ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
IRT Property Company, individually and collectively with its subsidiaries, "IRT" or the "Company," was founded in 1969 and has been a Georgia corporation since 1979. The Company is an owner, operator, developer and redeveloper of neighborhood and community shopping centers located primarily in the southeastern United States and usually anchored by necessity-oriented retailers such as supermarkets, drug stores and discount variety stores. IRT is a self-administered and self-managed equity real estate investment trust with acquisition, development, redevelopment, financing, property management and leasing capabilities.
IRT has elected since inception to be treated as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code (the "Code"). IRT intends to continue such election, although it is not required to do so. For the special provisions applicable to REITs, see Sections 856-860 of the Code, as amended. The Company has five subsidiaries.
IRT Partners, L.P. ("LP"), a Georgia limited partnership, was formed in 1998 to enhance the Company's acquisition opportunities by offering potential sellers the ability to engage in tax-deferred sales in exchange for Operating Partnership Units ("OP Units") of LP, which are redeemable for shares of the Company's common stock. The Company serves as general partner of LP and made an initial contribution of 20 shopping centers and related assets and cash to LP in exchange for OP Units and partnership interests. Subsequent to the formation of LP, the Company has contributed cash to acquire five shopping centers and LP has divested three shopping centers. As a result, IRT and one of its wholly owned subsidiaries own approximately 93.0% of LP as of December 31, 2000, which is included in the Company's consolidated financial statements. LP currently has several unaffiliated limited partners resulting from the acquisition of three Florida properties by LP in August 1998. The unaffiliated limited partners have the option to require LP to redeem their OP Units at any time, in which event LP has the option to purchase the OP Units for cash or convert them into one share of the Company's common stock for each OP Unit. LP has guaranteed the Company's bank indebtedness and its senior indebtedness.
IRT Capital Corporation II ("IRTCCII"), a taxable subsidiary of the Company, was formed under the laws of Georgia in 1999. IRTCCII has the ability to develop properties, buy and sell properties, provide equity to developers and perform third-party management, leasing and brokerage. The Company currently holds 96% of the non-voting common stock and 1% of the voting common stock of IRTCCII. The remaining voting common stock is currently held by an executive officer and a director of the Company, but the Company has elected on March 15, 2001 to become a taxable REIT subsidiary pursuant to the Tax Relief Extension Act of 1999 (sometimes referred to as the "REIT Modernization Act of 1999"). IRTCCII, which is accounted for by the Company under the equity method, is taxed as a regular corporation and not as a REIT. IRTCCII currently is in the process of developing three shopping centers in Florida. IRTCCII has guaranteed the Company's bank indebtedness and its senior indebtedness.
The Company has three wholly-owned subsidiaries. VW Mall, Inc. ("VWM") was formed in July 1994, but is currently inactive. IRT Alabama, Inc. ("IRTAL") was formed in August 1997 to purchase Madison Centre in Madison, Alabama, which it continues to own, but it conducts no significant operations beyond this property. IRT Management Company ("IRTMC") was formed in 1990. IRTMC currently holds 92.0% of the operating units of IRT Partners L.P.
IRT Capital Corporation ("IRTCC"), a taxable subsidiary of the Company, was dissolved in January 2001.
INVESTMENT AND OPERATING PHILOSOPHY
The Company's fundamental business is the ownership of real estate investments which consist principally of equity investments in income-producing properties, with primary emphasis on neighborhood and community shopping centers in the southeastern United States. The Company's investment portfolio includes
88 shopping centers, one industrial property, several investments which are accounted for as direct financing leases and four mortgage loans. In addition, the Company has authority to make other types of equity and mortgage investments in real estate. For a description of the Company's individual investments and of material developments during 2000 regarding these investments and the Company as a whole, reference is made to Items 2 and 7 hereof. Readers are also urged to review the Company's Annual Report to Shareholders for the year ended December 31, 2000.
The Company's mission is to maximize growth and long-term real estate value while providing attractive annual returns for its shareholders. The Company seeks to achieve this through geographic and tenant diversification, acquisitions, expansions and redevelopments, developments and co-developments, dispositions and technology initiatives.
The Company believes that geographic and tenant diversification will help increase shareholder return by managing economic risks. The following table summarizes the geographic diversification of the shopping centers by total gross leaseable area by state and total rental revenue by state as of and for the year ended December 31, 2000.
SUMMARY OF GEOGRAPHIC DIVERSIFICATION
The Company's shopping centers were 93% leased as of December 31, 2000 with over 1,000 different tenants. No one shopping center accounts for more than 4.3% of rental revenue and no one tenant represents more than 8.0% of rental revenues. The average base rent per square foot increased $0.05 to $7.87 per square foot for the year ended December 31, 2000. As of December 31, 2000, the Company's five largest tenants, as a percentage of base rental revenues, are Publix, Kroger, Wal-Mart, Kmart and Harris Teeter with percentages of 8.0%, 6.9%, 5.1%, 5.0% and 2.4% respectively. Necessity-oriented retailers such as supermarkets, drug stores and discount variety stores are typical anchor tenants, and accounted for 49% of the Company's rental revenues in 2000.
In making new real estate investments, the Company intends to continue to place primary emphasis on obtaining equity interests in well-located, income-producing properties with attractive yields and potential for increases in income and capital appreciation. The Company focuses on neighborhood and community shopping centers, primarily in the southeastern United States; however, the Company will consider acquisitions in other regions. Since 1996 the Company has acquired 21 properties in primary or secondary markets in the southeast, for an aggregate cost of $184 million. These acquisitions contributed approximately 29% to rental revenues for 2000. Also, the Company continually reviews mergers and acquisitions with companies engaged in businesses similar or complementary to ours.
Existing investments are continuously reviewed by Company management and appropriate programs to renovate and modernize properties are designed and implemented in order to improve leasing arrangements
and tenant satisfaction, thereby increasing funds from operations and property values. In 2000, the Company commenced such programs for six properties -- two properties in each of Florida and Georgia, respectively, and one in both North Carolina and South Carolina. These expansions and redevelopments will total approximately 155,430 additional square feet.
In 1999 the Company initiated a development program through IRTCCII with the acquisition of two parcels of land in Florida. In 2000 the Company purchased an additional parcel of land in Florida. The Company commenced the development of these properties in 2000, which will have an aggregate of 334,270 square feet when completed. The Company also has seven projects in various stages of pre-development for an aggregate of approximately 635,420 square feet and continues to search for other development opportunities. The Company maintains a conservative approach toward development and manages the development risk usually by pre-leasing the development before commencement of construction.
The Company also, from time to time, considers the disposition or exchange of existing investments in order to improve its investment portfolio. During 1999, the Company identified those investments that are in tertiary markets and focused its efforts to sell these properties. During 1999 and 2000, the Company sold a combined total of 10 properties for approximately $30.2 million.
During 2000, the Company entered into two strategic partnerships, without any investment by the Company, for internet and broadband technologies to increase the Company's internal growth and operating efficiencies. On August 16, 2000 the Company entered into a Warrant Agreement and a Marketing Services Agreement with StoreTrax.com, Inc. Pursuant to the agreements, StoreTrax.com is the exclusive source on the internet for publishing leasing information about the Company's properties. In exchange for entering into this agreement with StoreTrax.com, the Company received a warrant to purchase a specified amount of StoreTrax.com's outstanding common stock. On December 6, 2000, the Company entered into an agreement with MyShoppingCenter.com to install broadband infrastructure and to develop and host websites for all of the Company's properties and tenants.
The Company directly provides property management and leasing services for all of its operating properties. Self-management enables the Company to emphasize and more closely control leasing and property management. Internal property management also provides the Company opportunities for operating efficiencies by enabling it to acquire additional properties without proportionate increases in property management expenses. The Company's property management program is staffed by property management and leasing professionals located in offices in Atlanta, GA; Charlotte, NC; Orlando, FL; Ft. Lauderdale, FL and New Orleans, LA. During 2000, the Company upgraded its internal systems to allow information access for all southeastern locations, thereby improving communication and information transmittal between the regional offices and corporate headquarters.
The Company has principal offices in Atlanta, GA and presently employs a total of 62 people located in the five southeastern locations. Since its founding in 1969, the Company has successfully operated and grown through three major real estate recessions. The Company believes its management has the experience and expertise necessary to preserve values and enhance future operating performance.
