SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-15923
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KRAMONT REALTY TRUST
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(Exact name of Registrant as specified in its charter)
Maryland 25-6703702
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(State of Incorporation) (I.R.S. Employer Identification No.)
580 West Germantown Pike, Plymouth Meeting, PA 19462
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-7100
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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
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Number of Common Shares of Beneficial Interest, par value $.01 per share, as of
May 7, 2003: 23,744,838
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KRAMONT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
March 31, 2003 December 31, 2002
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ASSETS
Real estate - income producing, net of accumulated depreciation $ 685,228 $ 686,064
Properties held for sale 7,413 10,262
Mortgage notes receivable 32,981 33,340
Investments in unconsolidated affiliates 2,862 2,923
Cash and cash equivalents (includes $1,687 restricted, 2003 and 2002) 12,799 18,173
Other assets 28,711 28,498
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Total assets $ 769,994 $ 779,260
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LIABILITIES AND BENEFICIARIES' EQUITY
LIABILITIES:
Mortgages and notes payable $ 472,426 $ 480,489
Accounts payable and other liabilities 13,874 15,335
Distributions payable 9,765 9,766
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Total liabilities 496,065 505,590
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Minority interests in Operating Partnerships 19,515 19,780
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BENEFICIARIES' EQUITY:
Preferred shares of beneficial interest 30 30
Common shares of beneficial interest, $0.01 par value; authorized
96,683,845 shares; outstanding, 23,358,685 and 23,075,985 as of
March 31, 2003 and December 31, 2002, respectively 233 231
Additional paid-in capital 239,377 235,409
Retained earnings 25,200 28,988
Accumulated other comprehensive income loss (1,397) (1,613)
Treasury stock, cumulative preferred shares of beneficial interest
Series A-1, 11,155 shares, at cost (6,070) (6,070)
Treasury stock, Redeemable preferred shares of beneficial interest
Series D, 146,800 shares, at cost (2,349) (2,349)
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255,024 254,626
Unearned compensation on restricted shares of beneficial interest (610) (736)
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Total beneficiaries' equity 254,414 253,890
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Total liabilities and beneficiaries' equity $ 769,994 $ 779,260
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See accompanying notes to consolidated financial statements.
2
KRAMONT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------------------
2003 2002
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Revenues:
Rent $ 27,591 $ 25,427
Interest, principally from mortgage notes 1,126 1,214
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28,717 26,641
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Expenses:
Interest 8,506 9,367
Operating 9,610 7,055
Depreciation and amortization 4,456 4,164
General and administrative 2,198 1,619
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24,770 22,205
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3,947 4,436
Equity in income of unconsolidated affiliates 149 171
Minority interests in income of Operating Partnerships (162) (221)
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Net income from continuing operations 3,934 4,386
Results from discontinued operations:
Income from operations of properties sold or held for sale 3 18
Gain on sale of properties 1,683 212
Minority interest in discontinued operations (114) (18)
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Net income from discontinued operations 1,572 212
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Net Income 5,506 4,598
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Preferred share distribution (1,703) (1,884)
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Net income to common shareholders $ 3,803 $ 2,714
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Per common share:
Net income from continuing operations, basic and diluted $ .09 $ .13
Net income from discontinued operation, basic and diluted .07 .01
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Total net income per share, basic and diluted $ .16 $ .14
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Dividends declared $ .325 $ .325
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Average common shares outstanding:
Basic 23,353,688 18,872,295
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Diluted 23,383,647 18,885,102
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CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
2003 2002
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Net income $ 5,506 $ 4,598
Change in fair value of cash flow hedges (96) 87
Reclassification adjustment for hedge losses included in net
income 312 234
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Comprehensive income $ 5,722 $ 4,919
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See accompanying notes to consolidated financial statements
3
KRAMONT REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31,
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 7,179 $ 10,608
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CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on mortgage notes receivable 359 316
Capital improvements (3,150) (1,696)
Proceeds from the sale of real estate, net 4,152 982
Change in restricted cash -- 35
Distributions from unconsolidated affiliates 211 210
Other -- 28
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Net cash provided by (used in) investing activities 1,572 (125)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 1,728
Repayments of borrowings (4,063) (1,699)
Repayments of line of credit, net (4,000) --
Cash distributions paid on common shares (7,593) (6,135)
Cash distributions paid on preferred shares (1,703) (1,884)
Proceeds from issuance of common shares of beneficial interest 3,970 --
Distributions to minority interests (541) (434)
Deferred financing costs (195) --
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Net cash used in financing activities (14,125) (8,424)
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Net (decrease) increase in unrestricted cash and cash equivalents (5,374) 2,059
Unrestricted cash and cash equivalents at the beginning of the period 16,486 9,186
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Unrestricted cash and cash equivalents at the end of the period $ 11,112 $ 11,245
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Supplemental disclosure of cash flow information:
Cash paid for interest $ 8,514 $ 8,673
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See accompanying notes to consolidated financial statements.
