UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number 0-19244
Krupp Government Income Trust
Massachusetts 04-3089272
(State or other jurisdiction
of incorporation or organization) (IRS employer identification no.)
One Beacon Street, Boston, Massachusetts 02108
(Address of principal executive offices) (Zip Code)
(617) 523-0066
(Registrant's telephone number, including area code)
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
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
This Form 10-Q 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 could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
identified herein.
KRUPP GOVERNMENT INCOME TRUST
BALANCE SHEETS
ASSETS
June 30, December 31,
2000 1999
Participating Insured Mortgage Investments
("PIMIs") (Note 2)
Insured Mortgages $ 59,944,676 $ 60,129,492
Additional Loans, net of impairment provision of $2,162,618 8,350,990 8,350,990
Participating Insured Mortgages ("PIMs")(Note 2) 47,116,313 47,331,673
Mortgage-Backed Securities and insured
mortgage loan ("MBS") (Note 3) 16,877,238 17,495,423
Total mortgage investments 132,289,217 133,307,578
Cash and cash equivalents 5,158,996 4,627,499
Interest receivable and other assets 700,088 973,491
Prepaid acquisition fees and expenses, net
of accumulated amortization of $6,465,735
and $6,089,755, respectively 1,867,726 2,243,706
Prepaid participation servicing fees, net of
accumulated amortization of $1,973,322 and
$1,834,434, respectively 804,427 943,315
Total assets $ 140,820,454 $ 142,095,589
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans (Note 5) $ 3,823,955 $ 3,918,021
Other liabilities 12,512 25,025
Total liabilities 3,836,467 3,943,046
Shareholders' equity (Note 4)
Common stock, no par value; 17,510,000
Shares authorized; 15,053,135 Shares
issued and outstanding 136,795,488 137,921,227
Accumulated comprehensive income 188,499 231,316
Total Shareholders' equity 136,983,987 138,152,543
Total liabilities and Shareholders' equity $ 140,820,454 $ 142,095,589
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Revenues:
Interest income - PIMs
and PIMIs:
Basic interest $ 2,026,783 $ 2,288,267 $ 4,044,827 $ 4,634,107
Additional Loan interest 141,088 79,398 282,501 187,665
Participation interest 68,762 75,020 145,730 75,020
Interest income - MBS 346,268 390,263 699,674 800,295
Interest income - cash and
cash equivalents 77,556 97,134 145,039 205,164
Total revenues 2,660,457 2,930,082 5,317,771 5,902,251
Expenses:
Asset management fee
to an affiliate 250,993 290,685 502,893 580,287
Expense reimbursements
to affiliates 66,906 67,479 122,747 85,694
Amortization of prepaid
fees and expenses 257,434 295,865 514,868 591,731
General and
administrative 120,256 147,333 184,936 209,854
Total expenses 695,589 801,362 1,325,444 1,467,566
Net income 1,964,868 2,128,720 3,992,327 4,434,685
Other comprehensive income:
Net change in unrealized
gain on MBS (18,839) (231,864) (42,817) (283,397)
Total comprehensive income $ 1,946,029 $ 1,896,856 $ 3,949,510 $ 4,151,288
Basic earnings per Share $ .14 $ .14 $ .27 $ .29
Weighted average Shares
outstanding 15,053,135 15,053,135
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
2000 1999
Operating activities:
Net income $ 3,992,327 $ 4,434,685
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of (discounts) and premiums (715) 2,194
Amortization of prepaid fees and expenses 514,868 591,731
Changes in assets and liabilities:
Decrease in interest receivable and other
assets 273,403 43,154
(Decrease) increase in deferred income on
Additional Loans (94,066) 184,653
(Decrease) increase in other liabilities (12,513) 91,732
Net cash provided by operating activities 4,673,304 5,348,149
Investing activities:
Principal collections on MBS 576,083 2,497,854
Principal collections on PIMs and Insured
Mortgages 400,176 409,674
Net cash provided by investing activities 976,259 2,907,528
Financing activity:
Dividends (5,118,066) (9,784,546)
Net increase (decrease) in cash and cash equivalents 531,497 (1,528,869)
Cash and cash equivalents, beginning of period 4,627,499 9,004,397
Cash and cash equivalents, end of period $ 5,158,996 $ 7,475,528
Non Cash Activities:
Decrease in Fair Value of MBS $ (42,817) $ (283,397)
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
1. Accounting Policies
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this report on Form 10-Q pursuant to the Rules
and Regulations of the Securities and Exchange Commission. However, in the
opinion of Berkshire Mortgage Advisors Limited Partnership (the "Advisor"), the
Advisor to Krupp Government Income Trust (the "Trust"), the disclosures
contained in this report are adequate to make the information presented not
misleading. See Notes to Financial Statements in the Trust's Form 10-K for the
year ended December 31, 1999 for additional information relevant to significant
accounting policies followed by the Trust.
