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 September 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 0-20164
Krupp Government Income Trust II
Massachusetts 04-3073045
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
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 II
BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
Participating Insured Mortgage Investments
("PIMIs")(Note 2)
Insured mortgages $ 121,560,615 $131,750,452
Additional loans, net of impairment provision of $2,994,000 21,298,351 21,298,351
Participating Insured Mortgages ("PIMs")(Note 2) 37,724,678 37,994,412
Mortgage-Backed Securities ("MBS")(Note 3) 19,366,017 21,127,474
Total mortgage investments 199,949,661 212,170,689
Cash and cash equivalents 7,670,463 8,653,673
Prepaid acquisition fees and expenses, net of
accumulated amortization of $8,627,581 and
$8,093,170 respectively 5,168,256 6,522,092
Prepaid participation servicing fees, net of
accumulated amortization of $2,598,979 and
$2,262,659 respectively 1,896,740 2,233,060
Interest receivable and other assets 868,234 1,629,549
Total assets $ 215,553,354 $ 231,209,063
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred income on Additional Loans $ 2,726,228 $ 2,692,976
Other liabilities 143,769 150,025
Total liabilities 2,869,997 2,843,001
Shareholders' equity (Note 4)
Common stock, no par value; 25,000,000
Shares authorized; 18,371,477 Shares
issued and outstanding 213,051,102 228,920,012
Accumulated comprehensive loss (367,745) (553,950)
Total Shareholders' equity 212,683,357 228,366,062
Total liabilities and Shareholders' equity $ 215,553,354 $ 231,209,063
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
Revenues:
Interest income - PIMs and
PIMIs:
Basic interest $ 2,811,216 $ 2,995,857 $ 8,456,060 $ 9,009,739
Additional loan interest 474,684 392,683 1,315,467 1,367,277
Participation interest 270,606 250,834 1,651,508 505,316
Interest income - MBS 359,862 585,222 1,111,168 1,838,554
Interest income - cash and cash
equivalents 115,312 260,192 360,398 726,678
Total revenues 4,031,680 4,484,788 12,894,601 13,447,564
Expenses:
Asset management fee to an
affiliate 383,360 436,460 1,147,883 1,308,359
Expense reimbursements to
affiliates 78,825 79,161 221,528 197,745
Amortization of prepaid
fees and expenses 441,591 490,329 1,690,156 1,470,985
General and administrative 124,313 80,975 351,305 290,681
Total expenses 1,028,089 1,086,925 3,410,872 3,267,770
Net income 3,003,591 3,397,863 9,483,729 10,179,794
Other comprehensive income:
Net change in unrealized loss
on MBS 214,289 (136,479) 186,205 (700,758)
Total comprehensive income $ 3,217,880 $ 3,261,384 $ 9,669,934 $ 9,479,036
Basic earnings per Share $ .17 $ .18 $ .52 $ .55
Weighted average shares
outstanding 18,371,477 18,371,477
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
STATEMENTS OF CASH FLOWS
For the Nine Months
Ended September 30,
2000 1999
Operating activities:
Net income $ 9,483,729 $ 10,179,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of net premium 41,351 151,675
Amortization of prepaid fees and expenses 1,690,156 1,470,985
Changes in assets and liabilities:
Decrease in interest receivable and other assets 761,315 346,888
Increase (decrease) in deferred income on Additional Loans 33,252 (134,304)
(Decrease) increase in other liabilities (6,256) 38,198
Net cash provided by operating activities 12,003,547 12,053,236
Investing activities:
Principal collections on MBS 1,906,136 7,104,376
Principal collections on PIMs and Insured Mortgages 10,459,746 1,276,434
Net cash provided by investing activities 12,365,882 8,380,810
Financing activity:
Dividends (25,352,639) (17,223,296)
Net (Decrease) increase in cash and cash equivalents (983,210) 3,210,750
Cash and cash equivalents, beginning of period 8,653,673 18,010,578
Cash and cash equivalents, end of period $ 7,670,463 $ 21,221,328
Non Cash activities:
Increase (decrease) in Fair Value of MBS $ 186,205 $ (700,758)
The accompanying notes are an integral
part of the financial statements.
KRUPP GOVERNMENT INCOME TRUST II
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
II (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 primarily of
normal recurring accruals) necessary to present fairly the Trust's
financial position as of September 30, 2000, the results of its operations
for the three and nine months ended September 30, 2000 and 1999 and its
cash flows for the nine months ended September 30, 2000 and 1999.
The results of operations for the three and nine months ended September 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 September 30, 2000, the Trust's PIMs and PIMIs had a fair value of
$176,689,764 and gross unrealized gains and losses of $170,954 and
$4,064,834, respectively. The PIMs and PIMIs have maturities ranging from
2006 to 2036. At September 30, 2000, there are no insured mortgage loans
within the Trust's portfolio that are delinquent of principal or interest.
Oasis at Springtree and Windmill Lakes both have been adversely affected by
the competitive South Florida rental housing market. The Advisor recorded
an impairment provision of $2,994,000 in total against the two Additional
Loans during the fourth quarter of 1998. Based on its analyses of the
property operations underlying the PIMIs, it continues to maintain that
allowance.