FINANCIAL PHILOSOPHY
Maintaining a conservative capital structure that allows the Company continued cost-effective access to the capital markets is an important element of the Company's growth strategy. The Company believes its financial position as of December 31, 2000, including the following measures, demonstrates management's discipline in applying conservative capital policies:
- Long-term variable rate debt was 9.7% of total market capitalization.
- Unencumbered real estate assets as a percentage of real estate investments at cost was 69% as 70 out of the 92 investments were unencumbered.
The Company anticipates that cash flows from operations will continue to provide adequate capital to fund its operating and administrative expenses, regular debt service obligations and the payment of dividends.
The Company intends to finance future acquisitions and developments with additional secured or unsecured borrowings, its revolving credit facility, proceeds from property sales, the issuance of OP Units of LP or issuance of common or preferred stock. The Company intends to closely monitor and review such financing activity to ensure compliance with certain covenants and restrictions and to maintain the Company's investment grade bond rating. The Company currently has a shelf registration outstanding for up to $300 million of common stock, preferred stock, depositary shares, debt securities and warrants. No securities were issued off this shelf registration statement in 2000.
INDUSTRY AND COMPETITIVE CONDITIONS
The results of the Company's operations depend upon the performance of its existing investment portfolio, the availability of suitable opportunities for new investments, the yields available on such new investments and the Company's cost of capital. Yields will vary with the type of investment involved, the condition of the financial and real estate markets, the nature and geographic location of the investment, competition and other factors. The performance of a real estate investment company is strongly influenced by the cycles of the real estate industry. As financial intermediaries providing equity funds for real estate projects, real estate investment companies are generally subject to the same market and economic forces as other real estate investors.
In seeking new investment opportunities, the Company competes with other real estate investors, including pension funds, foreign investors, real estate partnerships, other real estate investment trusts and other domestic real estate companies, such as Weingarten Realty Investors and Regency Realty Corporation. On properties presently owned by the Company or in which it has investments, the Company and its tenants and borrowers compete with other owners of like properties, such as Regency Realty Corporation and JDN Realty Corporation, for tenants and/or customers depending on the nature of the investment. Management believes that the Company is well positioned to compete effectively for new investments and tenants.
For any borrowed funds that may be used in new investment activity, the Company would be in competition with other borrowers seeking both secured and unsecured borrowings in the banking, real estate lending and public debt markets.
REGULATION
The Company is subject to federal, state and local environmental regulations regarding the ownership, development and operation of real property. The Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. sec.9601 et seq. ("CERCLA"), and applicable state laws subject the owner of real property to claims or liability for the costs of removal or remediation of hazardous substances that are disposed of on real property in amounts that require removal or remediation. Liability under CERCLA and applicable state superfund laws can be imposed on the owner of real property or the operator of a facility without regard to fault or even knowledge of the disposal of hazardous substances. The failure to undertake remediation where it is necessary may adversely affect the owner's ability to sell real estate or borrow money using such real estate as collateral. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in claims by private parties for personal injury or property damage.
The Company has obtained independent Phase I environmental site assessments (which generally do not include environmental sampling, monitoring or laboratory analysis) for property acquisitions beginning in 1989, and otherwise as required by its lenders. Except as otherwise disclosed and based upon information presently available to the Company, the Company has no reason to believe that any environmental contamination has occurred nor any violation of any applicable environmental law, statute, regulation or ordinance exists that would have a material adverse effect on the Company's financial position. The Company presently carries limited insurance coverage for the types of environmental risks described herein. For the years commencing January 1, 2000, the Company has acquired environmental and pollution legal liability insurance coverage to mitigate the associated risks.
RISK FACTORS
Set forth below are the risks that management believes are material to investors in the Company's common stock ("Shares") or the OP Units, which are redeemable on a one-for-one basis for Shares or their cash equivalent. We refer to the Shares and the OP Units together as our "Securities," and the investors who own Shares or OP Units as our "Security Holders."
OWNING AND OPERATING RETAIL REAL ESTATE ENTAILS RISKS THAT COULD ADVERSELY AFFECT OUR PERFORMANCE
Dependence on the Retail Industry. Our properties consist predominately of community and neighborhood shopping centers. The market for retail space may be adversely affected by consolidation of retailers, the relatively weak financial condition of certain retailers and overbuilding in certain markets.
Internet Sales. Retail sales over the Internet have been increasing rapidly. The success of electronic commerce businesses in attracting customers of our tenants could adversely affect our tenants and other companies, and thus the demand for retail space. A reduction in the demand for retail space would adversely affect our performance.
Major Tenants. As of December 31, 2000, our five largest tenants, as a percentage of base rental revenues, were Publix, Kroger, Wal-Mart, Kmart and Harris Teeter with percentages of 8.0%, 6.9%, 5.1%, 5.0% and 2.4% respectively. We could be adversely affected if any of our major tenants experienced a significant downturn in its business or failed to renew its leases as they expired. A downturn in the business of other significant tenants could also affect us adversely; however, as of December 31, 2000, we received no more than 2.4% of our annualized base rental revenue from any other single tenant.
Bankruptcy of Tenants. A financially troubled tenant could seek the protection of the bankruptcy laws, which might result in rejection and termination of the tenant's lease. Whether or not a financially troubled tenant seeks the protection of the bankruptcy laws, we could experience delays and incur significant costs and delays in enforcing our rights against a financially troubled tenant that does not pay its rent when due.
In October 1999, Jitney Jungle filed for reorganization under Chapter 11 of the United States Bankruptcy Code. At the time of filing, the Company had leases with Jitney Jungle at 10 store locations. Jitney Jungle disavowed two of these leases at the time of the bankruptcy filing. During 2000, Jitney Jungle released three additional leases and in January 2001, the remaining leases were rejected by the bankruptcy court. As of March 19, 2001, of the 10 original Jitney Jungle locations, three are fully leased to grocery operators, two are partially leased to another national tenant, with the balance of the space at these two locations under negotiation with other retailers. The Company is negotiating with retailers for three of the remaining five locations.
Vacancies and Lease Renewals. Our anchor tenants' leases generally have terms of up to 20 years, often with one or more renewal options. We may not be able to find a replacement tenant at the end or nonrenewal of a lease. The space may remain vacant or may be re-leased at terms that vary materially with the original terms.
Tenant Closings. Certain leases permit the tenant to close its operations at the leased location. Although the tenant would still be responsible for its rental obligations, any rents based on the sales of that tenant could be lost. Such a closure could adversely affect customer traffic as well as the other tenants at a shopping center. Rental rates and occupancy may also be affected adversely at such a center.
REAL ESTATE INDUSTRY RISKS MAY AFFECT OUR PERFORMANCE
Concentration in the Southeast. Most of our real estate portfolio is located in the southeastern United States. This region has experienced rapid growth in recent years. Our business could be adversely affected generally by changes in the region's growth and economic condition.
Uncertainty of Meeting Acquisition Objectives. We continually seek additional shopping centers and portfolios of shopping centers. We seek purchases with attractive initial yields and/or which may enhance our revenues and funds from operations through renovation, development, expansion and re-leasing programs. We
also evaluate mergers and acquisitions with companies engaged in businesses similar or complementary to ours. However, we may not be able to meet our acquisition goals and cannot assure you that any acquisition will increase our revenues or funds from operations or result in a certain yield. In addition, we incur certain costs evaluating possible transactions, many of which are not recoverable when the transaction does not close.
Competition. We compete with numerous other real estate companies. Other retail properties within our markets compete with us for tenants. The location and number of competitive retail properties could affect the Company's occupancy levels and rental increases.
Other real estate companies compete with us for development, redevelopment and acquisition opportunities. Such competitors may be willing and able to pay more for such opportunities than we would. This may increase the prices sought by sellers of these properties.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND COULD BE COSTLY
Possible Environmental Liabilities. An owner or operator of real estate may be liable for the costs of removal of the releases of certain hazardous or toxic substances. The presence of hazardous or toxic substances on or near our properties, or the failure to properly clean them up, may adversely affect our ability to sell or rent the property or to use such property as collateral for our borrowings. Corrective costs could adversely affect our financial condition and performance.
Lack of Environmental Analyses. The Company has obtained independent Phase I environmental site assessments for property acquisitions beginning in 1989, and otherwise as required by its lenders. A Phase I assessment, however, has not been obtained for several properties. Moreover, Phase I assessments generally do not include environmental sampling, monitoring or laboratory analysis. As a result there may be environmental contamination at our properties of which we are unaware. The Company presently carries limited insurance coverage for the types of environmental risks described herein. For the years commencing January 1, 2000, the Company has acquired environmental and pollution legal liability insurance coverage to mitigate the associated risks. However, there is no assurance that this insurance will be adequate to protect the Company against unforeseen liabilities, which could adversely affect the Company's performance.
