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: June 30, 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 (IRS 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 July 31, 1994.
INDEX
Page
ITEM No. No.
Cover Page. . . . . . . . . . . . . . . . . . . . . . . . .-
Index . . . . . . . . . . . . . . . . . . . . . . . . . . .1
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . .2
Statements of Operations. . . . . . . . . . . . . . . . .3-4
Statements of Cash Flows. . . . . . . . . . . . . . . . .5-6
Statement of Changes in Shareholders' Equity. . . . . . . .7
Notes to Financial Statements . . . . . . . . . . . . . . .7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 8-11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . 12
ITEM 2. Changes in Securities . . . . . . . . . . . . . 12
ITEM 3. Defaults Upon Senior Securities . . . . . . . . 12
ITEM 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . 12
ITEM 5. Other Information . . . . . . . . . . . . . . . 12
ITEM 6. Exhibits and reports on Form 8-K. . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 13
1
BALANCE SHEETS
(Unaudited)
June 30, 1994 December 31, 1993
(000) (000)
------------- -----------------
ASSETS
Investments in Real Estate:--
Direct Ownership Investments:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,745 $12,790
Buildings and Improvements . . . . . . . . . . . . . . . . 42,668 31,432
------------- -------------
58,413 44,222
Less--Accumulated Depreciation . . . . . . . . . . . . . . 5,061 4,789
------------- -------------
53,352 39,433
Mortgage Loan Receivable . . . . . . . . . . . . . . . . . 10,646 10,646
In-Substance Foreclosed Asset . . . . . . . . . . . . . . . -- 17,192
------------- -------------
63,998 67,271
Less: Allowance for Possible Losses . . . . . . . . . . . . -- 2,410
------------- -------------
Net Investment Portfolio . . . . . . . . . . . . . . . . . 63,998 64,861
Marketable Securities--REMICs. . . . . . . . . . . . . . . . . 2,202 1,684
Short-Term Investments:
Vanguard Money Market Reserves-Prime Portfolio
(1,982,111 and 2,482,738 shares, respectively) . . . . . . . 1,982 2,483
Temporary Cash Investments . . . . . . . . . . . . . . . . 7,496 6,000
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 1,255 1,897
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $76,933 $76,925
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage Loans (including current portion of $98 and $93,
respectively) . . . . . . . . . . . . . . . . . . . . . $2,431 $2,477
Due to Affiliates . . . . . . . . . . . . . . . . . . . . . 161 149
Dividend Payable . . . . . . . . . . . . . . . . . . . . . 1,653 --
Other Liabilities . . . . . . . . . . . . . . . . . . . . . 434 558
------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . 4,679 3,184
------------- -------------
Shares of Beneficial Interest, without par value, unlimited
shares authorized . . . . . . . . . . . . . . . . . . . . 80,608 80,608
Accumulated Distributions in Excess of Net Income . . . . . (8,354) (6,867)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 72,254 73,741
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . $76,933 $76,925
============= =============
The accompanying notes are an integral part of these statements.
2
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30,
1994 1993
(000) (000)
------------- -------------
REAL ESTATE INCOME
Rental Income . . . . . . . . . . . . . . . . . . . . . . . $2,015 $2,080
Mortgage Interest Income . . . . . . . . . . . . . . . . . . 221 297
Net Income from In-Substance Foreclosed Assets . . . . . . . -- 787
------------- -------------
2,236 3,164
------------- -------------
REAL ESTATE EXPENSES
Mortgage Interest Expense . . . . . . . . . . . . . . . . . 61 355
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . 199 231
Property Operating Expenses . . . . . . . . . . . . . . . . 316 290
Depreciation and Amortization . . . . . . . . . . . . . . . 320 433
Provision for Possible Losses . . . . . . . . . . . . . . . 780 1,854
------------- -------------
1,676 3,163
------------- -------------
INCOME FROM REAL ESTATE . . . . . . . . . . . . . . . . . . 560 1
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 87 64
------------- -------------
647 65
------------- -------------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . . 87 116
Administrative Fee . . . . . . . . . . . . . . . . . . . . . 74 102
Other Administrative Expenses . . . . . . . . . . . . . . . 87 86
------------- -------------
248 304
------------- -------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . $ 399 $ (239)
============= =============
NET INCOME (LOSS) PER SHARE . . . . . . . . . . . . . . . . $ .04 $ (.02)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . . . . . . . 11,019,978 11,044,988
============= =============
The accompanying notes are an integral part of these statements.
