-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JGtO97bIKIrXuXmfgxBeiFVAHmka0aX6YDaryC9UlVnstsSSQET3Q+rqBkEbDHZ3 /jFEW4r9Xjk1HYwTVJtM1Q== 0001042810-03-000115.txt : 20030813 0001042810-03-000115.hdr.sgml : 20030813 20030813125849 ACCESSION NUMBER: 0001042810-03-000115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY ONE INC CENTRAL INDEX KEY: 0001042810 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 650563410 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13499 FILM NUMBER: 03839970 BUSINESS ADDRESS: STREET 1: 1696 N E MIAMI GARDENS DR SUITE 200 CITY: NORTH MIAMI BEACH STATE: FL ZIP: 33179 MAIL ADDRESS: STREET 1: 1696 N E MIAMI GARDENS DR SUITE 200 CITY: NORTH MIAMI BEACH STATE: FL ZIP: 33179 10-Q 1 eqy_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 Commission File No. 001-13499 EQUITY ONE, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) 1696 N.E. Miami Gardens Drive N. Miami Beach, Florida 33179 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (305) 947-1664 - -------------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) Maryland 52-1794271 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) - -------------------------------------------------------------------------------- Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the past 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 Exchange Act Rule 12b-2 of the Exchange). Yes [X] No [ ] Applicable only to Corporate Issuers: As of the close of business on August 6, 2003, 64,085,942 shares of the Company's common stock, par value $0.01 per share, were issued and outstanding. EQUITY ONE, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Page ------ Condensed Consolidated Balance Sheets- As of June 30, 2003 and December 31, 2002 (unaudited) ............ 1 Condensed Consolidated Statements of Operations- For the three-month and six-month periods ended June 30, 2003 and 2002 (unaudited) ................................................. 3 Condensed Consolidated Statements of Comprehensive Income- For the three-month and six-month periods ended June 30, 2003 and 2002 (unaudited) ................................................. 5 Condensed Consolidated Statement of Stockholders' Equity- For the six-month period ended June 30, 2003 (unaudited) ......... 6 Condensed Consolidated Statements of Cash Flows- For the six-month periods ended June 30, 2003 and 2002 (unaudited)....................................................... 7 Notes to the Condensed Consolidated Financial Statements (unaudited) ........................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................... 21 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 29 Item 4. Controls and Procedures.......................................... 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings ............................................... 30 Item 2. Changes in Securities and Use of Proceeds ....................... 31 Item 3. Defaults upon Senior Securities ................................. 31 Item 4. Submission of Matters to a Vote of Security Holders ............. 31 Item 5. Other Information ............................................... 31 Item 6. Exhibits and Reports on Form 8-K ................................ 31 Signatures ............................................................... 32 Certificate of Chief Executive Officer.................................... 33 Certificate of Chief Financial Officer ................................... 34 PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 AND DECEMBER 31, 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
June 30, December 31, 2003 2002 ----------- ----------- ASSETS PROPERTIES: Income producing ........................................................... $ 1,414,908 $ 682,941 Less: accumulated depreciation ............................................. (52,059) (40,433) ----------- ----------- 1,362,849 642,508 Construction in progress and land held for development ..................... 42,104 35,923 Properties held for sale ................................................... 1,210 -- ----------- ----------- Properties, net ......................................................... 1,406,163 678,431 CASH AND CASH EQUIVALENTS ..................................................... 2,119 2,944 CASH HELD IN ESCROW ........................................................... 3,381 5,933 ACCOUNTS AND OTHER RECEIVABLES, NET .......................................... 11,964 7,053 INVESTMENTS IN AND ADVANCES TO JOINT VENTURES ................................. 8,503 10,021 GOODWILL ...................................................................... 22,535 2,276 OTHER ASSETS .................................................................. 27,841 23,411 ----------- ----------- TOTAL ......................................................................... $ 1,482,506 $ 730,069 =========== =========== (continued)
1 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2003 AND DECEMBER 31, 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
June 30, December 31, 2003 2002 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: NOTES PAYABLE Mortgage notes payable .......................................................$ 420,265 $ 332,143 Revolving credit facilities .................................................. 98,931 23,000 Unsecured senior notes payable ............................................... 150,000 -- ----------- ----------- 669,196 355,143 Unamortized premium on notes payable ............................................ 20,945 -- ----------- ----------- Total notes payable ....................................................... 690,141 355,143 OTHER LIABILITIES Accounts payable and accrued expenses ........................................ 25,416 14,760 Tenant security deposits ..................................................... 6,678 4,342 Other liabilities ............................................................ 2,895 1,724 ----------- ----------- Total liabilities ......................................................... 725,130 375,969 ----------- ----------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES .................................. 15,763 3,869 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value - 10,000 shares authorized but unissued ..... -- -- Common stock, $0.01 par value - 100,000 shares authorized, 63,517 and 34,540 shares issued and outstanding for 2003 and 2002, respectively ...... 635 345 Additional paid-in capital ................................................... 749,327 355,450 Retained earnings ............................................................ 1,451 5,969 Accumulated other comprehensive gain (loss) .................................. 1 (46) Unamortized restricted stock compensation .................................... (6,194) (4,375) Notes receivable from issuance of common stock ............................... (3,607) (7,112) ----------- ----------- Total stockholders' equity ................................................ 741,613 350,231 ----------- ----------- TOTAL ...........................................................................$ 1,482,506 $ 730,069 =========== =========== See accompanying notes to the condensed consolidated financial statements. (Concluded)
2 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- RENTAL INCOME: Minimum rental .................................. $ 37,671 $ 17,983 $ 66,602 $ 35,388 Expense recoveries ............................... 10,590 5,140 18,599 11,218 Termination fees ................................. 438 111 497 234 Percentage rent payments ......................... 463 274 1,476 1,215 -------- -------- -------- -------- Total rental revenue ........................... 49,162 23,508 87,174 48,055 INVESTMENT INCOME .................................... 343 392 874 805 OTHER INCOME ......................................... 27 37 90 135 -------- -------- -------- -------- Total revenues ................................. 49,532 23,937 88,138 48,995 -------- -------- -------- -------- COSTS AND EXPENSES: Property operating expenses ....................... 13,328 6,708 24,360 14,216 Interest expense .................................. 10,588 5,384 18,307 11,396 Amortization of deferred financing fees ........... 309 217 595 413 Rental property depreciation and amortization ..... 7,086 3,266 12,099 6,476 General and administrative expenses ............... 3,279 1,574 5,520 3,570 -------- -------- -------- -------- Total costs and expenses ...................... 34,590 17,149 60,881 36,071 -------- -------- -------- -------- INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURES, LOSS ON EXTINGUISHMENT OF DEBT, AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ......................... 14,942 6,788 27,257 12,924 EQUITY IN INCOME OF JOINT VENTURES ................... 149 146 260 293 LOSS ON EXTINGUISHMENT OF DEBT ....................... -- -- (623) -- -------- -------- -------- -------- INCOME BEFORE MINORITY INTEREST IN EARNINGS OF CONSOLIDATED SUBSIDIARIES ......................... 15,091 6,934 26,894 13,217 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES ....... (238) (26) (379) (51) -------- -------- -------- -------- INCOME FROM CONTINUING OPERATIONS .................... 14,853 6,908 26,515 13,166 -------- -------- -------- -------- DISCONTINUED OPERATIONS Income from operations of sold properties ......... 128 549 307 1,436 Gain on disposal of income producing properties ... 1,371 981 1,874 7,103 -------- -------- -------- -------- Total income from discontinued operations ....... 1,499 1,530 2,181 8,539 -------- -------- -------- -------- NET INCOME ........................................... $ 16,352 $ 8,438 $ 28,696 $ 21,705 ======== ======== ======== ======== (Continued)
3 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- EARNINGS PER SHARE: BASIC EARNINGS PER SHARE Income from continuing operations ... $ 0.25 $ 0.21 $ 0.49 $ 0.42 Income from discontinued operations.. 0.02 0.04 0.04 0.27 ---------- ---------- ---------- ---------- Total basic earnings per share .... $ 0.27 $ 0.25 $ 0.53 $ 0.69 ========== ========== ========== ========== NUMBER OF SHARES USED IN COMPUTING BASIC EARNINGS PER SHARE ............ 60,920 33,255 54,080 31,316 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE Income from continuing operations ... $ 0.24 $ 0.21 $ 0.48 $ 0.41 Income from discontinued operations.. 0.02 0.04 0.04 0.27 ---------- ---------- ---------- ---------- Total diluted earnings per share... $ 0.26 $ 0.25 $ 0.52 $ 0.68 ========== ========== ========== ========== NUMBER OF SHARES USED IN COMPUTING DILUTED EARNINGS PER SHARE .......... 62,824 33,967 55,671 31,999 ========== ========== ========== ========== See accompanying notes to the condensed consolidated financial statements. (Concluded)
4 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, ----------------- ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- NET INCOME ........................................... $16,352 $ 8,438 $28,696 $21,705 OTHER COMPREHENSIVE INCOME: Net unrealized holding gain on securities available for sale .......................................... 48 21 47 28 ------- ------- ------- ------- COMPREHENSIVE INCOME ................................. $16,400 $ 8,459 $28,743 $21,733 ======= ======= ======= =======
See accompanying notes to the condensed consolidated financial statements. 5 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2003 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Accumulated Notes Other Unamortized Receivable Additional Comprehensive Restricted from the Total Common Paid-In Retained (Loss)/ Stock Issuance of Stockholder' Stock Capital Earnings Income Compensation Common Stock Equity --------- --------- --------- ----------- ------------ ------------ ------------ BALANCE, JANUARY 1, 2003....... $ 345 $ 355,450 $ 5,969 $ (46) $ (4,375) $ (7,112) $ 350,231 Issuance of common stock: IRT transaction... 175 231,562 - - - - 231,737 Other issuances... 115 163,491 - - (1,819) 3,505 165,292 Stock issuance costs - (1,176) - - - - (1,176) Net income........... - - 28,696 - - - 28,696 Dividends paid....... - - (33,214) - - - (33,214) Net unrealized holding gain on securities available for sale - - - 47 - - 47 --------- --------- --------- ----------- ----------- ------------ ------------ BALANCE, JUNE 30, 2003......... $ 635 $ 749,327 $ 1,451 $ 1 $ (6,194) $ $(3,607) $ 741,613 ========= ========= ========= =========== =========== ============ ============
