | ) | (0.01 | ) | (0.22 | ) | 0.88 | |||||||||
| Net income (loss) available per common share - basic and diluted (Note A) |
$ | 0.10 | $ | (0.12 | ) | $ | (0.12 | ) | $ | 0.72 | ||||||
| Weighted average common shares outstanding - basic and diluted |
21,468,000 | 21,116,000 | 21,416,000 | 18,086,000 | ||||||||||||
See notes to consolidated financial statements.
4
SIZELER PROPERTY INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine months ended September 30 | ||||||||
| 2006 | 2005 | |||||||
| OPERATING ACTIVITIES: |
||||||||
| Net (loss) income |
$ | (2,080,000 | ) | $ | 13,673,000 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
| Depreciation and amortization (Note E) |
13,605,000 | 9,601,000 | ||||||
| Non cash compensation |
19,000 | 124,000 | ||||||
| (Gain) loss on sale of real estate |
4,805,000 | (15,692,000 | ) | |||||
| Loss on sale of fixed assets |
— | 281,000 | ||||||
| Change in accounts receivable and accrued revenue |
2,758,000 | (938,000 | ) | |||||
| Change in prepaid expenses and other assets |
1,457,000 | 528,000 | ||||||
| Change in accounts payable and accrued expenses |
2,338,000 | (1,389,000 | ) | |||||
| Net Cash Provided by Operating Activities |
22,902,000 | 6,188,000 | ||||||
| INVESTING ACTIVITIES: |
||||||||
| Acquisitions of and improvements to real estate investments |
(12,026,000 | ) | (16,398,000 | ) | ||||
| Proceeds from sale of real estate |
17,407,000 | 24,700,000 | ||||||
| Net Cash Provided by Investing Activities |
5,381,000 | 8,302,000 | ||||||
| FINANCING ACTIVITIES: |
||||||||
| Principal payments on mortgage notes payable (Note D) |
(1,636,000 | ) | (23,295,000 | ) | ||||
| Net payments on notes payable to banks |
(23,975,000 | ) | (12,065,000 | ) | ||||
| Change in mortgage escrow deposits and debt issuance costs |
(660,000 | ) | (101,000 | ) | ||||
| Cash distributions to common shareholders |
(6,436,000 | ) | (5,533,000 | ) | ||||
| Cash distributions to preferred shareholders |
(497,000 | ) | (614,000 | ) | ||||
| Purchase of preferred stock |
(2,063,000 | ) | — | |||||
| Redemption of debentures |
— | (2,630,000 | ) | |||||
| Proceeds from issuance of shares of common stock pursuant to an equity placement and direct stock purchase and stock option plans |
2,622,000 | 30,339,000 | ||||||
| Net Cash Used in Financing Activities |
(32,645,000 | ) | (13,899,000 | ) | ||||
| Net (decrease) increase in cash and cash equivalents |
(4,362,000 | ) | 591,000 | |||||
| Cash and cash equivalents at beginning of year |
5,787,000 | 6,297,000 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 1,425,000 | $ | 6,888,000 | ||||
| Supplemental cash flow information: |
||||||||
| Cash interest payments |
$ | 5,256,000 | $ | 4,122,000 | ||||
| Non cash operating and investing activities |
$ | 840,000 | $ | 1,200,000 | ||||
See notes to consolidated financial statements.
5
Sizeler Property Investors, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2006
NOTE A — BASIS OF PRESENTATION
As of September 30, 2006, the Company’s real estate portfolio included interests in fifteen shopping centers and fifteen apartment communities. The Company holds, directly or indirectly through wholly-owned subsidiaries, a fee interest in twenty-eight of its properties, and long-term ground leases on the remaining two properties – Southwood Shopping Center in Gretna, Louisiana and Westland Shopping Center in Kenner, Louisiana. Fourteen properties are held through partnerships and limited partnerships whereby the owners are wholly-owned subsidiaries of Sizeler Property Investors, Inc. Fifteen properties in the portfolio are held through wholly-owned subsidiary corporations or limited liability companies. One of the properties, Southwood Shopping Center, is owned by a partnership in which the Company has a 50% interest, which is accounted for using the equity method. Sizeler Property Investors, Inc. and its wholly-owned subsidiaries, partnerships and limited partnerships, are referred to collectively as the “Company”.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Furthermore, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Operating results for the three and nine month periods ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The consolidated balance sheet at December 31, 2005, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Sizeler Property Investors, Inc. Annual Report on Form 10-K for the year ended December 31, 2005.
NOTE B – RECLASSIFICATIONS
Certain reclassifications have been made in the 2005 consolidated financial statements to conform to the 2006 consolidated financial statement presentation.
NOTE C – REAL ESTATE INVESTMENTS
The Company has evaluated its land holdings and designated certain parcels of land as held for development or sale as of September 30, 2006. This land is currently made up of approximately 56 acres at various locations and has a book value of approximately $6.8 million. During the second quarter 2006, the Company sold a 9.9 acre parcel of land located in Lake Mary, Florida, and received net proceeds of approximately $3.7 million, which was used to reduce bank debt. The Company recognized a gain on this sale of approximately $531,000.
During the second quarter of 2006, the Company sold its Hammond Square Mall and received net proceeds of approximately $13.7 million, which was used to reduce bank debt. The Company recognized a loss on this sale of approximately $5.3 million.
The Company acquired The Villages of Williamsburg, an apartment community with 194 units located in Shreveport, Louisiana, on September 9, 2005 for $9.3 million. The Company recorded $173,000 of the purchase price as an intangible asset for leases acquired and in-place at the time of acquisition and is amortizing this intangible asset over the estimated average remaining life of the leases. The remaining purchase price was allocated among land and building.
6
On May 10, 2005, the Company sold its Bryn Mawr Apartments, a 240-unit apartment community, located in Naples, Florida, acquired in 1993. The Company received net proceeds of approximately $23.7 million of which approximately $9.2 million was used to repay indebtedness secured by the property. The remaining $15.5 million was used to repay short term bank debt and added to the Company’s cash and cash equivalents. A gain of approximately $15.7 million was recognized in the second quarter of 2005.
