10-Q 1 form10q1stquarter2004.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2004 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to_____ Commission File Number 1-12803 URSTADT BIDDLE PROPERTIES INC. (Exact Name of Registrant in its Charter) MARYLAND 04-2458042 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 321 Railroad Avenue, Greenwich, CT 06830 ---------------------------------------- Address of principal executive offices) (ZipCode) Registrant's telephone number, including area code: (203) 863-8200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No As of March 8, 2004, the number of shares of the Registrant's classes of Common Stock and Class A Common Stock was: 7,038,435 Common Shares, par value $.01 per share and 18,611,534 Class A Common Shares, par value $.01 per share THE SEC FORM 10-Q, FILED HEREWITH, CONTAINS 20 PAGES, NUMBERED CONSECUTIVELY FROM 1 TO 20 INCLUSIVE, OF WHICH THIS PAGE IS 1. 1 INDEX URSTADT BIDDLE PROPERTIES INC. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - January 31, 2004 and October 31, 2003. Consolidated Statements of Income -Three months ended January 31, 2004 and 2003. Consolidated Statements of Cash Flows - Three months ended January 31, 2004 and 2003. Consolidated Statements of Stockholders' Equity - Three months ended January 31, 2004. Notes to Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. Item 4. Controls and Procedures PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 6. Exhibits and Reports on Form 8-K. SIGNATURES 2
URSTADT BIDDLE PROPERTIES INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) January October 31 ASSETS 2004 2003 ---- ---- (unaudited) Real Estate Investments: Core properties-- at cost, net of accumulated depreciation $329,071 $330,920 Non-core properties - at cost, net of accumulated depreciation 10,961 11,215 Mortgage notes receivable 2,166 2,184 ----- ----- 342,198 344,319 Cash and cash equivalents 28,452 22,449 Restricted cash 1,102 1,098 Marketable securities 2,014 9,532 Tenant receivables, net allowances of $1,509 and $1,369 10,064 8,815 Prepaid expenses and other assets 4,940 3,276 Deferred charges, net of accumulated amortization 3,258 3,229 ----- ----- Total Assets $392,028 $392,718 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage notes payable $104,106 $104,588 Accounts payable and accrued expenses 1,892 2,743 Deferred officers' compensation 441 401 Other liabilities 4,653 5,243 ----- ----- Total Liabilities 111,092 112,975 ------- ------- Minority Interests 7,320 7,320 ----- ----- Preferred Stock, par value $.01 per share; 20,000,000 shares authorized; 8.99% Series B Senior Cumulative Preferred stock, (liquidation preference of $100 per share); 150,000 shares issued and outstanding 14,341 14,341 8.50% Series C Senior Cumulative Preferred Stock, (liquidation preference of $100 per share); 400,000 issued and outstanding 38,406 38,406 ------ ------ Total Preferred Stock 52,747 52,747 ------ ------ Commitments and Contingencies Stockholders' Equity: Excess stock, par value $.01 per share; 10,000,000 shares authorized; none issued and outstanding - - Common stock, par value $.01 per share; 30,000,000 shares authorized; 7,038,435 and 6,817,771 issued and outstanding shares, respectively 70 68 Class A Common stock, par value $.01 per share; 40,000,000 shares authorized; 18,611,534 and 18,548,453 issued and outstanding shares, respectively 186 185 Additional paid in capital 262,231 258,296 Cumulative distributions in excess of net income (33,891) (33,611) Other comprehensive income 348 - Unamortized restricted stock compensation and officers notes receivable (8,075) (5,262) ------- ------- Total Stockholders' Equity 220,869 219,676 ------- ------- Total Liabilities and Stockholders' Equity $392,028 $392,718 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 3
URSTADT BIDDLE PROPERTIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data) Three Months Ended January 31, 2004 2003 ---- ---- Revenues: Base rents $12,619 $10,400 Recoveries from tenants 3,776 2,920 Lease termination income 542 - Interest and other 221 361 ------ ------ 17,158 13,681 ------ ------ Operating Expenses: Property operating 2,788 2,332 Property taxes 2,134 1,642 Interest 2,005 2,035 Depreciation and amortization 2,792 2,349 General and administrative 1,019 985 Directors' fees and expenses 57 49 ------ ----- 10,795 9,392 ------ ----- Operating Income before Minority Interests 6,363 4,289 Minority Interests in Results of Consolidated Joint Ventures (92) (92) ---- ----- Net Income 6,271 4,197 Preferred Stock Dividends (1,187) (337) ------- ----- Net Income Applicable to Common and Class A Common Stockholders $5,084 $3,860 ====== ====== Basic Earnings per Share: Common $.19 $.15 ==== ==== Class A Common $.21 $.16 ==== ==== Diluted Earnings Per Share: Common $.19 $.15 ==== ==== Class A Common $.21 $.16 ==== ==== Dividends Paid Per Share: Common $.195 $.19 ===== ==== Class A Common $.215 $.21 ===== ====
The accompanying notes to consolidated financial statements are an integral part of these statements. 4