Presence of Dry Cleaning Solvents. A number of Company properties include facilities leased to dry cleaners. At some of these properties, dry cleaning solvents have been discovered in soil and or groundwater. In each such instance either the amount detected was below reportable limits or the state regulatory authority has informed the Company that no further enforcement action would be taken. In Florida, the state regulatory authority has admitted the affected Company property into the state-sponsored fund responsible for the clean up of dry cleaning spills. Neither the admission of a property into the Florida fund nor the assurances of the relevant state regulatory authority ensures that the Company will not incur costs associated with corrective action.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT AND OTHER LAWS MAY BE COSTLY
Our properties must comply with the federal Americans with Disabilities Act of 1990 (the "ADA"). This law requires that disabled persons must be able to enter and use public properties like our shopping centers. The ADA, or other federal, state and local laws may require us to modify our properties, which may adversely affect our financial performance, and may limit renovations. If we fail to obey such laws, we may pay fines or damages.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE
We carry comprehensive liability, fire, extended coverage and rental loss insurance on all of our properties. We believe this insurance coverage is reasonably adequate. Certain types of losses, such as lease and other contract claims generally are not insured. Should an uninsured loss or a loss in excess of insured limits occur, we could lose some or all of our investment in a property, and the anticipated future revenue from the property could be adversely affected. Notwithstanding any such loss, we would still owe mortgage debt or other financial obligations related to the property.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH DEBT FINANCING
At December 31, 2000, we had $319 million in long-term debt. On December 31, 2000, our debt-to-total market capitalization ratio was 56% without giving effect to the conversion of the subordinated debentures or the OP Units, and 52% assuming conversion of our subordinated debentures and the OP Units held by unaffiliated persons. Of our long-term debt, 36% was secured by mortgages on our properties. If the Company was unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of revenues and asset value to the Company. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering the Company's ability to meet the REIT distribution requirements of the Code. We must pay our debts on time. Interest and principal on the Company's debt must be paid before dividends can be paid to shareholders. We may not be able to refinance existing indebtedness on favorable terms.
We are obligated on floating rate debt, and historically have not used interest rate protection instruments. If we do not hedge our exposure to increases in interest rates through interest rate protection or cap agreements, increases in rates may reduce cash flow and our ability to service our debt. Our organization documents place no limit on the amount of indebtedness we may incur.
SECURITY HOLDERS MAY BE ADVERSELY AFFECTED BY THE DILUTION OF COMMON STOCK
The Company may issue additional Shares or OP Units without Security Holder approval. Additionally, each OP Unit may be redeemed by the holder for one share of common stock or, at our option, the cash value of one share of common stock. Such issuances may dilute your interest in the Company.
OUR LIQUIDITY IS SUBJECT TO THE RESTRICTIONS ON SALES OF CERTAIN PROPERTIES
We have agreements that limit our sale of certain properties acquired by LP in exchange for OP Units for up to 10 years. We may enter into similar agreements in the future with future sellers of properties that take OP Units in exchange for transferring properties to LP. These agreements may prevent sales of properties that could be advantageous to our Security Holders.
THE ABILITY TO EFFECT CHANGES IN CONTROL OF THE COMPANY MAY BE LIMITED
Certain provisions of the law, our charter documents and Company policies may have the effect of delaying or preventing a change in control of the Company or other transaction that could, if consummated, provide investors with a premium over the then-prevailing market price of the Company's securities. These provisions include the ownership limit described below and the Company's Shareholders' Rights Plan. Also, any future series of preferred stock may have certain voting provisions that could delay or prevent a change of control or other transaction that might involve a premium price or otherwise be of benefit to other equity interests in the Company. For a description of the Company's Shareholders Rights Plan, see the Company's report on Form 8-K dated August 21, 1998.
THE COMPANY IS SUBJECT TO OWNERSHIP LIMITS AND CERTAIN ADVERSE EFFECTS OF FAILING TO QUALIFY AS A REIT
Concentration of Ownership of the Company is Limited. In order to qualify as a REIT under the Code, we must satisfy various tests related to the sources and amounts of our income, the nature of our assets and our stock ownership. For example, not more than 50% in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals. Our charter authorizes our directors to take such action as may be required to preserve our qualification as a REIT including limits on the ownership of our securities. These limits may have the ancillary effect of delaying, deferring or preventing a change in control of the Company.
REIT Investment Limitations. We must hold certain types of real estate and other investments. This limits our ability to diversify our assets outside of real estate.
Adverse Effects of Failing to Qualify as a REIT. If the Company fails to qualify as a REIT under the Code, it will be subject to income taxes on its taxable income. The Company also may be disqualified from
treatment as a REIT for the four taxable years following the year during which qualification is lost. This would reduce the net earnings of the Company available for investment or distribution to Security Holders because of the additional tax liability for the year(s) involved. In addition, distributions to our Security Holders would no longer be required, which would likely substantially reduce, or even eliminate, any dividends paid by the Company to its shareholders.
ITEM 2.
ITEM 2. PROPERTIES (IN THOUSANDS, EXCEPT FOR SQUARE FOOTAGE)
The following tables and notes thereto describe the properties in which the Company had investments at December 31, 2000, as well as the mortgage indebtedness to which the Company's investments were subject. Reference is made to Note 3 to the consolidated financial statements included as a part of this report for information on minimum base rentals on noncancellable operating leases for the next five years and thereafter.
I. EQUITY INVESTMENTS (LAND AND BUILDINGS)
The Company had a fee or leasehold interest in land and improvements thereon as follows:
I. EQUITY INVESTMENTS (LAND AND BUILDINGS) CONTINUED
I. EQUITY INVESTMENTS (LAND AND BUILDINGS) CONTINUED
I. EQUITY INVESTMENTS (LAND AND BUILDINGS) CONTINUED
I. EQUITY INVESTMENTS (LAND AND BUILDINGS) CONTINUED
NOTES:
(1) The Company owns a 49.5% interest in the property of North Village Center. The Company also owns a 75% interest in Venice Plaza Shopping Center. These investments are consolidated for reporting purposes and minority interests are recorded. (2) Subject to ground leases expiring in 2002 for Shelby Plaza, 2005 for McAlpin Square and 2008 for Plaza Acadienne, with renewal options to extend the terms to 2017, 2033 and 2035, respectively. The Company has options to purchase the land at Shelby Plaza and McAlpin Square. (3) Ownership through IRT Partners, L.P.
II. EQUITY INVESTMENTS (DIRECT FINANCING LEASES)
The Company also had a fee interest in land and improvements thereon in the following properties occupied by tenants under leases which are treated as direct financing leases.
NOTES:
(1) This investment represents ten banking facilities leased to The Old Phoenix National Bank. The leases expire March 2013 with no purchase or renewal options. (2) These two retail facilities are leased to Wal-Mart Stores, Inc. The leases expire January 2011, with five 5-year renewal options. There are no purchase options. Percentage rental income of $68,800 was received during the fiscal year ended December 31, 2000.
III. EQUITY INVESTMENTS (LAND PURCHASE-LEASEBACKS)
The Company owned land under the following properties, all of which are net leased back to lessees on terms summarized below. The improvements on such properties are owned by others but will revert to the Company at the end of the lease terms unless the purchase options of the lessees, as referred to below, are exercised.
NOTE:
(1) The lessee has a repurchase option exercisable at a specified price (in each case higher than the costs to the Company of its investment) which increases annually by a fixed amount.
IV. MORTGAGE LOAN INVESTMENTS (In thousands, except area and units)
The Company had mortgage loans receivable on the following properties:
NOTES:
(1) Principal outstanding at December 31, 2000 represents the Company's 46.2% interest in the total loan outstanding. (2) The interest rates are based upon the one month London Interbank Offering Rate ("LIBOR") two days prior to month end plus the specified premium.
V. MORTGAGE INDEBTEDNESS (In thousands)
Indebtedness of the Company secured by its investments (not including mortgage debt owed by lessees of its land purchase-leaseback investments) was as follows:
NOTES:
(1) Balloon payment at maturity. (2) Interest only. Entire principal due at maturity. (3) Although the Company is a partner or joint venturer in this investment, 100% of the mortgage note payable is recorded for financial reporting purposes. (4) Interest only through 9/1/00; then principal and interest of $1,158 annually for the final 10 years. (5) Callable anytime after 7/30/03. (6) For financial reporting purposes, mortgage indebtedness is valued assuming current interest rates at date of acquisition. (7) Ownership through IRT Partners, L.P.