See accompanying notes to the condensed consolidated financial statements. 6 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Six Months Ended June 30, ------------------------------ 2003 2002 ------------- ------------- OPERATING ACTIVITIES: Net income............................................................ $ 28,696 $ 21,705 Adjustments to reconcile net income to net cash provided by operating activities: Straight line rent adjustment.................................... (810) (65) Provision for losses on accounts receivable...................... 399 249 Amortization of premium on notes payable......................... (1,366) - Amortization of deferred financing fees.......................... 595 413 Rental property depreciation and amortization.................... 12,099 6,476 Depreciation and amortization included in discontinued operations 33 323 Amortization of restricted stock................................. 1,089 681 Equity in income of joint ventures............................... (260) (293) Loss on extinguishment of debt................................... 623 - Gain on securities available for sale............................ (8) - Minority interest in earnings of consolidated subsidiaries....... 379 51 Gain on disposal of real estate.................................. (1,874) (7,103) Changes in assets and liabilities: Accounts and other receivables.................................. 405 1,874 Other assets.................................................... (1,733) (2,121) Accounts payable and accrued expenses........................... (1,055) 2,076 Tenants security deposits....................................... 127 72 Other liabilities............................................... 718 (622) ------------- ------------- Net cash provided by operating activities............................. 38,057 23,716 ------------- ------------- INVESTING ACTIVITIES: Additions to and purchase of properties............................ (21,441) (56,869) Proceeds from disposal of properties and joint venture interest.... 11,547 11,148 Decrease (increase) in cash held in escrow......................... 9,516 (596) Distributions received from joint ventures......................... 535 312 Proceeds from repayments of notes receivable....................... 2,788 155 Increase in deferred leasing costs................................. (1,164) (617) Sale of securities available for sale.............................. 564 - Cash used in the purchase of IRT................................... (189,382) - Cash acquired in the IRT acquisition............................... 1,756 - ------------- ------------- Net cash used in investing activities................................. (185,281) (46,467) ------------- ------------- FINANCING ACTIVITIES: Repayments of mortgage notes payable............................... (48,055) (32,129) Net borrowings under revolving credit facilities................... 67,931 8,484 Increase in deferred financing costs............................... (820) (536) Proceeds from stock subscription and issuance of common stock...... 158,676 65,409 Stock issuance costs............................................... (1,176) (1,209) Repayment of notes receivable from issuance of common stock........ 3,505 - Cash dividends paid to stockholders................................ (33,214) (17,134) Distributions to minority interest................................. (448) (51) ------------- ------------- Net cash provided by financing activities............................. 146,399 22,834 ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................. (825) 83 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 2,944 906 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD............................. $ 2,119 $ 989 ============= ============= (Continued)
7 EQUITY ONE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In thousands, except per share amounts) - --------------------------------------------------------------------------------
Six Months Ended June 30, ------------------------------ 2003 2002 ------------- ------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized......................... $ 12,773 $ 11,728 ============= ============= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Change in unrealized holding (loss) gain on securities available for sale... $ 47 $ 28 ============= ============= Issuance of restricted stock................................................ $ 3,265 $ 3,183 ============= ============= Receivable from sale of joint venture interest.............................. $ 2,229 ============= Common stock issued for note receivable..................................... $ 1,534 ============= Note receivable from sale of property....................................... $ 1,425 ============= The Company acquired all of the outstanding common stock of IRT for $763,047, including transaction costs: Fair value of assets acquired, including goodwill........................... $ 763,047 Fair value of liabilities assumed........................................... (341,928) Common stock issued......................................................... (231,737) ------------- Cash paid for IRT acquisition, including transaction costs............. $ 189,382 ============= See accompanying notes to the condensed consolidated financial statements. (Concluded)
8 EQUITY ONE, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) (In thousands, except per share amounts) 1. Organization ------------ Equity One, Inc. operates as a self-managed real estate investment trust ("REIT") that principally acquires, renovates, develops and manages community and neighborhood shopping centers located predominately in high growth markets in the southern United States. These shopping centers are primarily anchored by supermarkets or other necessity-oriented retailers such as drug stores or discount retail stores. The condensed consolidated financial statements include the accounts of Equity One, Inc. and its wholly-owned subsidiaries and those partnerships of which the Company has financial and operating control. Equity One, Inc. and subsidiaries are hereinafter referred to as "the consolidated companies" or "the Company." The Company has a 50% investment in two joint ventures and a 50.1% interest in one joint venture of which it does not have financial or operating control and, accordingly, uses the equity method of accounting for these joint ventures. As of June 30, 2003, the Company's portfolio of neighborhood shopping centers anchored by national and regional supermarket chains and other necessity oriented retailers such as drug stores or discount stores are located in twelve states in the southern United States and consists of 178 properties, encompassing 122 supermarket-anchored shopping centers, nine drug store-anchored shopping centers, 40 other retail-anchored shopping centers, one self-storage facility, one industrial property, and five retail developments, as well as non-controlling interests in three joint ventures which own and operate commercial real estate properties. 2. Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared by the Company's management in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the "SEC"). Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-Q and with the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and audited financial statements and related footnotes, included in the Company's 2002 Annual Report on Form 10-K for the year ended December 31, 2002, filed with the SEC. The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts as previously reported have been reclassified to conform to the current period's presentation. 3. IRT Merger ---------- On February 12, 2003, the Company completed a statutory merger with IRT Property Company ("IRT"). As a result of the merger, the Company acquired 93 properties that comprise an aggregate of approximately 10,041 9 square feet of gross leasable area. The aggregate purchase price for the acquisition was $763,047 (including transaction costs and assumed debt), consisting of the payment of $189,382 in cash, the issuance of 17,490 shares of the Company's common stock valued at $231,737 and the assumption of $341,928 of outstanding debt, premium on notes payable, and other liabilities. The Company has recorded $20,259 of goodwill as a result of the acquisition. The acquisition of IRT was accounted for using the purchase method and the results of IRT are included in the Company's financial statements from the date of its acquisition. The fair values assigned to the identifiable tangible and intangible assets and liabilities are preliminary as the Company is evaluating the fair values and allocation of costs. Management does not believe that any adjustment would have a material effect on the Company's financial position or results of operations. The following unaudited supplemental pro forma information is presented to reflect the effects of the IRT acquisition and related transactions, and the impact on the Company's results, as if the transactions had occurred on January 1, 2002. The pro forma information includes the acquisition of IRT, the issuance of common stock related to the IRT transaction, the private placement of common stock and the borrowing under the revolving credit facility. The pro forma financial information is presented for informational purposes only and may not be indicative of what the actual results of operations would have been had the acquisition occurred as indicated, nor does it purport to represent the results of the operations for future periods:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ -------------------------- 2003 2002 2003 2002 ---------- ----------- ----------- ----------- Pro forma revenues.................................. $ 49,532 $ 46,488 $ 98,623 $ 93,597 ========== =========== =========== =========== Pro forma income from continuing operations......... $ 14,853 $ 13,435 $ 28,855 $ 25,830 ========== =========== =========== =========== Pro forma net income................................ $ 16,352 $ 15,329 $ 31,056 $ 35,084 ========== =========== =========== =========== Pro forma earnings per share: Basic earnings per share: Income from continuing operations............... $ 0.25 $ 0.23 $ 0.48 $ 0.46 Income from discontinued operations............. 0.02 0.04 0.04 0.17 ---------- ----------- ----------- ----------- Total basic earnings per share.............. $ 0.27 $ 0.27 $ 0.52 $ 0.63 ========== =========== =========== =========== Diluted earnings per share: Income from continuing operations.............. $ 0.24 $ 0.23 $ 0.47 $ 0.46 Income from discontinued operations............ 0.02 0.03 0.04 0.16 ---------- ----------- ----------- ----------- Total diluted earnings per share............ $ 0.26 $ 0.26 $ 0.51 $ 0.62 ========== =========== =========== ===========
4. Rental Property --------------- Income producing property is stated at cost and includes all costs related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of pre-development and certain direct and indirect costs of development. Costs incurred during the predevelopment stage are capitalized once management has identified a site, determined that the project is feasible and it is probable that the Company is able to proceed with the project. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements, which improve or extend the useful life of assets, are capitalized. Income producing properties are individually evaluated for impairment when various conditions exist that may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis) from a property is less than its historical net cost basis. Upon determination that a permanent impairment has occurred, the Company records an impairment charge equal to the excess of historical cost basis over fair value. In addition, the Company writes off costs related to predevelopment projects when it determines that it will no longer pursue the project. 10 Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, as follows: Land improvements 40 years Buildings 30-40 years Building improvements 5-40 years Tenant improvements Over the terms of the related lease Equipment 5-7 years Total interest expense capitalized to land held for development and construction in progress was $583 and $667 for the three months ended June 30, 2003 and 2002, respectively, and $1,267 and $1,179 for the six months ended June 30, 2003 and 2002, respectively. 5. Property Held for Sale ---------------------- As of June 30, 2003, one out parcel was classified as property held for sale. 6. Investments in and Advances to Joint Ventures --------------------------------------------- A summary of the Company's investments in and advances to joint ventures at June 30, 2003 and December 31, 2002 is as follows (all investments in unconsolidated entities are accounted for under the equity method):
June 30, December 31, Entity Location Ownership 2003 2002 - ---------------------------- -------------------------- ------------- ---------- ------------ PG Partners................. Palm Beach Gardens, FL 50.0% $ 2,753 $ 2,823 Parcel F, LLC............... Palm Beach Gardens, FL 50.0% 228 228 Oak Square JV*.............. Gainesville, FL - - 1,243 CDG (Park Place) LLC........ Plano, TX 50.1% 5,522 5,727 ---------- ------------ Total investments in and advances to joint ventures...................... $ 8,503 $ 10,021 ========== ============
* In June 2003, the Company sold its joint venture interest in this entity. A summary of unaudited financial information for all joint ventures being reported on the equity method of accounting is as follows:
As of As of June 30, 2003 December 31, 2002 --------------- ------------------- Assets: Rental properties, net................ $ 32,671 $ 47,309 Cash and cash equivalents............. 780 690 Other assets.......................... 534 1,170 --------------- ----------------- Total assets.......................... $ 33,985 $ 49,169 =============== ================= Liabilities and Ventures' Equity: Mortgage notes........................ $ 27,927 $ 44,625 Other liabilities..................... 391 651 Ventures' equity...................... 5,667 3,893 --------------- ----------------- Total ................................ $ 33,985 $ 49,169 =============== =================
The Company's investments in joint ventures, as reported on the condensed consolidated balance sheets, differ from its proportionate share of the joint ventures' underlying net assets due to basis differentials and advances. The basis differential of approximately $3,000 is being depreciated over the useful lives of the related assets. 11 As of June 30, 2003, the Company has guaranteed a mortgage note payable of $15,000 for one of its joint ventures.
