Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended: March 31, 1994
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File number: 0-16785
VANGUARD REAL ESTATE FUND I,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
(Exact name of Registrant as specified in its charter)
Massachusetts 23-6860148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Vanguard Financial Center
Malvern, PA 19355
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number (610)669-1000
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities and 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
11,019,978 shares of beneficial interest outstanding as of April 30, 1994.
PAGE
INDEX
Item Page
No. No.
Cover Page. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Statements of Operations. . . . . . . . . . . . . . . . . . . . . . .3
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . .4
Statement of Changes in Shareholders' Equity. . . . . . . . . . . . .5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . .6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . .8-9
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 10
ITEM 2. Changes in Securities . . . . . . . . . . . . . . . . . . 10
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 10
ITEM 4. Submission of Matters to a Vote of Security Holders . . . 10
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . 10
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1
PAGE
BALANCE SHEETS
(Unaudited)
March 31, 1994 December 31, 1993
ASSETS (000) (000)
------------- -------------
Investments in Real Estate:--
Direct Ownership Investments:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,790 $ 12,790
Buildings and Improvements . . . . . . . . . . . . . . . . . 31,369 31,432
------------- -------------
44,159 44,222
Less--Accumulated Depreciation 4,953 4,789
------------- -------------
39,206 39,433
In-Substance Foreclosed Asset . . . . . . . . . . . . . . . . . 17,200 17,192
Mortgage Loan Receivable . . . . . . . . . . . . . . . . . . 10,646 10,646
------------- -------------
67,052 67,271
Less--Allowance for Possible Losses 2,410 2,410
------------- -------------
Net Investment Portfolio . . . . . . . . . . . . . . . . . 64,642 64,861
Marketable Securities--REMICs . . . . . . . . . . . . . . . . . . 1,608 1,684
Short-Term Investments:
Vanguard Money Market Reserves-Prime Portfolio
(2,292,633 and 2,482,738 shares, respectively) 2,293 2,483
Temporary Cash Investments . . . . . . . . . . . . . . . . . 7,995 6,000
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,757 1,897
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 78,295 $ 76,925
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage Loans (including current portion of $95 and $93,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . $ 2,454 $ 2,477
Due to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 162 149
Dividend Payable . . . . . . . . . . . . . . . . . . . . . . . . 1,653 --
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 518 558
------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 4,787 3,184
------------- -------------
Shares of Beneficial Interest, without par value, unlimited shares
authorized . . . . . . . . . . . . . . . . . . . . . . . . . . 80,608 80,608
Accumulated Distributions in Excess of Net Income . . . . . . . . (7,100) (6,867)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 73,508 73,741
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . $ 78,295 $ 76,925
============= =============
The accompanying notes are an integral part of these statements.
2
PAGE
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1994 1993
REAL ESTATE INCOME (000) (000)
---------- -----------
Rental Income . . . . . . . . . . . . . . . . . . . . . . . . . $1,622 $2,004
Mortgage Interest Income. . . . . . . . . . . . . . . . . . . . 299 277
Net Income from In-Substance Foreclosed Assets. . . . . . . . . 341 785
---------- -----------
2,262 3,066
---------- -----------
REAL ESTATE EXPENSES
Mortgage Interest Expense . . . . . . . . . . . . . . . . . . . 62 356
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . 169 226
Property Operating Expenses . . . . . . . . . . . . . . . . . . 169 244
Depreciation and Amortization . . . . . . . . . . . . . . . . 277 410
Provision for Possible Losses/(Charge Offs) -- (191)
---------- -----------
677 1,045
---------- -----------
INCOME FROM REAL ESTATE . . . . . . . . . . . . . . . . . . . . 1,585 2,021
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 71 74
---------- -----------
1,656 2,095
---------- -----------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . . . . 87 115
Administrative Fee . . . . . . . . . . . . . . . . . . . . . 75 93
Other Administrative Expenses . . . . . . . . . . . . . . . . 74 104
---------- -----------
236 312
---------- -----------
NET INCOME $1,420 $1,783
========== ===========
NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . . $ .13 $ .16
========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . . . . . . . . . 11,019,978 11,060,578
========== ===========
The accompanying notes are an integral part of these statements.
