1
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: September 30, 1995
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number: 0-16785
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VANGUARD REAL ESTATE FUND I
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Massachusetts 23-6861048
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Vanguard Financial Center
Malvern, PA 19355
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (610) 669-1000
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Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 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
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11,019,978 shares of beneficial interest outstanding as of October 31, 1995.
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INDEX
ITEM Page
No. No.
----------- -------
Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Income Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-14
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 15
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1
3
BALANCE SHEETS
(Unaudited)
September 30, 1995 December 31, 1994
ASSETS ($ in 000s) ($ in 000s)
----------------- -----------------
Investments in Real Estate:
Direct Ownership Investments:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,650 $ 6,570
Buildings and Improvements . . . . . . . . . . . . . . . . 24,457 21,717
------- -------
37,107 28,287
Less -- Accumulated Depreciation . . . . . . . . . . . . . 1,714 2,069
------- -------
35,393 26,218
Mortgage Loan Receivable . . . . . . . . . . . . . . . . . . -- 10,646
------- -------
Net Investment Portfolio . . . . . . . . . . . . . . . . . . . 35,393 36,864
Marketable Securities -- REMICs . . . . . . . . . . . . . . . . 1,792 1,992
Short-Term Investments:
Vanguard Money Market Reserves - Prime Portfolio
(730,415 and 1,478,147 shares, respectively) . . . . . . . 730 1,478
Temporary Cash Investments . . . . . . . . . . . . . . . . . 5,495 2,000
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 971 945
------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $44,381 $43,279
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage Loans (including current portion of $111 and $102,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . $ 2,306 $ 2,383
Due to Affiliates . . . . . . . . . . . . . . . . . . . . . . . 93 98
Dividend Payable . . . . . . . . . . . . . . . . . . . . . . . 551 --
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . 613 297
------- -------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 3,563 2,778
------- -------
Shares of Beneficial Interest, without par value,
unlimited shares authorized . . . . . . . . . . . . . . . . . 34,394 36,047
Undistributed Net Income . . . . . . . . . . . . . . . . . . . 6,424 4,454
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TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . 40,818 40,501
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . $44,381 $43,279
======= =======
The accompanying notes are an integral part of these statements.
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4
Income Statements
(Unaudited)
Three Months Ended September 30,
1995 1994
(000) (000)
------ ------
REAL ESTATE INCOME
Rental Income . . . . . . . . . . . . . . . . . . . . . . . . $1,207 $2,032
Mortgage Interest Income . . . . . . . . . . . . . . . . . . . 121 285
------ ------
1,328 2,317
------ ------
REAL ESTATE EXPENSES
Mortgage Interest Expense . . . . . . . . . . . . . . . . . . 58 60
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . 99 202
Property Operating Expenses . . . . . . . . . . . . . . . . . 295 584
Depreciation and Amortization . . . . . . . . . . . . . . . . -- 308
------ ------
452 1,154
------ ------
INCOME FROM REAL ESTATE . . . . . . . . . . . . . . . . . . . 876 1,163
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 80 127
------ ------
956 1,290
------ ------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . . . 48 84
Administrative Fee . . . . . . . . . . . . . . . . . . . . . . 44 70
Other Administrative Expenses . . . . . . . . . . . . . . . . 60 80
------ ------
152 234
------ ------
INCOME BEFORE NET GAIN (LOSS) ON SALE
OF INVESTMENT . . . . . . . . . . . . . . . . . . . . . . 804 1,056
Net Gain (Loss) on Sale of Investment . . . . . . . . . . . . . 64 (67)
------ ------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . $ 868 $ 989
====== ======
Weighted Average Number of Shares Outstanding . . . . . . . . 11,019,978 11,019,978
========== ==========
Net Income Per Share:
Income Before Net Gain (Loss) on Sale of Investment . . . $.07 $.10
Net Gain (Loss) on Sale of Investment . . . . . . . . . . .01 (.01)
---- ----
Net Income Per Share . . . . . . . . . . . . . . . . . . . . . $.08 $.09
==== ====
The accompanying notes are an integral part of these statements.