Three Months Ended Six Months Ended June 30, June 30, --------------------- ------------------------- 2003 2002 2003 2002 -------- ------- ------- -------- Revenues: Rental revenues .................... $ 2,011 $ 1,751 $ 3,788 $ 3,583 Other revenues ..................... 1 19 3 34 ------- ------- ------- -------- Total revenues ................... 2,012 1,770 3,791 3,617 ------- ------- ------- -------- Expenses: Operating expenses ................. 414 407 927 825 Interest expense ................... 701 723 1,400 1,473 Depreciation ....................... 262 279 569 628 Other expense ...................... 84 43 122 71 ------- ------- ------- -------- Total expenses ................... 1,461 $ 1,452 3,018 2,997 ------- ------- ------- -------- Net income ............................. $ 551 $ 318 $ 773 $ 620 ======= ======= ======= ======== The Company's equity in income of joint ventures reported in: Continuing operations ............ $ 149 $ 146 $ 260 $ 293 ======= ======= ======= ======== Discontinued operations .......... $ 127 $ 13 $ 127 $ 17 ======= ======= ======= ========
Significant accounting policies used by the unconsolidated joint ventures are similar to those used by the Company. 7. Borrowings ---------- Each of the existing mortgage loans is secured by a mortgage on one or more of certain of the Company's properties. Certain of the mortgage loans involving an aggregate principal balance of approximately $209,000 contain prohibitions on transfers of ownership which may have been violated by the Company's previous issuances of common stock or in connection with past acquisitions and may be violated by transactions involving the Company's capital stock in the future. If a violation were established, it could serve as a basis for a lender to accelerate amounts due under the affected mortgage. To date, no lender has notified the Company that it intends to accelerate its mortgage. Based on discussions with various lenders, current credit market conditions and other factors, the Company believes that the mortgages will not be accelerated. Accordingly, the Company believes that the violations of these prohibitions will not have a material adverse impact on the Company's results of operations or financial condition. On February 7, 2003, the Company entered into a $340,000 unsecured revolving credit facility with a syndicate of banks for which Wells Fargo Bank, National Association is the sole lead arranger and administrative agent. This facility bears interest at the Company's option at (i) LIBOR plus 0.65% to 1.35%, depending on the credit ratings of the Company's senior unsecured long term notes or (ii) at the greater of (x) Wells Fargo's prime rate and (y) the Federal Funds Rate plus 0.5%. The facility also includes a competitive bid option which allows the Company to conduct auctions among the participating banks for borrowings in an amount not to exceed $150,000, a $25,000 swing line facility for short term borrowings, a $20,000 letter of credit commitment and may, at the request of the Company, be increased up to a total commitment of $400,000. The facility expires February 12, 2006 with a one year extension option. In addition, the facility contains customary covenants, including financial covenants regarding debt levels, total liabilities, interest coverage, EBITDA levels, unencumbered properties, permitted investments and others. The facility also prohibits stockholder distributions in excess of 95% of funds from operations calculated at the end of each fiscal quarter for the four fiscal quarters then ending. Notwithstanding this limitation, the Company can make stockholder distributions to avoid income taxes on asset sales. If a default under the facility exists, the Company's ability to pay dividends would be limited to the amount necessary to maintain the Company's status as a REIT unless the default is a payment default or bankruptcy event in which case the Company 12 would be prohibited from paying any dividends. The facility is guaranteed by several of the Company's wholly-owned subsidiaries. As of June 30, 2003, the Company had $98,000 outstanding on this credit facility. The weighted average interest rate as June 30, 2003 was 1.99%. As a result of the Company's merger with IRT, the Company assumed IRT's obligations relating to $150,000 principal amount of senior notes, bearing interest at fixed annual interest rates ranging from 7.25% to 7.84% and maturing between 2006 and 2012. The interest rate of one series of these senior notes is subject to a 50 basis point increase if the Company does not maintain its senior unsecured debt rating. These notes have also been guaranteed by the Company's wholly-owned subsidiaries. Also, as part of the Company's merger with IRT, the Company assumed $135,397 of mortgage notes payable. As of June 30, 2003, the Company had a $5,000 unsecured credit facility with City National Bank of Florida and had $931 outstanding on this credit facility. This facility also secures $1,378 in outstanding letters of credit. 8. Consolidating Financial Information ----------------------------------- As of June 30, 2003, substantially all of the Company's subsidiaries, including IRT Partners L.P., have guaranteed the Company's indebtedness under the unsecured senior debt. The guarantees are joint and several and full and unconditional.
Guarantors --------------------------- Condensed Balance Sheet IRT Equity Combined Partners, Eliminating Consolidated One, Inc. Subsidiaries LP Entries Equity One ----------- ------------ ---------- ----------- ------------- As of June 30, 2003 ASSETS Properties, net.................. $ 517,420 $ 704,447 $ 184,296 $ - $ 1,406,163 Investment in affiliates......... 435,752 - - (435,752) - Other assets..................... 34,455 39,015 2,873 - 76,343 ---------- ---------- --------- ---------- ----------- Total assets................... $ 987,627 $ 743,462 $ 187,169 $ (435,752) $ 1,482,506 ========== ========== ========= ========== =========== LIABILITIES Mortgage notes payable........... $ 86,978 $ 298,582 $ 34,705 $ - $ 420,265 Revolving credit facilities...... 98,931 - - - 98,931 Senior notes, net................ 150,000 - - - 150,000 Unamortized premium on notes payable........................ 20,945 - - - 20,945 Other liabilities.................. 12,929 19,399 2,661 - 34,989 ---------- ---------- --------- ---------- ----------- Total liabilities................ 369,783 317,981 37,366 - 725,130 MINORITY INTEREST.................. - - - 15,763 15,763 STOCKHOLDER'S EQUITY Total stockholders' equity....... 617,844 425,481 149,803 (451,515) 741,613 ---------- ---------- --------- ---------- ----------- Total liabilities and shareholders' equity............. $ 987,627 $ 743,462 $ 187,169 $ (435,752) $ 1,482,506 ========== ========== ========= ========== ===========
13
Guarantors ---------------------------- Condensed Statement of Operations IRT Equity Combined Partners, Consolidated One, Inc. Subsidiaries LP Equity One ----------- ------------ ------------- ------------ For the Three Months Ended June 30, 2003 RENTAL INCOME: Minimal rental................................ $ 12,800 $ 20,194 $ 4,677 $ 37,671 Expense recoveries............................ 3,140 6,145 1,305 10,590 Termination fees.............................. 12 422 4 438 Percentage rent payments...................... 104 272 87 463 ----------- ----------- ------------ ------------ Total revenues............................. 16,056 27,033 6,073 49,162 INVESTMENT INCOME............................... 140 193 10 343 OTHER INCOME (LOSS)............................. 65 (38) - 27 ----------- ----------- ------------ ------------ Total revenues............................. 16,261 27,188 6,083 49,532 ----------- ----------- ------------ ------------ COSTS AND EXPENSES: Property operating expenses.................. 4,357 7,228 1,743 13,328 Interest expense............................. 4,096 5,748 744 10,588 Amortization of deferred financing fees...... 195 114 - 309 Rental property depreciation and amortization 2,409 4,080 597 7,086 General and administrative expenses.......... 3,279 - - 3,279 ----------- ----------- ------------ ------------ Total costs and expenses................... 14,336 17,170 3,084 34,590 ----------- ----------- ------------ ------------ INCOME BEFORE EQUITY IN INCOME OR JOINT VENTURES, LOSS ON EXTINGUISHMENT OF DEBT, AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES........ 1,925 10,018 2,999 14,942 EQUITY IN INCOME OF JOINT VENTURES.............. - 149 - 149 ----------- ----------- ------------- ------------- INCOME BEFORE MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.................................. 1,925 10,167 2,999 15,091 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.. (34) (25) (179) (238) ----------- ----------- ------------ ------------ INCOME FROM CONTINUING OPERATIONS................ 1,891 10,142 2,820 14,853 ----------- ----------- ------------ ------------ DISCONTINUED OPERATIONS Income from operations of sold properties.... - 128 - 128 Gain on disposal of income producing properties................................... - 1,371 - 1,371 ----------- ----------- ------------ ------------ Total income from discontinued operations........ - 1,499 - 1,499 ----------- ----------- ------------ ------------ NET INCOME...................................... $ 1,891 $ 11,641 $ 2,820 $ 16,352 =========== =========== ============ ============
14
Guarantors ----------------------------- Condensed Statement of Operations Equity Combined IRT Consolidated One, Inc. Subsidiaries Partners, LP Equity One ----------- ------------ ------------- ------------ For the Six Months Ended June 30, 2003 RENTAL INCOME: Minimal rental................................ $ 20,118 $ 39,347 $ 7,137 $ 66,602 Expense recoveries............................ 4,641 12,004 1,954 18,599 Termination fees.............................. 64 428 5 497 Percentage rent payments...................... 279 917 280 1,476 ----------- ----------- ------------- ----------- Total revenues............................. 25,102 52,696 9,376 87,174 INVESTMENT INCOME............................... 401 402 71 874 OTHER INCOME.................................... 65 25 - 90 ----------- ----------- ------------- ----------- Total revenues............................. 25,568 53,123 9,447 88,138 ----------- ----------- ------------- ----------- COSTS AND EXPENSES: Property operating expenses.................. 6,841 14,837 2,682 24,360 Interest expense............................. 5,641 11,494 1,172 18,307 Amortization of deferred financing fees...... 309 284 2 595 Rental property depreciation and amortization 3,354 7,595 1,150 12,099 General and administrative expenses.......... 5,520 - - 5,520 ----------- ----------- ------------- ----------- Total costs and expenses................... 21,665 34,210 5,006 60,881 ----------- ------------ -------------- ----------- INCOME BEFORE EQUITY IN INCOME OR JOINT VENTURES, LOSS ON EXTINGUISHMENT OF DEBT, AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES........ 3,903 18,913 4,441 27,257 EQUITY IN INCOME OF JOINT VENTURES.............. - 260 - 260 LOSS ON EXTINGUISHMENT OF DEBT.................. - (623) - (623) ----------- ----------- ------------- ------------ INCOME BEFORE MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.................................. 3,903 18,550 4,441 26,894 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.. (89) (42) (248) (379) ----------- ---------- ------------ ----------- INCOME FROM CONTINUING OPERATIONS................ 3,814 18,508 4,193 26,515 ----------- ---------- ------------ ----------- DISCONTINUED OPERATIONS Income from operations of sold properties.... - 307 - 307 Gain on disposal of income producing properties................................. - 1,874 - 1,874 ----------- ---------- ------------ ----------- Total income from discontinued operations........ - 2,181 - 2,181 ----------- ---------- ------------ ----------- NET INCOME...................................... $ 3,814 $ 20,689 $ 4,193 $ 28,696 =========== ========== ============ ===========
