SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT No.1
(Mark One)
\X \ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission File No. 1-6309
HRE PROPERTIES
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-245-8042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 FIFTH AVENUE
NEW YORK, NEW YORK 10036
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 642-4800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares, without par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes \x\ No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. \x\
State the aggregate market value of the voting stock held
by non-affiliates of the Registrant ($50,974,477.00 as of January 12, 1995).
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest practicable date:
5,341,696 Common Shares, without par value, as of January 12, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held on
March 15, 1995 (certain parts as indicated herein) (Part III).
Item VI.Selected Financial Data.
(In thousands, except per share data)
Year Ended October 31, 1994 1993 1992 1991 1990
Total Assets $142,559 $119,330 $137,855 $130,727 $135,342
Mortgage Notes, Bank Loan
and Other Long-term
Obligations $ 51,386 $ 24,227 $ 31,226 $ 20,534 $ 20,711
Revenues $ 18,969 $ 16,162 $ 16,942 $ 17,136 $ 17,902
Operating Income (Loss) $ 1,262 $ (7,293) $ 1,588 $ 892 $ 2,247
Gains on Sales of
Properties $ 82 $ 2,330 $ -- $ 2,205 $ 1,622
Net Income (Loss) $ 1,344 $ (4,963) $ 1,588 $ 3,097 $ 3,869
Funds From Operations* $ 7,950 $ 7,036 $ 6,902 $ 7,841 $ 8,998
Per Share Data:
Net Income (Loss) $ .26 $(.94) $.30 $.58 $.70
Cash Dividends $1.10 $1.08 $1.16 $1.40 $1.60
* See Item VII for definition of Funds from Operations
Item VII. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Trust meets its liquidity requirements primarily by generating cash from
the operations of its properties, sale of real estate investments and
collection of principal and interest on its mortgage notes receivable.
Payments of expenses related to real estate operations, capital improvement
programs, debt service, management and professional fees, and dividend
requirements place demands on the Trust's liquidity.
The Trust believes that the financial resources currently available to it
are sufficient to meet all of its known obligations and commitments
and to make additional real estate investments when appropriate opportunities
arise. At October 31, 1994, the Trust had $8.7 million in cash and cash
equivalents. The Trust also has available $17 million in unsecured lines
of credit, (including an increase of $2 million in one such line of credit
subsequent to year end) with two major commercial banks. Long-term debt
consisted of eight mortgage notes payable totalling $46.4 million, of which
$411,000 in principal payments are due in fiscal 1995. Current liabilities,
including current installments of principal payments of mortgage notes
payable, and short-term borrowings under the creditlines, were approximately
$6.4 million. The credit lines are available to finance the acquisition,
management or development of commercial real estate and a portion of
such credit lines is available for working capital purposes.
The credit lines expire at various periods in 1995 and outstanding borrowings,
if any, may be repaid from proceeds of additional debt financings or sales
of properties. The Trust may also request that the time
for repayment be extended by the banks. It is the Trust's intent to renew
these credit lines as they expire in 1995. During fiscal 1994,
the Trust obtained proceeds of $22.5 million from first mortgage loan
financings. The loans are collateralized by three of the Trust's
properties having a net carrying value of $34.9 million at October 31, 1994.
The mortgage loans bear interest at fixed rates that range from 7.5%
to 9.75% and mature in five to seven years.
In fiscal 1994, the Trust sold its distribution property located in Memphis,
Tennessee, for $450,000, all cash. The Trust realized a gain on the sale of
property of $82,000. In December 1994, the Trust also sold a mortgage note
receivable for net proceeds of $3,750,000 (See Results of Operations for
further discussion).
The Trust has entered into contracts to sell four of its distribution and
service properties to a single purchaser for an aggregate sale price
of $13.5 million. The Trust has also contracted to sell a 106,000
square foot retail property for $7.5 million. The transactions
are expected to close in fiscal 1995. The proceeds from such sales may be
used to make additional real estate investments and/or reduce outstanding
mortgage loan indebtedness or meet dividend distribution requirements.
The Trust acquired two properties in fiscal 1994 at a total cost of $25.8
million. Funds for the acquisitions were provided principally from first
mortgage note proceeds of $15 million and available cash, including
$5 million drawn from a credit line. The Trust expects to make additional
real estate investments periodically. The funds for such investments
may come from existing liquid assets, line of credit arrangements, proceeds
from property sales, financing of acquired or existing properties
or the sale of mortgage notes receivable. Subsequent to fiscal 1994,
the Trust contracted to acquire a 193,000 square foot shopping center in
Danbury, Connecticut. The property will be acquired at a purchase price of
$19.25 million and funded through a first mortgage loan of $11.25 million
and available cash. The first mortgage will bear interest at 9.5% per annum
and mature in five years. The acquisition is scheduled to be completed in the
first quarter of fiscal 1995. The Trust also invests in its existing
properties and, during fiscal 1994, spent approximately $1.8 million
on its properties for capital improvement and leasing costs.
