10-Q 1 crt10q1q02.txt 1 ST QUARTER 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2002 Commission File Number 0-7716 CENTURY REALTY TRUST (Exact name of Registrant as specified in its charter) INDIANA 35-1284316 (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 823 Chamber of Commerce Building 46204 Indianapolis, Indiana (ZipCode) (Address of principal executive offices) Registrant's telephone number, including area code (317)632-5467 Indicate by check mark whether this registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Shares of Beneficial Interest, no par value 1,751,711 shares Part 1. Financial Information Century Realty Trust and Subsidiaries Consolidated Balance Sheets March December 31, 2002 31, 2001 _____________ ____________ Unaudited See Note 1 Assets Real estate investments: Land $3,776,383 $3,776,383 Buildings 52,884,865 52,792,086 Equipment 1,376,375 1,357,386 Allowances for depreciation (15,067,320) (14,623,791) _____________ ____________ 42,970,303 43,302,064 Net investment in direct financing leases 181,134 191,947 _____________ ____________ 43,151,437 43,494,011 Cash and cash equivalents 1,676,831 1,316,299 Restricted cash 1,586,280 1,412,694 Accounts and accrued income receivable 211,220 209,914 Unamortized management contracts 368,532 384,791 Unamortized mortgage costs 496,935 487,082 Undeveloped land 99,675 99,675 Other assets 108,549 151,486 _____________ ____________ $47,699,459 $47,555,952 _____________ ____________ _____________ ____________ Liabilities and shareholders' equity Liabilities: Short-term debt - $92,406 Mortgage notes payable $34,246,603 34,389,954 Accounts payable and accrued liabilities 223,689 244,088 Interest 208,889 214,811 State income and property taxes 1,804,176 1,422,088 Tenants' security deposits and unearned rent 605,120 571,123 _____________ ____________ 37,088,477 36,934,470 Minority interest in operating partnerships 770,653 802,403 Shareholders' equity: Shares of Beneficial Interest, no par value - authorized 5,000,000 shares, issued 1,770,918 shares (1,768,249 shares at December 31, 2001), including 19,207 shares in treasury 9,358,857 9,327,102 Overdistributed income other than from gain on the sale of real estate (636,214) (625,709) Undistributed net realized gain from the sale of real estate 1,316,078 1,316,078 Cost of treasury shares (198,392) (198,392) _____________ ____________ 9,840,329 9,819,079 _____________ ____________ $47,699,459 $47,555,952 _____________ ____________ _____________ ____________ See accompanying notes. Century Realty Trust and Subsidiaries Consolidated Statements of Income Unaudited Three Months Ended March 31 2002 2001 ____________ ____________ Income: Real estate operations: Rental Income $3,161,394 $3,181,544 Income from direct financing leases 5,712 7,086 Other income 71,558 71,891 ____________ ____________ 3,238,664 3,260,521 Less: Real estate operating expenses 1,348,618 1,400,370 Depreciation 462,054 432,527 Real estate taxes 361,851 358,392 ____________ ____________ 2,172,523 2,191,289 ____________ ____________ 1,066,141 1,069,232 Interest income 5,424 14,653 ____________ ____________ 1,071,565 1,083,885 Expenses: Interest 650,104 714,357 State income taxes 4,556 30,653 General and administrative 180,052 150,371 ____________ ____________ 834,712 895,381 Income before minority interest in operating partnerships 236,853 188,504 Minority interest in operating partnerships (3,093) 15,534 ____________ ____________ Net income $233,760 $204,038 ____________ ____________ ____________ ____________ Earnings per share: Basic earnings per share $0.13 $0.12 Diluted earnings per share $0.13 $0.12 See accompanying notes. Century Realty Trust and Subsidiaries Consolidated Statements of Cash Flows Unaudited Three Months Ended March 31 2002 2001 ___________ __________ Operating Activities Net income $233,760 $204,038 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 475,252 444,014 Minority interest 3,093 (15,534) Changes in operating assets and liabilities: Restricted cash (173,586) (133,863) Accounts and accrued income receivable (1,306) (187,600) Other assets 17,620 22,218 Accounts payable and accrued liabilities 355,767 340,731 Tenants' security deposits and unearned rent 33,997 29,129 ___________ __________ Net cash provided by operations 944,597 703,133 Investing Activities: Purchase of property and improvements (111,768) (75,456) Lease principal payments received 10,813 9,438 ___________ __________ Net cash used in investing activities (100,955) (66,018) Financing Activities: Net short-term bank loan repayments (92,406) - Principal payments on mortgage notes payable (143,351) (127,549) Shares purchased for treasury - - Treasury shares sold - 5,125 Dividends paid to shareholders (244,265) (360,315) Distributions to minority interest (3,088) (11,985) ___________ __________ Net cash used in financing activities (483,110) (494,724) ___________ __________ Net increase in cash and cash equivalents 360,532 142,391 Balance at beginning of period 1,316,299 781,215 ___________ __________ Balance at end of period $1,676,831 $923,606 ___________ __________ ___________ __________ Supplemental Data: Selected noncash activities related to investing and financing activities were as follows: Issued 2,669 shares in 2002 and 2,894 shares in 2001 in exchange for like numbers of operating partnership units of controlled partnerships $31,575 $33,319 ___________ __________ ___________ __________ See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CENTURY REALTY TRUST March 31, 2002 Unaudited Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Trust's annual report on Form 10-K for the year ended December 31, 2001. Note 2 - Interest in Operating Partnerships The Trust, through its wholly-owned subsidiary, CR Management, Inc., is the general partner in five limited partnerships each of which owns, as its principal asset, a single apartment property. CR Management, Inc. owns 2,972 of the 289,880 outstanding partnership units. Effective January 1, 2001, the Trust granted to each of the beneficial owners of the remaining 286,908 partnership units the right to exchange their units for an equal number of shares of the Trust. Exchanges may be exercised effective on the first day of each calendar quarter. At March 31, 2002 the Trust owned, in the aggregate 220,362, or 76%, of the 289,880 outstanding partnership units. The equity interest that the Trust does not own is described in the consolidated financial statements as the minority interest in operating partnerships. During the three months ended March 31, 2002, the Trust issued 2,669 shares of beneficial interest in exchange for partnership units. As of April 1, 2002, holders of 2,567 units elected to exchange units for shares. Including the exchanges exercised April 1, 2002, the Trust owns 222,929, or 77.7%, of the 289,880 outstanding operating partnership units. Note 3 - Mortgage Notes Payable Nine of the fifteen properties owned by the Trust are encumbered by mortgage loans that are payable in monthly installments totaling approximately $179,500, including interest at rates ranging from 3.80% to 9% per annum, and which mature from October 3, 2004 to February 1, 2012. Scheduled payments during the three months ended March 31, 2002 decreased mortgage loan balances, in the aggregate, by $113,396. The five apartment properties owned by the operating partnerships controlled by the Trust have long-term mortgage loans that are payable in monthly installments totaling approximately $78,000. The loans have interest rates ranging from 8 1/8% to 8 7/8%, and mature from June 1, 2006 to May 1, 2030. Scheduled payments during the three months ended March 31, 2002 decreased mortgage loan balances, in the aggregate, by $29,955. Note 4 - Short-Term Debt At December 31, 2001, the Trust had borrowed $92,406 under its $3,000,000 bank line of credit. The Trust repaid that balance in the first quarter of 2002. The line of credit is renewed annually in August. Note 5 - Federal Income Taxes The Trust intends to continue as a real estate investment trust as defined in the Internal Revenue Code and to distribute its taxable income. Assuming compliance with other requirements of the Code, income distributed will not be taxable to the Trust. Accordingly, no provision for federal income taxes is made in the financial statements. Distributions, however, to the extent that such payments are from earnings and profits of the Trust, are taxable to the shareholder recipients as dividend income. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Contained in this discussion are forward-looking statements which management believe to be reasonable and informative. Such statements are based on assumptions which may not prove to be correct for reasons management cannot predict. Consequently, the inclusion of forward-looking statements should not be considered as representations by the Trust or its management that expected results will be achieved or that stated objectives will be attained. At March 31, 2002 and 2001, and throughout the quarters then ended, the Trust owned or controlled fifteen apartment communities containing 2,136 apartment units, three multi-tenant commercial properties containing 89,000 rentable square feet, and two restaurant properties leased to operators under net leases. Five of the fifteen apartment communities containing a total of 586 units are owned by partnerships in which the Trust has a majority financial interest and over which it has exclusive control. A detailed listing of the investment real estate is contained on Page 2 of the Trust's 2001 annual report. At March 31, 2002 and 2001 the Trust's net