15 9. Stockholders' Equity and Earnings Per Share ------------------------------------------- The following table reflects the change in number of shares of common stock outstanding for the six months ended June 30, 2003:
Common Options Stock Exercised Total ----------- ----------- ---------- Board of Directors/Corporate Secretary...... 22* - 22* Officers..................................... 167* 211 378* Employees and other......................... 27* 363 390* IRT acquisition.............................. 17,490 - 17,490 Private placement............................ 6,911 - 6,911 Security offerings........................... 3,000 - 3,000 Dividend Reinvestment and Stock Purchase Plan 785 - 785 ----------- ----------- ---------- Total.................................. 28,402 574 28,976 =========== =========== ==========
* Reflects shares of "restricted stock' which are subject to forfeiture and vest over a period of two to five years. The following table sets forth the computation of basic and diluted shares used in computing earnings per share for the three and six-month periods ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 2003 2002 2003 2002 ------ ------ ------ ------ Denominator for basic earnings per share - weighted average shares ................. 60,920 33,255 54,080 31,316 ------ ------ ------ ------ Walden Woods Village, Ltd. ................. 94 94 94 94 Unvested restricted stock .................. 451 235 383 205 Convertible partnership units .............. 966 262 821 262 Stock options (using treasury method) ...... 393 121 293 122 ------ ------ ------ ------ Subtotal ................................ 1,904 712 1,591 683 ------ ------ ------ ------ Denominator for diluted earnings per share - weighted average shares ................. 62,824 33,967 55,671 31,999 ====== ====== ====== ======
10. Accounting for Stock Options ---------------------------- The Company applies the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in measuring stock-based compensation, including options. Accordingly, no compensation expense has been recognized for options granted under the Company's compensation plan as no grants were made at less than market value. Had compensation expense been determined based upon the fair value at the grant date for awards under the Plan consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per share on a pro forma basis would have been: 16
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- ------------------------------- 2003 2002 2003 2002 ------------- -------------- ------------- ------------- Net Income As reported.............. $ 16,352 $ 8,438 $28,696 $ 21,705 Stock based employee compensation expense included in reported net income............. - - - - Total stock based employee compensation expense determined under fair value based method for all awards................. 169 69 336 138 ------------- -------------- ------------- ------------- Pro forma................. $ 16,183 $ 8,369 $ 28,360 $ 21,567 ============= ============== ============= ============= Basic earnings per share As reported............... $ 0.27 $ 0.25 $ 0.53 $ 0.69 ============= ============== ============= ============= Pro forma................. $ 0.27 $ 0.25 $ 0.52 $ 0.69 ============= ============== ============= ============= Diluted earnings per share As reported.............. $ 0.26 $ 0.25 $ 0.52 $ 0.68 ============= ============== ============= ============= Pro forma................ $ 0.26 $ 0.25 $ 0.52 $ 0.68 ============= ============== ============= =============
11. Loans to Executives ------------------- As a result of certain provisions of the Sarbanes-Oxley Act of 2002, the Company is generally prohibited from making loans to directors and executive officers. Prior to the adoption of the Sarbanes-Oxley Act of 2002, the Company had loaned $7,112 to various executives in connection with their exercise of options to purchase shares of the Company's common stock of which $3,505 was repaid during the second quarter of 2003. The notes bear interest at a rate of 5%. Interest only is payable quarterly and the principal is due between 2006 and 2009. In accordance with the provisions of the Sarbanes-Oxley Act of 2002, there has been no material modifications to any of the terms of the loans granted to our executives. 12. Minority Interest ----------------- On January 1, 1999, a wholly owned subsidiary of the Company, Equity One (Walden Woods) Inc. (the "Walden Woods General Partner"), entered into a limited partnership as a general partner. An income producing shopping center was contributed by its owners (the "Walden Woods Minority Partners"), and the Walden Woods General Partner contributed 93.656 shares of Company common stock to the limited partnership at an agreed-upon price of $10.30 per share. Based on this per share price and the net asset value of the property contributed by the Walden Woods Minority Partners, each of the partners received 93.656 limited partnership units. The Company and the Walden Woods Minority Partners have entered into an agreement (the "Redemption Agreement") whereby the Walden Woods Minority Partners can request that the Company purchase either their limited partnership units or any shares of Company common stock which they have received in exchange for their limited partnership units at a price of $10.30 per unit or per share no earlier than two years, nor later than fifteen years, after the exchange date of January 1, 1999. As a result of the Redemption Agreement, the minority interest has been presented in the accompanying condensed consolidated balance sheet. In addition, under the terms of the limited partnership agreement, the Walden Woods Minority Partners do not have an interest in the common stock of the Company except to the extent of dividends declared on such common stock. Accordingly, a preference in earnings has been allocated to the Walden Woods Minority Partners to the extent of the dividends declared. The 93.656 shares of common stock of the Company held by the consolidated limited partnership are not considered outstanding in the calculation of basic earnings per share. 17 On December 5, 2000, a wholly owned subsidiary of the Company, Equity One (North Port) Inc., entered into a limited partnership (the "Shoppes of North Port, Ltd.") as a general partner. An income producing shopping center was contributed by its owners (the "North Port Minority Partners") and the Company contributed an income producing property to a limited liability company wholly owned by the Shoppes of North Port, Ltd. Both the North Port Minority Partners and the general partner were issued 261.850 operating partnership units ("OPUs") based on the net value of the properties contributed. The North Port Minority Partners had the right to redeem their OPUs for the Company's common stock on a one-for-one basis or for cash at an agreed upon price of $11.00 per share no earlier than December 10, 2001, nor later than three and one half years thereafter. Accordingly, the minority interest has been presented in the accompanying condensed consolidated balance sheets. The North Port Minority Partners received a preferred quarterly distribution equal to a 9% annual return on their initial capital contribution through December 31, 2002. On January 1, 2003, the preferred distribution was reduced to a 3% annual return on their initial capital contribution. This amount is reflected as interest expense in the condensed consolidated financial statements. During July 2003, North Port Minority Partners redeemed their OPUs in exchange for 261.850 shares of the Company's common stock. The Company is the general partner of IRT Partners L.P. ("LP") and maintains an indirect partnership interest through its wholly-owned subsidiary, IRT Management Company. LP was formed by IRT in order to enhance its acquisition opportunities through a downREIT structure. This structure offers potential sellers of properties the ability to make a tax-deferred sale of their real estate properties in exchange for limited partnership units ("OP Units") of LP. As of June 30, 2003, there were 734.267 OP Units outstanding held by partners not affiliated with the Company. LP is obligated to redeem each OP Unit held by a person other than the Company, at the request of the holder, for cash equal to the fair market value of a share of the Company's common stock at the time of such redemption, provided that the Company may elect to acquire any such OP Unit presented for redemption for one common share of stock. Such limited partnership interest of 5.59% of LP are held by persons unaffiliated with the Company and are reflected as a minority interest in the consolidated subsidiaries in the accompanying condensed consolidated balance sheets. The Company also records a minority interest for the limited partners' share of equity in two separate partnerships in which it controls. The two partnerships in which the Company has a general partner interest are Venice Plaza (75% interest) and North Village Center (49% interest). The minority interest has been presented in the accompanying condensed consolidated balance sheet. 13. Dispositions ------------ The Company has adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002, and has included the operations of properties sold and held for sale, as well as the gain on sale of sold properties, as discontinued operations for all periods presented. The Company expects to reclassify historical operating results whenever necessary in order to comply with the requirements of SFAS No. 144. The following table reflects the properties being reported in discontinued operations for the three and six-month periods ended June 30, 2003 and 2002:
Square Feet/ Gross Sales Gain On Property Location Date Sold Acres Price Sale - --------------------------- --------------------- ----------- ------------- ----------- ---------- 2003 Dispositions - --------------------------- Eckerd..................... Leesburg, FL February 12,739 $ 4,050 $ 326 Eckerd..................... Melbourne, FL February 10,908 2,715 177 ---------- ---------- First quarter 2003............................................................... 6,765 503 ---------- ---------- Pompano.................... Pompano Beach, FL April 80,697 3,400 470 Huntcrest-Outparcels....... Pompano Beach, FL April 2.94 acres 3,400 470 Oak Square Joint Venture... Gainesville, FL June - 2,230 901 ---------- ---------- Second quarter 2003.............................................................. 7,316 1,371 ---------- ---------- Total ........................................................................ $ 14,081 $1,874 ========== ==========
18