URSTADT BIDDLE PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) Three Months Ended January 31, 2004 2003 ---- ---- Operating Activities: Net income $6,271 $4,197 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,792 2,349 Amortization of restricted stock 302 252 Minority interests 92 92 Increase in tenant receivables (1,249) (430) Decrease (increase) in accounts payable and accrued expenses (851) 395 Decrease (increase) in other assets and other liabilities, net (2,175) 300 Increase in restricted cash (4) - ----- ----- Net Cash Provided by Operating Activities 5,178 7,155 ----- ----- Investing Activities: Acquisitions of properties - (51,352) Sale of short term investments 7,866 25,145 Improvements and other payments to properties and deferred charges (757) (806) Distributions to limited partners of consolidated joint ventures (92) (92) Payments received on mortgage notes receivables 18 29 ----- -------- Net Cash Provided by (Used in) Investing Activities 7,035 (27,076) ----- -------- Financing Activities: Dividends paid on Common and Class A Common shares (5,364) (5,166) Dividends paid on Preferred Stock (1,187) (337) Payments on mortgage notes payable (482) (448) Sales of additional Common and Class A Common shares 690 96 Repayment of officer's note receivable 133 - ------- ------- Net Cash Used in Financing Activities (6,210) (5,855) ------- ------- Net Increase (Decrease) In Cash and Cash Equivalents 6,003 (25,776) Cash and Cash Equivalents at Beginning of Period 22,449 46,342 ------- ------ Cash and Cash Equivalents at End of Period $28,452 $20,566 ======= ======= Supplemental Cash Flow Disclosures: Interest Paid $2,005 $2,035 ====== ======
The accompanying notes to consolidated financial statements are an integral part of these statements. 5
URSTADT BIDDLE PROPERTIES INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (In thousands, except shares and per share data) Unamortized Restricted Stock Common Stock Class A Common Stock Compensation ------------------ ------------------ (Cumulative and Outstanding Outstanding Additional Distributions Other Officers Number of Par Number of Par Paid In In Excess of Comprehensive Notes Shares Value Shares Value Capital Net Income) Income Receivable Total --------- ----- ---------- ----- -------- ---------- ------------ ---------- ----- Balances - October 31, 2003 6,817,771 $68 18,548,453 $185 $258,296 $(33,611) $ - $(5,262) $219,676 Comprehensive income: Net income applicable to Common and Class A common stockholders - - - - - 5,084 - - 5,084 Unrealized gain on marketable securities 348 - 348 --- Total Comprehensive income 5,432 Cash dividends paid: Common stock ($.195 per share) - - - - - (1,364) - - (1,364) Class A common stock ($.215 per share) - - - - - (4,000) - - (4,000) Sales of shares under dividend reinvestment plan 45,164 - 4,456 - 690 - - - 690 Shares granted under restricted stock plan 175,500 2 58,625 1 3,245 - - (3,248) - Amortization of restricted stock compensation - - - - - - - 302 302 Repayment of officer's note receivable - - - - - - - 133 133 --------- ---- --------- ---- -------- -------- ---- ------- -------- Balances - January 31, 2004 7,038,435 $70 18,611,534 $186 $262,231 $(33,891) $348 $(8,075) $220,869 ========= ==== ========== ==== ======== ========= ==== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 URSTADT BIDDLE PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Business Urstadt Biddle Properties Inc. (the Company) is engaged in the acquisition, ownership and management of commercial real estate, primarily neighborhood and community shopping centers in the northeastern part of the United States. Other assets include office and retail buildings and industrial properties. The Company's major tenants include supermarket chains and other retailers who sell basic necessities. As of January 31, 2004, the Company owned or had interests in 30 properties containing approximately 3.4 million square feet of leasable area. Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and joint ventures in which the Company has the ability to control the affairs of the venture. All significant intercompany transactions and balances have been eliminated. The financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the three-month period ended January 31, 2004 are not necessarily indicative of the results that may be expected for the year ending October 31, 2004. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended October 31, 2003. The preparation of financial statements requires management to make use of estimates and assumptions that affect amounts reported in the financial statements as well as certain disclosures. Actual results could differ from those estimates. The balance sheet at October 31, 2003 has been derived from audited financial statements at that date. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Federal Income Taxes The Company has elected to be treated as a real estate investment trust (REIT) under the Internal Revenue Code, as amended. A REIT, that among other things, distributes at least 90% of its REIT taxable income will not be taxed on that portion of its taxable income which is distributed. The Company believes it qualifies and intends to continue to qualify as a REIT. Earnings Per Share Basic EPS excludes the impact of dilutive shares and is computed by dividing net income applicable to Common and Class A Common stockholders by the weighted number of Common shares and Class A Common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue Common shares or Class A Common shares were exercised or converted into Common shares or Class A Common shares and then shared in the earnings of the Company. Since the cash dividends declared on the Company's Class A Common stock are higher than the dividends declared on the Common Stock, basic and diluted EPS have been calculated using the "two-class" method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to the weighted average of the dividends declared, outstanding shares per class and participation rights in undistributed earnings. 7 The following table sets forth the reconciliation between basic and diluted EPS (in thousands):