investment in real estate consisted of apartment properties (94%), commercial properties (5%) and net-leased restaurant properties (1%). Except for one restaurant property in Orlando, Florida, the Trusts' real estate investments are located in Indiana. The apartment communities, which comprise 94% of the Trust's investment property, also account for most of the rental income and expenses reported. Management expects the real estate portfolio will be unchanged during the second quarter of 2002. In view of lower average apartment occupancy rates, rental discounts offered at certain locations, and higher operating expenses to retain and attract residents, management expects that net operating income from apartment operations for the first half of 2002 will be less than that reported for the first half of 2001. Lower interest costs related to certain mortgage loans, however, are expected to mitigate the impact of apartment operations on net income through the second quarter of 2002. Critical Accounting Policies Amortization of Management Contracts. In November, 1997, the Trust paid $650,350 for the general partner interest and absolute management control over five partnerships, each of which owns one apartment property as its principal asset. The accounts of the partnerships are included in the consolidated financial statements of the Trust. The Trust granted to the limited partners in those partnerships options to exchange their interests for shares of beneficial interest of the Trust. Those options will expire in November 2007 at which time the Trust will have the option to issue shares in exchange for any outstanding limited partnership interests. The Trust elected in 1997 to amortize, on a straight line basis, its cost to acquire its position over the ten-year option period that it granted to the limited partners; consequently, depreciation expense each year includes $65,035 ($16,260 each quarter) of acquisition cost amortization. Carpet Replacement Policy. From its inception in 1973, the Trust has consistently followed the practice of charging the cost to replace carpets in its apartment units to real estate operating expense as incurred. The costs to replace carpets amounted to $45,735 and $73,667 in the first quarters of 2002 and 2001, respectively. An acceptable alternative method of accounting would be the capitalization of costs as incurred, followed by charges for depreciation over the estimated useful life of the carpet. Management believes that, due to the relatively short useful life of apartment carpets, the annual expense for replacements is not materially greater than would be the annual charges for depreciation had the carpets been capitalized when purchased. RESULTS OF OPERATIONS For the first quarter of 2002, the Trust reported a $21,900 or ..7%, decrease in gross income from real estate operations from the comparable 2001 period. Gross income from apartment operations decreased by $35,400, or 1.1%, from the prior year quarter. Higher average rental rates in 2002, up .9%, were more than offset by lower economic occupancy rates. Economic occupancy for the first quarter of 2002 was 89.6%, down 2% from the prior year quarter. Rental properties other than apartments accounted for 5.8% of total income from rental operations in the first quarter of 2002. Gross income from non-apartment properties increased $13,500 from the prior year quarter due primarily to $12,500 in rental revenue in 2002 from the Miami Subs restaurant property. That property produced no revenue in the 2001 quarter. The property is currently leased to a Miami Subs franchisee until 2004 under a net lease that commenced May 1, 2001. Occupancy rates for commercial properties, exclusive of net-leased restaurant properties, averaged 93% during the first quarters of 2002 and 2001. Operating expenses, excluding interest and depreciation, for all of the apartment properties amounted to 49.1% of gross possible income for the first quarter of 2002, down from 50.5% for the prior year period, and amounted to a decrease of $42,100, or 2.4%, in total operating expenses. A comparatively moderate winter season following a more severe winter a year ago resulted in lower utility, payroll and winter-related repair expenses during the 2002 quarter. Lower rates for heating fuel, even with an increase in the number of vacant units, contributed to a decrease of $9,400 in the cost of utilities. Maintenance and repair expenses decreased by $18,100, or 15%, in the 2002 quarter due primarily to the milder winter season. Due to the decrease in occupancy rates, advertising and other marketing costs were up $10,200 from the first quarter a year ago. Lower tenant turnover in the first quarter of 2002, resulted in $22,500 less expense for carpeting, painting and decorating. Real estate taxes on Indiana property are