4
KRAMONT REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Kramont Realty Trust, a Maryland real estate investment trust ("Kramont"), is a
self-administered, self-managed equity real estate investment trust ("REIT")
which is engaged in the ownership, acquisition, redevelopment, management and
leasing of community and neighborhood shopping centers. Kramont does not
directly own any assets other than its interest in Kramont Operating
Partnership, L.P. ("Kramont OP") and conducts its business through Kramont OP
and its affiliated entities, including Montgomery CV Realty, L.P. ("Montgomery
OP", together with Kramont OP and their wholly-owned subsidiaries, hereinafter
collectively referred to as the "OPs", which together with Kramont are
hereinafter referred to as the "Company"). The OPs, directly or indirectly, own
all of the Company's assets, including its interest in shopping centers.
Accordingly, the Company conducts its operations through an Umbrella Partnership
REIT ("UPREIT") structure. As of March 31, 2003, the Company owned 93.39% of
Kramont OP and is its sole general partner. As of March 31, 2003, Kramont
indirectly owned 99.87% of the limited partnership interest of Montgomery OP and
owned 100% of its sole general partner. As of March 31, 2003, the OPs owned and
operated 80 shopping centers (one of which is held for sale) and two office
buildings (one of which is held for sale), and managed five shopping centers for
third parties, located in 15 states aggregating approximately 11.5 million
square feet.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. For further information please refer to the
audited financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
Certain 2002 balance sheet and income statement amounts have been reclassified
to conform to current year presentation. These reclassifications had no impact
to net income to common shareholders as previously reported.
(2) ACCOUNTING POLICIES AND PROCEDURES
New Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). FIN 46 provides new guidance for the
consolidation of variable interest entities for which the voting interest model
is difficult to apply. Many variable interest entities have commonly been
referred to as special-purpose entities or off-balance sheet structures. The new
guidance, however, applies to a larger population of entities. The Company
believes that the adoption of FIN 46 will not have a material impact on the
Company's financial position or results of operations.
Stock Options
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, requires the Company to provide pro forma information
regarding net income and net income per common share as if compensation cost for
stock options granted under the plans, if applicable, had been determined in
accordance with the fair value based method prescribed in SFAS 123. The Company
does not plan to adopt the fair value based method prescribed by SFAS 123.
5
The Company estimates the fair value of each stock option grant by using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants: expected lives of ten years; dividend yield of
8.70%, volatility at 30%, risk free interest rate of 4.53% for 2002. Under
accounting provisions of SFAS 123, the Company's net income to common
shareholders and net income per common share, would have been reduced to the pro
forma amounts indicated below (in thousands, except per share data):
Three Months Ended March 31,
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2003 2002
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Net income to common shareholders
Net income, as reported $ 3,803 $ 2,714
Less fair value of stock options 4 8
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Pro forma $ 3,799 $ 2,706
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Net income per common share, basic and diluted:
As reported $ .16 $ .14
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Pro forma $ .16 $ .14
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(3) DISCONTINUED OPERATIONS
On January 21, 2003, the Company sold a three acre out-parcel at its Bensalem
Square shopping center in Bensalem, Pennsylvania. The Company received net cash
proceeds of $800,000 and recognized a gain of approximately $600,000. On March
6, 2003 the Company sold a 28 acre parcel of unimproved land located in Miramar,
Florida. The sale price for the land was $3.6 million with net proceeds of
approximately $3.5 million and the Company recorded a gain of approximately $1.1
million. The result of operations from these properties, along with properties
held for sale, is reported as income (loss) from operations of properties sold
or held for sale. The properties held for sale at March 31, 2003 include, a
shopping center in Hamden, Connecticut, an office building in West Palm Beach,
Florida, and a parcel of undeveloped land in Florida. There was no debt on these
properties at March 31, 2003.