The Company allocates the purchase price of each acquired investment property between land, building and improvements, other intangibles (including acquired above market leases, acquired below market leases, customer relationships and acquired in place leases) and any assumed financing that is determined to be above or below market terms. The Company uses the information contained in third party appraisals as the primary basis for allocating the purchase price between land and site improvements. The aggregate value of other intangibles is measured based on the difference between the purchase price and the property valued as if vacant.
NOTE D — MORTGAGE NOTES PAYABLE
The Company’s mortgage notes payable are secured by certain land, buildings and improvements. As of September 30, 2006, mortgage notes payable totaled approximately $82.3 million. Individual notes ranged from $2.2 million to $19.9 million, with fixed rates of interest ranging from 5.97% to 7.94% and maturity dates ranging from May 1, 2008 to August 1, 2014. Net book values of properties securing these mortgage notes payable totaled approximately $127.4 million at September 30, 2006, with individual property net book values ranging from $2.3 million to $29.8 million.
NOTE E — SEGMENT DISCLOSURE
The Company is engaged in two operating segments, the ownership and rental of retail shopping center properties and the ownership and rental of apartment properties. These reportable segments offer different products or services and are managed separately as each requires different operating strategies and management expertise. There are no intersegment sales or transfers.
The Company assesses and measures segment operating results based on a performance measure referred to as net operating income and is based on the operating revenue and operating expenses directly associated with the operation of the real estate properties (excluding depreciation and amortization, administrative and interest expense). Net operating income is not a measure of operating results as measured by GAAP, and should not be considered an alternative to net income as a measure of the Company’s operating performance and to cash flows as a measure of liquidity.
7
The operating revenue, operating costs, operating income and real estate investments for each of the reportable segments are summarized below for the three-month periods ended September 30, 2006 and 2005.
| Three months ended September 30, 2006 | Three months ended September 30, 2005 | |||||||||||||||||||||||||||||||
| Retail | Apartments | Other | Total | Retail | Apartments | Other | Total | |||||||||||||||||||||||||
| Operating revenue |
$ | 6,797 | $ | 6,330 | $ | 40 | $ | 13,167 | $ | 6,873 | $ | 5,465 | $ | 183 | $ | 12,521 | ||||||||||||||||
| Operating costs |
(2,036 | ) | (2,570 | ) | — | (4,606 | ) | (2,030 | ) | (2,202 | ) | (285 | ) | (4,517 | ) | |||||||||||||||||
| Operating income |
4,761 | 3,760 | 40 | 8,561 | 4,843 | 3,263 | (102 | ) | 8,004 | |||||||||||||||||||||||
| Hurricane expense |
192 | 100 | — | 292 | (15 | ) | (523 | ) | — | (538 | ) | |||||||||||||||||||||
| Administrative expenses |
— | — | (1,114 | ) | (1,114 | ) | — | — | (1,731 | ) | (1,731 | ) | ||||||||||||||||||||
| Restructuring costs |
— | — | (825 | ) | (825 | ) | — | — | — | — | ||||||||||||||||||||||
| Proxy contest expenses |
— | — | — | — | — | — | (1,074 | ) | (1,074 | ) | ||||||||||||||||||||||
| Depreciation and amortization |
(1,486 | ) | (1,510 | ) | (34 | ) | (3,030 | ) | (1,471 | ) | (1,455 | ) | (109 | ) | (3,035 | ) | ||||||||||||||||
| Income (loss) from continuing operations |
3,467 | 2,350 | (1,933 | ) | 3,884 | 3,357 | 1,285 | (3,016 | ) | 1,626 | ||||||||||||||||||||||
| Interest expense |
(457 | ) | (1,007 | ) | (92 | ) | (1,556 | ) | (479 | ) | (3,274 | ) | (96 | ) | (3,849 | ) | ||||||||||||||||
| Income (loss) before equity in income of partnership, gain (loss) on sale of real estate and net earnings (losses) from discontinued operations |
3,010 | 1,343 | (2,025 | ) | 2,328 | 2,878 | (1,989 | ) | (3,112 | ) | (2,223 | ) | ||||||||||||||||||||
| Equity in income of partnership |
30 | — | — | 30 | 29 | — | — | 29 | ||||||||||||||||||||||||
| Income (loss) before losses from discontinued operations |
3,040 | 1,343 | (2,025 | ) | 2,358 | 2,907 | (1,989 | ) | (3,112 | ) | (2,194 | ) | ||||||||||||||||||||
| Net loss from discontinued operations |
(8 | ) | — | — | (8 | ) | (106 | ) | — | — | (106 | ) | ||||||||||||||||||||
| Net income (loss) |
$ | 3,032 | $ | 1,343 | $ | (2,025 | ) | $ | 2,350 | $ | 2,801 | $ | (1,989 | ) | $ | (3,112 | ) | $ | (2,300 | ) | ||||||||||||
8
The operating revenue, operating costs, operating income and real estate investments for each of the reportable segments are summarized below for the nine-month periods ended September 30, 2006 and 2005.