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5
Income Statements
(Unaudited)
Nine Months Ended September 30,
1995 1994
(000) (000)
------ ------
REAL ESTATE INCOME
Rental Income . . . . . . . . . . . . . . . . . . . . . . . . $3,284 $5,670
Mortgage Interest Income . . . . . . . . . . . . . . . . . . . 731 805
Net Income from In-Substance Foreclosed Assets . . . . . . . . -- 341
------ ------
4,015 6,816
REAL ESTATE EXPENSES ------ ------
Mortgage Interest Expense . . . . . . . . . . . . . . . . . . 176 183
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . 302 570
Property Operating Expenses . . . . . . . . . . . . . . . . . 889 1,069
Depreciation and Amortization . . . . . . . . . . . . . . . . -- 904
Provision for Possible Losses . . . . . . . . . . . . . . . . 400 780
------ ------
1,767 3,506
------ ------
INCOME FROM REAL ESTATE . . . . . . . . . . . . . . . . . . . 2,248 3,310
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . 201 284
------ ------
2,449 3,594
------ ------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . . . 141 257
Administrative Fee . . . . . . . . . . . . . . . . . . . . . . 130 219
Other Administrative Expenses . . . . . . . . . . . . . . . . 272 243
------ ------
543 719
INCOME BEFORE NET GAIN (LOSS) ON SALE ------ ------
OF INVESTMENT . . . . . . . . . . . . . . . . . . . . . . 1,906 2,875
Net Gain (Loss) on Sale of Investment . . . . . . . . . . . . . 64 (67)
------ ------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $1,970 $2,808
====== ======
Weighted Average Number of Shares Outstanding . . . . . . . . 11,019,978 11,019,978
========== ==========
Net Income Per Share:
Income Before Net Gain (Loss) on Sale of Investment . . . $.17 $ .26
Net Gain (Loss) on Sale of Investment . . . . . . . . . . .01 (.01)
---- -----
Net Income Per Share . . . . . . . . . . . . . . . . . . . . . $.18 $ .25
==== =====
The accompanying notes are an integral part of these statements.
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6
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended September 30,
1995 1994
(000) (000)
------ -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 868 $ 989
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization . . . . . . . . . . . . . . -- 308
Net (Gain) Loss on Sale of Investment . . . . . . . . . . (64) 67
Valuation Allowance on Marketable Securities . . . . . . . -- 23
Changes in Other Assets and Liabilities . . . . . . . . . (507) (25)
------ -------
Net Cash Provided by Operating Activities . . . . . . . . . 297 1,362
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Building Improvements . . . . . . . . . . . . . . . . . . . (40) (14)
Sale of Investment -- Deluxe Check . . . . . . . . . . . . -- 5,342
Sale of Investments -- Shoreview, Fairview . . . . . . . . . 1,655 --
Principal Repayments on Marketable Securities -- REMICs . . . 77 67
------ -------
Net Cash Provided by Investing Activities . . . . . . . . . 1,692 5,395
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . . . . . (26) (24)
Distributions Paid . . . . . . . . . . . . . . . . . . . . . . (551) (1,653)
------ -------
Net Cash Used In Financing Activities . . . . . . . . . . . (577) (1,677)
------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 1,412 5,080
CASH AND CASH EQUIVALENTS -- Beginning of Period . . . . . . . 4,813 9,478
------ -------
CASH AND CASH EQUIVALENTS -- End of Period . . . . . . . . . . $ 6,225 $14,558
====== =======
The accompanying notes are an integral part of these statements.
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STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES (000) (000)
------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,970 $ 2,808
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Losses . . . . . . . . . . . . . . 400 780
Depreciation and Amortization . . . . . . . . . . . . . . -- 904
Net (Gain) Loss on Sale of Investment . . . . . . . . . . (64) 67
Valuation Allowance on Marketable Securities . . . . . . . -- 83
Changes in Other Assets and Liabilities . . . . . . . . . (173) (8)
------- -------
Net Cash Provided by Operating Activities . . . . . . . 2,133 4,634
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Building Improvements . . . . . . . . . . . . . . . . . . . (49) (14)
Sale of Investment -- Deluxe Check . . . . . . . . . . . . . -- 5,342
Sale of Investments -- Shoreview, Fairview . . . . . . . . . 1,655 --
Marketable Securities Acquired . . . . . . . . . . . . . . . . -- (715)
Principal Repayments on Marketable Securities -- REMICs . . . . 187 204
------- -------
Net Cash Provided by Investing Activities . . . . . . . . . 1,793 4,817
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . . . . . (77) (70)
Distributions Paid . . . . . . . . . . . . . . . . . . . . . . (1,102) (3,306)
------- -------
Net Cash Used In Financing Activities . . . . . . . . . . . (1,179) (3,376)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 2,747 6,075
CASH AND CASH EQUIVALENTS -- Beginning of Period . . . . . . . 3,478 8,483
------- -------
CASH AND CASH EQUIVALENTS -- End of Period . . . . . . . . . . $ 6,225 $14,558
======= =======
The accompanying notes are an integral part of these statements.
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8
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Shares of Total
Beneficial Interest Undistributed Shareholders'
Amount Net Income Equity
Number (000) (000) (000)
---------- -------- ------------- -------------
Balance: January 1, 1995 . . . . . . 11,019,978 $36,047 $4,454 $40,501
Net Income for the Period . . . . . . 1,970 1,970
Liquidating Distributions . . . . . . (1,653) (1,653)
---------- ------- ------ -------
Balance: September 30, 1995 . . . . . 11,019,978 $34,394 $6,424 $40,818
========== ======= ====== =======
The accompanying notes are an integral part of these statements.
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9
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, 1994. The results of operations
for the three and nine months ended September 30, 1995, are not necessarily
indicative of the results for the entire year ending December 31, 1995.