In the opinion of the Advisor of the Trust, the accompanying unaudited financial
statements reflect all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the Trust's financial position as of June
30, 2000, and the results of operations for the three and six months ended June
30, 2000 and 1999, and its cash flows for the six months ended June 30, 2000 and
1999.
The results of operations for the three and six months ended June 30, 2000 are
not necessarily indicative of the results which may be expected for the full
year. See Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
2. PIMs and PIMIs
At June 30, 2000, the Trust's PIMs and PIMIs have a fair value of $113,937,558
and gross unrealized gains and losses of $134,025 and $1,608,446, respectively.
The PIMs and PIMIs have maturities ranging from 2002 to 2034. At June 30, 2000,
there are no insured mortgage loans within the Trust's portfolio that are
delinquent of principal or interest.
The Advisor believes that the impairment provision of $2,162,618 is adequate
based on its analysis of property operations underlying the Additional Loans.
3. MBS
At June 30, 2000, the Trust's MBS portfolio has an amortized cost of $11,811,367
and unrealized gains and losses of $216,471 and $27,972, respectively. At June
30, 2000, the Trust's FHA insured mortgage has an amortized cost of $4,877,372.
The MBS portfolio including the insured mortgage has maturities ranging from
2008 to 2035.
Continued
KRUPP GOVERNMENT INCOME TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Shareholders' Equity
A summary of changes in shareholders' equity for six months ended
June 30, 2000 is as follows:
Total Accumulated
Common Retained Comprehensive Shareholders'
Stock Earnings Income Equity
Balance at December 31, 1999 $ 137,921,227 $ - $ 231,316 $ 138,152,543
Net income - 3,992,327 - 3,992,327
Dividends (1,125,739) (3,992,327) - (5,118,066)
Change in unrealized
loss on MBS - - (42,817) (42,817)
Balance at June 30, 2000 $ 136,795,488 $ - $ 188,499 $ 136,983,987
5. Related Party Transactions
The Trust received $86,609 and $57,739 of Additional Loan Interest during the
three months ended June 30, 2000 and 1999, respectively from affiliates of the
Advisor. The Trust also received participation interest of $68,762 and $75,020
from an affiliate of the Advisor during the three months ended June 30, 2000 and
1999, respectively.
The Trust received $86,935 and $144,348 of Additional Loan Interest during the
six months ended June 30, 2000 and 1999, respectively from affiliates of the
Advisor. The Trust also received participation interest of $68,762 and $75,020
from an affiliate of the Advisor during the six months ended June 30, 2000 and
1999, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At June 30, 2000 the Trust had liquidity consisting of cash and cash
equivalents, of approximately $5.2 million as well as the cash inflows provided
by PIMs, PIMIs, MBS, cash and cash equivalents. The Trust may also receive
additional cash flow from the participation features of its PIMs and PIMIs. The
Trust anticipates that these sources will be adequate to provide the Trust with
sufficient liquidity to meet its obligations, including providing dividends to
its investors.