| Nine months ended September 30, 2006 | Nine months ended September 30, 2005 | |||||||||||||||||||||||||||||||
| Retail | Apartments | Other | Total | Retail | Apartments | Other | Total | |||||||||||||||||||||||||
| Operating revenue |
$ | 20,755 | $ | 18,634 | $ | 211 | $ | 39,600 | $ | 19,728 | $ | 15,960 | $ | 550 | $ | 36,238 | ||||||||||||||||
| Operating costs |
(6,237 | ) | (7,450 | ) | (2 | ) | (13,689 | ) | (5,800 | ) | (6,254 | ) | (307 | ) | (12,361 | ) | ||||||||||||||||
| Operating income |
14,518 | 11,184 | 209 | 25,911 | 13,928 | 9,706 | 243 | 23,877 | ||||||||||||||||||||||||
| Hurricane expense |
4 | (57 | ) | — | (53 | ) | (15 | ) | (523 | ) | — | (538 | ) | |||||||||||||||||||
| Administrative expenses |
— | — | (2,868 | ) | (2,868 | ) | — | — | (5,263 | ) | (5,263 | ) | ||||||||||||||||||||
| Restructuring costs |
— | — | (1,971 | ) | (1,971 | ) | — | — | ||||||||||||||||||||||||
| Proxy contest expenses |
— | — | — | — | — | — | (2,365 | ) | (2,365 | ) | ||||||||||||||||||||||
| Depreciation and amortization |
(8,754 | )(a) | (4,458 | ) | (98 | ) | (13,310 | ) | (4,485 | ) | (3,958 | ) | (396 | ) | (8,839 | ) | ||||||||||||||||
| Income (loss) from continuing operations |
5,768 | 6,669 | (4,728 | ) | 7,709 | 9,428 | 5,225 | (7,781 | ) | 6,872 | ||||||||||||||||||||||
| Interest expense |
(1,385 | ) | (3,019 | ) | (846 | ) | (5,250 | ) | (1,449 | ) | (5,837 | ) | (1,868 | ) | (9,154 | ) | ||||||||||||||||
| Income (loss) before equity in income of partnership, gain (loss) on sale of real estate and net earnings (losses) from discontinued operations |
4,383 | 3,650 | (5,574 | ) | 2,459 | 7,979 | (612 | ) | (9,649 | ) | (2,282 | ) | ||||||||||||||||||||
| Equity in income of partnership |
87 | — | — | 87 | 87 | — | — | 87 | ||||||||||||||||||||||||
| Income (loss) before earnings (losses) from discontinued operations |
4,470 | 3,650 | (5,574 | ) | 2,546 | 8,066 | (612 | ) | (9,649 | ) | (2,195 | ) | ||||||||||||||||||||
| (Loss) gain on sale of real estate (b) |
(5,336 | ) | — | 531 | (4,805 | ) | — | 15,692 | — | 15,692 | ||||||||||||||||||||||
| Net income from discontinued operations |
179 | — | — | 179 | 94 | 82 | — | 176 | ||||||||||||||||||||||||
| Net (loss) income |
$ | (687 | ) | $ | 3,650 | $ | (5,043 | ) | $ | (2,080 | ) | $ | 8,160 | $ | 15,162 | $ | (9,649 | ) | $ | 13,673 | ||||||||||||
| (a) | Includes accelerated depreciation of $4.3 million due to change of useful life of the Kmart building as part of a redevelopment of Lantana in order to construct a new Publix Supermarket and Office Depot. |
| (b) | Includes net gain of approximately $531,000 on the sale of the Lake Mary land and a loss of approximately $5.3 million on the sale of Hammond Square Mall compared to a net gain of approximately $15.7 million on the sale of Bryn Mawr Apartments during 2005. |
Gross real estate investments:
| (in thousands) | ||||||||
| September 30 | ||||||||
| 2006 | 2005 | |||||||
| Retail |
$ | 205,350 | $ | 237,018 | ||||
| Apartments |
164,971 | 158,804 | ||||||
| 370,321 | 395,822 | |||||||
| Less: Accumulated depreciation |
(112,066 | ) | (117,600 | ) | ||||
| Net real estate investment |
$ | 258,255 | $ | 278,222 | ||||
9
NOTE F – SHARE-BASED PAYMENT
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123 (FAS 123(R)). Under FAS No. 123(R), the Company is required to recognize as expense the estimated fair value of all share-based payments to employees, including the fair value of employee stock options. This expense is recognized over the period during which the employee is required to provide service in exchange for the award. Pro forma disclosure of the estimated expense impact of such awards is no longer an alternative to expense recognition in the financial statements. The Company adopted the modified prospective transition method for implementation of FAS 123(R) which does not include restatement of prior periods. Also, the Company uses the Black-Scholes method for computing the fair value of options on the grant date.
On February 9, 2005, the Company granted 87,500 restricted shares under the 1996 Stock Option and Incentive Plan, as amended, to certain of its officers, of which 26,000 shares remain unvested and outstanding. The shares vest 20% on each of February 9, 2006, 2007, 2008, 2009 and 2010 and are subject to certain acceleration or forfeiture provisions whereby shares that have not vested in accordance with the previously mentioned dates at the termination of employment with the Company would be forfeited pursuant to the Plan approved by stockholders. These restricted shares were valued based on the closing price of the Company’s common stock on the New York Stock Exchange on February 9, 2005, the date of grant. The Company accounts for restricted stock in accordance with FAS No. 123(R) and, accordingly, compensation expense is recognized over the expected vesting period. Compensation expense related to restricted stock of $19,000 and $57,000 was recognized for the three and nine months ended September 30, 2006, respectively. Compensation expense related to restricted stock of $47,000 and $124,000 was recognized for the three and nine months ended September 30, 2005, respectively.
NOTE G – CAPITAL AND FINANCING TRANSACTIONS
In March 2005, the Company sold 2,649,000 newly-issued, shares of its common stock at a price of $10.75 per share, in a direct placement to a group of institutional investors, providing the Company with net proceeds of approximately $27.2 million. The proceeds were used to repay short term debt.
On March 30, 2005, the Company recalled all of its outstanding 9.0% convertible subordinated debentures due July 15, 2009 for redemption on May 2, 2005. On May 2, 2005, of the $56.6 million principal amount outstanding , $2.6 million principal amount were redeemed (together with accrued interest) and $54.0 million principal amount of debentures were converted into a total of 4,906,200 newly issued shares of the Company’s common stock at a conversion price of $11.00 per share, plus accrued interest that was forfeited. Deferred debt issuance cost of $1.1 million as well as $1.4 million of accrued interest was charged against paid in capital in the second quarter of 2005.
On May 10, 2005, the Company sold its Bryn Mawr Apartments, a 240-unit apartment community, located in Naples, Florida, acquired in 1993. Net proceeds of $23.7 million were received by the Company of which $9.2 million was used to repay indebtedness secured by the property. The remaining $15.5 million was used to repay short term bank debt and added to the Company’s cash and cash equivalents. A gain of approximately $15.7 million was recognized in the second quarter of 2005.
During the second quarter of 2006, the Company sold its Hammond Square Mall and received net proceeds of approximately $13.7 million, which was used to reduce bank debt. A loss of approximately $5.3 million was recognized on this sale during the second quarter 2006.