The Trust expects to invest similar amounts in the next fiscal year.
Funds from Operations
The Trust defines "Funds from Operations" as net income (computed in
accordance with generally accepted accounting principles), excluding
gains (or losses) from debt restructuring and sales of properties, plus
depreciation and amortization, and after adjustments for unconsolidated
joint ventures. The Trust believes the level of Funds from Operations to be
an appropriate supplemental financial measure of its operating performance.
Funds from Operations does not represent cash flows from operations as
defined by generally accepted accounting principles, is not indicative
that cash flows are adequate to fund all cash needs and is not considered to
be an alternative to net income. The Trust considers recoveries of investment
in properties owned subject to financing leases to be analogous to amortization
for purposes of calculating Funds from Operations. In fiscal 1994, Funds from
Operations increased 13% to $7,950,000 from $7,036,000 in the year ago period.
The improvement is primarily the result of the positive effect of the Trust's
new retail property investments in fiscal 1994 and late 1993.
Results of Operations
Fiscal 1994 vs. Fiscal 1993
Revenues
Total revenues were $18,969,000 in fiscal 1994 compared to $16,162,000 in
1993 and $16,942,000 in 1992. Rental income in fiscal 1994, including the
income portion of rental received in respect of direct finance leases,
comprised 94% of total revenues. Rental income from retail properties
increased 53% to $11.5 million from $7.5 million in fiscal 1993.
Retail property acquired in fiscal 1994 and late 1993 produced additional rents
of $3.9 million in fiscal 1994. The Trust's overall retail property
occupancy levels were generally unchanged from last year.
Gross rents from office property investments decreased nearly 20% to
$4.9 million in fiscal 1994 compared to $6.1 million a year ago, reflecting
the disposition in fiscal 1993 of the Trust's former office building
investment in Portland, Oregon and lower occupancy
during the year at the Trust's Denver, Colorado office building.
The Trust recently signed leases totalling 62,000 square feet of leasable
space at the Denver property and the building is currently 95% occupied.
Expenses
Total expenses were $17,727,000 in fiscal 1994, compared to $23,470,000 in
fiscal 1993. Included in expenses in fiscal 1994 and 1993 are
write-downs in the carrying values of investments of $1,086,000 and $8,285,000,
respectively.(see discussion below.)
The largest expense category is operating expenses of the Trust's real
estate operating properties. Operating expenses totalled $7,205,000
in fiscal 1994, compared to $6,311,000 in 1993. Expenses were generally
unchanged for properties owned during both 1994 and 1993.
Operating expenses for the Trust's new retail properties added
expenses of $1,231,000 in fiscal 1994. The prior year's expenses included
$548,000 for operating expenses of the Trust's office building
property in Portland, Oregon that was disposed of during fiscal 1993.
Interest expense rose $1,281,000 in fiscal 1994 due to the
addition of three new mortgage notes payable aggregating $22.5 million.
The mortgage notes bear interest at annual rates ranging
from 7.5% to 9.75%. In fiscal 1993, the Trust satisfied in foreclosure
a 10 3/4% mortgage loan with an outstanding principal balance of
$13.5 million.
General and administrative expenses decreased in fiscal 1994 as a result of
the Trust's decision to redeploy certain of its available staff
resources from administrative and asset management functions to direct
property management activities at certain of its retail properties.
The properties were managed previously by third-party management firms
under fee arrangements.
The decrease in consulting fee expense resulted from the termination in
fiscal 1993 of a consulting arrangement with a trustee.
In fiscal 1994, the Trust determined that the long-term economic prospects
for an office building collateralized by a participating mortgage
note receivable held by the Trust in the outstanding principal amount of
$4,836,000 had declined. As a result, the Trust decided to offer the mortgage
note for sale. In this connection, the Trust recorded a charge in fiscal 1994
of $1,086,000 to reflect the mortgage note at its net realizable value.
In December 1994, the mortgage note was sold for net proceeds of $3,750,000.
Fiscal 1993 vs. Fiscal 1992
Revenues
Operating lease income was lower in fiscal 1993 compared to the prior year
primarily as a result of the disposition in that year of the Trust's
office building investment in Portland, Oregon. The Trust discontinued
recording the revenues and expenses of the property after
a receiver was appointed for the property in connection with a foreclosure
proceeding. Rents from other office building investments
reflected lower occupancy especially at the trust's office building in
Denver, Colorado where a tenant occupying 34,000 square feet
of space failed to renew its lease upon expiration. Revenues from retail
properties increased by approximately 14.7% reflecting
income earned from recent shopping centers acquisitions by the Trust and
improved occupancy at the Trust's Newington, New Hampshire property.
