UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended March 31, 1999 Commission file number 0-7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4333 Edgewood Road N.E., Cedar Rapids, IA 52499
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-8975
N/A
(Former name, address and fiscal year, if changed since last report)
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
The number of shares of beneficial interest of the
registrant outstanding at May 12, 1999 was 3,880,000.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
USP REAL ESTATE INVESTMENT TRUST
Balance Sheets
(unaudited)
March 31, December 31,
1999 1998 1998
Assets
Real estate
Land, buildings and improvements at cost $ 34,508,522 40,694,216 34,508,522
Less accumulated depreciation (10,855,106) (12,331,475) (10,691,663)
23,653,416 28,362,741 23,816,859
Cash and cash equivalents 2,370,846 2,185,978 3,423,296
Rents and other receivables 468,335 500,203 397,822
Prepaid and deferred 248,537 284,699 275,653
Taxes held in escrow - 141,502 18,863
$ 26,741,134 31,475,123 27,932,493
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 9,645,512 14,034,337 10,897,933
Accounts payable and accrued expenses 469,039 573,106 418,204
Due to affiliates 43,460 327,379 115,722
Distribution declared 310,400 310,400 310,400
Tenant deposits 82,223 83,000 78,701
Other 41,217 75,096 10,928
10,591,851 15,403,318 11,831,888
Shareholders' Equity
Shares of beneficial interest,
$1 par value, 20,000,000
shares authorized, 3,880,000
shares issued and outstanding 3,880,000 3,880,000 3,880,000
Additional paid-in capital 11,989,948 11,989,948 11,989,948
Undistributed net earnings 279,335 201,857 230,657
16,149,283 16,071,805 16,100,605
$ 26,741,134 31,475,123 27,932,493
USP REAL ESTATE INVESTMENT TRUST
Statements of Earnings
(Unaudited)
Three Months Ended
March 31,
1999 1998
Revenue
Rents $ 1,200,527 1,596,907
Interest 35,164 25,879
1,235,691 1,622,786
Expenses
Property expenses:
Real estate taxes 116,801 152,955
Repairs and maintenance 104,620 73,130
Utilities 28,509 26,685
Management fee 57,187 75,206
Insurance 8,881 12,040
Other 26,223 94,197
Property expenses, excluding depreciation 342,221 434,213
Depreciation 163,443 208,723
Total property expenses 505,664 642,936
Interest 268,571 349,074
Administrative fee 54,243 63,909
Other administrative 48,135 54,610
876,613 1,110,529
Net earnings $ 359,078 512,257
Basic and diluted net earnings per share $ .09 .13
Distributions to shareholders $ 310,400 310,400
Distributions to shareholders per share $ .08 .08
USP REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
1999 1998
Cash flows from operating activities:
Rents collected $ 1,151,329 1,551,533
Interest received 35,164 25,879
Payments for operating expenses (424,997) (237,147)
Interest paid (267,729) (348,232)
Net cash provided by operating activities 493,767 992,033
Cash flows from investing activities:
Other, net 16,604 4,165
Net cash provided by investing activities 16,604 4,165
Cash flows from financing activities:
Principal portion of scheduled
mortgage loan payments (82,294) (106,247)
Principal repayment of mortgage loans (1,170,127) -
Distributions paid to shareholders (310,400) (310,400)
Net cash used by financing activities (1,562,821) (416,647)
Net increase (decrease) in cash and cash equivalents (1,052,450) 579,551
Cash and cash equivalents at beginning of period 3,423,296 1,606,427
Cash and cash equivalents at end of period $ 2,370,846 2,185,978
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 359,078 512,257
Add (deduct) reconciling adjustments:
Depreciation 163,443 208,723
Amortization 842 842
Increase in rent and other receivables (79,487) (76,192)
Decrease in prepaid and deferred expenses 22,166 61,976
Decrease in taxes held in escrow 18,863 11,514
Increase in accounts payable
and accrued expenses 50,835 12,189
Increase (decrease) in due to affiliates (72,262) 229,906
Increase in advance rents 30,289 30,818
Net cash provided by operating activities $ 493,767 992,033
Notes to Financial Statements
Note 1: The unaudited interim financial statements are prepared in
accordance with generally accepted accounting principles and include
all adjustments of a normal recurring nature necessary for a fair
presentation of the financial position and quarterly results. Interim
reports should be read in conjunction with the audited financial
statements and related notes included in the 1998 Annual Report.
Note 2: Shareholders' equity, December 31, 1998 $ 16,100,605
Net earnings 359,078
Dividends to shareholders (310,400)
Shareholders' equity, March 31, 1999 $ 16,149,283
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
USP Real Estate Investment Trust had net earnings of
$359,078 ($.09 per share) for the three months ended March
31, 1999 compared to $512,257 ($.13 per share) for the same
period a year ago. The decrease from 1998 to 1999 is
primarily due to the sale of Geneva Square in Lake Geneva,
Wisconsin, on December 22, 1998.
The Trust's rental income decreased by $396,000 from the
first quarter of 1998. Rental income for properties owned
in both years actually increased by $58,000 due to a lease
termination fee and an increase in expense recoveries
(additional rents). However, Geneva Square contributed
$454,000 in rental income in the first quarter of 1998, but
none in 1999. At March 31, 1999, overall leased occupancy
of the portfolio was 95%. Total property expenses,
excluding depreciation, decreased by $91,992 from 1998 to
1999. As a percentage of rental income, such expenses
increased from 27% in 1998 to 29% in 1999, primarily because
rents declined more than expenses.