During the second quarter 2006, the Company sold a 9.9 acre parcel of land located in Lake Mary, Florida and received net proceeds of approximately $3.7 million, which was used to reduce bank debt. A gain of approximately $531,000 was recognized on this sale.
During the first nine months of 2006, options for 286,000 shares of the Company’s common stock were exercised generating $2.5 million which was the primary source of the increase in proceeds from issuance of shares of common stock pursuant to an equity sale and direct stock purchase and stock option plans as disclosed in the cash flow statement. The proceeds were used to repay short term debt.
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NOTE H – HURRICANE LOSS
During the third quarter of 2005, the Company’s properties sustained storm damages from a succession of hurricanes. The Company incurred costs in preparation for these storms in addition to losses from actual damages, including the loss of rents, as well as for storm clean-up. The Company has insurance to cover a substantial portion of the costs incurred by such events. The Company estimated that its cash exposure to the insurance deductible as well as non-covered costs to be approximately $4.3 million. After taking into consideration existing book values of assets and capitalization policies, an expense of $1.4 million was recorded during 2005. A credit of $292,000 was recorded for the three months ended September 30, 2006 and net expense for cost incurred of approximately $53,000 was recorded for the nine months ended September 30, 2006 as compared to $538,000 for the three and nine months ended September 30, 2005. During the first nine months of 2006, a partial payment of $2.6 million in insurance proceeds was received, resulting in a receivable balance related to the hurricanes of approximately $1.3 million as of September 30, 2006. The final charge to expense, as a result of these hurricanes, however, is subject to the Company’s final cost assessment of required repairs as well as settlement of the insurance claim.
NOTE I – SIGNIFICANT EVENTS
On August 18, 2006, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Revenue Properties Company Limited (“Revenue Properties”) and Revenue Properties (Sizeler) Inc., an indirect wholly-owned subsidiary of Revenue Properties (“Merger Sub”). Pursuant to the Merger Agreement, the Company will merge (the “Merger”) with and into Merger Sub, with Merger Sub surviving, and all of the outstanding shares of the Company’s common stock will be converted into the right to receive $15.10 in cash per share. The Company’s common stockholders are also entitled to receive cash dividends of approximately $0.144, for a total payment of approximately $15.244 per share.
Completion of the Merger is subject to customary conditions, including, among others, the approval of the Merger and the Merger Agreement by the Company’s common stockholders. At a special meeting of the Company’s stockholders held at 9:00 a.m. on Wednesday, November 8, 2006, the Company’s common stockholders voted to approve the Merger. The Merger is expected to close on November 10, 2006.
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Sizeler Property Investors, Inc.:
We have reviewed the condensed consolidated balance sheet of Sizeler Property Investors, Inc. and subsidiaries as of September 30, 2006, and the related condensed consolidated statements of income for the three and nine month periods ended September 30, 2006 and 2005, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2006 and 2005. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2005 and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended and financial statement schedules, and our report dated March 16, 2006 expressed an unqualified opinion on those consolidated financial statements and financial statement schedules.
/s/ Ernst & Young LLP
New Orleans, Louisiana
November 8, 2006
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Sizeler Property Investors, Inc. is a self-administered and self-managed real estate investment trust (REIT). The Company develops, acquires and owns income producing retail shopping centers and apartment communities in the southeastern United States. As of September 30, 2006, the real estate investment portfolio was composed of fifteen apartment communities and fifteen retail properties, one of which is currently under redevelopment. The properties are located in Louisiana (16), Florida (10), and Alabama (4). Sizeler Property Investors, Inc. and its wholly-owned subsidiaries, partnerships and limited partnerships, are referred to as the “Company”.
On January 1, 2005, the Company had outstanding $56,599,000 principal amount of its 9.0% convertible subordinated debentures due July 15, 2009 and 336,040 shares of its 9.75% Series B cumulative redeemable preferred stock (with a liquidation price of $25 per share plus accumulated distributions). On March 30, 2005, the Company recalled all of the outstanding 9.0% convertible subordinated debentures due July 15, 2009 for redemption on May 2, 2005. Of the $56.6 million principal amount outstanding at the beginning of 2005, $2.6 million principal amount were redeemed (together with accrued interest) and $54.0 million principal amount of debentures were converted into a total of 4,906,200 newly issued shares at a conversion price of $11.00 per share, plus the accrued interest that was forfeited.
In March 2005, the Company sold 2,649,000 newly-issued shares of its common stock at a price of $10.75 per share, in a direct placement to a group of institutional investors, providing the Company with net proceeds of approximately $27.2 million. The proceeds were used to repay short term debt.
On May 10, 2005, the Company sold its Bryn Mawr Apartments, a 240-unit apartment community, located in Naples, Florida, that was acquired in 1993. Net proceeds of approximately $23.7 million were received of which approximately $9.2 million was used to repay indebtedness secured by the property. The remaining $15.5 million was used to repay short term bank debt and added to the Company’s cash and cash equivalents. A gain of approximately $15.7 million was recognized on the sale in the second quarter of 2005.
The Company acquired The Villages of Williamsburg, an apartment community with 194 units located in Shreveport, Louisiana, on September 9, 2005 for $9.3 million. The Company recorded $173,000 of the purchase price as an intangible asset for leases acquired and in-place at the time of acquisition and is amortizing this intangible asset over the estimated average remaining life of the leases. The remaining purchase price was allocated among land and building.
On May 15, 2006, the Company sold its Hammond Square Mall and received net proceeds of approximately $13.7 million, which was used to reduce bank debt. A loss of approximately $5.3 million was recognized on the sale during the second quarter 2006. Also during the second quarter 2006, the Company sold a 9.9 acre parcel of land located in Lake Mary, Florida and received net proceeds of approximately $3.7 million, which was used to reduce bank debt. A gain of approximately $531,000 was recognized on the sale during the second quarter 2006.
The Company completed construction in the fourth quarter of 2005 of its apartment development, Greenbrier Estates, in Slidell, Louisiana (144 units).