Three Months Ended January 2004 2003 ---- ---- Numerator Net income applicable to common stockholders - basic $1,219 $914 Effect of dilutive securities: Operating partnership units 36 34 ------ ---- Net income applicable to common stockholders - diluted $1,255 $948 ====== ==== Denominator Denominator for basic EPS-weighted average common shares 6,337 6,232 Effect of dilutive securities: Stock options 203 227 Operating partnership units 55 55 ----- ----- Denominator for diluted EPS - weighted average common equivalent shares 6,595 6,514 ===== ===== Numerator Net income applicable to Class A common Stockholders-basic $3,865 $2,946 Effect of dilutive securities: Operating partnership units 55 58 ------ ------ Net income applicable to Class A common Stockholders - diluted $3,920 $3,004 ====== ====== Denominator Denominator for basic EPS - weighted average Class A common shares 18,231 18,170 Effect of dilutive securities: Stock options 146 190 Operating partnership units 310 310 ------ ------ Denominator for diluted EPS - weighted average Class A Common equivalent shares 18,687 18,670 ====== ======
Marketable Securities Marketable securities consist of short-term investments and marketable equity securities. Short-term investments consist of investments with original maturities of greater than three months when purchased and are carried at fair value (which approximates cost plus accrued interest). Marketable equity securities are carried at fair value. The Company has classified marketable securities as available for sale. Unrealized gains and losses on available for sale securities are recorded as other comprehensive income in Stockholders Equity. At January 31, 2004, other comprehensive income consists of net unrealized holding gains of $348,000. Unrealized gains held in other comprehensive income will be reclassified into earnings, as gains are realized. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, mortgage notes receivable and tenant receivables. The Company places its cash and cash equivalents in excess of insured amounts with high quality financial institutions. The Company performs ongoing credit evaluations of its tenants and may require certain tenants to provide security deposits or letters of credit. Though these security deposits and letters of credit may be insufficient to meet the terminal value of a tenant's lease obligation, they are a measure of good faith and source of funds to offset the economic costs associated with lost rent and the costs associated with retenanting the space. There is no dependence upon any single tenant. Segment Reporting The Company operates in one industry segment, ownership of commercial real estate properties which are located principally in the northeastern United States. Management reviews operating and financial data for each property separately and independently from all other properties when making resource allocation decisions and measuring performance. 8 Recently Issued Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," which explains how to identify variable interest entities ("VIE") and assess whether to consolidate such entities. The provisions of this interpretation are effective immediately for VIE's formed after January 31, 2003. For VIE's formed prior to January 31, 2003, the provisions of this interpretation apply to the first fiscal year or interim period beginning after December 15, 2003. The adoption of this pronouncement in the first quarter of fiscal 2004 did not have any effect on the Company's operations or financial position as the company does not have any VIE's. In November 2003, the FASB deferred the classification and measurement provisions of FASB No. 150 which apply to certain mandatorily redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The Company has one finite life joint venture which contains a mandatorily redeemable non-controlling interest. At January 31, 2004, the estimated fair value of the minority interest was approximately $2.7 million. The joint venture has a termination date of December 31, 2097. 2. CORE PROPERTIES In December 2002, the Company purchased Orange Meadows Shopping Center in Orange, Connecticut for $11.3 million. In connection with the acquisition, the Company agreed to pay the seller, as additional purchase price, an amount to be determined pursuant to an agreed formula, but not less than $969,000, for leasing efforts at the property. In January 2004, the Company paid the seller $1.7 million in satisfaction of the contingent payment. Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets, (consisting of land, buildings and building improvements) and identified intangible assets and liabilities, (consisting of above-market and below-market leases and in-place leases) in accordance with SFAS No.141 "Business Combinations." The Company utilizes methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. The fair value of tangible assets of an acquired property considers the value of the property "as-if-vacant." The fair value reflects the depreciated replacement cost of the asset. In allocating purchase price to identified intangible assets and liabilities of an acquired property, the values of above-market and below-market leases are estimated based on the differences between (i) contractual rentals and the estimated market rents over the applicable lease term discounted back to the date of acquisition utilizing a discount rate adjusted for the credit risk associated with the respective tenants and (ii) the estimated cost of acquiring such leases giving effect to the Company's history of providing tenant improvements and paying leasing commissions, offset by a vacancy period during which such space would be leased. The aggregate value of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property "as-if-vacant," determined as set forth above. The Company is currently in the process of analyzing the fair value of in-place leases for Somers Commons in Somers, New York, which was acquired in June 2003, and consequently, no value has yet been assigned to the leases. Accordingly, the purchase price allocation is preliminary and may be subject to change. 