3
PAGE
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES (000) (000)
---------- ----------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $1,420 $1,783
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization. . . . . . . . . . . . . . . 277 410
Changes in Other Assets and Liabilities . . . . . . . . . 60 240
---------- ----------
Net Cash Provided by Operating Activities. . . . . . . . 1,757 2,433
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Building Improvements . . . . . . . . . . . . . . . . . . . . -- (40)
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . -- (48)
Principal Repayments on Marketable Securities . . . . . . . . 72 --
---------- ----------
Net Cash Provided by (Used In) Investing Activities . . . 72 (88)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . . . (23) (20)
Shares Repurchased . . . . . . . . . . . . . . . . . . . . . -- (387)
---------- ----------
Net Cash Used In Financing Activities . . . . . . . . . . (23) (407)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 1,806 1,938
CASH AND CASH EQUIVALENTS--Beginning of Period . . . . . . . 8,483 8,366
---------- ----------
CASH AND CASH EQUIVALENTS--End of Period . . . . . . . . . . $10,289 $10,304
========== ==========
The accompanying notes are an integral part of these statements.
4
PAGE
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Accumulated
Shares of Distributions
Beneficial Interest In Excess of Total Shareholders'
Number Amount Net Income Equity
(000) (000) (000)
-----------------------------------------------------------------------
Balance: January 1, 1994 . . . . . 11,019,978 $80,608 $(6,867) $73,741
Net Income for the Period . . . . 1,420) 1,420
Income Distributions . . . . . . . (1,653) (1,653)
-----------------------------------------------------------------------
Balance: March 31, 1994 . . . . . 11,019,978 $80,608 $(7,100) $73,508
=======================================================================
The accompanying notes are an integral part of these statements.
5
PAGE
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Fund's Annual Report
to Shareholders for the year ended December 31, 1993. The results of
operations for the three months ended March 31, 1994, are not necessarily
indicative of the results for the entire year ending December 31, 1994.
2. One of the Fund's real estate investments, the Sheffield Forest
Apartments, has been reclassified as an In-Substance Foreclosed Asset for
presentation purposes. For accounting purposes, property is deemed to be an
in-substance foreclosure when a debtor has little or no equity in the
collateral and proceeds for repayment of the loan can be expected to come only
from the sale or operation of the collateral. Although legal title to the
property has not been obtained, the Fund is considered to have substantially
the same risks and rewards as an owner. For mortgage loans treated for
accounting purposes as in-substance foreclosures, revenue is recognized only
to the extent of cash receipts.
In January 1994, the borrower under the Sheffield mortgage loan
investment, a limited partnership whose sole asset is the Sheffield property,
defaulted on the loan by making only a partial payment on the then-due
interest installment. The Fund and the borrower remedied the default on April
13, 1994. Pursuant to an agreement, the Fund received title to the underlying
property via transfer of all of the partnership interests of the borrower in
full satisfaction of the mortgage loan outstanding. During the period of
default, the borrower remitted the net cash flow generated by the property to
the Fund. Since the allowance for possible losses previously recorded
sufficiently reduced the carrying value of the Sheffield investment to its
estimated net realizable value at March 31, 1994, no additional loss on this
event was required to be recorded in the quarter ended March 31, 1994.