(4) REAL ESTATE
(a) Real Estate is located in 15 states and consists of (in thousands):
March 31, 2003 December 31, 2002
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Income producing:
Land $ 121,434 $ 122,259
Shopping centers 612,097 607,876
Office buildings 4,096 4,096
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Total 737,627 734,231
Less accumulated depreciation (52,399) (48,167)
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Real estate - income producing, net $ 685,228 $ 686,064
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Properties held for sale:
Land $ 840 $ 840
Shopping centers/office buildings 3,509 3,964
Undeveloped land 3,063 5,458
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Properties held for sale $ 7,413 $ 10,262
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6
(b) On January 21, 2003, the Company sold a three acre out-parcel at its
Bensalem Square shopping center in Bensalem, Pennsylvania for net cash proceeds
of $800,000 and recognized a gain of approximately $600,000.
(c) On March 6, 2003, the Company sold an unimproved parcel of land in Miramar,
Florida for net cash proceeds of $3.5 million and recognized a gain of
approximately $1.1 million.
(d) Real Estate with a net book value of $667.9 million, at March 31, 2003, is
pledged as collateral for borrowings (see Note 6).
Subsequent Events
On April 3, 2003, the Company completed the acquisition of three shopping
centers and sixteen acres of land for development for approximately $12.5
million plus $500,000 of pre-development cost reimbursements to the seller. The
purchase includes a 31,500 square foot Shop Rite Supermarket and a fully
occupied 14,000 square foot office building in Springfield, New Jersey, a 54,000
square foot Shop Rite Supermarket, and an adjacent sixteen acres of land
approved for development in Somers Point, New Jersey. The properties were
purchased using cash and common shares of beneficial interest.
On May 2, 2003, the Company sold a nine acre parcel of unimproved land in Dania,
Florida. The sale price for the land was $4.1 million with net proceeds of
approximately $3.8 million. The Company will record a gain of approximately
$750,000. The Company will use the proceeds for general corporate purposes.
(5) MORTGAGE NOTES RECEIVABLE
At March 31, 2003, the Company's mortgage notes receivable consisted of $33
million collateralized by first mortgages on the recreation facilities at three
Century Village adult condominium communities in southeast Florida
(collectively, the "Recreation Notes"). The Recreation Notes provide for
self-amortizing equal monthly principal and interest payments due through 2012,
bear interest ranging from 8.84% to 13.5% per annum and contain certain
prepayment prohibitions. The Recreation Notes are pledged as collateral for
certain borrowings (see Note 6).
(6) BORROWINGS
Borrowings consist of (in thousands):
March 31, December 31,
2003 2002
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Mortgage notes payable through June 2003, interest only fixed payments at
an average rate of 7.96% per annum, collateralized by mortgages on
twenty-seven shopping centers. $ 181,700 $ 181,700
Mortgage notes payable through August 2028, interest ranging from 3.00%
to 9.38% per annum, collateralized by mortgages on real estate. 162,029 164,976
Mortgage notes payable through October 2008, interest fixed at 7.00% per
annum, collateralized by mortgages on nine shopping centers. 62,934 63,148
Mortgage notes payable through December 2005, interest at borrowers
election of prime plus .25%, or one month LIBOR plus a minimum of 1.75%
to a maximum of 2.25% (3.60% at March 31, 2003), collateralized by
mortgages on sixteen shopping centers. 38,988 42,988
7
Mortgage notes payable through August 2003 under $155 million credit
facility, interest at one month LIBOR plus 2.45% (3.79% at March 31,
2003), collateralized by a mortgage on one shopping center. 9,300 9,300
Collateralized Mortgage Obligations, net of unamortized discount of
$147,000 and $167,000 based on a fixed effective interest rate of 8.84%
per annum, collateralized by certain of the Recreation Notes (see Note 5),
quarterly self-amortizing principal and interest payments required through
March 2007. 17,475 18,377
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Totals $ 472,426 $ 480,489
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 and 2002
Net Income
For the quarter ended March 31, 2003, net income to holders of common shares of
beneficial interest was $3.8 million or $.16 per common share compared to $2.7
million or $.14 per common share for the same period of 2002.