During the first quarter of 2000, the Trust received the prepayment of the
Windsor Lake PIMI consisting of a first mortgage with a remaining balance
of $9,172,642. The Trust had previously received the balance of $2,000,000
on the Additional Loan, $40,000 of base interest on the Additional Loan and
$792,907 of participation interest in December 1999. On February 2, 2000,
the Advisor declared a special dividend of $.66 per Share that was paid on
February 18, 2000 from the payoff of the mortgage on the Windsor Lake PIMI.
In March 2000, the Trust received $175,489 of participation interest based
on 1997 operating results for Falls at Hunters Pointe from borrower escrows
controlled by the Trust. On July 11, 2000, the Advisor, on behalf of the
Trust, filed a complaint against the partners of the borrowing entity. The
Trust is seeking collection of delinquent participation interest relating
to 1998 and 1999 along with late payment penalties and legal fees.
MBS
At September 30, 2000, the Trust's MBS portfolio had an amortized cost of
approximately $19,733,762 and gross unrealized gains and losses of
approximately $29,184 and $396,929, respectively. The MBS portfolio has
maturities ranging from 2009 to 2031.
KRUPP GOVERNMENT INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS, Continued
4. Changes in Shareholder's Equity
A summary of changes in Shareholders' equity for the nine months ended
September 30, 2000 is as follows:
Accumulated Total
Common Retained Comprehensive Shareholders'
Stock Earnings Loss Equity
Balance at
December 31, 1999 $ 228,920,012 $ - $ (553,950) $ 228,366,062
Net income - 9,483,729 - 9,483,729
Dividends (15,868,910) (9,483,729) - (25,352,639)
Change in
unrealized loss
on MBS - - 186,205 186,205
Balance at
September 30, 2000 $ 213,051,102 $ - $ (367,745) $ 212,683,357
5. Related Party Transactions
The Trust received $221,641 of Additional Loan Interest during each of the
three months ended September 30, 2000 and 1999, respectively, from an
affiliate of the Advisor. The Trust also received participation interest of
$270,606 and $200,834 from an affiliate of the Advisor during the three
months ended September 30, 2000 and 1999, respectively.
The Trust received $443,282 of Additional Loan Interest during each of the
nine months ended September 30, 2000 and 1999, respectively, from an
affiliate of the Advisor. The Trust also received participation interest of
$446,574 and $392,816 from an affiliate of the Advisor during the nine
months ended September 30, 2000 and 1999, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
At September 30, 2000 the Trust had liquidity consisting of cash and cash
equivalents, of approximately $7.7 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 $4.4 million, and special distributions.
Funds for dividends come from interest income received on PIMs, PIMIs, MBS
and 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 $.24 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.
In addition to providing guaranteed or insured monthly principal and
interest payments, the Trust's investments in the 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 increase in the value realized upon the sale or refinance of
the underlying properties. However, these payments are neither guaranteed
nor insured and depend on the successful operations of the underlying
properties.
The Trust received Additional Loan interest from seven of the PIMI
investments during the nine months ended September 30, 2000. The Trust also
received a payment from the borrower on the Windmill Lakes PIMI, which was
applied to delinquent Additional Loan interest. During 1999, the Advisor
determined that the borrower on the Norumbega PIMI had paid Additional Loan
interest from funds other than surplus cash, which resulted in overpayments
during the previous three years; consequently, the Trust will not receive
any Additional Loan interest until the overpayment has been absorbed.
The Trust received participation interest totaling $1,651,508 during the
nine months ended September 30, 2000. The Trust collected $72,556 of
participation interest based on 1998 operating results for Mequon Trails,
$346,514 of participation interest based on both 1998 and 1999 operating
results for Martins Landing, $686,165 of participation interest based on
both 1998 and 1999 operating results for The Lakes at Vinings, $175,968 of
participation interest based on the second half of 1999 operations and
$270,606 based on the first half of 2000 operations for The Seasons,
$50,000 of participation interest from Crossings Village based on 1999
operating results and $49,699 of participation interest from The Fountains
based on 1998 operations. The Trust expects to collect participation
interest based on successful 1999 operating results from Mequon Trails and
Sunset Summit by year end.
The Advisor is closely monitoring three other properties due to market
conditions or payment issues relating to the Additional Loans. Competitive
market conditions in the south Florida market have adversely affected the
ability of Oasis at Springtree and Windmill Lakes to generate sufficient
cash flow from operations to service the interest payments due on the
Additional Loans. The Borrower on the Falls at Hunters Pointe PIMI was
declared in default under the terms of the participation and Additional
Loan documents for non-payment of participation interest due relating to
1998 and 1999 along with late payment penalties and legal fees.
The strength of the South Florida economy, bolstered by an expanding
business environment and in-migration coupled with low interest rates and
available building sites, has fostered aggressive development of both
single family homes and new apartments. Oasis at Springtree is located in
the Sunrise submarket, an established market that has seen some major rehab
activity as well as new infill construction in the multifamily sector.