3. MORTGAGE NOTES PAYABLE AND LINES OF CREDIT At January 31, 2004, the Company had ten non-recourse first mortgage notes payable totaling $104,106,000 due in installments over various terms extending to the fiscal year 2011 at fixed rates of interest ranging from 6.29% to 8.375%. The mortgage notes payable are collateralized by real estate investments having a net carrying value of approximately $166,169,000 as of January 31, 2004. The Company has a secured revolving line of credit with a bank which permits borrowings up to $18.125 million. The agreement expires in October 2005 and is secured by first mortgage liens on two properties. Interest on outstanding borrowings is at a variable rate of prime + 1/2% or LIBOR + 1.5%. The agreement requires the Company to maintain certain debt service coverage ratios during its term and provides for a permanent reduction in the revolving credit loan amount of $625,000 annually. The Company also has a $20 million unsecured line of credit which expires in January 2005. Outstanding borrowings bear interest at prime rate + 1/2 or LIBOR + 2 1/2%. Extensions of credit under the arrangement are at the bank's discretion and subject to the bank's satisfaction of certain conditions. There were no borrowings outstanding under either line of credit at January 31, 2004. 4. PREFERRED STOCK In fiscal 2003, the Company sold 400,000 shares of 8.50% Series C Senior Cumulative Preferred Stock, par value $.01 per share ("Series C Preferred Stock") for net proceeds of $38.4 million. The Series C Preferred Stock has no stated maturity and is not convertible into other securities of the Company. On or after May 29, 2013, the Series C Preferred Stock may be redeemed by the Company, at its option, at a redemption price of $100 per share. The Series C Preferred Stock contains covenants which require the Company to maintain certain financial coverages relating to fixed charge and capitalization ratios. The Company was in compliance with such covenants at January 31, 2004. 9 In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("Statement"). The Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. As the holders of the Series B Preferred Stock and Series C Preferred Stock only have a contingent right to require the Company to repurchase all or part of such holders interests upon a change of control of the Company (as defined), the Series B Preferred Stock and Series C Preferred Stock are classified as redeemable equity instruments as a change in control is not certain to occur. 5. STOCKHOLDERS EQUITY The Company has a restricted stock plan for key employees and directors of the Company. The plan authorizes grants as an incentive for future services of up to 1,050,000 shares (350,000 shares each of Class A Common stock and Common stock and 350,000 shares, which at the discretion of the Company's compensation committee, may be awarded in any combination of Class A Common or Common Stock). In January 2004, the Company awarded 58,625 shares of Class A Common stock and 175,500 shares of Common stock to participants in the Plan. The shares vest between five and ten years after the date of grant. The market value of shares awarded is recorded as unamortized restricted stock compensation and amortized to expense over the vesting periods. As a result of the 2004 grants, the Company recorded $3,249,000 as unamortized restricted stock compensation in the first quarter of 2004. As of January 31, 2004, the Company has awarded 685,000 shares of Common stock and 301,125 shares of Class A Common Stock to participants in the plan (of which 21,750 shares each of Common Stock and Class A Common Stock are vested). Dividends on vested and non-vested shares are paid as declared. The Company has a Dividend Reinvestment and Share Purchase Plan that allows shareholders to acquire additional shares of Common Stock and Class A Common Stock by automatically reinvesting dividends. The Company issued 45,164 shares of Common Stock and 4,456 shares of Class A Common Stock in the three months ended January 31, 2004 (3,236 shares of Common Stock and 4,945 shares of Class A Common Stock in 2003) through the Plan. 6. STOCK OPTION PLAN The Company has a stock option plan whereby 824,093 Common shares and 743,003 Class A Common shares were reserved for issuance to key employees and non-employee Directors of the Company. As of January 31, 2004, options to purchase 55,876 shares of Common shares and 42,733 shares of Class A Common shares, respectively, were outstanding (All outstanding grants are fully vested). Options are granted at fair market value on the date of grant, have a duration of ten years from the date of grant, and vest over a maximum period of four years from the date of grant. There were no grants of stock options in 2004 or 2003. Had compensation cost for stock options granted been determined based on fair value on the grant date consistent with the provisions of SFAS 123, there would have been no effect on the Company's net income and earnings per share in each of the three month periods ended January 31, 2004 and 2003. In a prior year, an officer of the Company exercised certain stock options to purchase shares of Common Stock of the Company. In connection with the exercise, the officer executed a full recourse promissory note equal to the purchase price of the shares. At January 31, 2004, the outstanding balance of the note was $1,300,000. The note, which expires in fiscal 2012, has a 10-year term at an annual interest rate of 6.8%. The shares are pledged as additional collateral for the note. Interest is payable quarterly. During the first quarter of fiscal 2004, another officer fully repaid his outstanding stock option loan of $133,584. 