Interest income decreased principally from lower rates of return on
short-term investments and lower levels of cash and cash equivalents
available for short-term investment. Interest earned from a loan to an
unconsolidated joint venture decreased when the loan in the
principal amount of $800,000 became non-performing and was subsequently
written off during the year.
Expenses
Real estate operating expenses include the effect of the additional expenses
of shopping centers acquired by the Trust and the discontinued recording of
expenses of the Portland office building earlier in the year.
The increase in net interest expense resulted from the addition of two
mortgage notes payable totaling $11.65 million at an average annual
interest rate of 9.36% and the satisfaction in foreclosure of a nonrecourse
mortgage loan with an outstanding balance of $13.5 million.
In light of continued adverse office market conditions including excess
supply of available space, weak tenant demand, declining rents, expected
capital requirements and known debt service obligations, the Trust determined
in fiscal 1993 that the additional funds required to meet capital
and debt service obligations was not justified by the near-term prospects
for its office building investment in Portland, Oregon which was encumbered
with a mortgage note payable of $13.5 million.
The Trust commenced discussions with the lender to the property, seeking
among other things, modifications to the mortgage note
payable to more closely reflect the then current market conditions for
similar debt obligations. The office building was owned by a joint
venture in which the Trust held a 92% interest. The joint venture elected
not to make debt service payments on its mortgage loan obligation and, as a
result, the mortgagee filed an action seeking foreclosure
of the property. In fiscal 1993, the Trust determined that the long term
economic prospects of the property did not warrant additional investment
and decided to allow the foreclosure to proceed. Subsequently, the mortgagee
obtained a foreclosure judgment and the property was sold. As a result
of these developments, the Trust recorded a charge of $2.6 million in fiscal
1993 to reflect the property's carrying value at its estimated fair value.
For similar reasons discussed above, the Trust, in fiscal 1993 changed its
investment strategy with respect to an unconsolidated joint venture and
reached an agreement to sell its 50% interest in the joint
venture to its partner for $250,000. The joint venture owned an
office building located in Santa Ana, California. In this connection, the
Trust recorded a charge of $4,885,000 to reflect its investment
in the unconsolidated joint venture at net realizable value.
The Trust also wrote off an $800,000 second mortgage loan investment to
another unconsolidated joint venture in which the Trust had a 50% interest.
The mortgage loan became non performing as to principal and interest in
fiscal 1993 as a result of lower tenancy and the joint venture's
inability to meet the debt obligations of the first mortgage loan.
Subsequent to fiscal 1993, the joint venture was liquidated following a
foreclosure of the property by the first mortgage lender to the property.
The Trust recorded a gain on sale of properties of $2.3 million or $.44 per
share in connection with a sale of the Trust's 62,000 square foot
retail property located in Los Angeles, California.
Item 14a.(1) - Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
October 31,
ASSETS 1994 1993
Real Estate Investments:
Properties owned at cost, net of accumulated depreciation
and recoveries $ 114,197 $ 99,279
Properties held for sale 6,434 --
Investments in and loans to unconsolidated joint ventures -- 250
Mortgage notes receivable 7,763 8,917
128,394 108,446
Cash and cash equivalents 8,738 7,061
Interest and rent receivable 2,343 1,304
Deferred charges, net of accumulated amortization 2,108 1,796
Other assets 976 723
$142,559 $119,330
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities:
Mortgage notes payable and bank loan $ 51,386 $ 24,227
Accounts payable and accrued expenses 1,024 847
Deferred trustees fees 521 602
Other liabilities 1,147 958
54,078 26,634
Shareholders Equity:
Preferred shares, without par value; 2,000,000 shares authorized; none issued
Common shares, without par value; unlimited shares authorized; 5,520,044
and 5,498,454 issued in 1994 and 1993, respectively 123,507 123,205
Less 178,348 common shares held in treasury, at cost (2,861) (2,861)
Distributions in excess of accumulated net income (32,165) (27,648)
88,481 92,696
$142,559 $119,330
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended October 31,
1994 1993 1992
Revenues:
Operating leases $16,498 $13,763 $14,477
Financing leases 1,392 1,520 1,638
Interest 1,079 1,122 1,232
Interest from and equity in losses of unconsolidated
joint ventures -- (243) (405)
18,969 16,162 16,942
Operating Expenses:
Real estate operations 7,205 6,311 6,426
Interest 3,775 2,494 2,318
Depreciation and amortization 4,075 4,363 4,481