Square Feet/ Gross Sales Gain On Property Location Date Sold Acres Price Sale - -------------------------- -------------------- ------------ -------------- ------------ ---------- 2002 Dispositions - -------------------------- Equity One Office.......... Miami Beach, FL February 28,780 $ 6,050 $ 4,396 Olive land................. Miami, FL February 6.79 acres 1,900 694 Benbrook................... Fort Worth, TX February 247,422 2,590 1,032 Montclair apartments....... Miami Beach, FL June 9,375 2,450 981 Shoppes of Westburry....... Miami, FL July 33,706 5,220 167 Forest Edge................ Orlando, FL July 68,631 3,475 561 Northwest Crossing......... Dallas, TX September 33,366 2,350 363 McMinn Plaza............... Athens, TN November 107,200 6,200 951 Woodforest................. Houston, TX December 12,741 1,850 119 ---------- --------- Total............................................................................. $ 32,085 $ 9,264 ========== =========
The Company classified the results of operations from the properties sold during 2002 and 2003 as income from discontinued operations in the accompanying condensed consolidated statements of operations. The effect of the adoption of SFAS No. 144 on the condensed consolidated statements of operations is shown below.
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ------------------------ 2003 2002 2003 2002 -------- -------- -------- -------- Rental income...................................... $ (4) $ 1,034 $ 234 $ 2,527 -------- -------- -------- -------- Operating expenses................................. (5) 195 21 562 Interest expense................................... - 107 - 215 Amortization of deferred financing fees............ - 4 - 8 Depreciation....................................... - 192 33 323 -------- -------- -------- -------- Total expenses..................................... (5) 498 54 1,108 -------- -------- -------- -------- Equity in income of joint ventures................. 127 13 127 17 -------- -------- -------- -------- Income from discontinued operations................ $ 128 $ 549 $ 307 $ 1,436 ======== ======== ======== ========
14. Debt Extinguishment ------------------- For the six months ended June 30, 2003, the Company prepaid various mortgage notes payable and incurred prepayment fees of $623. The Company has adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, and is reporting the loss on extinguishment of debt as part of ordinary income as it no longer meets the criteria for extraordinary gain (loss) accounting treatment. 15. New Accounting Pronouncements and Changes ----------------------------------------- In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections which rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers, and amends FASB Statement No. 13, Accounting for Leases. Finally SFAS No. 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions related to the rescission of FASB Statement No. 4 and its amendment Statement No. 64 is effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 as of July 2002 and has reflected gains (losses) from extinguishment of debt as part of ordinary income. 19 In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee's of Indebtedness of Other's (an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34). FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies. It requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee regardless of whether or not the guarantor receives separate identifiable consideration (i.e., a premium). The Company adopted the new disclosure requirements, which are effective beginning with 2002 calendar year-end financials. FIN 45's provisions for initial recognition and measurement are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirement of SFAS No. 123, Accounting for Stock-Based Compensation, to require prominent disclosure in both annual and interim financial statements about the effect of the method used on reported results. SFAS No. 148 is effective for financial statements issued for fiscal years ending after December 15, 2002 and, as it relates to Opinion No. 28, Interim Financial Reporting, the interim periods beginning after December 15, 2002, although earlier application is encouraged. The Company applies the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in measuring stock-based compensation. The Company has adopted the disclosure requirements of SFAS No. 148 in its financial statements. In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), an interpretation of ABR 51. FIN 46 provides guidance on identifying entities for which control is achieved through means other than through voting rights, variable interest entities ("VIE"), and how to determine when and which business enterprises should consolidate the VIE. In addition, FIN 46 requires both the primary beneficiary and all other enterprises with a significant variable interest in a VIE to make additional disclosures. The transitional disclosure requirements will take effect almost immediately and are required for all financial statements issued after January 31, 2003. The consolidated provisions of FIN 46 are effective immediately for variable interests in VIEs created after January 31, 2003. For variable interests in VIEs created before February 1, 2003, the provisions of FIN 46 are effective for the first interim period beginning after June 15, 2003. The Company is evaluating the effect of FIN 46 on the financial statements. 16. Commitments and Contingencies ----------------------------- As of June 30, 2003, the Company has pledged letters of credit totaling $1,433 as additional security for certain financings and other activities. The Company is subject to litigation in the normal course of business, none of which in the opinion of management will have a material adverse effect on the financial condition or results of operations of the Company. Following the execution of the merger agreement with IRT in October 2002, three IRT shareholders filed three separate purported class action and derivative suits in the Superior Court of Cobb County, State of Georgia, against IRT, IRT's board of directors and Equity One alleging claims of breach of fiduciary duty by the defendant directors, unjust enrichment and irreparable harm. The complaints sought declaratory relief, an order enjoining consummation of the merger, and unspecified damages. Although the Georgia court did not grant the plaintiffs the equitable relief requested and permitted the completion of the merger, two of these lawsuits, Greaves v. IRT Property Company, et. al. and Phillips v. IRT Property Company, et. al., were still pending following the merger and second amended complaints have been filed in each such suit. The third lawsuit was voluntarily dismissed. Although we believe that these suits are without merit and intend to continue to defend them vigorously, there can be no assurance that the pending litigation will be resolved in our favor. 17. Subsequent Events ----------------- During July 2003, the Company acquired three properties comprising an aggregate of 553 square feet for an aggregate purchase price of $87,958. As a result of these acquisitions, the Company has borrowed an additional $76,000 on the Wells Fargo credit facility increasing the balance outstanding to $174,000, as of August 12, 2003. 20 On July 9, 2003, the Company filed a universal shelf registration statement on Form S-3 which will permit it to offer and sell various types of securities, including common stock, preferred stock, debt securities, depository shares and warrants, up to a value of $600,000. Together with the current availability under the existing shelf registration statement, the Company can issue securities from time to time with an aggregate value of up to approximately $755,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with the Company's unaudited Condensed Consolidated Financial Statements, including the notes thereto, which are included elsewhere herein and the Company's audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2002 and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for an interim period may not give a true indication of results for the year. Unless the context otherwise requires, all references to "we," "our," "us," "Equity One," and the "Company" in this report refer collectively to Equity One, Inc., and its subsidiaries, including joint ventures. RESULTS OF OPERATIONS On February 12, 2003, Equity One, Inc. and IRT Property Company completed a statutory merger. The transaction has been accounted for as a purchase and the results of Equity One include the activity of IRT for the period February 12, 2003 through June 30, 2003. Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Total revenues increased by $25.6 million, or 106.9%, to $49.5 million in 2003 from $23.9 million in 2002. The following factors accounted for this increase: o The acquisition of IRT increased revenues by approximately $23.4 million; o Properties acquired during 2002 increased revenues by approximately $1.5 million; and o Other property revenues increased by $700,000 related to increases in percentage rent and expense recoveries. Property operating expenses increased by $6.6 million, or 98.7%, to $13.3 million for 2003 from $6.7 million in 2002. The following factors accounted for this increase: o The acquisition of IRT increased operating expenses by approximately $5.8 million; o Properties acquired during 2002 increased operating expenses by approximately $500,000; and o Other property operating expenses increased by $300,000. Rental property depreciation and amortization increased by $3.8 million, or 117.0%, to $7.1 million for 2003 from $3.3 million in 2002. The following factors accounted for this increase: o The acquisition of IRT increased depreciation and amortization by approximately $3.0 million; and o Other property depreciation and amortization increased by approximately $800,000. 21 Interest expense increased by $5.2 million, or 96.7%, to $10.6 million for 2003 from $5.4 million in 2002. This increase was primarily due to: o An increase in interest expense of $4.4 million as a result of the assumption of mortgage loans and senior unsecured debt in the acquisition of IRT; o Interest incurred on the debt related to the acquisition of properties made during 2002 of $114,000; o An increase in line of credit interest expense of $1.1 million primarily related to the acquisition of IRT; and o A decrease in capitalized interest of $166,000. o These increases to interest expense were partially offset by the payoff of various loans decreasing interest expense by $580,000. General and administrative expenses increased by $1.7 million, or 108.3%, to $3.3 million for 2003 from $1.6 million in 2002. Compensation and employer related expenses increased by $1.1 million and other general office expenses increased by $600,000. These expense increases were partially due to the increased staffing resulting from the IRT acquisition. Minority interest increased by $212,000 due to minority interests assumed in the acquisition of IRT. We sold two properties and a joint venture interest during 2003, the operating results which are being reflected as discontinued operations for the three-month period ended June 30, 2003 of $128,000. The sale of these two properties and the joint venture interest produced a gain of $1.4 million for 2003. The 2002 discontinued operations reflect a reclassification of operations for properties sold during 2002 and 2003. We recognized a gain of $981,000 in 2002 related to a gain in the disposal of properties sold during 2002. As a result of the foregoing, net income increased by $8.0 million, or 93.8%, to $16.4 million for 2003 from $8.4 million in 2002. Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002 Total revenues increased by $39.1 million, or 79.9%, to $88.1 million in 2003 from $49.0 million in 2002. The following factors accounted for this increase: o The acquisition of IRT increased revenues by approximately $36.1 million; o Properties acquired during 2002 increased revenues by approximately $3.4 million; and o Other property revenues decreased by $400,000 related to a decreases in percentage rent and for properties under redevelopment. Property operating expenses increased by $10.1 million, or 71.4%, to $24.4 million for 2003 from $14.2 million in 2002. The following factors accounted for this increase: o The acquisition of IRT increased operating expenses by approximately $8.9 million; o Properties acquired during 2002 increased operating expenses by approximately $944,000; and o Other property operating expenses increased by $256,000. Rental property depreciation and amortization increased by $5.6 million, or 86.8%, to $12.1 million for 2003 from $6.5 million in 2002. The following factors accounted for this increase: o The acquisition of IRT increased depreciation and amortization by approximately $4.5 million; 22 o Properties acquired during 2002 increased depreciation and amortization by approximately $436,000; and o Other property depreciation and amortization increased by approximately $664,000. Interest expense increased by $6.9 million, or 60.6%, to $18.3 million for 2003 from $11.4 million in 2002. This increase was primarily due to: o An increase in interest expense of $7.1 million as a result of the assumption of mortgage loans and senior unsecured debt in the acquisition of IRT; o Interest incurred on the debt related to the acquisition of properties made during 2002 of $500,000; o An increase in line of credit interest of $849,000 primarily relating to the acquisition of IRT; and o These increases to interest expense were partially offset by the payoff of various loans decreasing interest expense by $1.5 million, and an increase in capitalized interest of $88,000 related to development activity. General and administrative expenses increased by $1.9 million, or 54.6%, to $5.5 million for 2003 from $3.6 million in 2002. Compensation and employer related expenses increased by $1.7 million and other general office expenses increased by $900,000. These expense increases were partially due to the increased staffing resulting from the IRT acquisition. There was a decrease of $588,000 relating to the write off of pre-acquisition costs in 2002. During 2003, we settled various mortgage notes payable and incurred prepayment fees of $623,000. Minority interest increased by $328,000 due to minority interests assumed in the acquisition of IRT. We sold four properties and a joint venture interest during 2003, the operating results which are being reflected as discontinued operations for the six-month period ended June 30, 2003 of $307,000. The sale of these four properties and the joint venture interest produced a gain of $1.9 million for 2003. The 2002 discontinued operations reflect a reclassification of the operations for properties sold during 2002 and 2003. We recognized a gain of $7.1 million in 2002 related to a gain in disposal of properties. As a result of the foregoing, net income increased by $7.0 million, or 32.2%, to $28.7 million for 2003 from $21.7 million in 2002. FUNDS FROM OPERATIONS We believe Funds From Operations ("FFO"), a widely used and appropriate supplemental measure of performance for an equity REIT, provides a relevant basis for comparison among REITs. FFO, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), means income (determined in accordance with accounting principles generally accepted in the United States of America ("GAAP"), excluding gains (losses) from sales of property, adjustments for extraordinary items and cumulative effects of accounting changes, plus real estate related depreciation and amortization, minority interest and after adjustments for unconsolidated partnerships and joint ventures. We present FFO to assist investors in analyzing our performance. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITS. FFO (i) does not represent cash flows from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs and liquidity, including our ability to make distributions and (iii) should not be considered as an alternative to net income (determined in accordance with GAAP) for purposes of evaluating our operating performance. 23 The following table illustrates the calculation of FFO for the three periods ended June 30, 2003 and 2002:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net income .......................................... $ 16,352 $ 8,438 $ 28,696 $ 21,705 Adjustments: Depreciation and amortization related to rental properties ................................... 7,086 3,458 12,132 6,799 Gain on disposal of real estate ................. (1,371) (981) (1,874) (7,103) Minority interest in earnings of consolidated subsidiaries.................................. 238 26 379 51 Other Items: Interest on convertible partnership units ....... (22) 65 43 130 Share of joint venture real estate depreciation.. 139 140 300 314 ---------- ---------- ---------- ---------- Funds from operations ............................... $ 22,422 $ 11,146 $ 39,676 $ 21,896 ========== ========== ========== ==========
FFO increased by $11.3 million, or 101.2%, to $22.4 million for the three months ended June 30, 2003, from $11.1 million for the comparable period of 2002. FFO increased by $17.8 million, or 81.2%, to $39.7 million for the six months ended June 30, 2003, from $21.9 million for the comparable period of 2002. The increase is primarily the result of the inclusion of IRT's results for the current period and 2002 acquisitions, and the increases in income described above. The following table reflects the reconciliation of FFO per diluted share to earnings per diluted share, the most directly comparable GAAP measure, for the periods presented:
For the three months ended For the six months ended June 30, June 30, -------------------------- ------------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Earnings per diluted share...................... $ 0.26 $ 0.25 $ 0.52 $ 0.68 Adjustments: Depreciation and amortization related to rental properties........................... 0.11 0.10 0.21 0.21 Gain on sale of real estate................... (0.02) (0.03) (0.03) (0.22) Interest on convertible partnership units, minority interest in earnings of consolidated subsidiaries, and share of real estate depreciation of joint ventures........................... 0.01 0.01 0.01 0.01 -------- -------- -------- -------- Funds from operations per diluted share...... $ 0.36 $ 0.33 $ 0.71 $ 0.68 ======== ======== ======== ========
CASH FLOW Net cash provided by operations of $38.1 million for the six months ended June 30, 2003 included: (i) net income of $28.7 million, (ii) adjustments for non-cash and gain on sale items which increased cash flow by $11.0 million, and (iii) a net decrease in operating assets and liabilities of $1.6 million, compared to net cash provided by operations of $23.7 million for the six months ended June 30, 2002, which included (i) net income of $21.7 million, (ii) adjustments for non-cash items which increased cash flow by $715,000, and (iii) a net increase in operating assets and liabilities of $1.3 million. 24 Net cash used in investing activities of $185.3 million for the six months ended June 30, 2003 included: (i) the acquisition of one parcel of land and a supermarket for $5.2 million, (ii) construction, development and other capital improvements of $16.2 million and (iii) the acquisition of IRT for $187.6 million, net of cash received, offset by (a) proceeds from the sale of four properties and a joint venture interest of $11.6 million, (b) proceeds from escrowed funds on sale of properties to utilize tax deferred exchange for $9.5 million, and (c) proceeds from payment of notes receivable of $2.8 million. These amounts should be compared to net cash used in investing activities of $46.5 million for the six months ended June 30, 2002 which included: (i) the acquisition of two drugstores, four shopping centers and three parcels of land for $50.1 million (ii) construction, development and other capital improvements of $6.8 million, and (iii) increased leasing costs of $617,000, offset by proceeds from the sale of three properties of $11.1 million. Net cash provided by financing activities of $146.4 million for the six months ended June 30, 2003 included: (i) net borrowings on the revolving credit facilities of $67.9 million, (ii) net proceeds from the issuance of common stock of $157.5 million, and (iii) proceeds from repayment of notes receivable from the issuance of common stock of $3.5 million offset by (a) the payoff of six mortgage notes for $44.1 million and monthly principal payments on mortgage notes of $4.0 million, (b) cash dividends paid to common stockholders of $33.2 million, and (c) other miscellaneous uses of $1.2 million, compared to net cash used by financing activities of $22.8 million for the six months ended June 30, 2002 which included: (i) net proceeds from issuance of common stock of $64.2 million, and (ii) net borrowings on the revolving credit facilities of $8.5 million offset by (a) the payoff of six mortgage notes for $29.3 million and monthly principal payments on mortgage notes of $2.8 million, (b) cash dividends paid to common stockholders of $17.1 million, and (c) other miscellaneous uses of $587,000. LIQUIDITY AND CAPITAL RESOURCES The Company's principal demands for liquidity are maintenance expenditures, repairs, property taxes and tenant improvements relating to rental properties, leasing costs, acquisition and development activities, debt service and repayment obligations, and distributions to its stockholders. The principal sources of funding for the Company's operations are operating cash flows, the issuance of equity and debt securities, the placement of mortgage loans and periodic borrowings under the Company's revolving credit facilities. On February 7, 2003, the Company entered into a $340.0 million unsecured revolving credit facility with a syndicate of banks for which Wells Fargo Bank, National Association is the sole lead arranger and administrative agent. This facility bears interest at the Company's option at (i) LIBOR plus 0.65% to 1.35%, depending on the credit ratings of the Company's senior unsecured long term notes or (ii) at the greater of (x) Wells Fargo's prime rate and (y) the Federal Funds Rate plus 0.5%. The facility also includes a competitive bid option which allows the Company to conduct auctions among the participating banks for borrowings in an amount not to exceed $150.0 million, a $25.0 million swing line facility for short term borrowings, a $20.0 million letter of credit commitment and may, at the request of the Company, be increased up to a total commitment of $400.0 million. The facility expires February 12, 2006 with a one year extension option. In addition, the facility contains customary covenants, including financial covenants regarding debt levels, total liabilities, interest coverage, EBITDA levels, unencumbered properties, permitted investments and others. The facility also prohibits stockholder distributions in excess of 95% of funds from operations calculated at the end of each fiscal quarter for the four fiscal quarters then ending. Notwithstanding this limitation, the Company can make stockholder distributions to avoid income taxes on asset sales. If a default under the facility exists, the Company's ability to pay dividends would be limited to the amount necessary to maintain the Company's status as a REIT unless the default is a payment default or bankruptcy event in which case the Company would be prohibited from paying any dividends. The facility is guaranteed by several of the Company's wholly-owned subsidiaries. As of June 30, 2003, the Company had $98.0 million outstanding on this credit facility. The weighted average interest rate as June 30, 2003 was 1.99%. As of June 30, 2003, the Company had a $5.0 million unsecured credit facility with City National Bank of Florida and had $931,000 outstanding on this credit facility. This facility also secures $1.4 million in outstanding letters of credit. 25 Our revolving credit facility balances as of June 30, 2003 and December 31, 2002 consisted of the following: June 30, December 31, 2003 2002 --------- ---------- (in thousands) Revolving Credit Facilities City National Bank ................. $ 931 $ -- Wells Fargo ........................ 98,000 23,000 -------- -------- Total revolving credit facilities $ 98,931 $ 23,000 ======== ======== As of June 30, 2003, the gross availability under the various credit facilities was approximately $264.4 million, resulting in additional borrowing capacity of $164 million. Our mortgage and unsecured senior notes payable balances as of June 30, 2003 and December 31, 2002 consisted of the following:
June 30, December 31, 2003 2002 ------------ ------------ (in thousands) Mortgage and Unsecured Senior Notes Payable Fixed rate mortgage loans.............................. $ 420,265 $ 307,508 Variable rate mortgage loans........................... - 24,635 Unsecured senior notes payable......................... 150,000 - Unamortized premium on notes payable................... 20,945 - --------- --------- Total mortgage and unsecured senior notes payable... $ 591,210 $ 332,143 ========= =========
As a result of the Company's merger with IRT, the Company assumed IRT's obligations relating to $150.0 million principal amount of senior notes, bearing interest at fixed annual interest rates ranging from 7.25% to 7.84% and maturing between 2006 and 2012. The interest rate of one series of these senior notes is subject to a 50 basis point increase if the Company does not maintain its senior unsecured debt rating. These notes have also been guaranteed by the Company's wholly-owned subsidiaries. Also, as part of the Company's merger with IRT, the Company assumed $135.4 million of mortgage notes payable. Each of the existing mortgage loans is secured by a mortgage on one or more of certain of the Company's properties. Certain of the mortgage loans involving an aggregate principal balance of approximately $209.0 million contain prohibitions on transfers of ownership which may have been violated by the Company's previous issuances of common stock or in connection with past acquisitions and may be violated by transactions involving the Company's capital stock in the future. If a violation were established, it could serve as a basis for a lender to accelerate amounts due under the affected mortgage. To date, no lender has notified the Company that it intends to accelerate its mortgage. Based on discussions with various lenders, current credit market conditions and other factors, the Company believes that the mortgages will not be accelerated. Accordingly, the Company believes that the violations of these prohibitions will not have a material adverse impact on the Company's results of operations or financial condition. As of June 30, 2003, our total debt of $669.2 million less our cash and cash equivalents, cash held in escrow and securities available for sale, or $663.3 million, divided by our gross real estate assets of $1.5 billion equals 45.5%. 26 As of June 30, 2003, the balances due at the maturity of our various notes payable and revolving credit facilities (excluding unamortized premium) are as follows (in thousands):
Fixed Rate Revolving Total Mortgage Unsecured Credit Principal Balance Year Notes Senior Notes Facilities Due at Maturity ------------------ ----------- ------------- ------------ ----------------- 2003.............. $ 4,241 $ - $ 931 $ 5,172 2004.............. 8,980 - - 8,980 2005.............. 36,620 - - 36,620 2006.............. 34,444 50,000 98,000 182,444 2007.............. 12,643 75,000 - 87,643 Thereafter........ 323,337 25,000 - 348,337 ----------- ------------- ----------- ----------------- Total......... $420,265 $150,000 $ 98,931 $ 669,196 =========== ============= =========== =================
Our debt level could subject us to various risks, including the risk that our cash flow will be insufficient to meet required payments of principal and interest, and the risk that the resulting reduced financial flexibility could inhibit our ability to develop or improve our rental properties, withstand downturns in our rental income or take advantage of business opportunities. In addition, because we currently anticipate that only a small portion of the principal of our indebtedness will be repaid prior to maturity, it is expected that it will be necessary to refinance the majority of our debt. Accordingly, there is a risk that such indebtedness will not be able to be refinanced or that the terms of any refinancing will not be as favorable as the terms of our current indebtedness. We are currently redeveloping a portion of Oakbrook Square shopping center in Palm Beach Gardens, Florida to accommodate a new Homegoods store, a new out-parcel and the re-leasing of a portion of the in-line space. In addition, we have commenced the complete redevelopment of Crossroads Square (formerly known as University Mall) in Pembroke Pines, Florida, incorporating a new Lowe's home improvement store, a new Eckerd drug store and the refurbishing of the remainder of the center. We have also begun construction of a new 46,000 square foot L.A. Fitness Sports Club as part of an anticipated 120,000 square foot addition to our Shops at Skylake in North Miami Beach, Florida. We are in the planning and permitting stage for several other developments and redevelopments including: (1) the development of a new 25,000 square foot CVS drug store-anchored center across the street from our Plaza Alegre shopping center in Miami, Florida; (2) the redevelopment of Salerno Village in Stuart, Florida to accommodate a new and expanded Winn Dixie supermarket; and (3) the development of 20,000 square feet of retail space on a parcel of land located adjacent to our Cashmere Corners shopping center. These developments are scheduled for completion between the end of 2003 and the summer of 2004. We are in the process of reconfiguring and re-leasing the former Winn Dixie space at our Walden Woods shopping center in Plant City, Florida to accommodate a 20,000 square foot Dollar Tree store, an additional 13,000 square foot junior anchor and 12,000 square feet of local space. As of June 30, 2003, in order to complete the construction of our development projects, we have committed to fund construction costs of $18.8 million. These obligations principally range from construction contracts and are generally due as the work is performed. We expect to fund the costs of the development of these projects from cash generated from our operations, borrowings under our various revolving credit facilities and other sources of cash. On January 23, 2002, we filed a universal shelf registration statement with the Securities and Exchange Commission, which will permit us, from time to time, to offer and sell various types of securities, including common stock, preferred stock, debt securities, depositary shares and warrants, up to a value of $250 million. In May, 2003, we completed the sale of 3,000,000 shares of common stock of a price of $16.42 per share in an underwritten public offering. The net proceeds of $48.7 million from the stock offering were used for general corporate purposes, including the repayment of debt, ongoing development activities and the acquisition of additional shopping centers. 27 In July 2003, we filed a second universal shelf registration statement with the Securities and Exchange Commission, which will permit us, from time to time, to offer and sell various types of securities, including common stock, preferred stock, debt securities, depositary shares and warrants, up to a value of $600 million. The registration statement provides us additional flexibility in accessing capital markets to fund future growth and for general corporate purposes. In conjunction with the $155 million balance from our prior universal shelf registration, we now have approximately $755 million of availability under our existing shelf registration statements. For the three months ended June 30, 2003, we issued 561,364 shares of our common stock at prices ranging from $15.75 to $15.87 per share and for the six months ended June 30, 2003, we issued 785,486 shares of common stock at prices ranging from $12.76 to $15.87 per share pursuant to our Divided Reinvestment and Stock Purchase Plan. As of June 30, 2003, our shares remaining for sale under our Dividend Reinvestment and Stock Purchase Plan totaled 4.2 million. We believe, based on currently proposed plans and assumptions relating to our operations, that our existing financial arrangements, together with cash generated from our operations, will be sufficient to satisfy our cash requirements for a period of at least twelve months. In the event that our plans change, our assumptions change or prove to be inaccurate or cash flows from operations or amounts available under existing financing arrangements prove to be insufficient to fund our expansion and development efforts or to the extent we discover suitable acquisition targets the purchase price of which exceeds our existing liquidity, we would be required to seek additional sources of financing. There can be no assurance that any additional financing will be available on acceptable terms or at all, and any future equity financing could be dilutive to existing stockholders. If adequate funds are not available, our business operations could be materially adversely affected. We believe that we qualify and intend to qualify as a REIT under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to stockholders. As distributions have exceeded taxable income, no provision for federal income taxes has been made. While we intend to continue to pay dividends to our stockholders, we also will reserve such amounts of cash flow as we consider necessary for the proper maintenance and improvement of our real estate and other corporate purposes, while still maintaining our qualification as a REIT. INFLATION Most of our leases contain provisions designed to partially mitigate the adverse impact of inflation. Such provisions include clauses enabling us to receive percentage rents based on tenant gross sales above predetermined levels, which rents generally increase as prices rise, or escalation clauses which are typically related to increases in the Consumer Price Index or similar inflation indices. Most of our leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. Our financial results are affected by general economic conditions in the markets in which our properties are located. An economic recession, or other adverse changes in general or local economic conditions could result in the inability of some existing tenants to meet their lease obligations and could otherwise adversely affect our ability to attract or retain tenants. The properties are typically anchored by supermarkets, drug stores and other consumer necessity and service