Significant Events
On August 18, 2006, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Revenue Properties Company Limited (“Revenue Properties”) and Revenue Properties (Sizeler) Inc., an indirect wholly-owned subsidiary of Revenue Properties (“Merger Sub”). Pursuant to the
13
Merger Agreement, the Company will merge (the “Merger”) with and into Merger Sub, with Merger Sub surviving, and all of the outstanding shares of the Company’s common stock will be converted into the right to receive $15.10 in cash per share. The Company’s common stockholders are also entitled to receive cash dividends of approximately $0.144, for a total payment of approximately $15.244 per share.
Completion of the Merger is subject to customary conditions, including, among others, the approval of the Merger and the Merger Agreement by the Company’s common stockholders. At a special meeting of the Company’s stockholders held at 9:00 a.m. on Wednesday, November 8, 2006, the Company’s common stockholders voted to approve the Merger. The Merger is expected to close on November 10, 2006.
Comparison of the Three Months Ended September 30, 2006 and 2005
Operating revenue totaled approximately $13.2 million for the three months ended September 30, 2006, compared to approximately $12.5 million in 2005. Operating revenue was positively affected by an increase in retail revenue, excluding a $500,000 lease termination fee received during third quarter 2005, an overall improvement in the level of apartment units leased as well as rents charged on these units, and the addition of The Villages of Williamsburg apartment property to the portfolio.
Operating expenses, without non-ordinary expenses, were approximately $4.6 million in 2006, compared to approximately $4.5 million in 2005. Operating expenses increased as compared to 2005 due to higher real estate taxes, utility costs, costs of property operations and maintenance and due to the addition of the above mentioned property.
Non-ordinary expenses incurred during the third quarter ended September 30, 2006 totaled approximately $533,000. These non-ordinary items included:
| • | $292,000 credit to hurricane expense as described below. |
| • | $825,000 of restructuring costs primarily composed of legal and financial consulting fees, primarily relating to the pending merger. |
Non-ordinary expenses incurred during the third quarter ended September 30, 2005 totaled approximately $1,612,000. These non-ordinary items included:
| • | $538,000 of hurricane expenses as described below. |
| • | $1,074,000 of proxy contest costs, primarily composed of legal and financial consulting fees. |
Operations and maintenance increased $295,000 due to the new development projects, as well as the addition of The Villages of Williamsburg apartment property, and higher utilities. Other operating expenses decreased $293,000 primarily due to a net loss of $281,000 resulting from the sale of a fixed asset during third quarter 2005.
Administrative expenses were significantly reduced to approximately $1,114,000 as compared to $1,731,000 for the same period in 2005. This decrease for the quarter is attributable to lower costs for payroll, equipment maintenance, travel and entertainment, and legal and accounting services.
Interest expense for the three months ended September 30, 2006 decreased $2.3 million compared to the same period last year, due primarily to the prepayment premium of $2.2 million resulting from the payoff of the second mortgages held on the apartment properties during third quarter 2005, partially offset by higher interest rates on our bank lines of credit.
During the third quarter of 2005, the Company’s properties sustained storm damages from a succession of hurricanes. The Company incurred costs in preparation for these storms in addition to losses from actual damages, including the loss of rents, as well as for storm clean-up. The Company has insurance to cover a substantial portion of the costs incurred by such events. The Company estimates that its cash exposure to the insurance deductible as well as non-covered costs to be approximately $4.3 million. After taking into
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consideration existing book values of assets and capitalization policies, an expense of $1.4 million was recorded during 2005 and a credit of approximately $292,000 was recorded during third quarter 2006. During the third quarter of 2006, a partial payment of $1.5 million in insurance proceeds was received, resulting in a receivable balance related to the hurricanes of approximately $1.3 million as of September 30, 2006. The final charge to expense, however, is subject to the Company’s final cost assessment of required repairs as well as settlement of the insurance claim.
For the three months ended September 30, 2006, there was net income of approximately $2.4 million compared to a net loss of approximately $2.3 million in the prior year’s quarter. After distributions to preferred stockholders, the net income allocated to common stockholders was $2,200,000 in the current year’s quarter, compared to a net loss allocated to common stockholders of $2,505,000 for the same period last year. The improvement is due primarily to the above mentioned items.
Comparison of the Nine Months Ended September 30, 2006 and 2005
Operating revenue totaled approximately $39.6 million for the nine months ended September 30, 2006, compared to approximately $36.2 million in 2005. Operating revenue was positively affected by an increase in retail revenue, excluding a $500,000 lease termination fee received during third quarter 2005, an overall improvement in the level of apartment units leased as well as rents charged on these units, and the addition of The Villages of Williamsburg apartment property to the portfolio.
Operating expenses, without non-ordinary expenses, were approximately $13.7 million in 2006, compared to approximately $12.4 million in 2005. The increase in operating expenses was due to the new development projects, as well as the addition of The Villages of Williamsburg apartment property, and higher utilities.
Non-ordinary expenses incurred during the nine months ended September 30, 2006 totaled approximately $2,024,000. These non-ordinary items included:
| • | $53,000 of hurricane expenses as described below. |
| • | $1,971,000 of restructuring costs primarily composed of legal and financial consulting fees, primarily relating to the pending merger. |
Non-ordinary expenses incurred during the nine months ended September 30, 2005 totaled approximately $2,903,000. These non-ordinary items included:
| • | $538,000 of hurricane expenses as described below. |
| • | $2,365,000 of proxy contest costs, primarily composed of legal and financial consulting fees. |
Operations and maintenance increased $1,267,000 due to the new development projects, as well as the addition of The Villages of Williamsburg apartment property, and higher utilities. Other operating expenses decreased $80,000 primarily due to a net loss of $281,000 resulting from the sale of a fixed asset during third quarter 2005, partially offset by the new development projects, as well as the addition of The Villages of Williamsburg apartment property
Administrative expenses were significantly reduced to approximately $2,868,000 as compared to $5,263,000 for the same period in 2005. This decrease of approximately $2.4 million for the nine months is attributable to lower costs for payroll, equipment maintenance, travel and entertainment, and legal and accounting services.