General and administrative expenses 1,423 1,723 1,885
Trustees fees and expenses 163 149 131
Consulting fee -- 145 138
Write-down in carrying value of investments 1,086 8,285 --
17,727 23,470 15,379
Operating Income(Loss) before Minority Interests 1,242 (7,308) 1,563
Minority Interests in Results of Consolidated Joint Ventures 20 15 25
Operating Income(Loss) 1,262 (7,293) 1,588
Gains on Sales of Properties 82 2,330
Net Income(Loss) $ 1,344 $(4,963) $1,588
Net Income(Loss) Per Common Share:
Operating income(loss) $ .24 $ (1.38) $ .30
Gains on sales of properties .02 .44 -
Net Income(Loss) $ .26 $ (.94) $ .30
Weighted Average Number of Common Shares Outstanding 5,330 5,296 5,285
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended October 31,
1994 1993 1992
Operating Activities:
Net income(loss) $ 1,344 $(4,963) $ 1,588
Adjustments to reconcile net income(loss) to net cash provided
by operating activities:
Depreciation and amortization 4,151 4,448 4,568
Recovery of investment in properties owned
subject to financing leases 1,471 1,342 1,225
Equity in losses of unconsolidated joint venture -- 269 506
Minority interests in results of consolidated joint ventures (20) (15) (25)
Gains on sales of properties (82) (2,330) --
Write-down in carrying value of investments 1,086 8,285 --
7,950 7,036 7,862
Changes in operating assets and liabilities:
(Increase) decrease in interest and rent receivable (1039) (286) 142
Increase (decrease) in accounts payable and accrued expenses 97 (463) 114
(Increase) decrease in other assets and other liabilities, net (619) 253 (236)
Net Cash Provided by Operating Activities 6,389 6,540 7,882
Investing Activities:
Acquisition of properties owned (25,816) (6,197) (15,881)
Improvements to existing properties owned and deferred charges (1,764) (1,521) (1,564)
Investments in and loans to unconsolidated joint ventures -- (100) (1,624)
Proceeds from sales of properties and investment in
unconsolidated joint venture and contract deposit 1,204 3,231 --
Payments received on mortgage notes receivable 68 61 53
Miscellaneous (4) 66 (204)
Net Cash Used in Investing Activities (26,312) (4,460) (19,220)
Financing Activities:
Proceeds from mortgage notes and bank loan 27,500 6,600 11,650
Dividends paid (5,861) (5,718) (6,129)
Proceeds from sales of additional common shares 302 459 245
Payments on mortgage notes and other (341) (818) (199)
Net Cash Provided by Financing Activities 21,600 523 5,567
Net Increase (Decrease) In Cash and Cash Equivalents 1,677 2,603 (5,771)
Cash and Cash Equivalents at Beginning of Year 7,061 4,458 10,229
Cash and Cash Equivalents at End of Year $ 8,738 $ 7,061 $ 4,458
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except shares and per share data)
Common Shares
(Distributions
Treasury In Excess of
Outstanding Issued Shares, Accumulated
Number Amount at Cost Net Income) Total
Balances October 31, 1991 5,276,569 $122,345 $(2,705) $(12,426) $107,214
Net income 1,588 1,588
Cash dividends declared ($1.16 per share) (6,129) (6,129)
Sale of additional common shares under
dividend reinvestment plan 19,540 245 245
Balances October 31, 1992 5,296,109 122,590 (2,705) (16,967) 102,918
Net (loss) (4,963) (4,963)
Cash dividends declared ($1.08 per share) (5,718) (5,718)
Sale of additional common shares under
dividend reinvestment plan 32,247 459 459
Common shares acquired in cancellation
of stock option loan (8,250) 156 (156)
Balances October 31, 1993 5,320,106 123,205 (2,861) (27,648) 92,696
Net Income 1,344 1,344
Cash dividends declared ($1.10 per share) (5,861) (5,861)
Sale of additional common shares under
dividend reinvestment plan 18,048 261 261
Common shares issued upon
exercise of stock options 3,542 41 41
Balances October 31, 1994 5,341,696 $123,507 $(2,861) $(32,165) $88,481
The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of HRE Properties
(the Trust), its wholly-owned subsidiary, and certain joint ventures
where the Trust has the ability to control the affairs of the venture. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Accounting for Leases
The Trust accounts for its leases of real property in accordance with the
provisions of Financial Accounting Standards Statement No. 13, Accounting
for Leases, as amended. This Statement sets forth specific criteria for
determining whether a lease should be accounted for as an operating lease or
a direct financing lease. In general, the financing lease method applies
where property is under long-term lease to a creditworthy tenant
and the present value of the minimum required lease payments
at the inception of a lease is at least 90% of the market value of the
property leased. Other leases are accounted for as operating leases.
Federal Income Taxes
The Trust believes it qualifies and intends to continue to qualify as a real
estate investment trust under the Internal Revenue Code. The Trust has
distributed all of its taxable income for the fiscal years
through 1994. Accordingly, no provision has been made for Federal income
taxes in the accompanying consolidated financial statements.