VI. SHOPPING CENTER ACQUISITIONS (In thousands, except square footage)
VII. SHOPPING CENTER DISPOSITIONS (in thousands, except square footage)
NOTE:
(1) Represents additional sale proceeds received subsequent to the sale of the property.
Mortgage Indebtedness
During 2000, the Company made a scheduled balloon payment at maturity of $3,521 on a mortgage bearing interest at 7.75%.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings of which the Company is aware involving the Company, its subsidiaries or its properties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareholders during the fourth quarter of the Company's fiscal year ended December 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
(a) The following table shows the high and low sale prices for the Company's common stock, as reported on the New York Stock Exchange for the periods indicated.
(b) Approximate number of Equity Security Holders.
(c) IRT Property Company paid quarterly cash dividends per share of Common Stock during the years 2000 and 1999 as follows:
IRT has paid 92 consecutive quarterly dividends. The current annualized dividend rate is $0.94. The Company does not foresee any restrictions upon its ability to continue its dividend payment policy of distributing at least the 95% (90% for all years after 2000) of its otherwise taxable ordinary income required for qualification as a REIT.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share amounts)
The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
NOTE:
(1) The Company defines funds from operations, consistent with the NAREIT definition, as net income before gains (losses) on the sale of real estate investments and extraordinary items plus depreciation and amortization of capital leasing costs. Conversion of the 7.30% subordinated debentures is dilutive and therefore assumed for all years presented. Conversion of the OP Units is dilutive and therefore assumed for 2000, 1999 and 1998. Management believes funds from operations should be considered along with, but not as an alternative to, net income as defined by generally accepted accounting principles as a measure of the Company's operating performance. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund operating needs. See Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts)
MATERIAL CHANGES IN FINANCIAL CONDITION
During the fiscal year ended December 31, 2000, the Company:
- obtained cash proceeds of approximately $16,719 upon the sales of five properties and recognized a gain of approximately $4,549 for financial reporting purposes, and
- borrowed $34,600 under its unsecured revolving term loan.
During the fiscal year ended December 31, 2000, the Company utilized funds of:
- approximately $29,285, net of approximately $497, due to the Company's dividend reinvestment program, to pay dividends on the Company's outstanding common stock,
- approximately $11,438 for the acquisition of a shopping center investment,
- approximately $20,818 to repurchase 2,488,701 shares of the Company's common stock,
- approximately $4,507 to fund two loans for two co-development projects,
- approximately $10,091 for advances to IRTCCII for further development of land and property acquired in 1999 and 2000, and
- $3,521 to repay at maturity a 7.75% mortgage.
During the fiscal year ended December 31, 1999, the Company:
- obtained a $40,000, 6.5% fixed rate, 25 year fully-amortizing loan secured by first mortgages on eight properties, and
- obtained cash proceeds of approximately $12,409 from the sales of properties and recognized a gain of approximately $2,483 for financial reporting purposes.
During the fiscal year ended December 31, 1999, the Company utilized funds of:
- approximately $31,100 to pay down its unsecured revolving term loan,
- approximately $30,908 to pay dividends on the Company's outstanding common stock,
- approximately $15,518 for the acquisition of two shopping center investments, consisting of cash of approximately $9,776 and mortgage debt of approximately $5,742 secured by one of the centers,
- approximately $4,026 to repurchase 492,575 shares of the Company's common stock,
- approximately $1,191 for costs related to acquiring the new credit facility and obtaining the $40,000 mortgage,
- approximately $7,251 for a loan to IRT Capital Corporation II ("IRTCCII"), consisting of approximately $3,800 for the acquisition of 23 acres of undeveloped land in Miramar, Florida, approximately $2,600 for the acquisition of a shopping center and 9 acres of undeveloped land in Pasco County, Florida and approximately $851 to fund land development costs, and
- $3,333 to repay at maturity a 9.875% mortgage and $625 to repay at maturity a 9% purchase-money mortgage.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
During the fiscal year ended December 31, 2000, rental income from the Company's portfolio of shopping center investments:
- increased approximately $1,465 for the core portfolio, including a one time lease termination payment of $1,189 and a one time write-off of $323 in accounts receivable,
- increased approximately $585 due to the acquisition of two shopping centers in 1999, and
- decreased approximately $1,912 due to the sales of five investments in 1999 and five investments in 2000.
During the fiscal year ended December 31, 1999, rental income from the Company's portfolio of shopping center investments:
- increased approximately $1,147 for the core portfolio,
- increased approximately $7,115 due to the acquisition of nine shopping centers in 1998 and two in 1999,
- decreased approximately $994 due to the sales of an investment in 1998 and five investments in 1999 and the foreclosure of a mortgage held by the Company in 1998, and
- decreased approximately $2,435 due to the redevelopment of six centers.
Percentage rentals received from shopping center investments, excluding percentage rentals received from the two Wal-Mart investments classified as direct financing leases, totaled approximately $1,016, $1,018 and $776 during the fiscal years ended December 31, 2000, 1999 and 1998, respectively. Percentage rental income is recorded upon collection based on the tenants' lease year end.
Interest income during the fiscal years ended December 31, 2000 and 1999 increased approximately $821 and $18, respectively, due primarily to the interest charged on development loans.
Other income in 1999 of $969 was due to the Company's relinquishment of an option to purchase Old Decatur Square in 1999.
During the fiscal year ended December 31, 2000, operating expenses related to the Company's portfolio of real estate investments:
- increased approximately $812 for the core portfolio,
- increased approximately $158 due to the acquisition of two shopping centers in 1999, and
- decreased approximately $627 due to the sales of five investments in 1999 and five investments in 2000.
During the fiscal year ended December 31, 1999, operating expenses related to the Company's portfolio of real estate investments:
- increased approximately $228 for the core portfolio,
- increased approximately $1,893 due to the acquisition of two shopping centers in 1999 and nine in 1998,
- decreased approximately $305 due to the sale of foreclosed apartments in 1998, and
- decreased approximately $135 due to the redevelopment of six properties.
During the fiscal year ended December 31, 2000, interest expense on mortgages decreased $183 primarily due to a mortgage of $3,521 being repaid in 2000 at an interest rate of 7.75%.
During the fiscal year ended December 31, 1999, interest expense on mortgages decreased approximately $454 primarily due to two mortgages being repaid in 1999 and five in 1998 and increased approximately $4,208 due to:
- the assumption of a $2,232 mortgage bearing interest at 7.65% upon the acquisition of Town & Country shopping center in January 1998,
- the assumption of three mortgages aggregating approximately $20,083, bearing interest at 9.1875%, upon the acquisition of Charlotte Square, Riverside Square and Tamarac Square in August 1998 (these mortgages were discounted to the then current market rate of 8% for financial reporting purposes),
- the assumption of a $5,937 mortgage bearing interest at 8% upon the acquisition of Treasure Coast shopping center in August 1998,
- the placement of a $4,500 mortgage, bearing interest at 6.85%, on Mableton Crossing in August 1998 (Mableton was acquired without debt in June 1998),
- the assumption of a $5,742 mortgage bearing interest at 8% upon the acquisition of Shoppes of Lago Mar shopping center in February 1999, and
- the procurement, in February 1999, of a 25 year fully-amortizing $40,000 loan, secured by first mortgages on eight properties, bearing fixed interest at 6.5%.
Interest expense on bank indebtedness increased approximately $701 for the fiscal year ended December 31, 2000. The Company had average borrowings of approximately $35,583, $21,959 and $35,211, at effective interest rates of 7.61%, 6.75%, and 6.87%, under its variable rate bank credit facility during the fiscal years ended December 31, 2000, 1999 and 1998, respectively. In addition, the Company incurred commitment fees of approximately $202, $201 and $160 in 2000, 1999 and 1998, respectively. During 2000, average interest rates on bank indebtedness increased 0.86%.
The net increase in depreciation expense in 2000 was primarily due to the two shopping center investments acquired during 1999, partially offset by the ten investments sold during 2000 and 1999.
The net increase in general and administrative expense was approximately $75 for the fiscal year ended December 31, 2000.
