Item 1. Business
(a) General Description of Business
Kranzco Realty Trust (the "Trust") was formed on June 17, 1992 as a Maryland real estate investment trust ("REIT").
On November 19, 1992, the Trust consummated an initial public offering (the "IPO") of 6,400,000 of its common shares of beneficial interest (the "Shares"). On December 15, 1992, the Trust sold an additional 361,900 Shares as a result of the exercise of the over-allotment option granted to the underwriters in connection with the IPO.
On October 7, 1993, the Trust consummated a second public offering (the "Second Offering") of 2,200,000 Shares. On November 3, 1993, the Trust sold an additional 50,000 Shares as a result of the exercise of the over-allotment option granted to the underwriters in connection with the Second Offering.
The Trust and its consolidated subsidiaries are hereinafter referred to as the "Company".
(b) Developments During the 1998 Fiscal Year
In March 1998, the Company acquired one shopping center in Georgia for approximately $4,000,000. This shopping center was under contract as of December 31, 1997 and was the last of a portfolio of five Georgia properties to be acquired. The other four properties were acquired prior to December 31, 1997. The Company funded the purchase of the property through the assumption of approximately $3,300,000 of debt, the issuance of approximately $320,000 of Shares and the payment of approximately $225,000 of cash.
In September 1998, the Company acquired nine community shopping centers in five midwestern and southern states for approximately $89,000,000. The Company funded the purchase of the property through a 10-year 7% fixed rate $65,900,000 mortgage with Salomon Brothers Realty Corp. and the draw down of $23,100,000 from the secured line of credit with Salomon Brothers Realty Corp. The centers, seven of which are anchored by Wal-Mart, have a total of approximately 1.4 million square feet of gross leasable area and were approximately 99% leased when purchased. The acquisition resulted in an increase of approximately 15% in gross leasable area.
In August 1998, the Company sold one of its free-standing properties located in Richmond, Virginia, for a sale price of $420,000. The Company recorded a gain on sale of the property of $89,000. In July 1998, the Company sold a parcel of land of approximately 8,500 square feet at one of its properties to a third party buyer. The sales price of the land parcel was $40,000 and the Company recorded a gain on the sale of approximately $20,000.
On August 12, 1998, the Company commenced an Exchange Offer pursuant to which the Company offered to exchange an aggregate of $8,000,000 of Callable Convertible Subordinated Notes Due 2008, for an aggregate of 10,379,531 shares of common stock, par value $.01 per share (the "NAI Shares") of New America Network, Inc., a Delaware corporation which conducts business under the name New America International ("NAI"), or approximately 80% of the outstanding NAI Shares. Pursuant to the terms of the proposed transactions, NAI would have become a public company which would have been approximately 9.8% owned by the Company and would have provided for a long-term cooperative agreement under which the two companies would collaborate in developing new opportunities and revenue streams for each other from real estate brokerage and related services, but would otherwise remain independent. In December 1998, the Company terminated the Exchange Offer with NAI due to disruptions to the securities markets. It was in management's opinion that a public offering of a small capitalization company would not be favorable at that time. Under a new agreement, the Company invested $1,000,000 for a minority interest in NAI common stock and entered into an intercompany agreement with NAI.
In November 1998, the Company adopted a shareholder rights plan under which the Company has declared a distribution of one Preferred Share Purchase Right (collectively, the "Rights") on each outstanding share of Kranzco's common shares of beneficial interest. The Rights were designed to assure that all of the Company's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against abusive tactics to gain control of Kranzco. The Rights were not adopted in response to any specific takeover threat, but were a response to the general takeover environment in the REIT industry. The Rights are intended to enable all of the Company's shareholders to realize the long-term value of their investment in Kranzco. The Rights will not prevent a takeover, but should encourage anyone seeking to acquire Kranzco to negotiate with the Board prior to attempting a takeover. The Rights will expire on November 10, 2008.
During 1998, the Company had two anchor tenants, Bradlees and Caldor, which were in bankruptcy under Chapter 11 of the bankruptcy code. In general, in a Chapter 11 proceeding, the tenant is required to pay the full rental to the landlord for the store on a current basis unless the lease is disaffirmed.
In January 1999, Bradlees announced that they emerged from Chapter 11. The Bradlees store is located in Bethlehem, Pennsylvania and is approximately 85,899 square feet. This store is open and operating with rental obligations being paid on a timely basis in accordance with the lease. The Caldor stores are located in Towson, Maryland, Bristol, Pennsylvania and Hamilton Township, New Jersey and are approximately 94,600, 113,160 and 119,935 square feet, respectively. The Towson lease is guaranteed by The May Company. The three stores represent approximately $2.8 million or 3.9% of the Company's annual revenues. The average annual rent paid by Caldor for these locations is approximately $6.15 per square foot. In January 1999, Caldor announced that it would discontinue operations and close all stores during 1999. The Company is awaiting notice as to whether its leases are assigned in the bankruptcy liquidation proceedings. If not, the Company will seek replacement tenants for these spaces.
(c) Financial Information About Industry Segments
The Company is in the business of owning, managing, operating, leasing, acquiring, developing, investing in and disposing of neighborhood and community shopping centers and free-standing properties. The Company internally evaluates all properties as one segment and accordingly will not report segment information. See the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for certain financial information required by Item 1.
(d) Narrative Description of Business
General At March 23, 1999, the Company owned and operated 67 neighborhood and community shopping centers and free-standing properties (the "Properties") aggregating approximately 9.1 million square feet of GLA located in Arizona, Connecticut, Georgia, Florida, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia.
The Company is self-administered and self-managed and does not engage or pay a REIT advisor because the Company provides management, leasing, accounting, legal, design and construction expertise through its own personnel or, where appropriate, through outside professionals.
The Company's executive offices are located at 128 Fayette Street, Conshohocken, Pennsylvania 19428 and its telephone number is (610) 941-9292.
Operating Strategies The Company's primary business objective is to achieve growth in its funds from operations by enhancing the operating performance of the Properties and, through selective acquisitions, the value of its portfolio. The Company's operating strategies are to: (i) focus on the neighborhood and community shopping center business; (ii) actively manage its properties for long-term growth in funds from operations and capital appreciation; (iii) increase portfolio occupancy by capitalizing on management's reputation and long-standing relationships with national and regional tenants and extensive experience in marketing to local tenants, as well as the negotiating leverage inherent in a large portfolio of properties; (iv) maintain, renovate, expand and reconfigure its properties; (v) optimize the tenant mix in each shopping center; (vi) develop or ground lease outparcels or expansion areas existing from time to time at its properties for use as restaurants, banks, auto centers, cinemas or other facilities; and (vii) benefit from economies of scale by spreading overhead expenses over a larger asset base.
Acquisition Strategies/Investment Strategies The Company intends to make acquisitions in a manner consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code") applicable to REITs and related regulations with respect to the composition of the Company's portfolio and the derivation of income unless, because of circumstances or changes in the Code (or any related regulation), the trustees (the "Trustees") of the Company determine that it is no longer in the best interests of the Company to qualify as a REIT. The Company's acquisition strategy is to opportunistically acquire properties which need replacement anchor tenants or where the Company's management expertise and reputation can enhance value. That strategy includes acquiring and rehabilitating properties in new markets with strong demographic characteristics in order to reduce the Company's sensitivity to regional economic cycles. The Company does not intend to invest in excess of 15% of its assets in any single property.