Taxable income of the Trust prior to the dividends paid deduction for the
years ended October 31,1994, 1993 and 1992 was approximately
$2,200,000, $3,900,000 and $2,000,000, respectively. The
difference between net income for financial reporting purposes and taxable
income results from, among other things, different methods of accounting
for leases, depreciable lives related to the properties
owned and accounting differences related to the Trusts
investments in joint ventures. At October 31,1994, the Trust had
available capital loss carryovers of approximately $5,000,000 which expire
in 1999.
Depreciation and Amortization
The Trust uses the straight-line method for depreciation and amortization.
Acquisition costs and general improvement costs are depreciated
over the estimated useful lives of the properties, which range from
30 to 45 years. Furniture and equipment are depreciated over their
estimated useful lives, which range from 3 to 20 years. Tenant improvements,
deferred leasing costs and leasehold improvements are amortized over the life
of the related leases. All other deferred charges are amortized over the
terms of the agreements to which they relate.
Properties Held for Sale
Properties held for sale are carried at the lower of cost or fair value less
estimated costs of disposal. A property is classified as held for sale upon
determination by the Trustees that the property is to be sold.
Capitalization
The Trust capitalizes all direct costs relating to the acquisition of real
estate investments and costs relating to improvements to properties.
The Trust also capitalizes all direct costs relating to its
successful leasing activities.
Income Recognition
Rental income is generally recognized based on the terms of leases entered
into with tenants. Rental income from leases with scheduled
rent increases is recognized on a straight-line basis over the lease
term. Additional rents which are provided for in leases, are recognized as
income when earned and their amounts can be reasonably estimated.
Interest income is recognized as it is earned. Gains on sales
of properties are recorded when the criteria for recognizing such gains
under generally accepted accounting principles have been met.
Statements of Cash Flows
The Trust considers short-term investments with maturities of 90 days or
less to be cash equivalents.
Allowance For Possible Investment Losses
The Trust's real estate investments are recorded at the lower of depreciated
historical cost or estimated net realizable values. The Trust
periodically reviews each of its investments for declines in net
realizable values, to amounts below recorded balances, based on its present
investment strategies. Future changes in such investment strategies and
other circumstances may affect estimates of net
realizable values and therefore the carrying amount of investments.
Net Income Per Common Share
Computations of net income per common share are based on the weighted
average number of common shares outstanding during the respective periods.
The additional shares issuable upon exercise of stock options (see Note 7)
have not been included in the computations since
their effect is immaterial.
(2) REAL ESTATE INVESTMENTS
The Trusts investments in real estate were composed of the following at
October 31, 1994 and 1993 (in thousands):
Mortgage
Properties Notes 1994 1993
Receivable Totals Totals
Retail $ 80,819 $ 4,013 $ 84,832 $ 61,860
Office 22,947 3,750 26,697 27,862
Distribution and Service 15,361 15,361 17,220
Undeveloped Land 1,504 1,504 1,504
$120,631 $ 7,763 $ 128,394 $108,446
The Trusts investments at October 31, 1994, consisted of equity interests in
23 properties which are located in various regions throughout the United
States and mortgage notes. The following is a summary of the geographic
locations of the Trusts investments at October 31, 1994 and 1993 (in thousands):
1994 1993
Northeast $66,963 $43,953
Southeast 22,464 23,225
Midwest 13,124 14,321
Rocky Mountain 11,887 11,954
Southwest 10,678 11,295
Pacific Coast 2,070 2,369
Pacific Northwest 1,208 1,329
$128,394 $108,446
(3) PROPERTIES
Space at properties owned by the Trust is generally leased to various
individual tenants under short-and intermediate term leases which are
accounted for as operating leases. Certain properties have been leased on a
long term basis to a single tenant; these leases are generally
accounted for as direct financing leases.
Prior to fiscal 1994, the Trust had a 92% joint venture interest in an
office building, which property was subject to a nonrecourse first mortgage
loan with an outstanding principal balance of $13,540,000.
During fiscal 1993, the joint venture elected not to make required debt
service payments in an attempt to renegotiate the mortgage loan with the
lender. Subsequently, the lender refused to renegotiate the terms of the
mortgage loan and foreclosed on the property. The Trust wrote down the
carrying amount in this property to its estimated fair value which
approximated the related mortgage note payable balance at the
time of foreclosure. This write-down amounted to approximately $2.6 million and
is included in "Write-down in carrying value of investments" in the
accompanying 1993 consolidated statements of income. The foreclosure of the
property and the satisfaction of the mortgage note payable represented a
noncash financing activity and therefore was not included
in the accompanying 1993 consolidated statement of cash flows.
In 1994, the Trust acquired two properties for an aggregate purchase price
of $25.8 million. The acquisitions were financed principally from available
cash and cash equivalents and a $15 million nonrecourse first mortgage loan.
At October 31, 1994 and 1993 properties consisted of the following (in
thousands):
1994 1993
Properties subject to operating leases $ 105,912 $ 83,089
Properties subject to direct financing leases 14,719 16,190
$ 120,631 $ 99,279
In fiscal 1994, the Trust decided to sell five of its properties and at
October 31,1994 such properties were classified as held for sale.