During the quarter ended March 31, 2003, rent revenue and operating expenses
increased by $2.2 million and $2.6 million, respectively (a net rental income
decrease of $392,000). The rent revenue increase is primarily due to increased
recovery income in the amount of $1.8 million as a result of higher operating
expenses and rental revenue of $293,000, resulting from the purchase of a
shopping center on April 26, 2002. Operating expenses increased during the first
quarter of 2003 primarily due to an increase in snow removal expense in the
amount of $2.0 million and an increase in insurance expense in the amount of
$174,000.
Interest expense decreased by $861,000 during the first quarter of 2003
primarily as a result of lower outstanding debt balances in 2003 compared to the
same period in 2002.
Depreciation and amortization increased by $292,000, primarily due to additional
expense of $250,000 as a result of capital expenditures and the additional
expense of $42,000 as a result of the acquisition of a shopping center on April
26, 2002.
Interest income decreased by $88,000 during the first quarter of 2003, primarily
attributable to scheduled repayments of mortgage notes receivable (see Note 5)
which are long term and require self-amortizing payments through 2012.
General and administrative expenses increased by $579,000, primarily due to
higher payroll related expenses in the amount of $340,000 as a result of
additional personnel, increased salaries, and higher performance related
bonuses. In addition, during the first quarter of 2003, the Company incurred
increased expenses of $80,000 due to the implementation of a corporate marketing
program and an increase in information technology expenses of $50,000.
Net income from discontinued operations was $1.6 million for the first quarter
of 2003 compared to $212,000 for the first quarter of 2002. The 2003 amount
included a gain from the sale of real estate in the amount of $1.7 million. The
2002 amount included a gain from the sale of real estate in the amount of
$212,000. The 2002
8
amount consists of the net income from properties sold in 2003 and 2002, as well
as the properties held for sale.
Funds From Operations
Funds From Operations ("FFO"), as defined by the National Association of Real
Estate Investment Trusts (NAREIT), consists of net income (computed in
accordance with generally accepted accounting principles) before depreciation
and amortization of real property, extraordinary items and gains and losses on
sales of income-producing real estate.
The following schedule reconciles FFO to net income (in thousands):
Three Months Ended
March 31,
2003 2002
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Net income to common shareholders $ 3,803 $ 2,714
Depreciation and amortization of real property (1) (2) 4,220 3,832
(Gain) on sale of income-producing real estate (3) -- (197)
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FFO $ 8,023 $ 6,349
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(1) Net of minority interests of $306 and $338, respectively.
(2) Depreciation related to unconsolidated affiliates of $43 and $48,
respectively.
(3) Net of amounts attributable to minority interests of ($14) in 2002.
The Company believes that FFO should be considered in conjunction with net
income, as presented in the statements of operations. The Company believes that
FFO is an appropriate measure of operating performance because real estate
depreciation and amortization charges are not meaningful in evaluating the
operating results of the Company's properties and extraordinary items and the
gain on the sale of income-producing real estate would distort the comparative
measurement of performance and may not be relevant to ongoing operations.
However, FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and should not be
considered as an alternative to either net income as a measure of the Company's
operating performance or to cash flows from operating activities as an indicator
of liquidity or cash available to fund all cash flow needs. Since all companies
do not calculate FFO in a similar fashion, the Company's calculation, presented
above, may not be comparable to similarly titled measures reported by other
companies.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Statements of Cash Flows
Net cash provided by operating activities, as reported in the Consolidated
Statements of Cash Flows, amounted to $7.2 million for the three months ended
March 31, 2003 compared to $10.6 million for the same period in 2002. The
decrease in cash flow is primarily due to a decrease in accounts payable and
other liabilities of $1.1 million in the first quarter of 2003 compared to a
increase in accounts payable and other liabilities of $2.4 million for the same
period in 2002.