7. CONTINGENCIES In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties. In management's opinion, the liabilities, if any that may ultimately result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General Urstadt Biddle Properties Inc. (Company), a real estate investment trust (REIT), is engaged in the acquisition, ownership and management of commercial real estate, primarily neighborhood and community shopping centers in the northeastern part of the United States. Other real estate assets include office and retail buildings and industrial properties. The Company's major tenants include supermarket chains and other retailers who sell basic necessities. At January 31, 2004, the Company owned or had controlling interests in 30 properties containing a total of 3.4 million square feet of leasable area. Forward Looking Statements This report includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, including such matters as future capital expenditures, dividends and acquisitions (including the amount and nature thereof), expansion and other development trends of the real estate industry, business strategies, expansion and growth of the Company's operations and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate. Such statements are subject to a number of assumptions, risks and uncertainties, general economic and business conditions, the business opportunities that may be presented to and pursued by the Company, changes in laws or regulations and other factors, many of which are beyond the control of the Company. Any such statements are not guarantees of future performance and actual results or developments may differ materially from those anticipated in the forward-looking statements. Critical Accounting Policies Critical accounting policies are those that are both important to the presentation of the Company's financial condition and results of operations and require management's most difficult, complex or subjective judgments. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. This summary should be read in conjunction with the more complete discussion of the Company's accounting policies included in Note 1 to the consolidated financial statements of the Company. Revenue Recognition The Company records base rents on a straight-line basis over the term of each lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in tenant receivables on the accompanying balance sheets. Most leases contain provisions that require tenants to reimburse a pro-rata share of real estate taxes and certain common area expenses. These amounts are recognized in the period the related expenses are incurred. Expense reimbursement payments generally are made monthly based on an estimated amount determined at the beginning of the year. The difference between the actual amount due and the estimated amounts paid by the tenant throughout the year is billed or credited to the tenant. Allowance for Doubtful Accounts The allowance for doubtful accounts and mortgage notes receivable is established based on a quarterly analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivables, the payment history of the tenants or other debtors, the financial condition of the tenants and management's assessment of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations, among other things. Management's estimates of the required allowance is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on tenants, particularly those at retail centers. It is the Company's policy to maintain an allowance for future tenant credit losses of approximately 10% of the deferred straight-line rents receivable balance. 11 Real Estate Land, buildings, property improvements, furniture/fixtures and tenant improvements are recorded at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows: Buildings 30-40 years Property Improvements 10-20 years Furniture/Fixtures 3-10 years Tenant Improvements Lease term The Company is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation. These assessments have a direct impact on the Company's net income. Assessments by the Company of certain other lease related costs are made when the Company has a reason to believe that the tenant may not be able to perform under the terms of the lease as originally expected. This requires management to make estimates as to the recoverability of such assets. Asset Impairment On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties and mortgage notes receivable may be impaired. A property value is considered impaired only if management's estimate of current and projected operating cash flows (undiscounted and without interest charges) of the property over its remaining useful life is less than the net carrying value of the property. Such cash flow projections consider factors such as expected future operating income, trend and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the loss is measured as the excess of the net carrying amount of the property over the fair value of the asset. Management does not believe that the value of any of its rental properties or mortgage notes receivable was impaired at January 31, 2004. Liquidity and Capital Resources At January 31, 2004, the Company had unrestricted cash and cash equivalents of $28.5 million compared to $22.4 million at October 31, 2003. The Company's cash positions include the remaining net proceeds received from the sale of the Company's Series C Preferred Stock in May 2003 for $38.4 million. (See below) The Company's sources of liquidity and capital resources include its cash and cash equivalents, proceeds from bank borrowings and long-term mortgage debt, capital financings and sales of real estate investments. Payments of expenses related to real estate operations, debt service, management and professional fees, and dividend requirements place demands on the Company's short-term liquidity. The Company expects to meet its short-term liquidity requirements primarily by generating net cash from the operations of its properties. The Company believes that its net cash provided by operations will be sufficient to fund its short-term liquidity requirements in fiscal 2004 and to meet its dividend requirements necessary to maintain its REIT status. Net cash provided by operations for the three months ended January 31, 2004 amounted to $5.2 million compared to $7.2 