Operating Leases
The components of properties subject to operating leases were as follows (in thousands):
1994 1993
Land $ 21,047 $ 16,085
Buildings and improvements 111,038 89,841
132,085 105,926
Accumulated depreciation (26,173) (22,837)
$ 105,912 $ 83,089
Minimum rental payments on noncancellable operating leases become due as
follows: 1995 $13,300,000; 1996 $12,717,000; 1997 $11,661,000;
1998 $10,414,000; 1999 $9,369,000; and thereafter $41,719,000.
In addition to minimum rental payments, certain tenants are required to pay
additional rental amounts based on increases in property operating expenses
and/or their share of the costs of maintaining common areas. Certain of the
Trusts leases provide for the payment of additional rent based on a
percentage of the tenants revenues. Such additional rents
are included in rental income and aggregated approximately $515,000,
$559,000, and $529,000 in 1994, 1993 and 1992,respectively.
Direct Financing Leases
The components of properties subject to direct financing leases were
as follows (in thousands):
1994 1993
Total remaining minimum lease payments to be received $11,465 $14,328
Assumed residual values of leased property 6,675 6,675
Unearned income (3,421) (4,813)
Investment in property subject to financing leases $14,719 $16,190
Original cost of property subject to financing leases $26,737 $26,737
Assumed residual values are based upon a depreciated cost concept using
estimated useful lives and thus do not contain an element of
appreciation which may result by reason of inflation or other factors.
Minimum lease payments receivable on direct financing leases become due at a
rate of $2,810,000 in 1995, $2,454,000 in 1996, $1,734,000 in 1997,
$1,468,000 in 1998, $1,468,000 in 1999, and $1,531,000 thereafter.
Annual rental payments of approximately $2.5 million are received from one
tenant which leases distribution space under direct financing lease
arrangements.
(4) INVESTMENTS IN AND LOANS TO UNCONSOLIDATED JOINT VENTURES
Prior to fiscal 1994, the Trust had interests in two unconsolidated joint
ventures which owned office buildings located in Santa Ana, California
and Charlotte, North Carolina, respectively. Both properties were subject
to nonrecourse first mortgage loans. The Trust has accounted for these
joint venture investments on the equity method of accounting. In
fiscal 1993, the Trust determined that the additional funds required to meet
expected capital requirements and debt service obligations of the
Santa Ana joint venture were not justified by its near-term prospects and, as
a result, in fiscal 1993 changed its investment strategy with respect
to the joint venture and sold its ownership interest to its joint venture
partner for $250,000. Accordingly in fiscal 1993, the Trust recorded a
charge in the accompanying 1993 consolidated statement of income of $4,885,000
to write down the carrying value of the Trust's investment in the
unconsolidated joint venture to its net realizable value.
In fiscal 1993,The Trust also wrote down the carrying value of an $800,000
second mortgage loan to the Charlotte joint venture to zero. The loan
became non-performing as to principal and interest during fiscal 1993 as a
result of lower tenancy at the property and the joint venture's inability
to meet the debt service obligations of the first mortgage loan. Subsequent
to fiscal 1993, the joint venture was liquidated following a foreclosure
of the property by the first mortgage lender to the property.
(5) MORTGAGE NOTES RECEIVABLE
The Trusts portfolio of mortgage notes receivable consists of fixed rate
mortgages and one participating mortgage. The participating mortgage
($4,836,000) entitles the Trust to a fixed rate of interest plus a
participation in increases in the property's income and market value.
The participating mortgage note is collateralized by an office property. In
fiscal 1994,the Trust determined that the long-term outlook for the property
had declined due, among other things, to significant tenant turnover.
As a result of these circumstances, the Trust changed its investment strategy
with respect to this asset and decided to offer the mortgage loan for
sale and, in December 1994, the mortgage loan was sold for net
proceeds of $3,750,000. Accordingly, in fiscal 1994 the carrying value of
the mortgage loan was written down to its selling price. In this connection,
the Trust recorded a charge of $1,086,000, which charge is reflected in
"Write-down in carrying value of investments" in the accompanying 1994
consolidated statement of income. The components of the mortgage notes
receivable at October 31, 1994 and 1993 were as follows (in thousands):
1994 1993
Remaining principal balance $ 9,946 $10,066
less: Write down of Mortgage Note Receivable (see above) ( 1,086) --
Unamortized discounts to reflect market interest rates at time of acceptance of notes ( 1,097) (1,149)
$ 7,763 $ 8,917
Principal payments on mortgage notes receivable become due as follows:
1995 $132,000; 1996 $144,000; 1997 $158,000; 1998 $172,000;
1999 $189,000; thereafter $9,151,000.