The Company will generally acquire 100% fee simple or leasehold interests in real property consistent with the Company's acquisition strategies set forth above. However, the Company may make equity investments through joint ventures with developers, owners or other persons which may provide for, among other terms, (i) a cumulative preference as to cash distributions; (ii) a participation in net cash flows from operations; and (iii) a participation in the appreciation of the value of the underlying real property. The Company contemplates that it would maintain at least equal control over the underlying real property to be operated by any joint venture (including possibly the day-to-day management of the real property) and additional investments in or sale or financing of such underlying real property. The Company may also acquire investments in real property or real estate oriented companies through issuance of debt or equity securities in exchange for investments or by such other methods as the Trustees deem to be in the best interests of the Company.
Financing Strategies The Company intends to maintain a conservative ratio of debt to estimated value of the Company's real estate assets (as determined by the Trustees, taking into consideration the tenants in occupancy, gross rental revenues, geographic location and other factors affecting the value of the Company's properties) ("Debt Ratio") of generally not more than 50%, depending on current market conditions. At December 31, 1998, the Company had a Debt Ratio of approximately 55% and a ratio of debt to total market capitalization, based upon the closing price of the Company's stock on the New York Stock Exchange as of December 31, 1998, of approximately 62%. The Company intends to finance acquisitions with the most appropriate sources of capital, as determined by the Trustees, which may include available cash flows from operations, the issuance of equity securities, the sale of investments and, within the debt guidelines described above, bank and other institutional borrowings and the issuance of debt securities. Future borrowings by the Company for acquisitions may be either on a secured or unsecured basis. In this regard, in addition to the $181,700,000 real estate mortage loan (the "Mortgage Loan"), the Company has obtained several credit facilities as described below.
The Company has a $1.0 million unsecured credit facility from First Union National Bank (the "First Union Facility"). Amounts borrowed under the line of credit bear interest at the bank's prime rate. As of December 31, 1998, there were no borrowings outstanding under the First Union Facility. The facility was extended through March 31, 1999.
The Company has a $3.0 million secured line of credit facility from Bank Leumi Trust Company of New York (the "Bank Leumi Facility"). Amounts borrowed under the Bank Leumi Facility will bear interest at 50 basis points above that bank's reference rate. Borrowings under the Bank Leumi Facility are secured by a first mortgage lien on the Golfland Shopping Center in Orange, Connecticut. There were no outstanding borrowings under this facility as of December 31, 1998. The expiration date of the Bank Leumi Facility was extended to June 30, 1999.
In September 1998, the Company increased its secured line of credit from Salomon Brothers Realty Corp. to $100 million from $50 million (the "Salomon Facility"). Eighteen of the Company's shopping centers or portions thereof secure the Salomon Facility. Amounts borrowed under the Salomon Facility will bear interest at a rate equal to the one month London Interbank Offering Rate ("LIBOR") plus a spread of 175 basis points. The term of the Salomon Facility was extended to July 2000, with an option for a one year renewal. As of December 31, 1998, the Company had $42 million of outstanding borrowings under this facility.
Operating Practices Virtually all operating and administrative functions, such as leasing, data processing, maintenance, finance, accounting, construction and legal, are centrally managed at the Company's headquarters. In addition, the Company maintains regional offices at The Village of Mableton in Mableton, Georgia, The Mall at Cross County in Yonkers, New York and Marumsco Plaza, in Woodbridge, Virginia. On-site functions such as security, maintenance, landscaping, sweeping, plumbing, electrical and other similar activities are either performed by the Company or subcontracted. The cost of these functions are passed through to tenants to the extent permitted by their respective leases.
The Company has proprietary sophisticated computer software systems designed to support its operating and administrative functions and to optimize management's ability to own, operate and manage additional properties without significant increase in its general and administrative expenses. The Company's systems allow instant access to floor plans, store availability, lease data, tenants' sales history, cash flows and budgets. The Company believes its systems to be as advanced as any in the industry.
Competition All of the Company's properties are located in developed retail and commercial areas. There are generally numerous other neighborhood and community shopping centers within a five-mile radius of each of the properties. In addition, with respect to some of the Company's properties there are one or more regional malls within a 10-mile radius. The amount of rentable space in the area could have a material effect on the Company's ability to rent space and the rents charged. In addition, the Company will be competing with others who may have greater financial resources and experience than the Company and its officers and Trustees for tenants and acquisitions.
Employees As of December 31, 1998, the Company had approximately 60 full and part-time employees. None of the Company's employees are subject to a collective bargaining agreement and the Company has experienced no labor-related work stoppages. The Company considers its relations with its personnel to be good.
Business Risks The Company is subject to risks arising in connection with the underlying real estate, including defaults under or nonrenewal of tenant leases, tenant bankruptcies, competition, inability to rent unleased space, failure to generate sufficient income to meet operating expenses, including debt service (including "balloon" payments on certain financial obligations), capital expenditures and tenant improvements, environmental matters, financing availability and costs, and changes in real estate and zoning laws. The success of the Company also depends upon certain key personnel, its ability to maintain its qualification as a REIT, compliance with the terms and conditions of its mortgages and the credit facilities and trends in the national and local economy, including income tax laws, governmental regulations and legislation and population trends.
Tax Status The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. So long as the Company qualifies for taxation as a REIT, the Company generally will not be subject to Federal income tax to the extent it distributes at least 95% of its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.
Item 2.
Item 2. Properties
Shopping Center Properties The Company owns and operates 67 neighborhood and community shopping centers and free-standing properties located in Arizona, Connecticut, Georgia, Florida, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee and Virginia. The Properties were designed to attract local area customers and are typically anchored by a supermarket, discount department store or drugstore, and are diversified in size, ranging from 387,000 square feet of gross leasable area to a free-standing restaurant of only 4,000 square feet of gross leasable area. Typical tenants are Wal-Mart (at 11 Properties), Kmart (8), A & P SuperFresh Supermarkets (2), Pathmark Supermarkets (6), Stop & Shop (4), The Sports Authority (2), Food Lion (4), Ames (3), Kroger (3), Home Depot (1), Fashion Bug (15), Marshalls/TJ Maxx (4), Cato (14), Eckerd Drug (6), Drug Emporium (3), Toys "R" Us (1) and Kids "R" Us (3). At 36 of the Properties, free-standing restaurants, retail stores or banks, such as McDonalds, Ponderosa, Pizza Hut, First Union National Bank, Auto Zone, Tire America and Somerset Tire Service, are businesses located on Out-Parcels. Three of the Properties are community malls of 295,000 square feet, 262,000 square feet and 177,000 square feet, respectively. One is anchored by Kmart and Ames Department Store while another is anchored by Kids "R" Us, The Sports Authority, Circuit City, National Wholesale Liquidators and TJ Maxx. The third is anchored by Ames Department Stores. Thirteen of the Properties contain additional land for expansion of existing stores and thirty one of the Properties have Out-Parcels available for development of free-standing buildings for use as restaurants, banks, auto centers, cinemas and other operations.
The Properties are smaller than regional malls, depend less on long travel times and the sale of major consumer goods and focus on everyday purchases from a smaller customer base. Discount stores and supermarkets attract convenience goods shoppers and bring customers to the smaller satellite shops. Shopping centers of this kind are typically less vulnerable to shifts in population and traffic patterns and rely heavily on weekly advertising by the anchor tenants.