Net cash provided by investing activities for the three months ended March 31,
2003 increased to $1.6 million from net cash used in investing activities of
$125,000 for the same period in 2002. The 2003 amounts reflect net proceeds from
the sale of real estate in the amount of $4.2 million and $359,000 of
collections on mortgage notes receivable, offset by $3.2 million of capital
improvements. The 2002 amounts reflect $1.7 million of
9
capital improvements offset by net proceeds from the sale of real estate in the
amount of $982,000 and $316,000 of collections on mortgage notes receivable.
Net cash used in financing activities increased to $14.1 million for the three
months ended March 31, 2003 from net cash used in financing activities of $8.4
million in the same period in 2002. The 2003 amounts consist of cash
distributions of $9.3 million to shareholders, cash distributions of $541,000 to
minority interests, and $8.1 million of net repayment of borrowings, partially
offset by $4 million of proceeds from the issuance of common shares of
beneficial interest. The 2002 amounts consist of cash distributions of $8.0
million to shareholders, and cash distributions of $434,000 to minority
interests.
Borrowings
At March 31, 2003, the Company's contractual obligations are as follows:
Payments Due by Period
(in millions)
Less than 1 year 1 to 3 years 4 to 5 years After 5 years
---------------- ------------ ------------ -------------
$ 225.7 $ 100.0 $31.5 $ 115.2
At March 31, 2003, borrowings were $472.4 million. Scheduled principal payments
over the remainder of this year and the next four years are $357.2 million with
$115.2 million due thereafter. Borrowings consist of $406.3 million of fixed
rate indebtedness, with a weighted average interest rate of 7.68% at March 31,
2003, and $66.1 million of variable rate indebtedness with a weighted average
interest rate of 4.24% at March 31, 2003. The borrowings are collateralized by a
substantial portion of the Company's real estate and three Century Village adult
condominium communities in southeast Florida (collectively, the "Recreation
Notes"). The Company expects to refinance certain of these borrowings, at or
prior to maturity, through new mortgage loans on real estate. The ability to do
so, however, is dependent upon various factors, including the income level of
the properties, interest rates and credit conditions within the commercial real
estate market. Accordingly, there can be no assurance that such refinancing can
be achieved.
Effective December 20, 2002, the Company entered into a Loan Agreement (the
"Loan Agreement") with Fleet National Bank, N.A. on its own behalf and as agent
for certain other banks providing for a credit facility (the "Credit Facility").
As of December 30, 2002, the date of the initial funding, the maximum amount of
the Credit Facility was $100 million and the maximum amount the Company could
borrow was $68 million based on the current collateral. The maximum amount of
the Credit Facility was increased to $125 million on March 19, 2003, under the
terms and conditions of the Loan Agreement. The Borrowing Base available to
Kramont OP under the Credit Facility is subject to increase or decrease from its
current amount pursuant to the terms of the Loan Agreement. The Credit Facility
is a revolving line of credit with a term of three years and is secured by
guarantees by the Company and those of its subsidiaries who have provided
mortgages to the lenders, sixteen first mortgages on shopping centers and a
first priority security interest in the membership interests and partnership
interests of the subsidiary entities. The Credit Facility contains various
financial covenants that must be observed. The Company was in compliance with
these covenants at March 31, 2003. Credit Facility borrowings bear interest at
the Borrowers election of (a) at the prime rate or the prime rate plus 25 basis
points based on the leverage ratio of the Company's and Kramont OP's total debt
and liabilities to its total asset value, or (b) London InterBank Offered Rate
("LIBOR") plus 175 to 225 basis points based on such ratio. Interest rates may
be set for one, three or six-month periods. Advances under the Credit Facility
may be used for general corporate purposes and, among other purposes, to fund
acquisitions, repayment of all or part of outstanding indebtedness, expansions,
renovations, financing and refinancing of real estate, closing costs and for
other lawful purposes. Additional provisions include arrangement and commitment
fees of up to $1,100,000, and a fee applicable to the unused portion of the
maximum Credit Facility amount. The $68 million received on December 30, 2002,
was used to pay outstanding debt, including a portion of the amount
10
outstanding under the Company's credit facility with GMAC Commercial Mortgage.
On December 31, 2002, and January 2, 2003, $25 million and $4 million,
respectively, received from the issuance of equity was used to decrease the
outstanding balance of the Credit Facility to $39 million.