Interest expense for the nine months ended September 30, 2006 decreased $3.9 million to $5,250,000 compared to $9,154,000 in the same period last year, due primarily to the prepayment premium of $2.2 million resulting from the payoff of the second mortgages held on the apartment properties during third quarter 2005 and the effects of conversion and redemption of $56.6 million of debentures, partially offset by higher interest rates on our bank lines of credit.
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During the third quarter of 2005, the Company’s properties sustained storm damages from a succession of hurricanes. The Company incurred costs in preparation for these storms in addition to losses from actual damages, including the loss of rents, as well as for storm clean-up. The Company has insurance to cover a substantial portion of the costs incurred by such events. The Company estimated that its cash exposure to the insurance deductible as well as non-covered costs to be approximately $4.3 million. After taking into consideration existing book values of assets and capitalization policies, an expense of $1.4 million was recorded during 2005 and net expense of approximately $53,000 was recorded for cost incurred for the nine months ended September 30, 2006. During the first nine months of 2006, a partial payment of $2.6 million in insurance proceeds was received, resulting in a receivable balance related to the hurricanes of approximately $1.3 million as of September 30, 2006. The final charge to expense, however, is subject to the Company’s final cost assessment of required repairs as well as settlement of the insurance claim.
For the nine months ended September 30, 2006, there was a net loss of $2,080,000 compared to net income of $13,673,000 for the same period in 2005. The 2006 period included a net loss on the sale of real estate of $4,805,000, primarily due to the sale of Hammond Square Mall and an accelerated charge to depreciation expense of $4,258,000 due to the partial demolition of a real estate asset as part of a redevelopment project at Lantana Shopping Center in Palm Beach County, Florida. The 2005 period included a gain on the sale of real estate operations of $15,692,000 attributable to the sale of Bryn Mawr Apartments. After distributions to preferred stockholders, $2,577,000 of net loss was allocated to common stockholders, compared to $13,059,000 of net income allocated to common stockholders in the same period last year. Net income, before the sales of real estate assets and the accelerated charge to depreciation expense, for the nine-month period ended September 30, 2006 totaled $6,983,000 compared to a net loss of $2,019,000 a year ago. The improvement is due primarily to the above mentioned items.
Discontinued Operations
For the three and nine month periods ended September 30, 2006 and 2005, the results of operations of Hammond Square Mall, sold in May 2006, and Bryn Mawr Apartments, sold in May 2005, were classified as discontinued operations. The property-specific components of net earnings that were classified as discontinued operations include rental revenue, rental expense, real estate tax expense, depreciation expense and interest expense, defined as interest related to the Bryn Mawr Apartments mortgage.
The following is a summary of net (loss) earnings from discontinued operations:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||||||
| Operating revenues |
$ | (6,000 | ) | $ | 614,000 | $ | 1,139,000 | $ | 2,948,000 | |||||||
| Operating expenses |
(2,000 | ) | (488,000 | ) | (627,000 | ) | (1,638,000 | ) | ||||||||
| Real estate taxes |
— | (26,000 | ) | (38,000 | ) | (139,000 | ) | |||||||||
| Depreciation |
— | (206,000 | ) | (295,000 | ) | (763,000 | ) | |||||||||
| Mortgage interest expense |
— | — | — | (232,000 | ) | |||||||||||
| $ | (8,000 | ) | $ | (106,000 | ) | $ | 179,000 | $ | 176,000 | |||||||
Liquidity and Capital Resources
The sources of working capital for the Company on both a short-term and long-term basis are provided by operating activities, from which the Company generally funds operating requirements, periodic distributions to investors and capital expenditures, supplemented as needed by mortgage or other financings as well as property sales. Sixteen of the properties in the portfolio are currently unencumbered by mortgage debt, and at September 30, 2006, the Company had approximately $1.4 million in cash and cash equivalents. The Company maintains unsecured credit lines of $50 million with commercial banks-of which approximately $48.0 million was available at September 30, 2006-which it utilizes to temporarily finance the cost of portfolio growth, property improvements, and other expenditures. Utilization of the bank lines is subject to certain restrictive covenants, borrowing levels, and the maintenance of prescribed financial ratios:
| • | Minimum net worth, adding back accumulated depreciation - must exceed $115 million |
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| • | Debt to equity – must not exceed 150% of equity |
| • | Distributions to funds from operations – must not exceed 100% of funds from operations |
| • | Unencumbered assets to committed bank lines – must exceed 100% of committed bank lines |
| • | Interest coverage – funds from operations plus interest expense must exceed 150% of interest expense |
| • | Net operating income from unencumbered assets to the funded portion of committed bank lines – must exceed 15% of funded bank lines |
| • | Funds from operations from unencumbered assets to interest expense on funded unsecured debt – must exceed 200% of interest expense on funded unsecured debt |
The Company was in compliance with each of these covenants as of September 30, 2006.
Net cash flows provided by operating activities increased approximately $16.7 million in 2006 from 2005. The increase is primarily attributable to an improvement in net operating income of approximately $9.8 million and a $3.7 million increase in accounts receivable primarily attributable to the hurricane claim as well as a $3.7 million increase in accounts payable and accrued expenses principally attributable to the timing in payment of certain expenses as compared to the prior year’s period.
Net cash flows provided by investing activities decreased approximately $2.9 million in 2006 from 2005, primarily due to a decrease in proceeds from the sale of real estate, partially offset by a decrease in acquisitions of and improvements to real estate investments.
Net cash flows used in financing activities increased approximately $18.7 million in 2006 from 2005, primarily due to a $27.7 million decrease in proceeds from issuance of shares of common stock pursuant to an equity placement and direct stock purchase and stock option plans, an $11.9 million increase in the amount of borrowing on notes payable to banks, a $2.0 million increase in the purchase of preferred stock and a $903,000 increase in distributions paid to common stockholders because of additional shares outstanding. The increase was partially offset by a $21.7 decrease in principal payments on mortgage notes payable and a $2.6 million reduction in redemption of debentures in 2006 compared to 2005.