3
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30,
1994 1993
(000) (000)
------------- -------------
REAL ESTATE INCOME
Rental Income . . . . . . . . . . . . . . . . . . . . . . . $3,638 $4,084
Mortgage Interest Income . . . . . . . . . . . . . . . . . . 521 574
Net Income from In-Substance Foreclosed Assets . . . . . . . 341 1,572
------------- -------------
4,500 6,230
------------- -------------
REAL ESTATE EXPENSES
Mortgage Interest Expense . . . . . . . . . . . . . . . . . 123 711
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . 368 457
Property Operating Expenses . . . . . . . . . . . . . . . . 485 534
Depreciation and Amortization . . . . . . . . . . . . . . . 597 843
Provision for Possible Losses . . . . . . . . . . . . . . . 780 1,663
------------- -------------
2,353 4,208
------------- -------------
INCOME FROM REAL ESTATE . . . . . . . . . . . . . . . . . . 2,147 2,022
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 157 138
------------- -------------
2,304 2,160
------------- -------------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . . 173 231
Administrative Fee . . . . . . . . . . . . . . . . . . . . . 149 195
Other Administrative Expenses . . . . . . . . . . . . . . . 163 190
------------- -------------
485 616
------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $1,819 $1,544
============= =============
NET INCOME PER SHARE . . . . . . . . . . . . . . . . . . . . $ .17 $ .14
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . . . . . . . 11,019,978 11,052,738
============= =============
The accompanying notes are an integral part of these statements.
4
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
1994 1993
(000) (000)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . $ 399 $ (239)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Depreciation and Amortization . . . . . . . . . . . . . 320 433
Provision for Possible Losses . . . . . . . . . . . . . 780 1,854
Valuation Allowance on Marketable Securities . . . . . 56 --
Changes in Other Assets and Liabilities . . . . . . . . (40) 16
------------- -------------
Net Cash Provided by Operating Activities . . . . . . . . 1,515 2,064
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Building Improvements . . . . . . . . . . . . . . . . . . -- (191)
Principal Repayments on Marketable Securities . . . . . . . . 65 --
Marketable Securities Acquired . . . . . . . . . . . . . . . (715) (5,035)
------------- -------------
Net Cash Used In Investing Activities . . . . . . . . . . (650) (5,226)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . . . . (23) (21)
Dividends Paid . . . . . . . . . . . . . . . . . . . . . . . (1,653) (1,656)
------------- -------------
Net Cash Used In Financing Activities . . . . . . . . . . (1,676) (1,677)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . (811) (4,839)
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD . . . . . . . 10,289 10,304
------------- -------------
CASH AND CASH EQUIVALENTS--END OF PERIOD . . . . . . . . . . $9,478 5,465
============= =============
The accompanying notes are an integral part of these statements.