Consistent with its intention to retain its shopping centers for long-term investment, the Company intends to continue to pursue a program of regular physical maintenance, together with major renovations and refurbishing, to preserve and increase the value of the Properties. These projects usually include or will include renovating existing facades, installing uniform signage, resurfacing parking lots and increasing parking lot lighting.
A substantial portion of the income from the Properties consists of rent received under long-term leases. Most of the leases provide for the payment of fixed minimum rent monthly in advance and for the payment by tenants of a pro rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping center. Certain of the major tenant leases provide that the landlord is obligated to pay certain of these expenses above or below specific levels. Except for Wal-Mart, Pathmark Supermarkets, Kmart, Stop & Shop and Caldor, which represented approximately 7%, 4%, 4%, 3% and 3%, respectively, no tenant represented more than 3% of the aggregate minimum rent of the Properties as of December 31, 1998. Minimum rent revenues and operating expense reimbursements accounted for approximately 98% of the total revenues of the Company for the year ended December 31, 1998. A majority of the leases associated with the Properties also provide for the payment of percentage rent calculated as a percentage of a tenant's gross sales above predetermined thresholds. Percentage rent accounted for appoximately 2% of the total revenues of the Company for the year ended December 31, 1998.
The leases of space at the Properties typically require the landlord to provide maintenance of a shopping center's common areas, including cleaning, lighting, paving, security, landscaping and insurance, the costs of which are typically reimbursed to the landlord by the tenants. The landlord is also typically required to make roof and structural repairs as needed, which in some cases are without reimbursement. The leases for larger shopping center tenants often restrict the ability of tenants to assign or sublet their spaces and require tenants to use the space they lease for the purposes designated in the leases and to operate their businesses on a continuous basis. However, certain of the leases with major tenants contain modifications of these provisions as a result of the financial condition, stability or desirability of such tenants. If a tenant assigns or subleases its space, the original tenant generally will remain liable for the payment of rent under the lease.
Three of the Properties and a portion of another are subject to long-term ground leases where a third party owns and has leased the underlying land to the Company to operate a shopping center. The Company pays rent for the use of the land and generally is responsible for all costs and expenses associated with the building and improvements. At the end of the lease term, unless extended, the land, together with all improvements thereon, will revert to the land owner without compensation to the Company.
As of March 1, 1999, the occupancy rate for the Properties was approximately 93%. The property table set forth below gives more specific information with respect to each of the Properties as of March 1, 1999.
KRANZCO REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business and Nature of Operations Kranzco Realty Trust (a Maryland real estate investment trust) and its subsidiaries ("KRT" or the "Company") are engaged in the ownership, management, leasing, operation, acquisition, development, investment and disposition of neighborhood and community shopping centers and free-standing properties. The Company completed its initial public offering of shares of beneficial interest and commenced operations on November 19, 1992. In addition to its own properties, the Company may provide management services for shopping centers owned by third parties. As of December 31, 1998, the Company owned 67 properties in nineteen Northeastern, Southern and Mid-Atlantic states.
Principles of Consolidation The accompanying consolidated financial statements include the accounts of KRT and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segment Information The Company internally evaluates all properties as one segment and accordingly, will not report segment information.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. The ultimate results could differ from those estimates.
Real Estate Real estate assets and improvements or replacements are carried at depreciated cost. Depreciation is computed using the straight-line method over the estimated useful life of thirty years for buildings and the lesser of the useful life or lease term of the improvements. Maintenance and repairs are charged to expense as incurred. The Company determines potential impairment losses in accordance with the provisions of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
Deferred Costs Deferred costs relate to the placement of debt and costs of leasing the shopping centers. Deferred financing costs are amortized using the effective interest method over the term of the related debt. Leasing costs are amortized on a straight-line basis over the term of the related lease.
Capitalized Charges Carrying charges, principally interest and taxes, of land under development and buildings under construction are capitalized by the Company. Interest is capitalized using an interest rate which equals a weighted average interest rate on the Company's indebtedness. Capitalization ceases when construction activities are completed and the property is available for occupancy by tenants and the costs are then depreciated over the estimated useful life of the property. The Company capitalizes certain direct labor charges on identifiable projects, such as certain significant tenant leases. These costs are amortized over the length of the applicable leases.
Revenue Recognition Minimum rental income is recognized on a straight-line basis over the term of the lease agreements regardless of when payments are due and accrued rents are included in rents receivable. Certain lease agreements contain provisions which provide for additional rents based on tenants' sales volume and reimbursement of the tenants' share of real estate taxes and certain common area maintenance costs. These additional rents are reflected on the accrual basis.
Comprehensive Income In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income." The standard establishes additional disclosure for the elements of comprehensive income and a total comprehensive income calculation. Net income as reported by the Company reflects total comprehensive income for the years ended December 31, 1998, 1997 and 1996.
Earnings Per Share Data In 1997, the FASB issued Statement No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock.
Basic Earnings Per Share ("Basic EPS") is based on the weighted average number of common shares of beneficial interest outstanding. The weighted average number of shares outstanding used in the Basic EPS computations was 10,478,793, 10,341,958 and 10,327,795 in 1998, 1997 and 1996, respectively. The Diluted Earnings Per Share ("Diluted EPS") computations have been adjusted to give effect to common share equivalents; specifically, common share options outstanding. The weighted average number of shares outstanding used in the Diluted EPS computations was 10,485,091, 10,348,216 and 10,327,925 in 1998, 1997 and 1996, respectively. The Company's Series A-1 and B Preferred Shares and the majority of the Company's stock options were not included in the Diluted EPS calculation because their impact would be anti-dilutive based on current market prices.
Statements of Cash Flows Cash and cash equivalents include all cash and liquid investments with original maturities of three months or less, primarily consisting of money market accounts and government investments. Cash paid for interest was $22,196,000, $19,715,000, and $16,870,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. KRT intends to maintain its election to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856 to 860 of the Internal Revenue Code. Accordingly, no provision for Federal income taxes has been reflected in the financial statements.
The Company is subject to a Federal excise tax computed on a calendar year basis. The excise tax equals 4% of the excess, if any, of 85% of the Company's ordinary income plus 95% of any capital gain income for the calendar year over cash distributions during the calendar year, as defined. No provision for excise tax has been reflected in the financial statements as no tax was due.
Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to the differences in the cost basis for Federal income tax purposes and in the estimated useful lives used to compute depreciation. The Federal tax basis of the shopping center properties was $533,469,000 as of December 31, 1998.
2. INDEBTEDNESS:
At December 31, 1998 and 1997, the Company had mortgages and notes payable outstanding of $350,141,000 and $255,124,000, respectively.