Effective August 1, 2000, the Company entered into an Amended and Restated Loan
and Credit Facility Agreement (the "Amended Facility") with GMAC Commercial
Mortgage ("GMAC") wherein GMAC increased an existing $100 million facility to a
$155 million facility. The Amended Facility is a non-revolving line of credit
with individual loan terms of three years if funds are advanced within the first
twelve months, and two years if funds are advanced during the thirteenth to the
eighteenth months. Advances under the Amended Facility: (1) must be secured by
assets based on specified aggregate loan to value and debt service coverage
ratios, (2) bear interest at an annual rate of one month London Interbank
Offering Rate ("LIBOR") plus a spread ranging from 245 to 295 basis points,
based on loan to value ratios, and (3) may be drawn only during the first
eighteen months of the credit facility. Additional provisions include a 1/2%
commitment fee, a minimum net worth covenant of $175 million, cross-default and
cross-collateralization requirements with respect to debt and properties within
the Amended Facility and under certain conditions an exit fee. Advances under
the Amended Facility may be used to fund acquisitions, expansions, renovations,
financing and refinancing of real estate. As of March 31, 2003, the Company had
$9.3 million outstanding under the $155 million Amended Facility.
In 1996, the Company entered into a seven year, fixed rate real estate mortgage
loan in the principal amount of $181.7 million (the " Mortgage Loan"), at a
weighted average interest rate of 7.96%, which is inclusive of trustee and
servicing fees. The Mortgage Loan is secured by twenty seven-shopping center
properties (the "Mortgaged Properties"). The entire outstanding principal
balance of the Mortgage Loan is due in June 2003. As a condition of the Mortgage
Loan, the Company was required to establish a sinking fund account and a capital
and tenant improvement ("TI") reserve account. All funds in the capital and TI
reserve account may be used to fund capital improvements, repairs, alterations,
tenant improvements, and leasing commissions at the Mortgaged Properties. On
October 23, 2002, the Company obtained a commitment from Metropolitan Life
Insurance Company (the "Commitment") for a loan in the amount of $190 million to
replace the Mortgage Loan when it matures in June 2003. The terms of the
Commitment are for ten years with a weighted average interest rate of 6.12%,
interest only for the first two years, with amortization for the remainder of
the loan term. The closing of the Commitment is subject to certain closing
conditions.
In 1998, the Company obtained a $65.9 million fixed rate mortgage from Salomon
Brothers Realty Corp. This loan is secured by a first mortgage on nine
properties acquired by the Company in September 1998. The mortgage loan bears a
fixed interest rate of 7% per annum and requires monthly payments of interest
and principal based on a 30-year amortization. The loan matures on October 1,
2008. The outstanding balance on the mortgage was approximately $63 million as
of March 31, 2003. Pursuant to the mortgage loan, the Company is required to
make monthly escrow payments for the payment of tenant improvements and repair
reserves.
In addition, the Company has twenty-five mortgage loans outstanding as of March
31, 2003 which were primarily assumed in connection with various acquisitions of
certain shopping centers. These mortgage loans have maturity dates ranging from
2003 through 2028. Nineteen of the twenty-five mortgage loans have fixed
interest rates ranging from 6.08% to 9.38%. The outstanding principal balance on
these mortgage loans at March 31, 2003 was approximately $144 million. The
remaining six mortgage loans, in the aggregate amount of $17.8 million at March
31, 2003, have variable rates ranging from 3.00% to 7.63%.
The Company has $17.5 million of borrowings consisting of Collateralized
Mortgage Obligations, net of unamortized discount, with a fixed effective
interest rate of 8.84% which are collateralized by the Recreation Notes and
require self-amortizing principal and interest payments through March 2007.
11
On July 12, 2001, the Company established a secured line of credit in the amount
of $3.2 million with Wachovia Bank, N.A. This line is secured by a shopping
center and has an interest rate payable at a rate adjusted monthly to the sum of
30 day LIBOR plus 1.8%. The line of credit matures on August 1, 2003. No amounts
were outstanding at March 31, 2003 on this line of credit.