million in the comparable period of fiscal 2003. The decrease in net cash provided by operations is primarily due to the timing of payments on property taxes and rents received. Dividends paid to stockholders of the Company in the three month periods ended January 31, 2004 and 2003 were $6.6 million and $5.5 million, respectively. The Company derives substantially all of its revenues from tenants under existing leases at its properties. The Company's operating cash flow therefore depends on the rents that it is able to charge to its tenants, and the ability of its tenants to make rental payments. The Company believes that the nature of the properties in which it typically invests - primarily grocery-anchored neighborhood and community shopping centers - provides a more stable revenue flow in uncertain economic times, in that consumers still need to purchase basic staples and convenience items. However, even in the geographic areas in which the Company owns properties, general economic downturns may adversely impact the ability of the Company's tenants to make lease payments and the Company's ability to re-lease space as leases expire. In either of these cases, the Company's cash flow could be adversely affected. The Company expects to fund its long-term liquidity requirements such as property acquisitions, repayment of indebtedness and capital expenditures through other long-term indebtedness (including indebtedness assumed in acquisitions), proceeds from sales of non-core properties and/or the issuance of equity securities. The Company believes that these sources of capital will continue to be available to it in the future to fund its long-term capital needs; however, there are certain factors that may have a material adverse effect on its access to capital sources. The Company's ability to incur additional debt is dependent upon its existing leverage, the value of its unencumbered assets and borrowing limitations imposed by existing lenders. The Company's ability to raise funds through sales of equity securities is dependent on, among other things, general market conditions for REITs, market perceptions 12 about the Company and its stock price in the market. The Company's ability to sell properties in the future to raise cash will be dependent upon market conditions at the time of sale. Financings In May 2003, the Company sold 400,000 shares of Series C Cumulative Preferred Stock (Series C Preferred Stock) and realized net proceeds of $38.4 million from the sale. A portion of the net proceeds was used to acquire a retail property in fiscal 2003 and the remaining proceeds of approximately $17 million is expected to be used to acquire additional income producing properties consistent with the Company's current business strategy and to fund renovations on, or capital improvements in connection with, the Company's existing properties, including tenant improvements. Pending such use of the net proceeds, the Company may use the net proceeds to make investments in short-term income-producing securities. At January 31, 2004, the Company had a $18.125 million secured revolving credit facility with a bank which expires in fiscal 2005. The agreement provides for a permanent reduction in the revolving credit loan amount of $625,000 annually and requires the Company to maintain certain coverage ratios during its term. The Company also has a $20 million unsecured credit line with the same bank. Extensions of credit under the unsecured credit line are at the bank's discretion and subject to the bank's satisfaction of certain conditions. In January 2004, the unsecured credit line was extended on the same terms as the expiring arrangement for an additional one year period. Both revolving credit lines are available to finance future acquisitions, management and/or development of commercial real estate, refinance indebtedness and for working capital purposes. There were no borrowings during the first quarter of fiscal 2004 and there were no outstanding borrowings on either line of credit at January 31, 2004. The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. Borrowings consist of $104,106,000 of fixed rate mortgage notes payable with a weighted average interest rate of 7.53% at January 31, 2004. The mortgage loans are secured by fourteen properties and have fixed rates of interest ranging from 6.29% to 8.375%. The Company may refinance certain of these borrowings, at or prior to maturity, through new mortgage loans on real estate. The ability to do so, however, is dependent upon various factors, including the income level of the properties, interest rates and credit conditions within the commercial real estate market. Accordingly, there can be no assurance that such refinancings can be achieved. Contractual Obligations The Company's contractual payment obligations as of January 31, 2004, were as follows (Amounts in thousands):
Payments Due by Period Total 2004 2005 2006 2007 2008 Thereafter ----- ---- ---- ---- ---- ---- ---------- Contractual Obligations: Mortgage notes payable $104,106 $1,502 $2,139 $8,926 $11,225 $53,261 $27,053 Tenant obligations* 717 717 - - - - - -------- ------ ------ ------ ------- ------- ------- Total Contractual Obligations $104,823 $2,219 $2,139 $8,926 $11,225 $53,261 $27,053 ======== ====== ====== ====== ======= ======= =======