In 1996, the Company entered into a seven year, secured, fixed rate real estate mortgage loan in the principal amount of $181,700,000 (the "Mortgage Loan"), at a weighted average interest rate of 7.96%, which is inclusive of trustee and servicer fees. The Mortgage Loan is secured by twenty-seven shopping center properties (the "Mortgaged Properties"). The entire outstanding principal balance of the Mortgage Loan is due in June 2003. In 1996, the Company recorded an extraordinary loss on refinancing of $11,052,000 including the write-off of approximately $8,844,000 of unamortized deferred finance costs related to the debt instruments repaid, as well as other costs including prepayment fees, premiums paid on repurchase of the $100 million adjustable rate mortgage loan (the "$100 million REMIC") certificates and professional fees. In connection with the repayment of the $100 million REMIC, the Company sold its interest rate protection agreements. The proceeds received on the sale of the agreements of approximately $3,935,000 reduced the extraordinary loss on debt refinancing. Interest expense for the years ended December 31, 1998, 1997 and 1996 on the accompanying statements of operations is shown net of reimbursements of $0, $0 and $275,000, respectively, relating to the interest rate protection agreements and capitalized interest of $850,000, $947,000 and $252,000, respectively.
As a condition of the Mortgage Loan, the Company was required to establish a Sinking Fund Account and a Capital and TI Reserve Account. The balance in the Sinking Fund Account as of December 31, 1998 and 1997 was $349,000 and $204,000, respectively. All funds in the Capital and TI Reserve Account may be used by the Company to fund capital improvements, repairs, alterations, tenant improvements and leasing commissions at the Mortgaged Properties. The balance in the Capital and TI Reserve Account was $178,000 and $182,000 as of December 31, 1998 and 1997, respectively.
In September 1998, the Company obtained a $65.9 million fixed rate mortgage from Salomon Brothers Realty Corp. This mortgage is secured by nine properties acquired in September, 1998. The mortgage bears a fixed interest rate of 7% per annum and requires monthly payments of interest and principal based on a 30-year amortization. The mortgage matures on October 1, 2008. Pursuant to the mortgage, the Company is required to make monthly escrow payments for the payment of real estate taxes, insurance, tenant improvements and repair reserves. The balance of the tenant improvement and repair reserve account as of December 31, 1998 was $345,000.
In addition, the Company has eleven mortgages outstanding as of December 31, 1998 which were assumed in connection with various acquisitions of certain shopping centers. These mortgages have maturity dates ranging from 1999 through 2009. Nine of the eleven mortgages assumed have fixed interest rates ranging from 7.50% to 10.50%. The outstanding principal balance on these mortgages at December 31, 1998 was approximately $53,527,000. The other two mortgages have interest rates payable at a rate adjusted each year to equal the sum of Moody's A Corporate Bond Index Daily Rate minus 0.125% per annum. The outstanding principal balance on these mortgages at December 31, 1998 was approximately $7,109,000.
In 1998, the Company increased its secured line of credit from Salomon Brothers Realty Corp. to $100 million from $50 million (the "Salomon Facility"). Amounts borrowed under the line bear interest at the one month London Interbank Offering Rate ("LIBOR") plus 175 basis points, which interest rate was 7.30% at December 31, 1998. The weighted average interest rate on the Salomon Facility was 7.29% for the year ending December 31, 1998. As of December 31, 1998, there was $42,000,000 outstanding under this facility and an additional $9,000,000 available for future borrowing. The facility is secured by eighteen of the Company's shopping centers or portions thereof and the due date was extended to July 2000. The Company has an option to extend the facility for an additional year. As a condition of the facility, the Company was required to establish a Repair Reserve Account for immediate and ongoing capital expenditure reserves and replacement reserves. The balance in the Repair Reserve Account was $422,000 as of December 31, 1998.
The Company has a $3.0 million secured line of credit from Bank Leumi Trust Company of New York that expires June 30, 1999. Amounts borrowed under the line will bear interest at 50 basis points above that bank's reference rate which was 7.75% at December 31, 1998. The weighted average interest rate on the Bank Leumi facility was 9.0% for the year ending December 31, 1998. There was no outstanding borrowings under this facility as of December 31, 1998 and $1,000,000 outstanding as of December 31, 1997.
The Company has a $1.0 million unsecured line of credit from First Union National Bank. Amounts borrowed under the line will bear interest at that bank's prime rate. The weighted average interest rate on the First Union facility was 8.16% for the year ending December 31, 1998. There were no outstanding borrowings under this facility as of December 31, 1998 and 1997. The facility was extended through March 31, 1999.
Aggregate principal payments on all outstanding indebtedness are due, as follows:
1999 $ 8,247,000 2000 50,082,000 2001 5,279,000 2002 4,354,000 2003 193,970,000 Thereafter 88,209,000 ------------ $350,141,000 ------------
The carrying values of the long-term debt at December 31, 1998 and 1997 were approximately equal to their respective fair values, as determined by using year-end interest rates and market conditions.
3. RISKS AND UNCERTAINTIES:
The retailing industry has had numerous entities file for bankruptcy protection in recent years. The Company has been affected by the bankruptcy filing of two anchor tenants, Bradlees and Caldor, and several smaller tenants at various properties in the portfolio. Bradlees has since emerged from bankruptcy. The Company monitors each situation closely and believes that it maintains adequate reserves against the risk of uncollectable amounts associated with pre-petition rent, straight-line rental income and expense reimbursements for certain of these tenants. The Company's releasing assumptions provide for the related capital costs of retenanting including capital improvements, tenant allowances and leasing commissions. The Company believes that in the event certain leases are disaffirmed by these anchor tenants, the existing lease terms are at or below market rental rates and could be relet.
Caldor operates three stores representing approximately $2.8 million of the Company's annual revenues. Caldor announced in January 1999 that they would be closing all of their stores and cease operations. The Company is currently waiting to receive notice if any of the three leases will be purchased through the bankruptcy court. The lease for one of the stores is guaranteed by The May Company. Should this lease not be purchased, The May Company will be responsible for the charges in accordance with the lease terms. In the fourth quarter of 1998, the Company recorded a charge of approximately $2.9 million for receivables for straight line rents and pre-petition charges for troubled tenants, primarily relating to the three Caldor stores.
A provision for credit losses is recorded based on management's judgment of tenant creditworthiness. This provision is recorded in operations and maintenance expenses within the accompanying consolidated statements of operations. The activity in the allowance for credit losses during 1998, 1997 and 1996 was as follows:
Balance at Provision Accounts Balance at Beginning for Credit Written End of Year Ended of Year Losses Off Year - ------------------ ----------- ----------- ----------- ----------
December 31, 1998 $1,152,000 $3,443,000 ($2,435,000) $2,160,000
December 31, 1997 $1,245,000 $445,000 ($538,000) $1,152,000
December 31, 1996 $831,000 $717,000 ($303,000) $1,245,000
4. OPERATING LEASES:
The Company's shopping centers are leased to tenants under operating leases with expiration dates extending to the year 2022. Future minimum rentals under noncancellable operating leases, excluding tenant reimbursements of operating expenses and additional contingent rentals based on tenants' sales volume as of December 31, 1998 are as follows:
1999 $61,200,000 2000 $56,241,000 2001 $52,069,000 2002 $46,418,000 2003 $42,289,000 Thereafter $233,816,000
The revenue resulting from straight-line rental income adjustments for the years ended December 31, 1998, 1997 and 1996 was $505,000, $946,000 and $1,149,000, respectively. No tenant represented more than 10% of the minimum rental revenues for 1998, 1997 or 1996.