The Company has a line of credit with Wilmington Trust of Pennsylvania in the
amount of $3.5 million secured by two shopping centers with an interest rate
payable at a rate adjusted monthly to the sum of 30 day LIBOR plus 1.8%. The
line of credit matures on June 30, 2003. At March 31, 2003 there was no
outstanding balance on this line of credit.
Capital Resources
On April 3, 2002, the Company filed a Shelf Registration Statement on Form S-3
("Shelf Registration") to register $150 million in common and preferred shares
of beneficial interest, depository shares, warrants and debt securities. The
Shelf Registration Statement became effective April 17, 2002.
On January 2, 2003, under the Shelf Registration, the Company sold 280,000 of
its common shares of beneficial interest for proceeds of $4 million to Teachers
Insurance and Annuity Association of America. The Company used $4 million to pay
down the Credit Facility.
The Company's operating funds are generated from rent revenue net of operating
expense from income producing properties and, to a much lesser extent, interest
income on the mortgage notes receivable. The Company believes that the operating
funds will be sufficient in the foreseeable future to fund operating and
administrative expenses, interest expense, recurring capital expenditures and
distributions to shareholders in accordance with REIT requirements. Sources of
capital for non-recurring capital expenditures and scheduled principal payments,
including balloon payments, on outstanding borrowings are expected to be
obtained from property refinancings, scheduled principal repayments on the
mortgage notes receivable, sales of non-strategic real estate, the Company's
lines of credit and/or potential debt or equity financings in the public or
private markets.
Subsequent Events
On April 3, 2003, the Company completed the acquisition of two shopping centers,
an office building and sixteen acres of land for development for approximately
$12.5 million plus $500,000 of pre-development cost reimbursements to the
seller. The purchase includes a 31,500 square foot Shop Rite Supermarket and a
fully occupied 14,000 square foot office building in Springfield, New Jersey, a
54,000 square foot Shop Rite Supermarket, and an adjacent sixteen acres of land
approved for development in Somers Point, New Jersey. The properties were
purchased using cash and common shares of beneficial interest.
On May 2, 2003, the Company sold a nine acre parcel of unimproved land in Dania,
Florida. The sale price for the land was $4.1 million with net proceeds of
approximately $3.8 million. The Company will record a gain of approximately
$750,000. The Company will use the proceeds for general corporate purposes.
INFLATION
During recent years, the rate of inflation has remained at a low level and has
had minimal impact on the Company's operating results. Most of the tenant leases
contain provisions designed to lessen the impact of inflation. These provisions
include escalation clauses which generally increase rental rates annually based
on cost of living indexes (or based on stated rental increases which are
currently higher than recent cost of living increases), and percentage rentals
based on tenant's gross sales, which generally increase as prices rise. Many of
the leases are for terms of less than ten years which increases the Company's
ability to replace those leases
12
which are below market rates with new leases at higher base and/or percentage
rentals. In addition, most of the leases require the tenants to pay their
proportionate share of increases in operating expenses, including common area
maintenance, real estate taxes and insurance.
However, in the event of significant inflation, the Company's operating results
could be adversely affected if general and administrative expenses and interest
expense increases at a rate higher than rent income or if the increase in
inflation exceeds rent increases for certain tenant leases which provide for
stated rent increases (rather than based on cost of living indexes).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure to market risk is to changes in interest rates.
The Company has both fixed and variable rate debt. The Company has $472.4
million of debt outstanding as of March 31, 2003 of which $406.3 million, or
86%, has been borrowed at fixed rates ranging from 6.08% to 9.38% with
maturities through 2028. As these debt instruments mature, the Company typically
refinances such debt at their existing market interest rates which may be more
or less than interest rates on the maturing debt. Changes in interest rates have
different impacts on the fixed and variable rate portions of the Company's debt
portfolio. A change in interest rates impacts the net market value of the
Company's fixed rate debt, but has no impact on interest incurred or cash flows
on the Company's fixed rate debt. Interest rate changes on variable debt impacts
the interest incurred and cash flows but does not impact the net market value of
the debt instrument. Based on the variable rate debt of the Company as of March
31, 2003, a 100 basis point increase in interest rates would result in an
additional $661,000 in interest incurred per year and a 100 basis point decline
would lower interest incurred by $661,000. To ameliorate the risks of interest
rate increases, the Company has entered into interest rate swap agreements in
the notional amounts of $32.5 million. A 100 basis point increase in interest
rates would result in a $10.7 million decrease in the fair value of the fixed
rate debt and a 100 basis point decline would result in a $9.6 million increase
in the fair value.