At October 31, 1994, the remaining principal balance was due from four
borrowers. The amount due from the largest individual borrower at
October 31, 1994 was $4,836,000.
The contractual interest rates on mortgage notes receivable range from 9% to
14%, and the weighted average interest rate of all such mortgages
was 12% at October 31, 1994 and 1993.
(6) MORTGAGE NOTES PAYABLE AND BANK LINE OF CREDIT
Mortgage notes payable consisted of the following at October 31, 1994 and
1993 (in thousands):
1994 1993
7.5% note with interest only due monthly, until 11/1/95; thereafter installments
of principal and interest of $120,840 due monthly until maturity in 1998. $ 15,000 $ --
7.56% note with principal installments of $12,500 plus interest due monthly until
maturity in 2001. 2,888 --
9.75% note with installments of principal and interest of $39,143 due monthly
until maturity in 2001. 4,497 --
8.25% note with installments of principal and interest of $4,731 due monthly until
maturity in 1998. 592 599
9.625% note with interest only due monthly; the principal is due at maturity
in 1997. 9,100 9,100
8.5% note with installments of principal and interest of $19,607 due monthly
until maturity in 1997. 2,506 2,528
9.75% note with interest only due monthly; the principal is due at maturity
in 1997. 6,000 6,000
Variable rate note with principal installments of $16,419 plus interest at prime minus
.25% due monthly until maturity in 2000.(See below). 5,803 6,000
$46,386 $24,227
Mortgage notes payable are collateralized by various real estate investments
having a net carrying value of $73,481,000 as of October 31, 1994.
All mortgage notes payable are nonrecourse except the variable rate note for
which the Trust has guaranteed the repayment of $1.5 million of
principal and all unpaid and accrued interest thereon. In connection
with the variable rate note, the Trust has entered into an interest rate
swap agreement in the notional amount of $6 million. Under the terms of the
swap agreement, the Trust has agreed to pay interest at an
annual rate of 7.55% on the notional amount in exchange for interest at
prime minus 1/4% on the notional amount. This agreement which matures
in 2000, effectively fixes the interest rate at 7.55% for the term of the
note.
Scheduled principal payments during the next five years are as follows:
1995 $411,000; 1996 $765,000; 1997 $18,326,000; 1998 $15,234,000;
1999 $394,000; and thereafter $11,256,000.
At October 31, 1994, the Trust had available $15 million in unsecured lines of
credit with two commercial banks and in December, 1994, increased one such
line of credit from $5 million to $7 million. The lines of credit
expire at various dates in fiscal 1995 and bear interest at
rates tied to the prime rate or LIBOR(8.75% at October 31, 1994). The Trust
pays fees of 1/4% per annum on the unused portions of the line of credit
commitments. In connection with one of the commitments, the Trust has
agreed to maintain certain deposit account balances with a bank.
At October 31, 1994 the Trust had outstanding borrowings of $5,000,000
under the line of credit agreements (none at October 31,1993).
Interest paid for the years ended October 31, 1994, 1993 and 1992 was,
$3,775,000, $2,494,000 and $2,318,000 respectively.
(7) STOCK OPTIONS AND SHAREHOLDER RIGHTS PLAN
At October 31, 1994, 460,333 shares of the Trusts authorized but unissued
stock were reserved for issuance to key employees of the Trust and certain
non-employee trustees under the Trusts stock option plan. Options are granted at
fair market value on the date of the grant and are generally exercisable in
installments over a maximum period of four years from the date of grant.
A summary of stock options at October 31, 1994 and 1993 is as follows:
Number Option Price
of Shares Per Share
Outstanding at October 31,
1994 331,082 $11.38-$27.00
1993 270,917 $11.38-$27.00
Exercisable at October 31, 1994 194,729 $11.38-$27.00
No accounting recognition is given to stock options until they are exercised,
at which time the proceeds are credited to shareholders equity. During the
years ended October 31, 1994 and 1993, options to purchase 3,542
common shares (none in 1993) were exercised.
Stock appreciation rights may be issued in tandem with the stock options,
in which case, either the option or the right can be exercised. Such rights
entitle the grantee to payment in cash or a combination of
common shares and cash equal to the increase in the value of the
shares covered by the option to which the stock appreciation right is
related. The plan limits the value of the stock appreciation rights
to 150% of the option price for the related shares. The excess of the
market price of the shares over the exercise price of vested options is
charged to expense. For the years ended October 31, 1994, l993 and 1992,
there were no amounts charged to expense.
The Board of Trustees adopted a Preferred Share Purchase Rights Plan in 1988.
In this connection, the Board of Trustees declared a dividend distribution of
one preferred share purchase right for each outstanding common share. The
rights, which expire on November 13, 1998, are not currently exercisable.