5. PREFERRED SHARES OF BENEFICIAL INTEREST:
In connection with the purchase of five shopping centers in 1995, the Company issued 11,155 shares of non-voting Series A-1 Increasing Rate Cumulative Convertible Preferred Shares of Beneficial Interest, $0.01 par value per share, of Kranzco Realty Trust (the "Series A-1 Preferred Shares") at a face amount of $11,155,000. The Preferred Shares were valued for accounting purposes based on the fair value of the assets acquired and recorded at approximately $7,976,000, net of issuance costs. The Preferred Shares have an initial distribution rate of 5.0% per annum with increases of 0.25% per annum up to a maximum rate of 6.5% per annum. As of December 31, 1998, the distribution rate on the Preferred Shares is 5.75%. The Company recorded a discount of approximately $467,000 at the time of issuance which represents the present value of the difference between the total distributions to be paid in the seven year period prior to commencement of the perpetual distribution and the perpetual distribution amount for that same seven year period. This amount is accreted on an effective interest method over the seven years through a charge to cumulative net income available for common shareholders. The Preferred Shares are redeemable by the Company at any time at their liquidation preference and are convertible into the Company's Common Shares of Beneficial Interest (the "Common Shares"), at a rate of 16.67% annually commencing in the fifth year, with a maximum of 50% convertible in any one year. The Preferred Shares are convertible into that number of Common Shares as would result in the holder receiving the same amount of distributions from the Common Shares at the applicable conversion dates as they received as a holder of the Preferred Shares, up to a maximum of the greater of 500,000 Common Shares or 5% of the then outstanding Common Shares.
In connection with the acquisition of sixteen shopping centers in 1997, the Company issued 1,183,331 shares of Series B-1 and Series B-2 Cumulative Convertible Preferred Shares of Beneficial Interest (the "Series B Preferred Shares"), par value $0.01 per share, each with a $25.00 per share liquidation preference. These shares were recorded, net of issuance costs, at approximately $29,366,000. The Series
B Preferred Shares have a distribution rate of 9.75% per annum and distributions are paid quarterly in arrears for each calendar quarter on January 20, April 20, July 20 and October 20 of each year. The Series B-1 Preferred Shares are convertible into Common Shares after February 1998 with the following conversion prices: $19.175 in the first year, $18.69 in the second year, $18.20 in the third year, $17.71 in the fourth year and thereafter. In the second quarter of 1998, 54 shares of the Series B Preferred Shares were converted into 70 Common Shares. The Series B-2 Preferred Shares automatically convert into Series B-1 Preferred Shares after the third anniversary date and follow the conversion rates of the Series B-1 Preferred Shares thereafter. The Company also issued 356,400 shares of Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series C Preferred Shares"), par value $0.01 per share, each with a $10.00 liquidation preference. These shares were recorded, net of issuance costs, at approximately $3,560,000. The Series C Preferred Shares have a distribution rate of 8% per annum and distributions are payable quarterly on the last day of January, April, July and October of each year with respect to the immediately preceding calendar quarter. The Company was required to redeem, commencing April 1997, in eight equal quarterly installments all of the outstanding Series C Preferred Shares at a redemption price equal to the $10.00 liquidation price plus an amount equal to the accrued and unpaid distributions, if any, allocable to the Series C Preferred Shares. The final redemption of the Series C Preferred Shares was on January 29, 1999.
In December 1997, the Company issued 1,800,000 shares of 9 1/2% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series D Preferred Shares"), par value $0.01 per share, each with a $25.00 per share liquidation preference. These shares were recorded, net of issuance costs, at approximately $42,945,000. The proceeds of the issuance were used in connection with the acquisition of four shopping centers in December 1997 (approximately $15,774,000), to repay approximately $19,810,000 of indebtedness and for general corporate purposes. In connection with the debt repayment, the Company recorded an extraordinary loss on the early extinguishment of debt of $467,000 including the write-off of approximately $179,000 of unamortized deferred finance costs related to the repaid debt instruments and prepayment fees. The distributions are paid quarterly in arrears for each calendar quarter on January 20, April 20, July 20 and October 20 of each year. The Series D Preferred Shares are not redeemable prior to December 11, 2002. On or after December 11, 2002, the Series D Preferred Shares may be redeemed for cash at the option of the Company at a redemption price of $25.00 per share, plus accrued and unpaid distributions, if any, thereon to the redemption date.
Other than the 54 Series B Preferred Shares discussed above, there was no conversion of preferred shares into common shares of beneficial interest during 1998 or 1997.
6. SHARE OPTION PLANS, INCENTIVE PLAN AND WARRANTS:
The Company has established share option plans for the employees and trustees of the Company. The employees' plan has a maximum of 300,000 shares available for issuance and the trustees' plan has a maximum of 700,000 shares available for issuance. The options are exercisable at a price not less than fair market value at the date of grant and expire ten years after the date of grant.
On June 6, 1995 the shareholders approved the Company's 1995 Incentive Plan. The purpose of the Incentive Plan is to align the interests of the Company's trustees, executive officers, key employees, advisors and consultants with those of the shareholders and to enable the Company to attract, compensate and retain trustees, executive officers, key employees, advisors and consultants and provide them with appropriate incentives and rewards for performance. Awards under the Incentive Plan may take the form of share options ("Options"), including corresponding share appreciation rights ("SARs") and reload options, and in the case of employees, restricted share awards, and share purchase awards. Awards under the Incentive Plan may be granted in combination with other awards. The maximum number of Common Shares that may be the subject of awards under the Incentive Plan is 1,000,000 Common Shares. The Incentive Plan provides that in any given year, the maximum number of Common Shares with respect to which Options or SARs may be granted to any employee is 100,000 Common Shares. During 1998, 1997 and 1996, 13,049, 7,711 and 6,445 restricted shares, respectively, were issued to employees and officers of the Company at the then market price of $18.44, $16.25 and $14.50 per share, respectively. The shares will vest with the employees and be recorded as compensation expense over various periods of time. Compensation expense of $153,000 in 1998, $101,000 in 1997 and $66,000 in 1996 was recognized in connection with these plans.
The following tables show the activity and balances for each share option plan and the incentive plan:
Incentive Plan
1998 1997 1996 --------- --------- ---------
Outstanding, beginning of year 303,000 297,000 285,000 Granted at $19.19 per share 12,000 - - $18.31 per share 1,500 - - $15.25 per share - - 12,000 $16.25 per share - 4,500 - $16.00 per share - 1,500 - Exercised at $15.25 per share (3,000) - - -------- -------- -------- Outstanding, end of year 313,500 303,000 297,000
In connection with the acquisition of certain unaffiliated shopping center properties, the Company issued 191,429 warrants in November 1992 to purchase common shares of beneficial interest. These warrants were exercisable within five years after issuance at $26 per share. No such warrants were exercised and the warrants expired in November 1997.
During 1996, the Company adopted the stock-based compensation accounting standard, "Accounting for Stock-Based Compensation"("SFAS No. 123"). SFAS No. 123 encourages a fair value method of accounting for employee stock options and similar equity instruments. The statement also allows an entity to continue to account for stock-based compensation using the intrinsic value based method in APB Opinion No. 25. As provided for in the statement, the Company elected to continue the intrinsic value method of expense recognition. If compensation cost for these plans had been determined using the fair value method prescribed by SFAS No. 123, the Company's net income (loss) would have reflected the pro forma amounts indicated below.
1998 1997 1996 ---------- ---------- ----------- Net income (loss) for common shareholders $3,852,000 $6,935,000 ($3,295,000) Earnings (loss) per common share $0.37 $0.67 ($0.32)
The pro forma effect on results may not be representative of the impact in future years because the fair value method was not applied to options granted before 1995.