The most significant demand on the Trust's liquidity is quarterly dividends,
paid to investors of approximately $2.6 million, and special distributions.
Funds for dividends come from interest income received on PIMs, PIMIs, MBS, cash
and cash equivalents net of operating expenses and the principal collections
received on PIMs, PIMIs and MBS. The portion of dividends funded from principal
collections reduces the capital resources of the Trust. As the capital resources
of the Trust decrease, the total cash flows to the Trust will also decrease
which may result in periodic adjustments to the dividends paid to the investors.
The Advisor periodically reviews the dividend rate to determine whether an
adjustment is necessary based on projected future cash flows. The current
dividend rate is $.17 per Share per quarter. In general, the Advisor tries to
set a dividend rate that provides for level quarterly distributions. To the
extent quarterly dividends do not fully utilize the cash available for
distribution and cash balances increase, the Advisor may adjust the dividend
rate or distribute such funds through a special distribution.
The Trust's PIMIs funded the construction or significant rehabilitation of
multifamily housing, which requires time to achieve stabilized operations
following the completion of the work. With this in mind, the Trust required
those borrowers to escrow a portion of the Additional Loan proceeds in reserves
so funds would be available for the PIMI Additional Loan payments during the
construction and lease-up periods. As these reserves become depleted, full
payment of the Additional Loan interest becomes primarily dependent on whether
the underlying property generates sufficient operating cash flow to make such
payments.
In addition to providing guaranteed or insured monthly principal and interest
payments, the Trust's investments in PIMs and PIMIs also may provide additional
income through the interest on the Additional Loan portion of the PIMIs as well
as participation income based on operating cash flow and an increase in the
value realized upon the sale or refinance of the underlying properties. However,
these payments are neither guaranteed nor insured and depend upon the successful
operations of the underlying properties.
The Trust received the first installment of Additional Loan interest from two of
its PIMI investments, Red Run and The Seasons during the six months ended June
30, 2000. The Trust's three other PIMI investments, Lifestyles, Mountain View
and Windward Lakes operate under workout agreements with the Trust that require
Additional Loan interest payments only if Surplus Cash, as defined by HUD, is
generated through property operations. None of these three properties generated
Surplus Cash as of December 31, 1999; consequently, the Trust did not receive
any Additional Loan interest during the first half of 2000.
The Trust received participation interest from three of its investments during
the first half of 2000. Waterford Townhomes, one of the Trust's PIM investments,
paid $42,731 of participation interest based on 1998 operating results. Red Run,
one of the Trust's PIMI investments, paid $33,630 of participation interest
based on 1999 operating results. The Trust also received $68,762 of
participation interest based on the second half of 1999 operating results for
The Seasons. The Trust expects to collect participation interest based on
successful 1999 operating results from the Lincoln Green and Waterford Townhomes
PIM investments later during 2000. Three other properties, Rivergreens I, Mill
Pond I and Riverview, are occupied in the low 90% range and generate sufficient
revenue to meet all cash requirements for operations and maintenance, but do not
generate Surplus Cash under HUD's definition for payment of participation
interest to the Trust.
As mentioned above, three properties operate under workout agreements with the
Trust. Windward Lakes' operating results deteriorated during 1995 and 1996, and
in early 1997 the independent Trustees approved a workout with the borrower of
the Windward Lakes PIMI, an affiliate of the Advisor of the Trust. In the
workout, the Trust agreed to reduce the effective basic interest rate on the
insured first mortgage by 2% per annum for 1997 and 1% per annum for 1998, 1999
and 2000. The borrower made an equity contribution of $133,036 to the property
and agreed to cap the annual management fee paid to an affiliate at 3% of
revenues. The Trust's participation in current operations is 50% of any Surplus
Cash as determined under HUD guidelines, and the Additional Loan interest is
payable out of its share of Surplus Cash. Any unpaid Additional Loan interest
accrues at 7.5% per annum. When the property is sold or refinanced, the Trust
will receive 50% of any net proceeds remaining after repayment of the insured
mortgage, the Additional Loan, the interest rate relief, accrued and unpaid
Additional Loan interest and the Borrower's equity up to the point that the
Trust has received a cumulative, non-compounded 10% preferred return on its
investment in the PIMI.