Stock Repurchase Programs
The Board of Directors has authorized the repurchase of up to 1,000,000 shares of the Company’s common stock. This repurchase program may be limited or terminated at any time without prior notice. Stock repurchases under this program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. No shares have been repurchased under this plan as of September 30, 2006.
On December 1, 2005, the Board of Directors authorized the repurchase of all or a portion of the 336,040 issued and outstanding shares of its 9.75% Series B Cumulative Redeemable Preferred Stock. The shares may be purchased in the open market or in privately negotiated transactions, and at times and in amounts that the Company’s management deems appropriate. As of September 30, 2006 the Company had repurchased 89,500 shares of its 9.75% Series B Cumulative Redeemable Preferred Stock resulting in a balance of 246,540 shares outstanding.
Contractual Obligations
Holders of our 9.75% Series B Cumulative Redeemable Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available for the payment of distributions, preferential cumulative cash distributions at the rate of 9.75% per annum of the liquidation preference per share (equivalent to a fixed annual amount of $2.4375 per share). Distributions on the 9.75% Series B Cumulative Redeemable Preferred Stock will be payable quarterly in arrears on the fifteenth day of February, May, August and
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November of each year, or, if not a business day, the next succeeding business day. The 9.75% Series B Cumulative Redeemable Preferred Stock is redeemable after May 10, 2007, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends thereon to the date fixed for redemption, without interest. In connection with the Merger, each share of the 9.75% Series B Cumulative Redeemable Preferred Stock will be exchanged for approximately $26.79 in cash, which will be paid shortly following the closing of the Merger.
Our common stock distribution policy is to pay quarterly distributions to common stockholders, based upon, among other things, funds from operations, as opposed to net income. Because funds from operations excludes the deduction of non-cash charges, principally depreciation on real estate assets, quarterly distributions will typically be greater than net income and may include a tax-deferred return of capital component.
There were no other material changes outside the ordinary course of our business during the three months ended September 30, 2006 to our contractual obligations as set forth in the Liquidity and Capital Resources section of our Annual Report on Form 10-K for the year ended December 31, 2005.
Funds From Operations
The Company defines Funds from Operations (FFO) as net income, computed in accordance with accounting principles generally accepted in the United States of America (GAAP), excluding: gains or losses from sales of property; those items defined as extraordinary under GAAP; plus depreciation on real estate assets, impairment write downs and after adjustments for unconsolidated partnerships (and joint ventures). Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.
FFO is a key operating measure used by management in evaluating operating performance, and trends in operating performance. The Company also uses FFO to compare operating performance with other equity REITs, particularly those who own retail and residential properties. In computing FFO, the Company excludes the effect of depreciation, amortization, impairment write downs and gains and losses from sales of real estate. In the Company’s view, these amounts, which are derived from historical cost, are of limited relevance in evaluating current performance. The Company’s experience, and the experience of other owners of shopping centers and apartment communities in the markets in which we operate, is that depreciation and amortization have virtually no correlation with changes in the value of the properties. Real estate assets can also appreciate rather than depreciate in value over time.
The Company believes that FFO, by excluding items referred to above, which can vary among owners of similar assets in similar condition based on historical cost accounting and useful life estimates, can help compare the operating performance of a company’s real estate. The Company’s FFO may not be comparable to FFO reported by other REITs, who may not define FFO in a comparable manner or may use different interpretations in the calculation. The Company believes that FFO may also facilitate comparisons of operating performances between the Company and other equity REITs. Investors should review FFO, along with GAAP net income and other appropriate operating measures and cash flows from operating activities, investing activities and financing activities when trying to understand an equity REIT’s operating performance. FFO is not a GAAP measure or a disclosure required by the Securities and Exchange Commission.
As previously stated, computations of FFO differ among REITs. Thus, an investor should be attentive to differences in FFO computations when comparing FFO among REITs. FFO does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered as an alternative to net income, determined in accordance with GAAP, as an indication of financial performance, or to cash flow from operating activities, determined in accordance with GAAP, as a measure of liquidity, nor is it indicative of funds available to fund cash needs, including the ability to make cash distributions. A reconciliation of net income to basic FFO is presented below (in thousands):
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| Three months ended September 30 | ||||||||||||
| 2006 | 2005 | |||||||||||
| Dollars | Shares (a) | Dollars | Shares (a) | |||||||||
| Net income or (loss) |
$ | 2,350 | 21,468 | $ | (2,300 | ) | 21,116 | |||||
| Additions: |
||||||||||||
| Depreciation and amortization |
3,040 | 3,250 | ||||||||||
| Deductions: |
||||||||||||
| (Gains) or losses on sale of real estate |
— | — | ||||||||||
| Preferred dividends |
(150 | ) | (205 | ) | ||||||||
| Amortization costs |
(49 | ) | (271 | ) | ||||||||
| Funds from operations - available to common shareholders |
$ | 5,191 | 21,468 | $ | 474 | 21,116 | ||||||
| (a) | Weighted average shares outstanding |
| Nine months ended September 30 | ||||||||||||
| 2006 | 2005 | |||||||||||
| Dollars | Shares (a) | Dollars | Shares (a) | |||||||||
| Net income (loss) |
$ | (2,080 | ) | 21,416 | $ | 13,673 | 18,086 | |||||
| Additions: |
||||||||||||
| Depreciation and amortization |
13,634 | 9,628 | ||||||||||
| Deductions: |
||||||||||||
| (Gains) or losses on sale of real estate |
4,805 | (15,692 | ) | |||||||||
| Preferred dividends |
(497 | ) | (614 | ) | ||||||||
| Amortization costs |
(148 | ) | (599 | ) | ||||||||
| Funds from operations - available to common shareholders |
$ | 15,714 | 21,416 | $ | 6,396 | 18,086 | ||||||
| (a) | Weighted average shares outstanding |
For the three months ended September 30, 2006, the net income available to common stockholders was approximately $2.2 million compared to a net loss of $2.5 million for the same period in 2005. For the nine months ended September 30, 2006, the net loss available to common stockholders was approximately $2.6 million compared to income of $13.1 million for the same period in 2005. The decrease was due to a net loss on the sale of real estate of $4,805,000, primarily attributable to the sale of Hammond Square Mall and an accelerated charge to depreciation expense of $4,258,000 due to the partial demolition of a real estate asset in connection with a redevelopment project at Lantana Shopping Center in Palm Beach County, Florida to construct a new Publix Supermarket and an Office Depot. The 2005 period included a gain on the sale of real estate operations totaling $15,692,000 attributable to the sale of Bryn Mawr Apartments. The decrease was partially offset by a reduction in administrative expenses to approximately $2,868,000 as compared to $5,263,000 for the same period in 2005. This decrease of approximately $2,395,000 for the nine months is attributable to lower costs for payroll, equipment maintenance, travel and entertainment, and legal and accounting services. Additionally, interest expense for the nine months ended September 30, 2006, totaled $5,250,000 compared to $9,154,000 in the same period last year due primarily to the payoff of the second mortgages held on the apartment properties and the effects of conversion and redemption of approximately $56 million of debentures, partially offset by higher interest rates on the Company’s bank lines of credit.