* Committed tenant-related obligations based on executed leases as of January 31, 2004. We have various standing or renewable service contracts with vendors related to our property management. In addition, we have certain other utility contracts we enter into in the ordinary course of business which may extend beyond one year, which vary based on usage. These contracts include terms that provide for cancellation with insignificant or no cancellation penalties. Contract terms are generally one year or less. 13 Capital Expenditures The Company invests in its existing properties and regularly incurs capital expenditures in the ordinary course of business to maintain its properties. The Company believes that such expenditures enhance the competitiveness of its properties. During the first three months of fiscal 2004, the Company spent approximately $.8 million for capital expenditures principally related to tenant allowances and commissions in connection with the Company's leasing activities. The amounts of these expenditures can vary significantly depending on tenant negotiations, market conditions and rental rates. The Company has budgeted an additional $3.5 million for expected capital improvement and leasing costs in fiscal 2004. These expenditures may be funded from operating cash flows or borrowings. Non-Core Assets In a prior year, the Company's Board of Directors expanded and refined the strategic objectives of the Company to refocus its real estate portfolio into one of self-managed retail properties located in the northeast and authorized the sale of the non-core properties of the Company in the normal course of business over a period of several years. The Company intends to sell the non-core properties as opportunities become available. The Company's ability to generate cash from asset sales is dependent upon market conditions and will necessarily be limited if market conditions make such sales unattractive. At January 31, 2004, the remaining non-core properties total four properties with a net book value of approximately $11.0 million and consist of two distribution service facilities, one office building and one retail property (all of which are located outside of the northeast region of the United States). Funds from Operations The Company considers Funds from Operations ("FFO") as defined by the National Association of Real Estate Investment Trusts ("NAREIT") to be one supplemental financial measure of an equity REIT's operating performance. FFO is calculated as net income (computed in accordance with generally accepted accounting principles (GAAP)), plus real estate related depreciation and amortization, excluding gains (or losses) from sales of property and debt restructuring and after adjustments for unconsolidated joint ventures. FFO does not represent cash flows from operations as defined by GAAP and should not be considered an alternative to net income as an indication of the Company's operating performance or for cash flows as a measure of liquidity or its dividend paying capacity. Furthermore, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The table below provides a reconciliation of net income in accordance with GAAP to FFO for the three months ended January 31, 2004 and 2003 (amounts in thousands).
Three Months Ended January 31, ----------------------------- 2004 2003 ---- ---- Net Income Applicable to Common and Class A Common Stockholders $5,084 $3,860 Plus: Real property depreciation 2,129 1,729 Amortization of tenant improvements and allowances 550 501 Amortization of deferred leasing costs 113 119 Minority interests 92 92 ------ ------ Funds from Operations Applicable to Common and Class A Common Stockholders (Diluted) $7,968 $6,301 ====== ====== Net Cash Provided by (Used In): Operating Activities $5,178 $ 7,155 ====== ======= Investing Activities $7,035 $(27,076) ====== ========= Financing Activities $(6,210) $(5,855) ======== ========
14 Results of Operations Comparison of the Three Months Ended January 31, 2004 to the Three Months Ended January 31, 2003. Revenues Base rents increased 21.3% to $12.6 million in the first quarter of fiscal 2004 compared to $10.4 million in the comparable quarter of fiscal 2003. Recoveries from tenants, which represents reimbursements from tenants for property operating expenses and property taxes, increased by 29.3% in the first quarter of fiscal 2004 to $3.8 million from $2.9 million in the comparable quarter of fiscal 2003. The increase in base rents and recoveries from tenants resulted principally from a full quarter's effect of the addition of four operating properties totaling 438,000 square feet of leasable space acquired in 2003 which increased base rents by $1.4 million and tenant recoveries by approximately $800,000 in the first quarter of fiscal 2004. Base rents also increased this quarter by approximately $500,000 from the effect of new leasing of previously vacant space and renewals of expiring leases at generally higher base rental rates. The Company's 202,000 sf office building property in Southfield, Michigan is currently 70% leased and contains approximately 60,000 sf of vacant space. The office market in this region continues to be weak and the Company does not expect to re-lease the vacant space during fiscal 2004. The Company has also been advised by a tenant occupying 41,000 sf of space in the building, that it will not renew its lease upon expiration in December 2004. At January 31, 2004, the Company's overall property occupancy level was unchanged at 96% from the year ago period and the end of the last fiscal year. During the first quarter of fiscal 2004, the Company leased or renewed approximately 79,000 square feet of space. Leases totaling 66,500 square feet of leasable space expired during the same period. The Company expects the impact of recent leasing activity and rents attributable to acquisitions to continue to benefit the operating results of the Company in the balance of fiscal 2004. Lease termination income of $542,000 consists of a lease cancellation payment of $230,000 from a tenant who terminated during the quarter and a payment of $312,000 received in settlement of a bankruptcy action of a former tenant. Interest income in the first quarter of fiscal 2004 decreased compared to the same period in fiscal 2003 from the utilization of cash in 2003 to acquire retail properties totaling $51.3 million in the first quarter. Expenses Property operating expenses