The net decrease in general and administrative expense of approximately $1,223 for the fiscal year ended December 31, 1999 was primarily due to:
- capitalization of approximately $230 of compensation and overhead costs associated with development activity,
- capitalization of $430 of incremental compensation and other personnel costs associated with leasing activity, and
- merger expenses of approximately $373 which were incurred in 1998 and did not result in a merger.
FUNDS FROM OPERATIONS
The Company defines funds from operations, consistent with the National Association of Real Estate Investment Trusts ("NAREIT") definition, as net earnings on real estate investments less gains (losses) on sale of properties and extraordinary items plus depreciation and amortization of capitalized leasing costs. Interest and amortization of issuance costs related to convertible subordinated debentures and minority interest expenses are added back to funds from operations when assumed conversion of the debentures and OP Units is dilutive. The conversion of the debentures and OP Units is dilutive and therefore assumed for the fiscal years ended December 31, 2000, 1999 and 1998. Management believes funds from operations should be considered along with, but not as an alternative to, net income as defined by generally accepted accounting principles as a measure of the Company's operating performance. Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.
The following data is presented with respect to the calculation of funds from operations under the NAREIT definition for 2000, 1999 and 1998 (In thousands, except share and per share amounts):
NOTE:
(1) Net of amounts attributable to minority interests
LIQUIDITY AND CAPITAL RESOURCES
In 2000 and 1999, the Company's dividends, mortgage amortization payments, stock repurchase program and capital improvements were funded primarily by funds from operations and also through supplemental funding from available cash investments, bank borrowings, asset sales and other sources. The Company believes that dividends, mortgage amortization payments and necessary capital improvements will continue to be funded primarily by funds from operations. Other planned activities, including property acquisitions, new developments, certain capital improvement programs and debt repayments are expected to be funded to the extent necessary by bank borrowings, mortgage financing, periodic sales or exchanges of existing properties, the issuance of OP Units and public or private offerings of stock or debt.
For a description of the Company's mortgage debt, reference is made to Note 8 to the consolidated financial statements included as a part of this report. For a description of commitments and contingencies, reference is made to Note 20 to the consolidated financial statements included as a part of this report. For additional information on the convertible subordinated debentures and the outstanding senior notes, reference is made to Notes 9 and 10, respectively, to the consolidated financial statements.
In May 1998, the Company filed a shelf registration statement covering up to $300,000 of common stock, preferred stock, depositary shares, debt securities and warrants. The Company intends to use the net proceeds of any offerings under such shelf registration for general corporate purposes, which may include, without limitation, repayment of maturing obligations, redemption of outstanding indebtedness or other securities, financing future acquisitions and for working capital. As of December 31, 2000, there had been no issuances of securities in connection with such shelf registration statement. In January 2001, the Company filed a new shelf registration statement to replace and update the 1998 shelf registration statement.
On December 15, 1995, the Company entered into a $100,000 unsecured revolving term loan which, with extensions, was scheduled to mature on January 4, 2001. On November 1, 1999, the Company repaid the balance and cancelled this loan and entered into a new $100,000 unsecured revolving term loan led by a different financial institution and further backed by a syndicate of four other financial institutions. This new
credit facility was scheduled to mature on November 1, 2002. Not later than November 1 of each year commencing in 2000, the Company may request to extend the maturity date for an additional 12-month period beyond the existing maturity date. The interest rate is, at the option of the Company, either prime, fluctuating daily, or LIBOR plus the "Applicable Margin" (currently 115 basis points), which is subject to adjustment based upon the rating of the senior unsecured long-term debt obligations of the Company. The Company may borrow, repay and/or reborrow under this loan at any time. In addition, the Company secured a $5,000 unsecured swingline, bearing interest at LIBOR plus the Applicable Margin, scheduled to mature on October 31, 2000. In October 2000, the Company requested and was approved an extension of the maturity date of the revolving term loan to November 1, 2003. The Company also secured an option to increase the loan at its discretion by $50,000. As of December 31, 2000 and 1999, the borrowings under the Company's credit facilities totaled $55,000 and $20,400, respectively. For additional information on this revolving term loan, reference is made to Note 11 to the consolidated financial statements.
LP, IRTCCII, IRTAL and IRTMC guarantee the Company's indebtedness under the Company's existing unsecured revolving term loan and its other senior debt.
In October 1999, Jitney Jungle filed for reorganization under Chapter 11 of the United States Bankruptcy Code. At the time of filing, the Company had leases with Jitney Jungle at 10 store locations. Jitney Jungle disavowed two of these leases at the time of the bankruptcy filing. During 2000, Jitney Jungle released three additional leases and in January 2001, the remaining leases were rejected by the bankruptcy court. As of March 19, 2001, of the 10 original Jitney Jungle locations, three are fully leased to grocery operators, two are partially leased to another national tenant, with the balance of the space at these two locations under negotiation with other retailers. The Company is negotiating with retailers for three of the remaining five locations.
Prior to July 1998, the Company's Dividend Reinvestment Plan allowed shareholders to elect to reinvest all or a portion of their distributions in newly issued shares of common stock of the Company at 95% of the market price of the shares. This plan was amended in 1998 to permit the Company the option to direct that Plan purchases be made either in the market or from the Company, and the discount was eliminated. During 1998 and 1997, the Company received net proceeds under this plan of $1,740 and $2,864, respectively. In 1999 we elected to have this Plan purchase shares on the market and we received no proceeds for Plan investments. In 2000, the Company issued 59,089 treasury shares and received net proceeds of $497.
INFLATION AND ECONOMIC FACTORS
The effects of inflation upon the Company's results of operations and investment portfolio are varied. From the standpoint of revenues, inflation has the dual effect of both increasing the tenant revenues upon which percentage rentals are based and allowing increased fixed rentals as rental rates rise generally to reflect higher construction costs on new properties. This positive effect is partially offset by increasing operating and interest expenses, but usually not to the extent of the increases in revenues.
The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. Such activities affect the availability and cost of credit, generally, and the Company's costs under its bank credit facilities, in particular.
ENVIRONMENTAL FACTORS
Certain of the Company's properties have environmental concerns that have been or are being addressed. The North Carolina Department of Environment, Health and Natural Resources ("DEHNR") informed the Company, by letter dated November 30, 2000, that the Company's Industrial property in Charlotte, North Carolina ("Industrial Property"), continues to be included on the North Carolina Inactive Hazardous Waste Sites Priority List ("Priority List"). According to DEHNR, the Priority List is a list of sites in North Carolina where uncontrolled disposal, spills, or releases of hazardous substances have been identified. The Company also has been informed by a third-party consultant that hazardous substances may be present in groundwater under the Industrial Property in excess of regulatory limits. DEHNR indicates in its November 30 letter that it is simply a notice of inclusion of the Industrial Property on the Priority List and is not an order to conduct any work and invites the Company to consider a voluntary cleanup.
The Company has begun investigating this matter, including the basis for inclusion of the Industrial Property on the Priority List and scope and source of any such hazardous substances in groundwater (which may be a result of, among other things, prior ownership and usage of the Industrial Property or contaminants from other nearby properties), and whether its insurance will cover these costs in whole or in part. Depending on the results of this investigation, notification of DEHNR may be required and certain corrective actions performed. Based on information presently available, the Company believes that the costs of any such corrective action is not expected to have a material adverse effect on the Company.
The Company maintains limited insurance coverage for this type of environmental risk. For the years commencing January 1, 2000, the Company has maintained environmental and pollution legal liability insurance coverage to attempt to mitigate the associated risks. Although no assurance can be given that Company properties will not be affected adversely in the future by environmental problems, the Company presently believes that there are no environmental matters that are reasonably likely to have a material adverse effect on the Company's financial position. See "Regulation."
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for reporting and disclosing comprehensive income (defined as revenues, expenses, gains and losses that under generally accepted accounting principles are not included in net income) and its components. The Company had no items of other comprehensive income in 2000, 1999 or 1998.
In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for reporting financial and descriptive information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is its senior management group.
The Company owns and operates retail shopping centers in 10 states in the southeast. Such shopping centers generate rental and other revenue through the leasing of shop spaces to a diverse base of tenants. The Company evaluates the performance of each of its shopping centers on an individual basis. However, because the shopping centers have generally similar economic characteristics and tenants, the shopping centers have been aggregated into one reportable segment.