5
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
1994 1993
(000) (000)
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . $1,819 $1,544
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization . . . . . . . . . . . . . 597 843
Provision for Possible Losses . . . . . . . . . . . . . 780 1,663
Valuation Allowance on Marketable Securities . . . . . 60 --
Changes in Other Assets and Liabilities . . . . . . . . 16 399
------------- -------------
Net Cash Provided by Operating Activities . . . . . . . . 3,272 4,449
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Building Improvements . . . . . . . . . . . . . . . . . . -- (231)
Principal Repayments on Marketable Securities . . . . . . . . 137 --
Marketable Securities Acquired . . . . . . . . . . . . . . . (715) (5,035)
------------- -------------
Net Cash Used In Investing Activities . . . . . . . . . . (578) (5,266)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . . . . (46) (41)
Dividends Paid . . . . . . . . . . . . . . . . . . . . . . . (1,653) (1,656)
Shares Repurchased . . . . . . . . . . . . . . . . . . . . . -- (387)
------------- -------------
Net Cash Used In Financing Activities . . . . . . . . . . (1,699) (2,084)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . 995 (2,901)
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD . . . . . . . 8,483 8,366
------------- -------------
CASH AND CASH EQUIVALENTS--END OF PERIOD . . . . . . . . . . $9,478 $5,465
============= =============
The accompanying notes are an integral part of these statements.
6
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 . 1,819 1,819
Income Distributions . . . . (3,306) (3,306)
---------------------------------------------------------------------------
Balance: June 30, 1994 . . . 11,019,978 $80,608 $(8,354) $72,254
===========================================================================
The accompanying notes are an integral part of these statements.
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 and six months ended June 30, 1994, are not
necessarily indicative of the results for the entire year ending December
31, 1994.
2. On April 13, 1994, the Fund obtained title to the Sheffield Forest
Apartment complex in Silver Spring, Maryland via a transfer of all of the
partnership interests of the borrower in full satisfaction of the mortgage
loan outstanding. This investment, formerly classified as an In-Substance
Foreclosed Asset at March 31, 1994, has been written down to its estimated
fair value and reclassified as a direct ownership investment. No additional
loss was required to be recorded since the allowance for possible losses
previously recorded sufficiently reduced the carrying value of the
Sheffield investment to its net realizable value at the date of the
transfer.
3. Activity relating to the allowance for possible losses on real estate
investments for the six months ended June 30, 1994, is as follows:
June 30, 1994
(In thousands)
--------------
Balance--January 1, 1994 $2,410
Write-off of In-Substance Foreclosed Asset (2,120)
Amounts Charged Off (290)
--------------
Balance--June 30, 1994 $ 0
==============
During the quarter ended June 30, 1994, $1,070,000 was charged to the
provision for possible losses to write-down the carrying value of a direct
ownership investment to its estimated fair value.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Vanguard Real Estate 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 under the Internal Revenue Code.
The Fund's investments include both direct ownership and shared
appreciation mortgages and consist of four income-producing commercial
properties (composed of one industrial park, one office building and two
shopping centers), and one income-producing residential 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
SIX-MONTH PERIOD ENDED JUNE 30, 1994 VS. SIX-MONTH PERIOD ENDED JUNE 30,
1993
The Fund had net income of $1,819,000, or $.17 per share, for the six-
months ended June 30, 1994, as compared to net income of $1,544,000, or
$.14 per share, for the same period of 1993. As more fully described
below, this increase in net income reflects (i) a provision for possible
losses of $780,000 for the six-months ended June 30, 1994 as compared to
$2,000,000 for the comparable period in 1993; (ii) an increase in net
rental income; (iii) a decrease in administrative expenses and (iv)
decreases in net income from in-substance foreclosed assets and mortgage
interest income, in each case as compared to such items in the six-months
ended June 30, 1993 and excluding results from the Fund's Citadel II
investment, which was transferred in September 1993.
For comparison purposes, results from Citadel II have been excluded since
the Fund did not realize net income, or recognize a loss, related to
Citadel II in 1993. In January 1993, the Fund defaulted on the 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 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 net income for the six-months ended June 30, 1993 of $337,000 was
charged to the Fund's allowance for possible losses, resulting in net
income of $0 related to Citadel II in the first six-months of 1993.
The provision for possible losses, which is based upon management's regular
evaluation of the recoverability of each investment in the portfolio, for
the six-months ended June 30, 1994 in the amount of $780,000 ($1,070,000,
net of charge-offs of $290,000) was recorded to write-down the carrying
value of one of the Fund's direct ownership investments to its estimated
fair value minus selling costs. During the second quarter of 1994, Fund
management, based on information provided by the Fund's Adviser, shortened
the estimated remaining holding period for this investment and,
accordingly, reduced its carrying value.