Effects of Inflation
Substantially all of the Company’s retail leases contain provisions de signed to provide the Company with a hedge against inflation. Most of the Company’s retail leases contain provisions that enable the Company to receive percentage rentals based on tenant sales in excess of a stated breakpoint and/or provide for periodic increases in minimum rent during the lease term. The majority of retail leases are for terms of less than ten years, which allows the Company to adjust rentals to changing market conditions. In addition, most retail leases require tenants to pay a contribution towards property operating expenses, thereby reducing exposure to higher operating costs caused by inflation. Apartment leases are written for short terms, generally nine to twelve months, and are adjusted according to changing market conditions.
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Future Results
This Form 10-Q and other documents prepared and statements made by the Company may contain certain forward-looking statements that are subject to risk and uncertainty. Investors and potential investors in the Company’s securities are cautioned that a number of factors could adversely affect the Company and cause actual results to differ materially from those in the forward-looking statements, including, but not limited to (a) the inability to lease current or future vacant space in the Company’s properties; (b) decisions by tenants and anchor tenants who own their space to close stores at properties; (c) the inability of tenants to pay rent and other expenses; (d) tenant financial difficulties; (e) general economic and world conditions, including threats to the United States homeland from unfriendly factions; (f) decreases in rental rates available from tenants; (g) increases in operating costs at properties; (h) increases in corporate operating costs associated with new regulatory requirements; (i) lack of availability of financing for acquisition, development and rehabilitation of properties; (j) force majeure as it relates to construction and renovation projects; (k) possible dispositions of mature properties since the Company is continuously engaged in the examination of the various lines of business; (l) increases in interest rates; (m) a general economic downturn resulting in lower retail sales and causing downward pressure on occupancies and rents at retail properties; (n) forces of nature; (o) the adverse tax consequences if the Company were to fail to qualify as a REIT in any taxable year; and (p) inability of Sizeler to complete the transactions contemplated by its definitive merger agreement with Revenue Properties.
Except as required under federal securities laws and the rules and regulations of the SEC, the Company does not have any intention or obligation to update or revise any forward-looking statements in this Form 10-Q, whether as a result of new information, future events, changes in assumptions or otherwise, including specifically any statements previously provided with respect to expected operating results or performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The disclosure contained in Item 7a, Quantitative and Qualitative Disclosures About Market Risk, of our Form 10-K, is incorporated by reference for the year ended December 31, 2005. During the nine months of 2006, the Company reduced short term, variable rate debt to $2,020,000 at September 30, 2006 from $25,995,000 at December 31, 2005, reducing the exposure to interest rate changes. There have been no other material changes during the first nine months of 2006.
Item 4. Controls and Procedures.
The Principal Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective.
During the quarterly period covered by this report, there were no changes in internal control over financial reporting.
OTHER INFORMATION
Since the Company announced on August 21, 2006 that it had entered into a definitive agreement with Revenue Properties, the Company has become aware of the filing of three civil actions alleging that the Company’s directors breached their fiduciary duties by entering into the agreement. The actions are J. Slade Anderson v. Sizeler Property Investors, Inc., et al. (filed on or about August 29, 2006 in the Circuit Court for Baltimore City, Maryland); Asbestos Workers Local 24 Pension Fund v. Sizeler Property Investors, Inc., et al.
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(filed on or about September 1, 2006 in the Circuit Court for Baltimore County, Maryland, voluntarily dismissed without prejudice and then re-filed on or about October 24, 2006 in the Circuit Court for Baltimore City, Maryland); and The Pennsylvania Avenue Funds v. Sizeler Property Investors, Inc., et al. (filed on or about September 18, 2006 in the 24th Judicial District Court for the Parish of Jefferson, Louisiana). Sizeler and all six of its present directors are named as defendants in all of these actions. Revenue Properties and one of its subsidiaries, Thomas A. Masilla, Jr., the Company’s principal executive officer, and Michael Ashner, a former director of the Company, are named as defendants in one or more but not all of the actions. All three actions purport to have been brought on behalf of a class consisting of all of the Company’s stockholders other than the Company, Revenue Properties and their affiliates. All three actions seek to enjoin the consummation of the proposed transaction with Revenue Properties or, alternatively, an award of damages in the event that the proposed transaction is consummated. The defendants intend to defend themselves vigorously in all three actions. The Pennsylvania Avenue Funds had requested that the judge issue a preliminary injunction enjoining the Merger. On November 3, 2006, the judge denied the request for an injunction on the basis that the plaintiff did not show it was likely to prevail on the merits and that there was no showing of irreparable harm.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
None.
| (a) | Exhibits |
| 15 | Letter regarding Unaudited Interim Financial Information (filed herewith). | |
| 31.1 | Certification of Principal Executive Officer (filed herewith). | |
| 31.2 | Certification of Chief Financial Officer (filed herewith). | |
| 32.1 | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 (filed herewith). | |
| 32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 (filed herewith). | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIZELER PROPERTY INVESTORS, INC. | ||
| (Registrant) | ||
| By: | /s/ Guy M. Cheramie | |
| Guy M. Cheramie | ||
| Chief Financial Officer | ||
| Principal Accounting Officer | ||
Date: November 9, 2006
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