increased to $2.8 million this quarter compared to $2.3 million in fiscal 2003's first quarter. Property taxes increased to $2.1 million from $1.6 million last year. The increases in both property operating expenses and property taxes reflects the effect of recently acquired properties which increased operating expenses and property taxes this quarter by $273,000 and $335,000, respectively. Property operating expenses and taxes for properties owned in both fiscal 2004 and 2003 periods increased from higher maintenance and repair costs and increases in real estate tax assessment rates at several of the Company's properties in fiscal 2004. As most of the Company's leases require the tenants to pay share of operating expenses and taxes, the Company anticipates that approximately 88% of these expenses are recoverable from the tenants. Depreciation expense increased by $449,000 principally due to the additional expense incurred from recent property acquisitions. General and administrative expense increased 3.5% to $1.0 million in the first quarter of fiscal 2004 due primarily to higher compensation expense and costs associated with new corporate governance initiatives. Inflation The Company's long-term leases contain provisions to mitigate the adverse impact of inflation on its operating results. Such provisions include clauses entitling the Company to receive (i) scheduled base rent increases and (ii) percentage rents based upon tenants' gross sales, which generally increase as prices rise. In addition, many of the Company's non-anchor leases are for terms of less than ten years, which permits the Company to seek increases in rents upon renewal at then current market rates if rents provided in the expiring leases are below then existing market rates. Most of the Company's leases require tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's expose to increases in costs and operating expenses resulting from inflation. 15 Environmental Matters Based upon management's ongoing review of its Properties, management is not aware of any environmental condition with respect to any of the Company's properties which would be reasonably likely to have a material adverse effect on the Company. There can be no assurance, however, that (i) the discovery of environmental conditions, which were previously unknown, (ii) changes in law, (iii) the conduct of tenants or (iv) activities relating to properties in the vicinity of the Company's properties, will not expose the Company to material liability in the future. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of the Company's tenants, which would adversely affect the Company's financial condition and results of operations. 16 Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond the Company's control. The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. The Company had no borrowings during the first quarter of fiscal 2004 and fiscal 2003 which were subject to variable rates of interest. The Company believes that its weighted average interest rate of 7.53% on its fixed rate mortgage debt is not materially different from current market interest rates for mortgage debt with similar risks and maturities. During the three month periods ended January 31, 2004 and 2003, the Company did not refinance any of its mortgage notes payable or borrow under its secured or unsecured lines of credit arrangements at variable rates of interest. The Company has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. Item 4 CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Based on their evaluation at the end of the period covered by this Quarterly Report on Form 10-Q, the Company's principal executive officer and principal financial officer have concluded that its disclosure and controls procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Changes in Internal Controls During the first quarter of fiscal 2004, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 17 Part II - Other Information Item 1. Legal Proceedings The Company is not involved in any litigation, nor to its knowledge is any litigation threatened against the Company or its subsidiaries, that in management's opinion, would result in a material adverse effect on the Company's ownership, management or operation of its properties, or which is not covered by the Company's liability insurance. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of the Chief Executive Officer of Urstadt Biddle Properties Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Chief Financial Officer of Urstadt Biddle Properties Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32 Certification of the Chief Executive Officer and Chief Financial Officer of Urstadt Biddle Properties Inc. pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: During the quarter ended January 31, 2004, the Registrant filed with the Commission: (1) A Current Report on Form 8-K dated December 12, 2003. Such report referred under Item 12 to a press release published by the Company on December 10, 2003 setting forth the Company's results of operations for the year ended October 31, 2003. 18 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. URSTADT BIDDLE PROPERTIES INC. (Registrant) By /s/ Charles J. Urstadt Charles J. Urstadt Chairman and Chief Executive Officer By /s/ James R. Moore James R. Moore Executive Vice President/ Chief Financial Officer (Principal Financial Officer Dated: March 12, 2004 and Principal Accounting Officer) 19 EXHIBIT INDEX Exhibit No. 31.1 Certification of the Chief Executive Officer of Urstadt Biddle Properties Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Chief Financial Officer of Urstadt Biddle Properties Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32 Certification of the Chief Executive Officer and Chief Financial Officer of Urstadt Biddle Properties Inc. pursuant to Section 906 of Sarbanes-Oxley Act of 2002 20