6
PAGE
3. The following is a summary of the net assets and liabilities, and
results of operations of the Sheffield Forest Apartments, the property
underlying the Sheffield mortgage investment, in which the Fund has invested
greater than 10% of its net offering proceeds:
SHEFFIELD FOREST APARTMENTS
November 1, 1993 to
Balance Sheet January 31, 1994 Statement of Operations January 31, 1994
(Unaudited) (In Thousands) (Unaudited) (In Thousands)
Assets Revenue
Property and Equipment $10,195 Rental Income $530
Due from Affiliate 1,998
Other Assets 384 Expenses
-------
12,577 Mortgage Interest 419
Operating 184
Liabilities Depreciation & Amortization 112
----
Mortgage Payable 18,635 715
Due to Affiliate 348
Other Liabilities 99
-------
19,082
Net Liabilities ($6,505) Net Loss ($185)
Property and equipment are carried at cost at the date of acquisition by the mortgagor, net of accumulated
depreciation. As described in Note 2, the borrower made only a partial payment of interest due in January
1994 on its mortgage payable to the Fund. In addition, mortgage interest expense is determined based on the
effective interest rate of the mortgage loan. Mortgage interest expense for the quarter ended January 31,
1994, including the defaulted portion, exceeded cash payments by $71,000.
7
PAGE
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Vanguard Real Estate Fund I, A Sales-Commission-Free Income Properties Fund
(the "Fund"), is a Massachusetts business trust that intends to continue to
qualify as a real estate investment trust ("REIT") under the Internal Revenue
Code. The Fund's investments include both direct ownership and shared
appreciation mortgages consisting of four income-producing commercial
properties (composed of one office building, two shopping centers and one
industrial park) and one income-producing apartment complex. Geographically,
the Fund's investments are located in various regions of the United States,
with two properties located in the Mideast and one property located in each of
the North Central, Pacific Northwest and Pacific Southwest regions. In
accordance with the Fund's Declaration of Trust, net proceeds from sale or
repayment may not be reinvested in real estate investments after December 31,
1993. The Fund presently intends to liquidate all investments between 1994
and 1999.
Results of Operations
For the three-months ended March 31, 1994, the Fund had net income of
$1,420,000, or $.13 per share, compared to net income for the three-months
ended March 31, 1993 of $1,783,000, or $.16 per share. As more fully
described below, this decrease of $363,000, or 20%, was primarily due to a
decrease in net income from in-substance foreclosed assets, partially offset
by an increase in mortgage interest income, in each case as compared to such
items in the quarter ended March 31, 1993.
Net income from in-substance foreclosed assets decreased by $444,000, or 57%,
from $785,000 for the quarter ended March 31, 1993 to $341,000 for the
comparable period of 1994. This decrease was a result of: (i) the discounted
payoff in late July 1993 of the Carmel mortgage loan investment, which had
been classified as an in-substance foreclosed asset since 1991 and which
contributed $392,000 in net income for the three-months ended March 31, 1993,
and (ii) the default by the borrower on the Sheffield Forest Apartments in-
substance foreclosed asset investment as described in Note 2 of the
accompanying financial statements. For mortgage loans treated for accounting
purposes as in-substance foreclosed assets, revenue is recognized only to the
extent of cash receipts. During the period of default, the borrower remitted
the net cash flow generated by the Sheffield property to the Fund, resulting
in a decrease of $52,000 in income from Sheffield for the three-months ended
March 31, 1994 as compared to the same period of 1993.
Mortgage interest income increased by $22,000, which represents interest
income earned from the Fund's investment in RTC-issued mortgage-backed
securities made in June 1993 as an additional temporary investment vehicle for
excess working capital reserve balances.
In January 1993, the Fund defaulted on a mortgage loan obligation secured by
its Citadel II office building investment in Orlando, Florida. The Fund
subsequently ceded title to Citadel II to the lender in full satisfaction of
amounts due under the non-recourse mortgage loan in September 1993. The
Citadel II investment had been written down to the remaining principal balance
of the loan as of December 31, 1992. In addition, during the period of
default, the net cash flow generated from the property's operations was
remitted to the lender. Accordingly, the Fund did not realize any net income,
or recognize a loss, related to Citadel II in 1993. The excess of the Citadel
II property expenses over its income for the quarter ended March 31, 1993 of
$191,000 was charged to the Fund's provision for possible losses, resulting in
net income of $0 related to Citadel II in the first quarter of 1993.
Exclusive of amounts related to Citadel II, net rental income, mortgage
interest expense and depreciation and amortization decreased $22,000, $2,000
and $2,000, respectively, for the three-months ended March 31, 1994 as
compared to such items in the three-month period ended March 31, 1993.