Real estate taxes decreased by $36,000 from 1998 due to the
sale of Geneva Square. Repairs and maintenance increased by
$31,000 from 1998 primarily due to tenant remodeling
expenses. Management fees decreased by $18,000 from 1998
due to lower revenue in 1999 as a result of the sale of
Geneva Square. Other property expenses decreased by $68,000
compared to 1998. This decrease is primarily due to a
reduction in lease commission expense at First Tuesday in
Carrollton, Georgia, where unamortized lease commissions
(pertaining to Luria's, a former tenant) in the amount of
$46,000 were written off in the first quarter of 1998 and
due to insurance claims which decreased by $15,000 from 1998
of which $12,000 pertained to Geneva Square.
In 1999, depreciation expense and the administrative fee
each decreased from 1998 due to the sale of Geneva Square.
Interest expense decreased by $81,000 due to the sale of
Geneva Square and due to the Trust prepaying the mortgage
loans in February 1999 on Presidential Drive Business Park
in Atlanta, Georgia and First Tuesday Mall. The prepayment
of these two loans, along with the March 1999 refinancing of
the mortgage loans on North Park Plaza in Phoenix, Arizona
and Mendenhall Commons in Memphis, Tennessee, will reduce
the Trust's debt service (and increase cash flow) by
approximately $372,000 in 1999 compared to 1998.
Capital resources of the Trust consist of equity in real
estate investments. Properties are maintained in good
condition and adequate insurance coverage is provided.
Liquidity is represented by cash and cash equivalents
($2,370,846 at March 31, 1999) as well as cash flow from the
continued operation of the Trust's real estate portfolio,
which is considered sufficient to meet current obligations.
The Board of Trustees declared a first quarter distribution
of $.08 per share, payable May 24, 1999 to shareholders of
record May 13, 1999. Distributions to shareholders continue
to be dependent upon earnings, cash flow, financial
condition and other factors reviewed by the Board of
Trustees.
YEAR 2000 ISSUE
Management of the Trust is well aware of the issues and
concerns surrounding the potential problems associated with
computer systems that may not be able to distinguish the
year 2000 from the year 1900, typically referred to as "the
year 2000 issue." The Trust does not own or use any
information technology directly, because all services
necessary to conduct the day-to-day operations of the Trust
are performed by AEGON USA Realty Advisors, Inc. and its
affiliates (the Advisor). Nevertheless, the Trust could be
adversely affected if computer systems, as well as certain
embedded technology, used by the Advisor, tenants, vendors,
financial institutions and other third parties do not
properly process and calculate date-related information and
data from and after January 1, 2000.
The most significant risks associated with year 2000 issues
that could negatively impact the Trust include failure of
tenants to pay rent, failure by the Trust to pay its own
obligations, failure of various building systems at the
Trust's real estate properties, failure of any and all third
parties to provide services and failure of any and all
information, accounting and recordkeeping systems or
processes. The reasons for such failures could range from a
simple inability to process electronic information in a
timely manner to a total business failure somehow related
to, or the result of, the year 2000 issue.
The Advisor has developed plans to modify, upgrade and/or
replace portions of its information technology to ensure
that its computer systems will function properly in the year
2000 and thereafter, and is in process of obtaining
reasonable assurances that comparable steps are being taken
by the Trust's' other major service providers. As of
December 31, 1998, substantially all of the Advisor's
mission critical systems were year 2000 compliant. The
Advisor will continue conducting revalidation testing of its
systems throughout 1999, including the development, review,
and revision of business resumption and continuity plans.
The Trust is not expected to incur any direct costs
associated with year 2000 issues. Based on these efforts to
date, management of the Trust is not aware of any
consequence of the year 2000 issue that it believes would
have a material effect on the Trust's business, results of
operations or financial condition. There can be no
assurance, however, that these efforts will be sufficient to
avoid any adverse impact to the Trust.
FORWARD LOOKING STATEMENTS
The discussion in this report concerning prepayment and
refinancing of mortgage loans and the potential impact on
debt service and cash flow contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results and the timing of
certain events could differ materially from those stated in
the forward-looking statements.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders.
At the Trust's annual meeting of shareholders on April 30,
1999, 81% of the Trust's outstanding shares were represented
(in person or by proxy). All four incumbent Trustees were
re-elected to the Board of Trustees with each receiving at
least 98% of the vote for the shares represented. The vote
tabulation for each Trustee was as follows:
Trustee Votes For Votes Withheld
Patrick E. Falconio 3,117,008 34,039
Edwin L. Ingraham 3,120,219 30,828
Samuel L. Kaplan 3,122,469 28,578
Richard M. Osborne 3,122,269 28,778
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
The Company reported on a Form 8-K, dated January 6,1999, that it
sold Geneva Square Shopping Center in Lake Geneva, Wisconsin.
The Company reported on a Form 8-K, dated February 5, 1999, the election
of Richard M. Osborne to the Board of Trustees, the prepayment of
mortgage loans at Presidential Drive Business Park and First Tuesday
Mall, and the refinancing of the mortgage loans on Mendenhall Commons
and North Park Plaza.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
USP REAL ESTATE INVESTMENT TRUST
/s/ Alan F. Fletcher
Alan F. Fletcher
Vice President and Treasurer
(principal financial officer)
/s/ Roger L. Schulz
Roger L. Schulz
Controller
(principal accounting officer)
Dated: May 12, 1999