The fair value of each option was estimated on the grant date using the Black-Scholes option pricing model and assumptions including the following weighted-average information presented below.
1998 1997 1996 ---------- --------- ---------- Expected life in years 2.33 2.99 2.33 Risk-free interest rate 5.57% 6.20% 5.28% Volatility 18.26% 19.65% 22.07% Dividend yield 9.06% 9.01% 9.34%
The weighted average fair value of options granted was $1.13 per option in 1998, $1.08 per option in 1997 and $1.13 per option in 1996.
7. RELATED PARTY TRANSACTIONS:
The Company rents office space in Conshohocken, Pennsylvania, under the terms of a net lease from an officer of the Company. The minimum annual rental under the lease is $154,000 and the lease was extended to January 14, 2004. During 1998, 1997 and 1996, the Company paid $154,000 in annual rent, respectively.
In December 1998, the Company terminated an Exchange Offer with New America Network, Inc., a Delaware corporation which conducts business under the name New America International ("NAI"), due to disruptions to the securities markets. In management's opinion, public offerings of small capitalization companies would not be favorable at that time. The Company recorded a $250,000 charge to general and administrative expenses for costs related to the terminated transaction in the fourth quarter of 1998. The Company has a $250,000 note receivable from NAI to reimburse the Company for costs related to the terminated Exchange Offer. Under a separate agreement, the Company invested $1 million for a minority interest in NAI common stock. This investment is accounted for using the cost method. The Chief Executive Officer of NAI is a member of the Company's Board of Trustees. The investment and note receivable are included in other assets in the accompanying consolidated balance sheet.
8. 401 (k) PLAN:
During 1993, the Company adopted a 401(k) Plan covering substantially all of the officers and employees of the Company and subsidiaries which permits participants to defer up to a maximum of 10% of their compensation. The Company, at its discretion, may match up to 50% of the initial five percent of the employees' contributions and may also make an additional discretionary contribution. The employees' contributions, together with contributions from the Company are generally fully vested and are fully funded as of December 31, 1998 and 1997. The Company's contributions to the Plan for the years ended December 31, 1998, 1997 and 1996 were $80,000, $70,000 and $67,000, respectively.
9. ACQUISITIONS AND DISPOSITIONS:
The Company acquired ten shopping centers during the year ended December 31, 1998 for approximately $93,000,000 which were accounted for by the purchase method. The results of operations of each center were included from the respective purchase date. The pro forma financial information presented below may not be indicative of results that would have been reported if the acquisitions had occurred on January 1, 1998 and 1997, respectively. The extraordinary loss recorded in 1997 of $467,000 has been excluded from the pro forma presentation.
Year ended December 31, Year ended December 31, 1998 (Unaudited) 1997 (Unaudited) - ------------------------------------- ----------------------------------- Pro forma total Pro forma total revenues $78,124,000 revenues $76,323,000 Pro forma net income Pro forma net income available for common available for common shareholders $3,478,000 shareholders $4,146,000 Pro forma net income Pro forma net income per common share $0.33 per common share $0.40
The Company acquired twenty shopping centers during the year ended December 31, 1997 for approximately $104,000,000 which were accounted for by the purchase method. The results of operations of each center were included from the respective purchase date. The pro forma financial information presented below may not be indicative of results that would have been reported if the acquisitions had occurred on January 1, 1997 and 1996, respectively. Extraordinary losses recorded in both 1997 and 1996 of $467,000 and $11,052,000, respectively, as well as the $63,000 loss on sale of real estate recorded in 1996, have been excluded from the pro forma presentation.
Year ended December 31, Year ended December 31, 1997 (Unaudited) 1996 (Unaudited) - ------------------------------------- -----------------------------------
Pro forma total Pro forma total revenues $67,067,000 revenues $68,724,000 Pro forma net income Pro forma net income available for common available for common shareholders $6,970,000 shareholders $5,502,000 Pro forma net income Pro forma net income per common share $0.67 per common share $0.53
In August 1998, the Company sold one of its free-standing properties located in Richmond, Virginia, for a sale price of $420,000. The Company recorded a gain on sale of the property of $89,000. In July 1998, the Company sold a parcel of land of approximately 8,500 square feet at one of its properties to a third party buyer. The sales price of the land parcel was $40,000 and the Company recorded a gain on the sale of approximately $20,000.
10. DISTRIBUTIONS ON COMMON AND PREFERRED SHARES OF BENEFICIAL INTEREST:
On December 15, 1998, the Trustees declared a cash distribution of $0.48 per common share, payable to common shareholders of record on December 28, 1998. The distribution of $5,058,000 was paid on January 20, 1999. The Company declared distributions of $1.92 per common share for the year ended December 31, 1998. The Company determined that $1.09 per share of the distributions represented ordinary income to the recipient and $0.83 per share represented a return of capital in 1998.
In December 1997, the Trustees declared a cash distribution of $0.48 per common share, payable to common shareholders of record on December 26, 1997. The distribution of $4,999,000 was paid on January 21, 1998. The Company declared distributions of $1.92 per common share for the year ended December 31, 1997. The Company determined that $1.07 per share of the distributions represented ordinary income to the recipient and $0.85 per share represented a return of capital in 1997.
In December 1996, the Trustees declared a cash distribution of $0.48 per common share, payable to common shareholders of record on December 24, 1996. The distribution of $4,960,000 was paid on January 20, 1997. The Company declared distributions of $1.92 per common share for the year ended December 31, 1996. The Company determined that the entire distribution represented a return of capital in 1996.
The Company accrued the quarterly distribution on the Series A-1 Preferred Shares of $160,000, $153,000 and $146,000 as of December 31, 1998, 1997 and 1996, respectively. These distributions were paid on January 1, 1999, 1998 and 1997, respectively.
The Company accrued $572,000 and $571,000 of the distribution on the Series B Preferred Shares as of December 31, 1998 and 1997, respectively. The distributions were paid on January 20, 1999 and 1998.
The Company accrued $12,000 and $45,000 of the distribution on the Series C Preferred Shares as of December 31, 1998 and 1997, respectively. The distributions were paid on January 29, 1999 and January 30, 1998, respectively.
The Company accrued $848,000 and $242,000 of the distribution on the Series D Preferred Shares as of December 31, 1998 and 1997, respectively. The distributions were paid on January 20, 1999 and 1998.