8
At both March 31, 1994 and 1993, the overall occupancy rate of the Fund's
remaining three direct ownership investments was 99%. The overall occupancy
rate of the properties underlying the Fund's two mortgage loan investments,
including Sheffield Forest, treated for accounting purposes as an in-substance
foreclosed asset, was 98% at March 31, 1994, as compared to 86% at March 31,
1993. Leases for 3% of the rentable space of the properties directly owned by
the Fund and for 5% at the property underlying the Fund's Plaza del Amo
mortgage investment expire over the remainder of 1994, respectively. Leases
for units at the property underlying the Fund's Sheffield mortgage loan
investment are for one-year terms as is customary for apartment leases. The
Fund's Investment Adviser is currently working to renew leases and to identify
new tenants for space covered by leases that have expired or are expiring.
However, there is no assurance that the Fund will be able to maintain its
current occupancy rate and level of income.
On March 16, 1994, the Fund's Board of Trustees declared a dividend of $.15
per share which was paid on April 29, 1994 to shareholders of record on March
31, 1994. The Fund intends to pay regular quarterly dividends at the rate of
$.15 per share. The Fund's continued ability to make quarterly distributions
in the amount of $.15 per share ($.60 per share annually) will depend upon the
Fund's financial condition, its earnings and cash flow and other factors, and
there can be no assurance that the Fund will be able to continue to make
quarterly distributions to shareholders in the amount of $.15 per share.
Liquidity and Capital Resources
For the three-month period ended March 31, 1994, funds from operations
(defined as net income plus depreciation, amortization and the provision for
possible losses) in the amount of $1,697,000 exceeded by $44,000 the amount of
distributions to shareholders of beneficial interest for the period. Funds
from operations are generated from the ongoing operations of direct real
estate investments and interest income on short-term investments and mortgage
loans. Accordingly, unfavorable economic conditions, vacancies, environmental
requirements, reductions in prevailing short-term interest rates or increases
in major expenses such as energy, insurance and real estate taxes could have
an adverse impact upon the Fund's future funds from operations and
distributions to shareholders.
As a matter of policy, the Fund seeks to maintain working capital reserves in
an amount not less that $2,300,000, which amount constitutes 2% of the gross
proceeds of the Fund's initial public offering. Working capital reserves is
defined as cash and cash equivalents and other assets expected to be realized
over the next year less liabilities expected to be paid over the next year.
Working capital reserves at March 31, 1994 aggregated approximately $8.6
million, representing 7.5% of the Fund's initial offering proceeds, compared
to working capital reserves of $8.5 million at December 31, 1993, which
represented 7.4% of the Fund's initial offering proceeds.
The Fund does not intend to reinvest net proceeds received from sale or
repayment in additional real estate investments.
During the fourth quarter of 1990, the Fund instituted a share repurchase
program. Under the program, the Fund is authorized to repurchase in the open
market from time to time up to 500,000 of the Fund's outstanding shares. As
of April 30, 1994, 413,725 shares have been repurchased under the program at
an aggregate cost of $3,134,000. No shares have been repurchased during the
three-month period ended March 31, 1994.
The Fund intends to continue to qualify as a real estate investment trust
under the Internal Revenue Code and distribute all of its taxable income. The
Fund's management considers the Fund's liquidity, as well as its ability to
generate cash, as adequate to meet its presently foreseeable operating and
shareholder distribution requirements and to fund both its share repurchase
program and capital improvements to its direct investments. However, if
additional funds are required, the Fund may borrow to meet its distribution
requirements, subject to the availability of financing in the marketplace. At
March 31, 1994, the Fund's debt to equity ratio was .03 to 1.
9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Fund filed no reports on Form 8-K during the first
quarter ended March 31, 1994.
10
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.
Vanguard Real Estate Fund I,
A Sales-Commission-Free Income Properties Fund
DATE: 5/11/94 John J. Brennan
-----------------------
President
DATE: 5/11/94 Ralph K. Packard
-----------------------
Vice President & Controller
11