Net rental income (rental income less real estate taxes and property
operating expenses) increased by $204,000, or 8%, from $2,581,000
(exclusive of $512,000 of net rental income related to Citadel II) for the
six-month period ended June 30, 1993 to $2,785,000 for the six-month period
ended June 30, 1994. This increase was primarily due to the Fund obtaining
title on April 13, 1994 to the Sheffield Forest Apartment complex in Silver
Spring, Maryland, as described in
8
Note 2 of the accompanying financial statements. This investment,
classified as an in-substance foreclosed asset since 1992, provided net
rental income of $208,000 from April 13 through June 30, 1994.
At June 30, 1994 and June 30, 1993, the overall occupancy rate of the
Fund's remaining three direct real estate investments was 99% and 98%,
respectively. The occupancy rate of Sheffield Forest was 98% and 89% at
June 30, 1994 and June 30, 1993, respectively. The overall occupancy rate
of Plaza del Amo, the property underlying the Fund's mortgage loan
investment, was 99% at June 30, 1994, as compared to 94% at June 30, 1993.
Leases for 2% of the rentable space of the properties directly owned by the
Fund, excluding Sheffield Forest, and for 4% of the rentable space at the
property underlying the Fund's Plaza del Amo mortgage investment expire
over the remainder of 1994, respectively. Leases for units at Sheffield
Forest are generally for one-year terms as is customary for apartment
leases. The Fund's 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 and level of rental income.
Net income from in-substance foreclosed assets decreased by $1,231,000, or
78%, from $1,572,000 for the six-months ended June 30, 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 $784,000 in net income for the six-months ended June
30, 1993, and (ii) the default by the borrower on the Sheffield Forest
Apartments investment, which had been classified as an in-substance
foreclosed asset since 1992, in January 1994. This default was remedied in
April 1994, 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 $447,000 in net income from in-substance foreclosed assets from
Sheffield for the six-months ended June 30, 1994 as compared to the same
period in 1993.
Mortgage interest income decreased by $53,000, from $574,000 for the six-
months ended June 30, 1993 to $521,000 for the comparable period of 1994.
This decrease was primarily attributable to a valuation adjustment of
$56,000 recorded in the quarter ended June 30, 1994 to reduce the carrying
value of the Fund s investments in RTC-issued mortgage-backed securities to
their market value at June 30, 1994. These investments were acquired in
June 1993 and April 1994 as an additional temporary investment vehicle for
excess working capital reserve balances.
Administrative expenses decreased by $131,000, from $616,000 for the six-
months ended June 30, 1993 to $485,000 for the comparable period of 1994.
This decrease was primarily due to the payoff of the Carmel investment and
subsequent distribution of the proceeds to shareholders in 1993. This
payoff resulted in lower advisory and administrative fees, which are based
on invested real estate assets, in 1994.
Exclusive of the amounts related to Citadel II, mortgage interest expense
decreased $4,000, and depreciation and amortization expense increased
$2,000, respectively, for the six-months ended June 30, 1994 as compared to
the same period in 1993.
THREE-MONTH PERIOD ENDED JUNE 30, 1994 VS. THREE-MONTH PERIOD ENDED JUNE
30, 1993
The Fund had net income of $399,000, or $.04 per share, for the three-
months ended June 30, 1994, as compared to a net loss of ($239,000), or
($.02) per share, for the same period of 1993. The Fund's results of
operations for the three-months ended June 30, 1994 reflects (i) the
provision for possible losses of $780,000 as compared to $2,000,000 for the
comparable period in 1993 and, as more fully described below, (ii) an
increase in net rental income; (iii) a decrease in
9
administrative expenses; and (iv) decreases in net income from foreclosed
assets and mortgage interest income, in each case as compared to such items
in the three-months ended June 30, 1993 and exclusive of amounts for the
Fund's former Citadel II investment, if applicable.