The Company also has $33 million of fixed rate mortgage notes receivable.
Changes in interest rates impacts the market value of the mortgage notes
receivable, but has no impact on interest earned or cash flows. A 100 basis
point increase in interest rates would result in a $1.6 million decrease in the
fair value of the mortgage notes receivable and a 100 basis point decline would
result in a $2.3 million increase in the fair value.
ITEM 4. CONTROLS AND PROCEDURES
In the 90 days prior to the filing date of this Quarterly Report on Form 10-Q,
the Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the Company's "disclosure controls and procedures," as that
term is defined in Rule 13a-14(c) promulgated under the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms, and to ensure
that such information is made known to the Chief Executive Officer and Chief
Financial Officer as appropriate to allow timely decisions regarding required
disclosure.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Chief Executive Officer and Chief Financial Officer completed their
evaluation. There were no significant deficiencies or material weaknesses, and
therefore no corrective actions with regard thereto.
13
FORWARD LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Quarterly Report may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of
1934, as amended, and as such may involve known and unknown risks, uncertainties
and other factors which may cause our actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project", or the negative thereof, or other variations
thereon or comparable terminology. Factors which could have a material adverse
effect on the operations and future prospects of our company include:
- our inability to identify properties to acquire or our inability to
successfully integrate acquired properties and operations;
- the effect of general economic downturns on demand for leased space at
and the amount of rents chargeable by neighborhood and community
shopping centers;
- changes in tax laws or regulations, especially those relating to REITs
and real estate in general;
- our failure to continue to qualify as a REIT under U.S. tax laws;
- the number, frequency and duration of tenant vacancies that we
experience;
- the time and cost required to solicit new tenants and to obtain lease
renewals from existing tenants on terms that are favorable to us;
- tenant bankruptcies and closings;
- the general financial condition of, or possible mergers or acquisitions
involving, our tenants;
- competition from other real estate companies or from competing shopping
centers or other commercial developments;
- changes in interest rates and national and local economic conditions;
- increases in our operating costs;
- the continued service of our senior executive officers;
- possible environmental liabilities;
- the availability, cost and terms of financing;
- the time and cost required to identify, acquire, construct or develop
additional properties that result in the returns anticipated or sought;
- the costs required to re-develop or renovate any of our current or
future properties; and
- our inability to obtain insurance coverage to cover liabilities arising
from terrorist attacks or other causes or to obtain such coverage at
commercially reasonable rates.
You should also carefully consider any other factors contained in this Quarterly
Report. You should not rely on the information contained in any forward-looking
statements, and you should not expect us to update any forward-looking
statements.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
14
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
EXHIBIT NO. DOCUMENT
----------- --------
99.1 Certification by Chief Executive Officer of Kramont
Realty Trust pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer of Kramont
Realty Trust pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Form 8-K
On March 19, 2003, the Company furnished a Current Report on Form
8-K, reporting under Item 7 - "Financial Statements, Pro Forma
Financial Information and Exhibits" -Presentation at Salomon Smith
Barney REIT CEO Conference - March 19, 2003 and under Item 9.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KRAMONT REALTY TRUST
--------------------------------------
(Registrant)
/s/ Louis P. Meshon, Sr.
May 7, 2003 --------------------------------------
Louis P. Meshon Sr., President
/s/ Carl E. Kraus
May 7, 2003 --------------------------------------
Carl E. Kraus, Chief Financial Officer
and Treasurer
16
CERTIFICATIONS
I, Louis P. Meshon, Sr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kramont Realty
Trust;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Louis P. Meshon, Sr.
May 7, 2003 -----------------------------------
Louis P. Meshon Sr., President and
Chief Executive Officer
(principal executive officer)
17
I, Carl E. Kraus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kramont Realty
Trust;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Carl E. Kraus
May 7, 2003 ---------------------------------------
Carl E. Kraus, Chief Financial Officer,
Chief Investment Officer and Treasurer
(principal financial officer)
18