When they are exercisable, the holder will be entitled to purchase from the
Trust one one-hundredth of a share of a newly-established Series A
Participating Preferred Stock at a price of $65 per one one-hundredth of a
preferred share, subject to certain adjustments. The rights will
become exercisable 10 days after a person or group either acquires 20%
(acquiring person) or more of the Trusts shares, or announces an offer the
consummation of which would result in such person or group owning 30% or more of
the shares. Following any such 20% acquisition, shareholders other than the
acquiring person will be entitled to use the
rights to purchase common shares of the Trust at 50% of market value.
If the Trust is involved in a merger or other business combination at any
time after the rights become exercisable, the rights will be modified to
entitle a holder other than the acquiring person to purchase
a number of shares of common stock of the acquiring company having a market
value of twice the exercise price of each right.
(8) SALES OF PROPERTIES
In fiscal 1994, the Trust sold an industrial property net leased to a
single tenant for a cash price of $450,000 resulting in a gain on sale of
property of $82,000.
In fiscal 1993, the Trust sold a retail property net leased to a single
tenant for a cash price of $3,250,000 resulting in a gain on sale of
property of $2,330,000.
(9) COMMITMENTS, CONTINGENCY AND OTHER MATTERS
In November 1994, the Trust entered into a contract to purchase a 193,000
square foot retail shopping center located in Danbury, Connecticut.
The property was acquired at a purchase price of $19,250,000, subject to a
nonrecourse first mortgage of $11,250,000. The mortgage loan will
bear interest at 9.5% per annum for a five-year term.
In November 1994, the Trust entered into a contract to sell four of its
distribution and service facilities to a single purchaser for an aggregate
sales price of approximately $13.5 million. The Trust also entered into a
contract to sell its 106,000 square foot retail property located in
Manassas, Virginia at a sale price of $7.5 million.
The Trust leases its executive office space under an agreement which expires
in 1995. Annual base rents are subject to escalation as provided for
in the lease. Minimum annual rentals are $292,700 through the end of the
lease. Rent expense for the fiscal years ended October 31, 1994, 1993 and 1992
was $400,000, $401,000, and $384,000, respectively.
A consulting fee was paid to a trustee (and former officer) pursuant to an
employment and consulting agreement between the trustee and the Trust
which agreement expired in November 1993. Certain trustees have elected to
defer payment of fees earned as trustees until their termination as a trustee
or revocation of their election. Deferred fees earn interest at rates set
annually by the Board of Trustees, currently 7.5% per annum.
(10) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended October 31,
1994 and 1993 are as follows (in thousands, except per share data):
Year Ended October 31, 1994 Year Ended October 31, 1993
Quarter Ended Quarter Ended
Jan 31 Apr 30 July 31 Oct 31 Jan 31 Apr 30 July 31 Oct 31
Revenues $ 4,362 $ 4,885 $ 4,819 $ 4,903 $ 4,382 $ 4,441 $ 3,497 $3,841
Income (loss) before gains
on sales of properties (1) $ 545 $ 571 $ 584 $ (438) $ 94 $(3,060) $(4,648) $ 322
Gains on sales of properties 82 2,330
Net Income (loss) $ 545 $ 653 $ 584 $ (438) $ 94 $ (730) $(4,648) $ 322
Per share:
Income (loss) before gains
on sales of properties $ .10 $ .10 $ .11 $ (.08) $ .02 $ (.58)$ (.88) $ .06
Gains on sales of properties .02 .44
Net Income (loss) $ .10 $ .12 $ .11 $ (.08) $ .02 $ (.14) $ (.88) $ .06
(1) Quarter ended October 31, 1994 results include a charge of $1,086,000 to reflect the Trust's investment in a
mortgage note receivable at its net realizable value. The mortgage note was sold subsequent to year end.
Quarter ended April 30, 1993 results include charges of $3,300,000 to writedown the Trust's investment in an
office property to its estimated fair value and to write off an $800,000 mortgage loan to an
unconsolidated joint venture which loan became non performing in fiscal 1993.
Quarter ended July 31, 1993 results include a charge of $4,885,000 to writedown the Trust's investment in an
unconsolidated joint venture at its estimated net realizable value.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of HRE Properties:
We have audited the accompanying consolidated balance sheets of HRE
Properties (the Trust), a Massachusetts voluntary association, and subsidiary
as of October 31, 1994 and 1993, and the related consolidated
statements of income, cash flows and shareholders equity for each of the
three years in the period ended October 31,1994. These financial statements
and the schedules referred to below are the responsibility
of the Trusts management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HRE Properties and
subsidiary as of October 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years
in the period ended October 31, 1994 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the
accompanying index to financial statements are presented for
purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
December 14, 1994
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HRE PROPERTIES
BY:/S/ CHARLES J URSTADT
Charles J Urstadt
Chairman and President
/S/ JAMES R MOORE
James R Moore
Senior Vice President-Principal
Financial Officer and
Principal Accounting Officer
Dated: May 5,1995