Occupancy at Oasis has remained stable over the past three years in the low
90% range; however, occupancy has become increasingly more expensive to
achieve. Because Oasis must compete with newer or rehabilitated properties,
maintenance costs have risen as the standards that apartment communities
are judged by continue to rise. However, as an older property, Oasis has
not been able to command the commensurate rental rate increases it needs to
be able to pay for improvements that will enhance its appeal in the market.
Consequently, the Advisor agreed to defer Additional Loan interest payments
for 1999 to free up funds for some major capital projects. Additional Loan
interest payments resumed during 2000. As a result of the factors described
above, the Advisor determined that the Additional Loan collateralized by
the Oasis at Springtree asset was impaired, and the Trust recorded a
valuation allowance of $994,000 in the fourth quarter of 1998 and continues
to maintain that allowance.
Windmill Lakes is located in the Pembroke Pines submarket, a market that
had vast tracts of vacant land three years ago and has seen explosive
construction activity since then in single family, multifamily and retail
sectors. Windmill Lakes is a ten-year old, basic apartment community that
has not been able to compete against the influx of new apartment
communities that have extensive amenity packages. Builders use deep
marketing concessions to fill the new properties, lowering the cost of
renting a new apartment and making it more difficult for older properties
like Windmill Lakes to attract residents. Occupancy has dropped as low as
80%, although there has been a slight recovery to the mid to high 80% range
during the first half of 2000. The property's curb appeal, a critical
element in a competitive market, has suffered as well because there has not
been enough cash flow for adequate maintenance. Consequently, the borrower
has been delinquent in his obligation to pay Additional Loan interest since
March 1998. Although he has tried to sell the property, the borrower has
been unable to secure a purchase price that will cover the property's
outstanding liabilities. The Advisor has agreed to defer the delinquent
Additional Loan payments pending a sale of the property. In the mean time,
the borrower paid $25,000 towards the delinquent Additional Loan interest
during the first quarter. If it becomes apparent that a sale of the
property at a mutually acceptable price to both the Trust and the borrower
will not be possible, the Advisor will reassess the feasibility of
extending long-term debt service relief rather than risk the consequences
of a default. As a result of the factors described above, the Advisor
determined that the Additional Loan collateralized by the Windmill Lakes
asset was impaired, and the Trust recorded a valuation allowance of
$2,000,000 in the fourth quarter of 1998 and continues to maintain that
allowance.
In November 1999, the Trust notified the borrower on the Falls at Hunters
Pointe PIMI that he was in default for non payment of participating
interest due to the Trust based on 1997 and 1998 operating results. The
borrower has failed to cure the default. Consequently, the Trust elected to
use a portion of the borrower's funds held in escrow to cure the 1997
portion of the default. The borrower remains in default for 1998 operating
results and is now in default for 1999 operating results. The Trust has
filed a complaint against the partners of the Borrowing entity. The Trust
is seeking collection of the delinquent participation interest related to
1998 and 1999 along with late payment penalties and legal fees.
Whether the operating performance of 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.
On December 16, 1999, the Trust received $2,832,907 from Windsor Lake;
consisting of $2,000,000 from the payoff of the Additional Loan, $40,000 of
Additional Loan interest, and $792,907 of Participation income. The payoff
of the balance on the insured mortgage, $9,172,642 was received on January
26, 2000. The Trust paid a special dividend of $.66 per Share from the
prepayment proceeds.
There are contractual restrictions on the prepayment of the PIMs and PIMIs.
During the first five years of the investment, borrowers are generally
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 income 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 the 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
generally would 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 Trust's net income for the nine months ended September 30, 2000
decreased by approximately $696,000 as compared to the nine months ended
September 30, 1999 due primarily to decreases in interest income from MBS
and cash and cash equivalents and basic interest on PIMs and PIMIs.
Participation income increased for the nine months ended September 30, 2000
by approximately $1,146,000 due to the Trust receiving payments from six
mortgage investments compared to two in 1999. Interest income on MBS
decreased by approximately $727,000, which was due to The Estates MBS
payoff in 1999 and amortization of the MBS portfolio. Interest income on
cash and cash equivalents decreased due to lower average cash balances
during the first nine months of 2000 when compared to the same period in
1999. Basic interest decreased primarily due to the payoff of the Windsor
Lake PIMI earlier this year.
Net income decreased by approximately $394,000 for the three months ended
September 30, 2000 as compared to the three months ended September 30, 1999
due primarily to lower basic interest income on PIMs and PIMIs, interest
income on MBS, and interest income on cash and cash equivalents. Basic
interest on PIM and PIMIs and interest income on cash and cash equivalents
decreased for the same reasons mentioned above.
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. 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 represent interests 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 $7.3 million
of Agency paper, which is issued by Government Sponsored Enterprises with a
credit rating equal to the top rating category of a nationally recognized
statistical rating organization.
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
September 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
dividend 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 II
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
Response: 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 II
(Registrant)
BY: / s / Robert A. Barrows
Robert A. Barrows
Treasurer and Chief Accounting Officer of
Krupp Government Income Trust II.
DATE: October 29, 2000