retailers which typically offer day-to-day necessities rather than luxury items. These types of tenants, in our experience, generally maintain more consistent sales performance during periods of adverse economic conditions. CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS Certain matters discussed in this Quarterly Report on Form 10-Q contain "forward-looking statements" for purposes of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations and are not guarantees of future performance. All statements other than statements of historical facts are forward-looking statements, and can be identified by the use of forward-looking terminology such as "may," "will," "might," "would," "expect," "anticipate," "estimate," "would," "could," "should," "believe," "intend," "project," "forecast," "target," "plan," or 28 "continue" or the negative of these words or other variations or comparable terminology, are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Because these statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on those statements, which speak only as of the date of this report. Among the factors that could cause actual results to differ materially are: o general economic conditions, competition and the supply of and demand for shopping center properties in our markets; o management's ability to successfully combine and integrate the properties and operations of separate companies that we have acquired in the past or may acquire in the future; o interest rate levels and the availability of financing; o potential environmental liability and other risks associated with the ownership, development and acquisition of shopping center properties; o risks that tenants will not take or remain in occupancy or pay rent; o greater than anticipated construction or operating costs; o inflationary and other general economic trends; o the effects of hurricanes and other natural disasters; and o other risks detailed from time to time in the reports filed by us with the Securities and Exchange Commission. Except for ongoing obligations to disclose material information as required by the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The primary market risk to which the Company has exposure is interest rate risk. Changes in interest rates can affect the Company's net income and cash flows. As changes in market conditions occur, interest rates can either increase or decrease, interest expense on the variable component of the Company's debt will move in the same direction. With respect to its mortgage and senior unsecured notes payable, changes in interest rates generally do not affect the Company's interest expense as these notes payable are predominantly at fixed-rates for extended terms with a weighted average life of 6.8 years, and 4.5 years, respectively. Because the Company has the intent to hold its existing fixed rate notes payable either to maturity or until the sale of the associated property, there is believed to be no interest rate market risk on the Company's results of operations or its working capital position. The Company's possible risk is from increases in long-term interest rates that may occur over a period of several years, as this may decrease the overall value of its real estate. The Company estimates the fair market value of its long term, fixed rate mortgage loans using discounted cash flow analysis based on current borrowing rates for similar types of debt. At June 30, 2003, the fair value of the fixed rate mortgage loans was estimated to be $481.5 million compared to the carrying value amount of $420.3 million, excluding the unamortized premium on notes payable. If the weighted average interest rate on the Company's fixed rate debt were 100 basis points lower or higher than the current weighted average rate of 7.43%, the fair market value would be $443.2 million and $400.9 million, respectively. The Company estimates the fair market value of its senior unsecured fixed rate debt using discounted cash flow analysis based on current borrowing rates for similar types of debt. At June 30, 2003, the fair value of its senior unsecured fixed rate debt was estimated to be $166.6 million compared to the carrying value amount of 29 $150.0 million, excluding unamortized premium on notes payable. If the weighted average interest rate on the Company's fixed rate debt were 100 basis points lower or higher than the current weighted average rate of 7.55%, the fair market value would be $155.6 million and $144.5 million, respectively. If the weighted average interest rate on the Company's variable rate debt were 100 basis points higher or lower, annual interest expense would increase or decrease by approximately $989,000 based on the Company's variable rate debt balance on June 30, 2003 encompassing $98.9 million of revolving credit facilities. The Company's objective in managing its exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flows. The Company may use a variety of financial instruments to reduce its interest rate risk, including interest rate swap agreements whereby the Company exchanges its variable interest costs on a defined amount of principal for another party's obligation to pay fixed interest on the same amount of principal, or interest rate caps, which will set a ceiling on the maximum variable interest rate the Company will incur on the amount of debt subject to the cap and for the time period specified in the interest rate cap. As of June 30, 2003, the Company has outstanding interest rate swaps in the aggregate amount of $70.0 million for periods ranging from eight months to 2.7 years. ITEM 4. CONTROLS AND PROCEDURES We have evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Securities Exchange Act of 1934, or the Exchange Act, and the rules and forms of the Securities and Exchange Commission. This evaluation was made under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within the 90-day period prior to the filing of this quarterly report. Our Chief Executive Officer and Chief Financial Officer have concluded, based on their review, that our disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, no significant changes were made to our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Our management, including our Chief Executive Officer and Chief Financial Officer, however, does not expect that our disclosure controls or our internal controls will prevent all errors and fraud. A control system, no matter how well operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of controls also is based in part upon assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Moreover, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Neither the Company nor the Company's properties are subject to any material litigation. The Company and its properties may be subject to routine litigation and administrative proceedings arising in the ordinary course of business which collectively is not expected to have a material adverse affect on the business, financial condition, results of operations or cash flows of the Company. Following the execution of the merger agreement with IRT in October 2002, three IRT shareholders filed three separate purported class action and derivative suits in the Superior Court of Cobb County, State of Georgia, against IRT, IRT's board of directors and Equity One alleging claims of breach of fiduciary duty by the defendant directors, unjust enrichment and irreparable harm. The complaints sought declaratory relief, an order enjoining 30 consummation of the merger, and unspecified damages. Although the Georgia court did not grant the plaintiffs the equitable relief requested and permitted the completion of the merger, two of these lawsuits, Greaves v. IRT Property Company, et. al. and Phillips v. IRT Property Company, et. al., were still pending following the merger and second amended complaints have been filed in each such suit. The third lawsuit was voluntarily dismissed. Although we believe that these suits are without merit and intend to continue to defend them vigorously, there can be no assurance that the pending litigation will be resolved in our favor. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On February 12, 2003, the Company completed a private placement of 6,911,000 shares of its common stock. Three affiliated investors, Alony Hetz Properties & Investments, Ltd., Silver Maple (2001), Inc. and M.G.N. (USA) Inc. purchased 1.6 million, 1.0 million, and 4.3 million shares of common stock, respectively, at $13.50 per share. The net proceeds of $93 million in cash were used to fund a portion of the cost of the acquisition of IRT. The foregoing issuances were made pursuant to exemption under Section 4(2) of the Securities Act of 1933, as amended. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on May 30, 2003. (1) The stockholders elected three nominees to the Board of Directors: For Withheld --- --------- Class A Directors (term to expire in 2006) Noam Ben-Ozer 55,044,042 106,833 Chaim Katzman 54,027,873 1,123,003 Doron Valero 54,028,393 1,112,483 The following directors' terms of office continued after the meeting: Peter Linneman Shaiy Pilpel Patrick L. Finn Robert L. Cooney Nathan Hetz Dori Segal ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 (b) Reports on Form 8-K: During the quarterly period ended June 30, 2003, the Company filed the following reports on Form 8-K: (i) Report on Form 8-K dated May 8, 2003 under Item 7 and 9. (ii) Report on Form 8-K dated May 13, 2003 under Item 5 and 7. (iii) Report on Form 8-K dated May 15, 2003 under Item 5 and 7. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 13, 2003 EQUITY ONE, INC. /s/ CHAIM KATZMAN ----------------------------- Chaim Katzman Chief Executive Officer (Principal Executive Officer) /s/ HOWARD M. SIPZNER ----------------------------- Howard M. Sipzner Chief Financial Officer (Principal Accounting and Financial Officer) 32 CERTIFICATE OF CHIEF EXECUTIVE OFFICER -------------------------------------- I, Chaim Katzman, Chief Executive Officer of Equity One, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Equity One, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in a all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 /s/ CHAIM KATZMAN ----------------------------- Chaim Katzman Chief Executive Officer 33 CERTIFICATE OF CHIEF FINANCIAL OFFICER -------------------------------------- I, Howard M. Sipzner, Chief Financial Officer of Equity One, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Equity One, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in a all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: August 13, 2003 /s/ Howard M. Sipzner ------------------------------- Howard M. Sipzner Chief Financial Officer 34 INDEX TO EXHIBITS ----------------- EXHIBIT NO. DESCRIPTION 99.1 Certificate of Chief Executive Officer 99.2 Certificate of Chief Financial Officer EXHIBIT 99.1 ------------ CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Equity One, Inc. (the "Company") for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Chaim Katzman, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ CHAIM KATZMAN ----------------------------- Chaim Katzman Chief Executive Officer EXHIBIT 99.2 ------------ CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Equity One, Inc. (the "Company") for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Howard Sipzner, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ Howard M. Sipzner ------------------------------- Howard M. Sipzner Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----