In June 1998 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued establishing accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair market value. SFAS No. 133 requires that changes in the derivative's fair market value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This statement was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB No. 133". This statement delayed the effective date of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities -- An Amendment of FASB Statement No. 133," which amended SFAS No. 133 to address issues related to implementation difficulties. The Company adopted these standards on January 1, 2001. The Company did not hold and has not engaged in transactions using derivative financial instruments. The adoption of these standards has not had a material effect on the Company's balance sheet or results of operations through December 31, 2000. The Company may utilize derivatives in the future, particularly to hedge transactions, and if used, these could affect our financial results and balance sheet.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates primarily to its variable interest rate bank credit facilities. The Company has not utilized derivative, hedging or similar financial instruments through December 31, 2000, but may in the future.
The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates or market conditions, including estimated fair values for the Company's interest rate sensitive liabilities as of December 31, 2000. As the table incorporates only those exposures that exist as of December 31, 2000, it does not address exposures which could arise after that date. Moreover, because there were no firm commitments to sell the obligations at fair value as of December 31, 2000, the information presented has limited predictive value. As a result, the Company's ultimate realized gain or loss with respect
to interest rate fluctuations will depend on the exposures that arise during a future period and prevailing interest rates. Dollar amounts in the following table are in thousands.
* Average rates as of December 31, 2000
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IRT PROPERTY COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IRT Property Company:
We have audited the accompanying consolidated balance sheets of IRT PROPERTY COMPANY (a Georgia corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of earnings, changes in shareholders' equity and cash flows for each of the three years ended December 31, 2000. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IRT Property Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to consolidated financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia January 26, 2001
ITEM 1. FINANCIAL STATEMENTS.
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated balance sheets.
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated statements.
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of these consolidated statements.
IRT PROPERTY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED WITH RESPECT TO SQUARE FOOTAGE)
1. ORGANIZATION AND NATURE OF OPERATIONS:
IRT Property Company, individually and collectively with its subsidiaries, "IRT" or the "Company," was founded in 1969. The Company is a self-administered and self-managed equity real estate investment trust ("REIT") which invests primarily in neighborhood and community shopping centers located in the southeastern United States and anchored by necessity-oriented retailers such as supermarkets, drug stores and discount variety stores. As of December 31, 2000, IRT owned 88 shopping centers and no single retailer accounts for more than 8% of IRT's gross revenues.
As of December 31, 2000 the Company had six subsidiaries, three of which are wholly-owned. VW Mall, Inc. ("VWM") was formed in July 1994, but is currently inactive. IRT Alabama, Inc. ("IRTAL") was formed in August 1997 to purchase Madison Centre in Madison, Alabama, which it continues to own, but it conducts no significant operations beyond this property. IRT Management Company ("IRTMC") was formed in 1990. IRTMC currently holds 92.0% of the operating units of IRT Partners L.P.
IRT Capital Corporation ("IRTCC"), a taxable subsidiary of the Company, was formed under the laws of Georgia in 1996. IRTCC has the ability to develop properties, buy and sell properties, provide equity to developers and perform third-party management, leasing and brokerage. The Company holds 96% of the non- voting common stock and 1% of the voting common stock of IRTCC. The remaining voting common stock is currently held by a former member of the Board of Directors and a former executive officer of the Company. IRTCC, which is accounted for by the Company under the equity method in the accompanying financial statements, is taxed as a regular corporation and not as a REIT.
IRT Partners, L.P. ("LP"), a Georgia limited partnership, was formed in 1998 to enhance the Company's acquisition opportunities by offering potential sellers the ability to engage in tax-deferred sales in exchange for Operating Partnership Units ("OP Units") of LP, which are redeemable for shares of the Company's common stock. The Company serves as general partner of LP and made an initial contribution of 20 shopping centers and related assets and cash to LP in exchange for OP Units and partnership interests. Subsequent to the formation of LP, the Company has contributed cash to acquire five shopping centers and LP has divested three shopping centers. As a result, IRT and IRTMC own approximately 93.0% of LP as of December 31, 2000. The accounts of LP are included in the accompanying consolidated financial statements. LP currently has several unaffiliated limited partners resulting from the acquisition of three Florida properties by LP in August 1998. The unaffiliated limited partners have the option to require LP to redeem their OP Units at any time, in which event LP has the option to purchase the OP Units for cash or convert them into one share of the Company's common stock for each OP Unit.
IRT Capital Corporation II ("IRTCCII"), a taxable subsidiary of the Company, was formed under the laws of Georgia in 1999. IRTCCII has the ability to develop properties, buy and sell properties, provide equity to developers and perform third-party management, leasing and brokerage. The Company currently holds 96% of the non-voting common stock and 1% of the voting common stock of IRTCCII. The remaining voting common stock is currently held by an executive officer and a director of the Company. IRTCCII, which is accounted for by the Company under the equity method in the accompanying financial statements, is taxed as a regular corporation and not as a REIT.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of IRT, its wholly-owned subsidiaries, majority-owned and controlled subsidiaries and partnership (collectively, the "Company").
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in unconsolidated affiliates over which the Company does not exercise control are accounted for by the equity method. Intercompany transactions and balances have been eliminated in consolidation.
INCOME RECOGNITION
Leases with tenants are accounted for as operating leases. Rental revenue is recognized on a straight-line basis over the initial lease term. Certain tenants are required to pay percentage rents based on the tenant's gross sales. This percentage rental revenue is recorded upon collection. The Company received reimbursements from tenants for real estate taxes, common area maintenance and other recoverable costs. These tenant reimbursements are recognized as revenue in the period the related expense is recorded.
The Company makes valuation adjustments to all tenant related revenue based upon the tenant's credit and business risk. The Company suspends the accrual of income on specific investments where interest, reimbursement or rental payments are delinquent sixty days or more.
Other non-rental revenue is recognized as revenue when earned.
Gains on sales of real estate assets are recognized at the time title to the asset is transferred to the buyer, subject to the adequacy of the buyer's initial and continuing investment and the assumption by the buyer of all future ownership risks of the property.
RENTAL PROPERTIES
Rental properties are stated at cost less accumulated depreciation. Costs incurred for the acquisition, renovation, and betterment of the properties are capitalized and depreciated over their estimated useful lives. Recurring maintenance and repairs are charged to expense as incurred. Depreciation is computed on a straight-line basis generally for a period of sixteen to forty years for buildings and significant improvements. Tenant improvements are depreciated on a straight-line basis over the life of the related lease.
The Company periodically evaluates the carrying value of its long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In cases where particular assets are being held for sale, impairment is based on whether the fair value (estimated sales price less costs of disposal) of each individual property to be sold is less than the net book value. Otherwise, impairment is based on whether it is probable that undiscounted future cash flows from each property will be less than its net book value. Management believes that no material impairment existed at December 31, 2000, and accordingly no loss was recognized.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
DEFERRED LEASING AND FINANCING COSTS
Internal and external commission costs incurred in obtaining tenant leases and loan costs incurred in obtaining long-term financing are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets. The costs are amortized over the terms of the related leases or debt agreements, as applicable.
DEBT ISSUE COSTS
Costs related to the issuance of debt instruments, included within prepaids and other assets, are capitalized and amortized as interest expense over the life of the related issue on a straight-line basis, which IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximates the effective interest method. Upon conversion or in the event of redemption, applicable unamortized costs are charged to shareholder's equity or to operations, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company has in past years elected to qualify, and intends to continue such election, to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). In general terms, under such Code provisions a trust or corporation which, in any taxable year, meets certain requirements and distributes to its shareholders at least 95% of its taxable income will not be subject to federal income tax. Thus, no provision for federal income taxes has been included in the accompanying consolidated financial statements.
If the Company fails to qualify as a real estate investment trust in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate tax rates. Even if the Company maintains its qualification for taxation as a real estate investment trust, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income. State income taxes were not significant in 2000, 1999, and 1998.
Additionally, certain subsidiaries of IRT, formed to provide management and other services to third and related parties, are taxed based on reportable income. The tax attributes of these entities are immaterial to the accompanying consolidated financial statements.
EARNINGS PER SHARE
Basic EPS excludes dilution and is computed by dividing net earnings by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares and then shared in the earnings of the Company. See Note 13 for the required disclosures.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Company has adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires companies that do not choose to account for stock-based compensation as prescribed by the statement to disclose the pro forma effects on net income and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock-based compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. See Note 15 for the required disclosures.
COMPREHENSIVE INCOME
In 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement established standards for reporting and disclosing comprehensive income (defined as revenues, expenses, gains
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and losses that under generally accepted accounting principles are not included in net income) and its components. The Company had no items of other comprehensive income in 2000, 1999 or 1998.