11. INTERIM RESULTS (Unaudited):
The following presents a summary of the unaudited quarterly financial information for the years ended December 31, 1998 and 1997:
Basic/Diluted Net Income(Loss) Earnings(Loss) For Common Per Common Revenues Shareholders Share ---------- ---------------- --------------
Year ended December 31, 1998 First Quarter $16,707,000 $1,659,000 $0.16 Second Quarter $16,982,000 $1,795,000 $0.17 Third Quarter $17,296,000 $1,946,000 $0.19 Fourth Quarter $20,357,000 ($1,521,000) ($0.14)
Year ended December 31, 1997 First Quarter $13,979,000 $2,001,000 $0.19 Second Quarter $15,259,000 $1,885,000 $0.18 Third Quarter $15,305,000 $1,818,000 $0.18 Fourth Quarter $15,769,000 $1,348,000 $0.13
As a result of tenant bankruptcy filings and a terminated transaction, the Company recorded a total charge of $3.1 million in the fourth quarter of 1998. Per share amounts are based on weighted average shares outstanding each quarter and may not equate to the full year amounts due to increases in shares outstanding.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders and Trustees of Kranzco Realty Trust:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Kranzco Realty Trust and subsidiaries included in this Form 10-K, and have issued our report thereon dated February 22, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The financial statement schedule referred to in Item 14
Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania February 22, 1999
EXHIBIT INDEX Sequentially Numbered Page Exhibit No. Description - -- ----------- 3.1 Amended and Restated Declaration of Kranzco Realty Trust. (Incorporated by reference to Exhibit 3.4 of the Company's Registration Statement No.33-49434.) 3.2 Amendment of Amended and Restated Declaration of Trust, dated December 31, 1995. (Incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 3.3 Amendment No. 2 of Amended and Restated Declaration of Trust, dated June 4, 1997. (Incorporated by reference to Exhibit 4.1(c) of the Company's Registration Statement on Form S-3 filed July 31, 1997.) 3.4 Amended and Restated Bylaws of Kranzco Realty Trust, as amended. 4.1 Specimen certificate for Common Shares of Beneficial Interest. (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement No.33-49434.) 4.2 Articles Supplementary for the Series A Increasing Rate Cumulative Convertible Preferred Shares of Beneficial Interest. (Incorporated by reference to the Company's Report on Form 8-K dated May 4, 1995.) 4.3 Articles Supplementary Classifying 11,155 Shares of Beneficial Interest as Series A-1 Increasing Rate Cumulative Convertible Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit 4.5 of the Company's Registration Statement on Form S-4 No. 333-18249.) 4.4 Articles Supplementary for the Company's Series B-1 Cumulative Convertible Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit 3.4 of the Company's Registration Statement on Form 8-A dated February 27, 1997.) 4.5 Articles Supplementary for the Company's Series B-2 Cumulative Convertible Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-4 No. 333-18249.) 4.6 Articles Supplementary for the Company's Series C Cumulative Redeemable Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-4 No. 333-18249.) 4.7 Articles Supplementary for the Company's Series D Redeemable Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit 3.5 of the Company's Registration Statement on Form 8-A filed December 10, 1997.) 4.8 Specimen of the Company Series D Redeemable Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form 8-A filed December 10, 1997.) 4.9 Specimen of the Company's Rights Certificate. (Incorporated by reference to Exhibit B of Exhibit 10.1 of the Company's Current Report on Form 8-K filed November 12, 1998.) 4.10 Articles Supplementary for the Company's Series E Junior Participating Preferred Shares of Beneficial Interest. (Incorporated by reference to Exhibit A of Exhibit 10.1 of the Company's Current Report on Form 8-K filed November 12, 1998.) 10.1 Kranzco Realty Trust 1992 Employees Share Option Plan, as amended. (Incorporated by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.2 Kranzco Realty Trust 1992 Employees Share Option Plan, amended. (Incorporated by reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.) 10.3 Kranzco Realty Trust 1995 Incentive Plan. (Incorporated by reference to Exhibit 4.4 of the Company's Registration Statement on Form S-8 No. 33-94294.) 10.4 Loan Agreement dated as of February 26, 1997 with Salomon Brothers Realty Corp. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed March 14, 1997.) 10.5 Global Promissory Note dated February 26, 1997 in the amount of $50,000,000 executed in favor of Salomon Brothers Realty Corp. (Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed March 14, 1997.) 10.6 Unlimited Guaranty of Payment dated as of February 26, 1997 issued by Kranzco Realty Trust in favor of Salomon Brothers Realty Corp. (Incorporated by reference to Exhibit 10.3 of the Company's Current Report on Form 8-K filed March 14, 1997.) 10.7 Form of Exemplar Open End Fee and Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing made by the Borrowers for the benefit of Salomon Brothers Realty Corp., and filed in Pennsylvania, New York, Connecticut, Rhode Island, Mississippi, North Carolina, Kentucky, Massachusetts, Minnesota, Arizona, Georgia, and Michigan with respect to Bradford Mall, Bradford, PA; Barn Plaza, Doylestown, Pennsylvania; Circuit City at Mall at Cross County, Yonkers, New York; Parkway Plaza I, Hamden, Connecticut; Valley Forge Mall, Phoenixville, Pennsylvania; Wampanoag Plaza, East Providence, Rhode Island; Brookway Village, Brookhaven, Mississippi; Magnolia Plaza, Morganton, North Carolina; Harrodsburg Marketplace, Harrodsburg, Kentucky; Franklin Center, Chambersburg, Pennsylvania; Ames Center, Raynham, Massachusetts; Baker's Square, Minnetonka, Minnesota; Baker's Square, Roseville, Minnesota; Sinclair Paints, Tucson, Arizona; 30000 Plymouth Road, Livonia, Michigan; Tower Plaza, Georgia; 1615 E. Shotwell Street, Bainbridge Town Center, Georgia; and Filene's Basement at Valley Fair, 260 West Swedesford Road, Devon, Pennsylvania. (Incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K filed March 14, 1997.) 10.8 Trust and Servicing Agreement, dated as of June 18, 1996, among KRT Origination Corp., GE Capital Management Corporation and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.43 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.9 Cash Collateral Account, Security, Pledge and Assignment Agreement, dated as of June 18, 1996, among the Borrowers, State Street Bank and Trust Company, as Agent, and KRT Origination Corp., as Lender. (Incorporated by reference to Exhibit 10.44 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.10 Cash Collateral Agreement, dated June 18, 1996, among the Borrowers, and State Street Bank and Trust Company, as Agent. (Incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 10.11 $123,700,000.00 Class A Mortgage Note dated June 18, 1996 made by the Borrowers in favor of KRT Origination Corp., as Lender. (Incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.12 $20,600,000.00 Class B Mortgage Note dated June 18, 1996 made by the Borrowers in favor of KRT Origination Corp., as Lender. (Incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.13 $28,900,000.00 Class C Mortgage Note dated June 18, 1996 made by the Borrowers in favor of KRT Origination Corp., as Lender. (Incorporated by reference to Exhibit 10.48 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.14 $8,500,000.00 Class D Mortgage Note dated June 18, 1996 made by the Borrowers in favor of KRT Origination Corp., as Lender. (Incorporated by reference to Exhibit 10.49 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.15 Form of Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits made by the Borrowers, as grantor, for the benefit of KRT Origination Corp., as mortgagee, and filed in Connecticut, Maryland, New Jersey, New York and Pennsylvania with respect to Groton Square in Groton, Connecticut, Manchester Kmart in Manchester, Connecticut, Milford in Milford, Connecticut, Orange in Orange, Connecticut, Fox Run in Prince Frederick, Maryland, Hillcrest Plaza in Frederick, Maryland, Anneslie in Baltimore, Maryland, Suburban Plaza in Hamilton, New Jersey, Collegetown in Glassboro, New Jersey, Hillcrest Mall in Phillipsburg, New Jersey, The Mall at Cross County in Yonkers, New York, Highridge Plaza in Yonkers, New York, North