Net rental income increased by $225,000, or 18%, from $1,275,000 (exclusive
of $284,000 of net rental income from Citadel II) for the three-month
period ended June 30, 1993 to $1,500,000 for the three-month period ended
June 30, 1994. This increase was primarily due to the net rental income of
$208,000 provided by Sheffield from April 13, the date title was obtained,
through June 30, 1994.
Net income from in-substance foreclosed assets decreased from $787,000 for
the three-months ended June 30, 1993 to $0 for the comparable period of
1994, as a result of the discounted payoff in late July 1993 of the Carmel
mortgage loan investment and the default by the borrower on the Sheffield
mortgage loan investment.
Mortgage interest income decreased by $76,000 from $297,000 for the three-
months ended June 30, 1993 to $221,000 for the comparable period of 1994.
This decrease was primarily attributable to a valuation adjustment of
$56,000 recorded in the quarter ended June 30, 1994 to reduce the carrying
value of the Fund's investments in RTC-issued mortgage-backed securities to
their market value at June 30, 1994.
Administrative expenses decreased by $56,000 from $304,000 for the three-
months ended June 30, 1993 to $248,000 for the comparable period of 1994.
This decrease was primarily due to the payoff of the Carmel investment and
subsequent distribution of the proceeds to shareholders in 1993. This
payoff resulted in lower advisory and administrative fees, which are based
on invested real estate assets, in 1994.
The excess of the Citadel II property expenses over its net income for the
three-months ended June 30, 1993 of $146,000 was charged to the Fund's
allowance for possible losses, resulting in net income of $0 related to
Citadel II in the second quarter of 1993. Exclusive of the amounts related
to Citadel II, mortgage interest expense decreased $3,000, and depreciation
and amortization expense increased $5,000, respectively, for the three-
months ended June 30, 1994.
On June 21, 1994, the Fund declared a second quarter distribution of $.15
per share, payable on July 29, 1994 to shareholders of record as of June
30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
For the six-months ended June 30, 1994, distributions to shareholders in
the amount of $3,306,000 exceeded funds from operations (defined as net
income, plus depreciation and the provision for possible losses) for that
same period by $110,000. Funds from operations are generated from the
ongoing operations of the Fund's direct real estate investments and joint
venture real estate investment, and interest income on short-term
investments and its mortgage loan. 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 than $2,300,000, which amount constitutes 2% of the
gross proceeds of the Fund's initial offering. Working capital reserves is
defined as cash and cash equivalents and other working assets expected to
be realized over the next year, less liabilities expected to be paid over
the next year. Working capital reserves at June 30, 1994 aggregated
approximately $10.1 million, representing 8.9% of the initial public
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.
10
The Fund presently intends, in accordance with its Declaration of Trust, to
sell all of its remaining real estate investments and terminate the Fund
between 1994 and 1999. Net proceeds from the sale or repayment of such
investments will not be reinvested in additional real estate investments.
The Fund's Adviser will continue to monitor investment disposition
opportunities consistent with the Fund's liquidation objectives and
policies.
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 July 31, 1994, 413,725 shares have been repurchased at an
aggregate cost of $3,134,000. No shares were repurchased during the six-
month period ended June 30, 1994.
It is the Fund's present intention to make aggregate distributions during
1994 of approximately $.60 per share. The Trustees and the Fund will
continue to monitor the Fund's operating results and cash flow. The Fund's
continued ability to make quarterly distributions in the amount of $.15 per
share ($.60 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.
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 considers its 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 on its direct real estate 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 June 30, 1994, the Fund's debt to equity ratio was .03 to 1.
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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 second quarter
ended June 30, 1994.
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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 8/11/94 John J. Brennan
---------------------------
President
DATE 8/11/94 Ralph K. Packard
---------------------------
Vice President & Controller
13