SEGMENT REPORTING
In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement established standards for reporting financial and descriptive information about operating segments in annual financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is its senior management group.
The Company owns and operates retail shopping centers in 10 states in the southeastern United States. Such shopping centers generate rental and other revenue through the leasing of shop spaces to a diverse base of tenants. The Company evaluates the performance of each of its shopping centers on an individual basis. However, because the shopping centers have generally similar economic characteristics and tenants, the shopping centers have been aggregated into one reportable segment.
DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued establishing accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair market value. SFAS No. 133 requires that changes in the derivative's fair market value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This statement was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB No. 133". This statement delayed the effective date of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities -- An Amendment of FASB Statement No. 133," which amended SFAS No. 133 to address issues related to implementation difficulties. The Company adopted these standards on January 1, 2001. The Company did not hold and has not engaged in transactions using derivative financial instruments. The adoption of these standards has not had a material effect on the Company's balance sheet or results of operations through December 31, 2000.
RECLASSIFICATION OF PRIOR YEAR AMOUNTS
Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2000 presentation.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. RENTAL PROPERTIES
Rental properties are comprised of the following:
Upon expiration of the leases for land covered by purchase-leaseback agreements, all improvements on the land will become the property of the Company. The lessees of these properties have the option, subject to certain conditions, to repurchase the land. Such option prices are for amounts greater than the Company's carrying value of the related land.
Future minimum base rentals on noncancellable operating leases for the Company's shopping center, industrial and land purchase-leaseback investments at December 31, 2000 are as follows:
SHOPPING CENTER ACQUISITIONS
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHOPPING CENTER DISPOSITIONS
NOTE:
(1) Represents additional sale proceeds received subsequent to the sale of the property.
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
LP, IRTCCII, IRTAL and IRTMC guarantee the Company's indebtedness under the Company's existing unsecured revolving term loan and its other senior debt. The guarantees are joint and several and full and unconditional.
Condensed consolidating financial information for the wholly owned subsidiaries and the affiliates is presented as follows (in thousands):
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES:
(1) Includes IRT Management Co. and IRT Alabama.
5. NET INVESTMENT IN DIRECT FINANCING LEASES
At December 31, 2000, two retail facilities are leased to Wal-Mart Stores, Inc. at a total annual rental of $333 plus percentage rentals of 1% of gross sales in excess of the tenants' actual sales for its fiscal year ended January 31, 1990. Rental income from these leases totaled $402, $399 and $400 in 2000, 1999 and 1998, respectively.
The Company acquired ten branch bank buildings in a 1984 merger. These facilities are leased to The Old Phoenix National Bank at a total annual rental of $313.
Of the total rental income on direct financing leases, $166, $160 and $133 were recorded as amortization of capitalized leasing income in 2000, 1999 and 1998, respectively.
The Company is to receive minimum lease payments of $646 per year during 2001 through 2005 and a total of $3,908 thereafter through the remaining lease terms.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEVELOPMENT AND CO-DEVELOPMENT
IRTCCII currently is in the process of developing three shopping centers in Florida for which IRT has committed to loan up to the amount necessary for development completion. The loan, bearing interest at 2% over the rates paid by IRT on its variable debt, matures in June 2002.
In 1999 the Company was engaged in a project to develop Old Decatur Square jointly with a partner. On December 31, 1999, the Company agreed to relinquish its option to acquire this property to the co-developer for $969 which is included in other income in the accompanying consolidated statements of earnings. The Company no longer maintains an interest in this co-development.
7. MORTGAGE LOANS
The Company's investments in mortgage loans, all of which are secured by real estate investments, are summarized by type of loan at December 31, 2000 and 1999, as follows:
Annual principal payments applicable to mortgage loan investments in the next five years and thereafter are as follows:
Based on current rates at which similar loans would be made, the estimated fair value of mortgage loans was approximately $4,354 and $148 at December 31, 2000 and 1999, respectively.
8. MORTGAGE NOTES PAYABLE
Mortgage notes payable are collateralized by various real estate investments having a net carrying value of approximately $182,576 at December 31, 2000. These notes have stated interest rates ranging from 6.50% to 9.625% and are due in monthly installments with maturity dates ranging from 2001 to 2024.
During 2000, the Company made a scheduled balloon payment at maturity of $3,521 on a mortgage bearing interest at 7.75%.
On February 25, 1999, the Company entered into a $40,000 loan secured by first mortgages on eight properties. This loan is a 25-year fully amortizing loan that bears interest at a fixed rate of 6.5%.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, the Company repaid at maturity a $625 purchase-money mortgage bearing interest at 9% and made a scheduled balloon payment at maturity of $3,333 on a mortgage bearing interest at 9.875%.
Future principal amortization and balloon payments applicable to mortgage notes payable at December 31, 2000 are as follows:
Based on the borrowing rates currently available to the Company for mortgages with similar terms and maturities, the estimated fair value of mortgage notes payable was approximately $129,371 and $117,000 at December 31, 2000 and 1999, respectively.
9. CONVERTIBLE SUBORDINATED DEBENTURES
Effective August 31, 1993, the Company issued $86,250 of 7.3% convertible subordinated debentures due August 15, 2003, $23,275 of which are outstanding as of December 31, 2000. Interest on the debentures is payable semi-annually on February 15 and August 15. The debentures are convertible at any time prior to maturity into common stock of the Company at $11.25 per share, subject to adjustment in certain events. The Company has the option to redeem the debentures at par. Costs associated with the issuance of the debentures were approximately $3,701 and are being amortized over the life of the debentures.
During 1997, $1,653 of these debentures were converted into 146,921 shares of common stock. During 1998, $5,178 of these debentures were converted into 460,263 shares of common stock. No debentures were converted during 2000 or 1999. Based upon the conversion price, 2,068,889 authorized but unissued common shares have been reserved for possible issuance if the $23,275 debentures outstanding at December 31, 2000 are converted.
Based on the closing market price at year-end, the estimated fair value of the debentures was approximately $22,111 and $22,751 at December 31, 2000 and 1999, respectively.
10. SENIOR NOTES
On March 26, 1996, the Company issued $50,000 of 7.45% senior notes due April 1, 2001. These senior notes were issued at a discount of $84 which is being amortized over the life of the notes on a straight-line basis for financial reporting purposes. Net proceeds from the issuance totaled approximately $49,394.
Interest on the 7.45% senior notes is payable semi-annually on April 1 and October 1. Costs associated with the issuance of these senior notes totaled approximately $522 and are being amortized over the life of the notes.
On August 15, 1997, the Company issued $75,000 of 7.25% senior notes due August 15, 2007. These senior notes were issued at a discount of $426 which is being amortized over the life of the notes on a straight-line basis for financial reporting purposes. Net proceeds from the issuance totaled $73,817. IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest on the 7.25% senior notes is payable semi-annually on February 15 and August 15. Costs associated with the issuance of these senior notes totaled approximately $757 and are being amortized over the life of the notes.
11. INDEBTEDNESS TO BANKS
On November 1, 1999, the Company obtained a $100,000 unsecured revolving loan facility ("Revolving Loan") which was scheduled to mature on November 1, 2002. This loan replaced the Company's previous credit facility which was cancelled concurrent to the procurement of the new term loan. In conjunction with the cancellation of the previous credit facility, the Company recognized $157 of extraordinary loss for the write-off of the related unamortized loan costs. In addition, the Company secured a $5,000 swing line credit facility with terms similar to those of the Revolving Loan with a scheduled maturity date of October 31, 2000. On November 1, 2000, the Company extended the maturity date of the Revolving Loan to November 1, 2003. The Company also secured an option to increase the loan at its discretion by $50,000.
Under the Revolving Loan, the Company may elect to pay interest at either the lender's prime, adjusted daily, or the London Interbank Offered Rates ("LIBOR"), plus the "Applicable Margin" based upon the rating of the senior unsecured debt obligations of the Company. The Applicable Margin ranges from .95% to 1.4%. The Applicable Margin based on the Company's current rating is 1.15%. At December 31, 2000, the weighted average interest rate was 7.61%. The terms of the Revolving Loan require the Company to pay an annual facility fee equal to 0.2% of the total commitment and include certain restrictive covenants which require compliance with certain financial ratios and measurements. At December 31, 2000, the Company was in compliance with these covenants.
LP, IRTCCII, IRTAL and IRTMC guarantee the Company's indebtedness on the Revolving Loan.