Ridge in New Rochelle, New York, Village Square in Larchmont, New York, A&P Mamaroneck in Mamaroneck, New York, Port Washington in Port Washington, New York, Bethlehem in Bethlehem, Pennsylvania, Whitehall Square in Whitehall, , Pennsylvania, Bristol Commerce Park in Bristol, Pennsylvania, Park Hills Plaza in Altoona, Pennsylvania, Barn Plaza in Doylestown, Pennsylvania, Best Plaza in Tredyffrin, Pennsylvania, Bensalem Square in Bensalem, Pennsylvania, Street Road in Bensalem, Pennsylvania, Pilgrim Gardens in Drexel Hill, Pennsylvania, 69th Street Plaza in Upper Darby, Pennsylvania and MacArthur Road in Whitehall, Pennsylvania (the "Properties"). (Incorporated by reference to Exhibit 10.50 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.16 Form of Unrecorded Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits made by the Borrowers, as grantor, for the benefit of KRT Origination Corp., and held in escrow with respect to the Properties located in Maryland and in New York. (Incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.17 Escrow Agreement made among KRT Origination Corp., the Borrowers and Robinson Silverman Pearce Aronsohn & Berman LLP, as escrow agent, with respect to the unrecorded second mortgages covering the Properties located in New York and Maryland. (Incorporated by reference to Exhibit 10.52 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.) 10.18 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Norman M. Kranzdorf. (Incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.19 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Robert H. Dennis. (Incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.20 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Edmund Barrett. (Incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.21 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Bengt Danielsson. (Incorporated by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.22 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Michael Warrington. (Incorporated by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.23 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Michael Kranzdorf. (Incorporated by reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.24 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and Peter J. Linneman. (Incorporated by reference to Exhibit 10.7 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.25 Severance Benefits Agreement dated as of March 28, 1997 by and between Kranzco Realty Trust and E. Donald Shapiro. (Incorporated by reference to Exhibit 10.9 of the Company's Form 10-Q for the quarter ended June 30, 1997.) 10.26 Severance Benefits Agreement dated as of July 30, 1998 by and between Kranzco Realty Trust and Gerald C. Finn. 10.27 Severance Benefits Agreement dated as of July 30, 1998 by and between Kranzco Realty Trust and Bernard J. Korman. 10.28 Agreement dated October 30, 1997 between Kranzco Realty Trust and GP Development Corporation. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.29 Agreement and Plan of Merger dated October 30, 1997 between Kranzco Realty Trust, GP Development Corporation, the shareholders of GP Development Corporation and KR Atlanta, Inc. (Incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.30 Mortgage Note for $6,700,000.00, dated as of October 5, 1990, from Holcomb Bridge Partners, L.P., a Georgia limited partnership ("Holcomb"), in favor of Allstate Life Insurance Company ("Allstate") (relating to Holcomb Bridge Crossing). (Incorporated by reference to Exhibit 2.3 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.31 Modification of Mortgage Note, dated as of October 31, 1995, between Holcomb and Harris Trust and Savings Bank ("Harris Trust") (relating to Holcomb Bridge Crossing). (Incorporated by reference to Exhibit 2.4 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.32 Deed to Secure Debt, Assignment of Leases, Rents and Contracts, Security Agreement and Fixture Filing ("Deed to Secure Debt") from Holcomb to Allstate, dated as of October 5, 1990 (relating to Holcomb Bridge Crossing). (Incorporated by reference to Exhibit 2.5 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.33 Modification of Deed to Secure Debt between Holcomb and Harris Trust, dated as of October 31, 1995 (relating to Holcomb Bridge Crossing). (Incorporated by reference to Exhibit 2.6 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.34 Real Estate Note for $3,725,000.00, dated as of August 6, 1987, from West Stewarts Mill Associates, Ltd., a Georgia limited partnership ("West Stewarts"), in favor of Confederation Life Insurance Company, a mutual insurance company incorporated in Canada ("Confederation"), first amendment thereto dated as of November 27, 1987, second amendment thereto dated as of November 1, 1993, third amendment thereto dated as of November 1, 1993 and fourth amendment thereto dated as of February 21, 1995 (relating to Park Plaza). (Incorparated by reference to Exhibit 2.7 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.35 Deed to Secure Debt and Security Agreement between West Stewarts and Confederation,dated as of August 6, 1987, first amendment thereto dated as of November 27, 1987 and second amendment thereto dated as of November 1, 1993 (relating to Park Plaza). (Incorporated by reference to Exhibit 2.8 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.36 Escrow Agreement, dated as of November 1, 1993, between Confederation and West Stewarts. (Incorporated by reference to Exhibit 2.9 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.37 Promissory Note for $10,670,000.00, dated as of July 31, 1996, from Mableton Village Associates, L.L.C., a Georgia limited liability company ("Mableton Village"), in favor of Lehman Brothers Holdings, Inc. d/b/a Lehman Capital ("Lehman") (relating to The Village at Mableton). (Incorporated by reference to Exhibit 2.10 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.38 Deed to Secure Debt and Security Agreement, dated as of July 31, 1996, between Mableton Village and Lehman (relating to The Village at Mableton). (Incorporated by reference to Exhibit 2.11 of the Company's Current Report on Form 8-K dated November 25, 1997.) 10.39 Sales Contract dated June 26, 1998 by and among Kranzco Realty Trust, a Maryland real estate investment trust, and Europco Property Investors II, Ltd., a Georgia limited partnership; Europco Property Investors III, Ltd., a Georgia limited partnership; Europco Property Investors IV, Ltd., a Georgia limited partnership; Secured Properties Investors V, L.P., a Georgia limited partnership; Secured Properties Investors VIII, L.P., a Georgia limited partnership; Secured Properties Investors IX, L.P. a Georgia limited partnership; and Tifton Partners, L.P., a Georgia limited partnership. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated June 26, 1998, filed July 16, 1998.) 10.40 Fixed Rate Note, dated September 29, 1998, made by the Borrowers named therein in favor of Salomon Brothers Realty Corp. (Incorporated by reference to Exhibit 10.38 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.41 Guaranty, dated as of September 29, 1998, made by and among Kranzco Realty Trust, for the benefit of Salomon Brothers Realty Corp. (Incorporated by reference to Exhibit 10.39 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.42 Form of Mortgage/Deed of Trust/Deed to secure Debt and Security Agreement, dated September 29, 1998, made by the Borrowers named therein for the benefit of Salomon Brothers Realty Corp. and filed in Florida, Georgia, Ohio, Tennessee, and Virginia with respect to Village Oaks, Pensacola, Florida; Vidalia Wal-Mart Center, Vidalia, Georgia; Summerville Wal-Mart Center, Summerville, Georgia; Tifton Corners, Tifton, Georgia; Douglasville Crossing, Douglasville, Georgia; Snellville Oaks, Snellville, Georgia; Pickaway Crossing, Circleville, Ohio; Meeting Square, Jefferson City, Tennessee; and Statler Crossing, Staunton, Virginia. (Incorporated by reference to Exhibit 10.40 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.43 Rights Agreement dated as of November 10, 1998 between Kranzco Realty Trust and First Union National Bank, as Rights Agent. The Rights Agreement includes as Exhibit A the form of Articles Supplementary for the Preferred Shares, as Exhibit B the form of Right Certificate and as Exhibit C the form of Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed November 12, 1998). 21 Subsidiaries of Kranzco Realty Trust. 23 Consent of Arthur Andersen LLP.