assessed on March 1 each year and are payable in two installments in the following calendar year. Real estate tax expense for the first quarter represents one-fourth of the estimated real estate taxes payable during the next calendar year. Estimates are based on actual tax payments during the preceding year with allowances for anticipated rate increases comparable with past experience. Interest expense for the quarter ended March 31, 2002 was $64,200 less than for the same quarter last year. Interest expense applicable to loans outstanding during both periods decreased by $68,200, while interest expense applicable to debt in the first quarter of 2002 that replaced debt which existed in the first quarter of 2001 increased by $4,000. The $68,200 decrease in interest expense related to loans outstanding during the first quarters of 2002 and 2001, consists of $9,700 that resulted from the reduction of loan balances through scheduled debt service payments, and $58,500 that resulted from lower interest rates on three mortgage loans. The three loans with lower interest rates in 2002 contain provisions to reset rates, based on lender-determined benchmarks, at intervals of one year or less . With respect to a mortgage loan with an unpaid balance of $4.9 million at March 31, 2002, the effective interest rates were 4.53% and 8.27% for the three months ended March 31, 2002 and 2001, respectively. The interest rate on that loan was reset to 3.8% effective April 1, 2002. The next interest rate reset date for that loan is October 1, 2002. The other two loans with unpaid balances totaling $1.38 million at March 31, 2002 were modified effective February 1, 2002. While balances were unchanged, maturity dates were extended from June, 2003 to February, 2012, and interest rates were reduced from 8.875% to initial rates of 4.875%. Those loans, as modified, provide for interest rates to be reset each year commencing February 1, 2003. In August, 2001, the Trust obtained a new first mortgage loan on one of its apartment properties, and used part of the proceeds to repay a first mortgage loan on one of its commercial properties and to repay a short-term bank loan. Interest expense for the first quarter of 2002 related to the new loan, exceeded by $4,000 the interest expense for the first quarter of 2001 related to loans then outstanding that were later repaid. FINANCIAL CONDITION AND LIQUIDITY On April 4, 2002, the Trust declared a $.14 per share cash distribution payable May 20, 2002 to shareholders of record April 26, 2002. With 1,753,951 shares outstanding, that distribution will require $245,553. Two of the five controlled partnerships declared surplus cash distributions aggregating $3,160 payable May 25, 2002 to minority interest partners of record April 26, 2002. Other than the requirement of $248,713 for declared, but unpaid distributions management is not aware of any significant transactions or events which would require material expenditures in the second quarter of 2002. The Trust has no obligations, nor has it made any commitments, which will require expenditures in excess of funds anticipated to be provided by operations during the remainder of 2002. No transactions or events have occurred to indicate that funds provided by operations during the balance of 2002 will differ disproportionately from the first quarter of the year. At March 31, 2002, the Trust held cash and cash equivalents of approximately $1,294,000 in its own accounts and $382,000 in partnership accounts which management believes is sufficient to meet anticipated working capital requirements. INFLATION Management believes that the direct effects of inflation on the Trust's quarterly operations have been insignificant during 2002 and 2001. PART II Item 6(b). No events occurred during the three months ended March 31, 2002, which would have necessitated the filing of a report on Form 8K. MANAGEMENT REPRESENTATIONS The information furnished in this report, while not audited, includes all adjustments, in the opinion of management, necessary for a fair representation of the financial position of Century Realty Trust at March 31, 2002, and December 31, 2001, and the results of its operations and its cash flow for the three months ended March 31, 2002, and March 31, 2001, in accordance with accounting principles generally accepted in the United States consistently applied. The interim results reported are not necessarily indicative of expected results for the full year, and should be considered in conjunction with the audited financial statements contained in the Trust's 2001 annual report. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTURY REALTY TRUST Date__5-13-2002__ By__/S_______________________ John I. Bradshaw, Jr. President and Treasurer Date__5-13-2002__ By__/S_______________________ David F. White Controller