Lifestyles operating results deteriorated during 1995, and the Trust approved a
two-year workout that effectively reduced the interest rate on the insured
mortgage by 1%. When that workout ended in 1997, the property was not able to
generate sufficient revenues to maintain the property and service the original
interest rate. Consequently, the borrower on the Lifestyles PIMI defaulted on
its May 1, 1998 debt service payment on the insured first mortgage. The Trust
agreed to a new workout that runs through 2007. Under its terms, the Trust
agreed to reduce the effective interest rate on the insured first mortgage by
1.75% retroactively for 1998 to clear the default, by 1.75% for 1999, and by
1.5% each year thereafter until the property is sold or refinanced. The borrower
made a $550,000 equity contribution, which has been escrowed, for the exclusive
purpose of correcting deferred maintenance and making capital improvements to
the property. Any Surplus Cash that is generated by property operations will be
split evenly between the Trust and the borrower. When the property is sold or
refinanced, the first $1,100,000 of any proceeds remaining after the insured
mortgage is paid off will be split 50% / 50%; the next $1,690,220 of proceeds
will be split 75% to the Trust and 25% to the borrower; and any remaining
proceeds will be split 50% / 50. The borrower's new equity and the reduction in
the effective interest rate on the insured first mortgage will provide funds for
repairs and improvements that should help reposition Lifestyles so it can
compete more effectively for new residents and rental rates. As a result of the
factors described above, the Advisor determined that the Additional Loan
collateralized by the Lifestyles asset was impaired, and the Trust recorded a
valuation allowance of $1,130,346 in the fourth quarter of 1998 and continues to
maintain that allowance.
Mountain View is similar to Lifestyles with respect to competitive market
conditions. In June 1999, the Trust approved a second workout that runs through
2004. Under its terms, the Trust agreed to reduce the effective interest rate on
the insured first mortgage by 1.25% retroactively for 1999 and each year
thereafter until the property is sold or refinanced, and to change the
participation terms. The workout eliminated the preferred return feature,
forgave $288,580 of previous accruals of Additional Loan interest related to the
first workout, and changed the Trust's participation in Surplus Cash generated
by the property. The Trust will receive 75% of the first $130,667 of Surplus
Cash and 50% of any remaining Surplus Cash on an annual basis to pay Additional
Loan interest. Unpaid Additional Loan interest related to the second workout
will accrue and be payable if there are sufficient proceeds from a sale or
refinancing of the property. In addition, the borrower repaid $153,600 of the
Additional Loan and funded approximately $54,000 to a reserve for property
improvements. As a result of the factors described above, the Advisor determined
that the Additional Loan collateralized by the Mountain View asset was impaired
and has recorded a valuation allowance of $1,032,272 and continues to maintain
that allowance.
Whether the operating performance at any of the properties mentioned above
provide sufficient cash flow from operations to pay either the Additional Loan
interest or participation income will depend on factors that the Trust has
little or no control over. Should the properties be unable to generate
sufficient cash flow to pay the Additional Loan interest, it would reduce the
Trust's distributable cash flow and could affect the value of the Additional
Loan collateral.
There are contractual restrictions on the repayment of the PIMs and PIMIs.
During the first five years of the investment, borrowers are prohibited from
repayment. During the second five years, the PIM borrowers can prepay the
insured first mortgage by paying the greater of a prepayment premium or the
participation due at the time of the prepayment. Similarly, the PIMI borrowers
can prepay the insured first mortgage and the Additional Loan by satisfying the
Preferred Return obligation. The participation features and Additional Loans are
neither insured nor guaranteed. If the prepayment of the PIM or PIMI results
from the foreclosure on the underlying property or an insurance claim, the Trust
would probably not receive any participation income or any amounts due under the
Additional Loan.