The following data is presented with respect to the Revolving Loan and swing line agreements in 2000 and 1999:
The Company incurred commitment fees of approximately $202, $201, and $160 for the years ended December 31, 2000, 1999 and 1998, respectively.
12. MINORITY INTEREST
Included in minority interest for the years ended December 31, 2000 and 1999 are the 7.0% and 7.1% interests, respectively, in the results of the LP which are owned by a third party. At December 31, 2000 and 1999, 815,852 OP Units were held by the limited partner. The unaffiliated limited partners have the option to require LP to redeem their OP Units at any time, in which event LP has the option to purchase the OP Units for cash or convert them into one share of the Company's common stock for each OP Unit.
Adjustments have been made to the minority interest balance in the OP to properly reflect their ownership interests in the Company. During 2000, 1999 and 1998, adjustments of $(395), $(357) and $739 were recorded, respectively. The adjustments are a result of the purchase or issuance of additional shares of common stock and OP units.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also records a minority interest for the limited partners' share of equity in two properties. The two properties in which the Company has a general partner interest are Venice Plaza (75% interest) and North Village Center (49.5% interest). The aggregate balance of the minority interests as of December 31, 2000 and 1999 is $434 and $341, respectively, and is included within accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.
13. EARNINGS PER SHARE
Basic earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. The effects of the conversion of the 7.3% subordinated debentures have been included in the calculation of dilutive earnings per share, as they are dilutive for the year ended December 31, 2000. The effects of such conversion of the 7.3% debentures for the years ended December 31, 1999 and 1998 are excluded, as they are antidilutive. The effects of the exercise of certain stock options, using the treasury stock method, have been included in the diluted earnings per share calculation for the years ended December 31, 2000 and 1998. However such effects of the stock options were antidilutive for the year ended December 31, 1999 and excluded from the calculation.
14. CASH DISTRIBUTIONS AND DIVIDEND REINVESTMENT PLAN
The taxability of per share distributions paid to shareholders during the years ended December 31, 2000, 1999 and 1998 was as follows:
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the 5% discount received upon purchase of shares under the Dividend Reinvestment Plan (the "DRIP") for 1998 is taxable as ordinary income to the participant.
The DRIP allowed shareholders to elect to reinvest all or a portion of their distributions in newly issued shares of common stock of the Company at 95% of the market price of the shares. The DRIP was amended in July 1998 to eliminate the discount. During 1998, the Company received net proceeds under the DRIP of $1,740. The Company did not receive any proceeds under the DRIP in 1999. In 2000, the Company issued 59,089 treasury shares and received net proceeds of $497.
15. STOCK OPTIONS
Effective May 8, 1989, the Company adopted and its shareholders approved the 1989 Stock Option Plan (the "1989 Plan"). The 1989 Plan includes provisions for a) the granting of both Incentive Stock Options ("ISOs") (as defined in Section 422A of the Code) and nonqualified options to officers and employees and b) the automatic granting of nonqualified options for 1,250 shares to each non-employee director upon the election and each annual re-election of each non-employee director. Under the terms of the 1989 Plan, the option price shall be no less than the fair market value of the optioned shares at the date of grant. The options are automatically vested and expire after ten years.
Effective June 18, 1998, the Company adopted and its shareholders approved the 1998 Long-Term Incentive Plan (the "1998 Plan"). The 1998 Plan includes provisions for the granting of ISOs, nonqualified options, stock appreciation rights, performance shares, restricted stock, dividend equivalents and other stock-based awards. Under the terms of the 1998 Plan, the option exercise price shall be no less than the fair market value of the optioned shares at the date of the grant. The options are automatically vested and expire after ten years.
The Company accounts for these plans under APB 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The weighted average fair value of options granted is $0.46 and $0.62 for 2000 and 1999, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2000 and 1999, respectively: risk-free interest rates of 6.71% and 4.74%; expected dividend yields of 12.03% and 9.50%; expected lives of five years; expected volatility of 21% and expected annual forfeiture rate of 5%.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the stock option activity during 2000, 1999, and 1998 are as follows:
The following table summarizes information about stock options outstanding and exercisable at December 31, 2000:
16. DEFERRED COMPENSATION AND STOCK LOANS
On June 18, 1998, 119,760 restricted shares of common stock were granted and 119,760 shares (the "Loan Shares") were issued pursuant to recourse loans due June 18, 2008 made to certain Company officers as incentives for future services. The restricted shares vest ratably over 10 years from the date of grant. The Restricted Shares and the Loan Shares were valued at the closing price of the Company's common stock on June 18, 1998 of $10.437.
On January 7, 2000, an additional 25,001 restricted shares of common stock were granted to certain Company officers as incentives for future services. The restricted shares vest ratably over 9 years from the date of grant. The restricted shares were valued at the closing price of the Company's common stock on January 7, 2000 of $8.1875.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. TREASURY STOCK
In November 1999, the Board of Directors authorized the Company to repurchase up to $25 million of its common stock through the open market or in privately negotiated transactions. During 2000 and 1999, the Company repurchased 2,488,701 and 492,575 shares, for a cost of $20,818 and $4,026, respectively, including commissions and other costs.
18. EMPLOYEE RETIREMENT BENEFITS
Under the Company's 401(k) Plan, employees who annually work over 1,750 hours and are at least 18 years of age are eligible for participation in the Plan. Employees may elect to make contributions to the Plan as defined by the Internal Revenue Code. The Company matches 100% of such contributions up to 6% of the individual participant's compensation, based on the length of service. The Company contributed approximately $184, $159 and $145 to the 401(k) Plan in 2000, 1999 and 1998, respectively.
19. SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash transactions for the years ended December 31, 2000, 1999 and 1998 were as follows:
20. COMMITMENTS AND CONTINGENCIES
The Company has entered into change in control employment agreements with certain key executives. Under each agreement in the event employment is terminated following a "Change In Control," the Company is committed to pay certain benefits, including the payment of each employee's base salary through the expiration of each agreement.
Certain of the Company's properties have environmental concerns that have been or are being addressed. The Company maintains limited insurance coverage for this type of environmental risk. Although no assurance can be given that Company properties will not be affected adversely in the future by environmental problems, the Company presently believes that there are no environmental matters that are reasonably likely to have a material adverse effect on the Company's financial position.
21. RELATED PARTY TRANSACTIONS
Beginning in 2000, the Company provides management services for two shopping centers owned principally by real estate joint ventures in which an officer of the Company has economic interests. Such services are performed pursuant to management agreements which provide for fees based upon a percentage of gross revenues from the properties and other direct costs incurred in connection with management of the centers. The Consolidated Statements of Earnings include management fee income from these management services of $14 for the year ended December 31, 2000.
IRT PROPERTY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. SUBSEQUENT EVENTS
On January 16, 2001, the Company completed the $25 million stock repurchase program authorized by the Board of Directors in November 1999. The Company repurchased a total of 3,028,276 shares at an average price of $8.26 per share.
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information for the fiscal years ended December 31, 2000 and 1999.
SCHEDULE III
IRT PROPERTY COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT USEFUL LIVES)
SCHEDULE III -- (CONTINUED)
SCHEDULE III -- (CONTINUED)
SCHEDULE III -- (CONTINUED)
SCHEDULE III -- (CONTINUED)
SCHEDULE III -- (CONTINUED)
SCHEDULE III -- (CONTINUED)
(1) Ownership through IRT Partners, L.P.
SCHEDULE III -- (CONTINUED)
NOTE: Real estate activity is summarized as follows:
SCHEDULE IV
IRT PROPERTY COMPANY
MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2000 (IN THOUSANDS)
NOTES:
(1) Monthly payments include principal and interest. (2) The interest rates are based upon the one month LIBOR rate two days prior to month end, plus a premium established in the respective note agreement. (3) Interest is payable monthly. Entire principal balance is payable on the maturity date.
Mortgage loan activity is summarized as follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III (Items 10, 11, 12, and 13) is incorporated herein by reference to the Company's definitive proxy statement for the Company's 2001 Annual Meeting of Shareholders of the Company, to be filed pursuant to Regulation 14A, pursuant to General Instruction G(3) to the Report on Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES.
Included in Part II of this Report are the following:
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Earnings for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Schedule III -- Real Estate and Accumulated Depreciation
Schedule IV -- Mortgage Loans on Real Estate
EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 21, 2001
IRT PROPERTY COMPANY
By: /s/ THOMAS H. MCAULEY ------------------------------------ Thomas H. McAuley President, Chief Executive Officer, Chairman of the Board & Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.