The Trust has the option to call certain PIMs and all the PIMIs by accelerating
their maturity if the loans are not prepaid by the tenth year after permanent
funding. The Advisor will determine the merits of exercising the call option for
each PIM and PIMI as economic conditions warrant. Such factors as the condition
of the asset, local market conditions, the interest rate environment and
available financing will have an impact on these decisions.
Results of Operations
The net income of the Trust for the three and six months ended June 30, 2000
decreased by approximately $164,000 and $442,000 respectively, as compared to
the three and six months ended June 30, 1999 due primarily to decreases in basic
interest income on PIMs and PIMIs. This decrease was primarily the result of the
payoff of the Audubon Villas PIMI during the third quarter of 1999 net of the
reduction to the interest rate rebate on the Lifestyles Loan.
The Trust generally funds a portion of its dividends with principal collections,
which will continue to reduce the assets of the Trust thereby reducing the
income, generated by the Trust in the future. Additionally, asset management
fees will decrease as the Trust's investments in MBS, PIMS, and insured
mortgages continue to decline as a result of principal collections.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Assessment of Credit Risk
The Trust's investments in insured mortgages and MBS are guaranteed or insured
by Fannie Mae, the Federal Home Loan Mortgage Corporation (FHLMC), the
Government National Mortgage Association (GNMA) and the Department of Housing
and Urban Development (HUD) and therefore the certainty of their cash flows and
the risk of material loss of the amounts invested depends on the
creditworthiness of these entities.
Fannie Mae is a federally chartered private corporation that guarantees
obligations originated under its programs. FHLMC is a federally chartered
corporation that guarantees obligations originated under its programs and is
wholly-owned by the twelve Federal Home Loan Banks. These obligations are not
guaranteed by the U.S. Government or the Federal Home Loan Bank Board. GNMA
guarantees the full and timely payment of principal and basic interest on the
securities it issues, which represents interest in pooled mortgages insured by
HUD. Obligations insured by HUD, an agency of the U.S. Government, are backed by
the full faith and credit of the U.S. Government.
The Trust's Additional Loans have similar risks as those associated with higher
risk debt instruments, including: reliance on the owner's operating skills,
ability to maintain occupancy levels, control operating expenses, ability to
maintain the properties and obtain adequate insurance coverage. Operations also
may be effected by adverse changes in general economic conditions, adverse local
conditions, and changes in governmental regulations, real estate zoning laws, or
tax laws, and other circumstances over which the Trust may have little or no
control.
The Trust includes in cash and cash equivalents approximately $4.7 million of
Agency paper.
Interest Rate Risk
The Trust's primary market risk exposure is to interest rate risk, which can be
defined as the exposure of the Trust's net income, comprehensive income or
financial condition to adverse movements in interest rates. At June 30, 2000,
the Trust's PIMs, PIMIs and MBS comprise the majority of the Trust's assets. As
such, decreases in interest rates may accelerate the prepayment of the Trust's
investments. The Trust does not utilize any derivatives or other instruments to
manage this risk as the Trust plans to hold all of its investments to expected
maturity.
The Trust monitors prepayments and considers prepayment trends, as well as
distribution requirements of the Trust, when setting regular dividend policy.
For MBS, the fund forecasts prepayments based on trends in similar securities as
reported by statistical reporting entities such as Bloomberg. For PIMs and
PIMIs, the Trust incorporates prepayment assumptions into planning as individual
properties notify the Trust of the intent to prepay or as they mature.
KRUPP GOVERNMENT INCOME TRUST
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Response: None
Item 2. Changes in Securities
Response: None
Item 3. Defaults upon Senior Securities
Response: None
Item 4. Submission of Matters to a Vote of Security Holders
Response: None
Item 5. Other Information
Response: None
Item 6. Exhibits and Reports on Form 8-K
Reponse: None
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.
Krupp Government Income Trust
(Registrant)
BY: / s / Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer
of Krupp Government Income Trust
DATE: August 6, 2000