2. On December 12, 1994, the Fund's Board of Trustees adopted a Plan of
Liquidation and Termination (the "Liquidation Plan"). The Fund's Declaration
of Trust initially contemplated the liquidation of all of the Fund's
investments after a period of approximately seven to twelve years following
completion of its initial public offering, or between June 30, 1994, and 1999,
respectively. The Trustees' decision to adopt the Liquidation Plan at this
point in the Fund's initially contemplated liquidation period was driven by
several factors, including real estate market conditions affecting each
investment in the Fund's portfolio, and tax considerations affecting real
estate investment trusts. The Liquidation Plan provides that the Fund will
dispose of all of its assets, wind up its affairs, pay or adequately provide
for the payment of all of its liabilities, and distribute for the benefit of
its shareholders all of the Fund's assets over 24 months, in complete
cancellation and redemption of all issued and outstanding shares of beneficial
interest. Under the Liquidation Plan, the Fund's Adviser (Aldrich, Eastman &
Waltch, L.P.), Trustees and officers are authorized and directed to take any
and all actions as may be necessary or convenient to market the assets of the
Fund and convert them into a form that may be distributed to shareholders. The
Liquidation Plan provides that the Fund's assets may be sold, conveyed,
transferred or otherwise disposed of when and on such terms and conditions as
are deemed by the Trustees to be in the best interests of the Fund and the
shareholders.
The Fund is currently in the process of liquidating its real estate
investments with the intention of distributing the net proceeds to its
shareholders in accordance with the Liquidation Plan. On September 30, 1995,
the Fund held investments in three income-producing properties or portfolios,
including two commercial properties (consisting of two shopping centers
located in Torrance, California, and Durham, North Carolina) and one
residential apartment complex located in Montgomery County, Maryland. It is
contemplated that the Fund will be completely liquidated and dissolved by
December 12, 1996. To the extent that the Fund has not disposed of all of its
assets or made provision for all of its liabilities on December 12, 1996, the
Fund intends to form a liquidating trust, the beneficiaries of which will be
the shareholders of the Fund. All assets and liabilities of the Fund not
previously disposed of and discharged will be transferred to the liquidating
trust. Shares of the Fund would no longer be traded and the beneficial
interests in the liquidating trust would not be readily transferable.
3. The Fund's financial statements have been prepared on the basis of a
going concern using historical cost. In December 1994, upon adoption of the
Liquidation Plan, the Fund considered all of its remaining investments
as held for sale and reduced the carrying value of such investments to the
extent that each investment's then-current carrying value exceeded its
estimated net realizable value, defined as estimated fair market value less
selling costs. Prior to the adoption of the Liquidation Plan, depreciation on
real estate owned was computed using the straight-line method over 40 years for
buildings and costs incurred in conjunction with the acquisition of real estate
investments were deferred and amortized on a straight-line basis over the life
of the loan for mortgage loan investments and the life of the property for
equity investments. Subsequent to adoption of the Liquidation Plan, no
depreciation
8
10
or amortization expense related to the Fund's owned real estate and acquisition
costs is recognized since the Fund's real estate investments are considered to
be held-for-sale assets.
4. In late September 1994, the Fund exercised its call right with respect
to its Plaza del Amo shared-appreciation, wrap-around mortgage loan
investment. As a result, the entire balance of the loan, less the unpaid
balance of the senior mortgage on the Plaza property, was due and payable in
late March 1995. The borrower failed to tender payment of the outstanding loan
balance on the due date, resulting in a default under the terms of the loan. On
July 31, 1995, the borrower transferred title to the property, in lieu of
foreclosure, to the Fund with the borrower retaining a residual interest in the
shared-appreciation feature of the mortgage.
Under the original loan terms, upon repayment of the loan, both the
borrower and the Fund were entitled to a share of the property's appreciation,
if any, equal to 50% of Plaza's fair market value in excess of the original
wrap-around loan balance of $10,646,000. In consideration for the borrower
agreeing to transfer title to the Fund in lieu of foreclosure, the transfer
agreement provides that, upon the Fund's ultimate sale of Plaza, the Fund will
pay the borrower the greater of 2% of Plaza's net sales proceeds, as defined,
or a share of Plaza's net sales proceeds in excess of the original wrap-around
mortgage loan balance such that the borrower and the Fund share in the
Property's appreciation equally as contemplated in the original mortgage loan
agreement.
Upon transfer of title, the Fund recorded the property at its
estimated fair market value less selling costs. Such costs included the
estimated minimum shared-appreciation obligation of $230,000 guaranteed the
borrower pursuant to the transfer agreement, such amount determined based on
the property's current estimated fair market value. Of this amount, $110,000
was paid to the borrower on the transfer date. Since the net realizable value
of the property received approximated the carrying value of the Fund's mortgage
loan investment, no gain or loss was recorded during the quarter ended
September 30, 1995, as a result of the Fund obtaining title to Plaza.
5. During the quarter ended March 31, 1995, $400,000 was charged to the
provision for possible losses to write down the carrying value of the Minnesota
Portfolio to its estimated fair market value less selling costs.
6. On July 28, 1995, the Fund sold the Shoreview and Fairview
Buildings, the remaining buildings in the Minnesota Portfolio, for a contract
price of $1,780,000. In connection with the sale, and in accordance with the
terms of the Fund's amended advisory agreement, the Fund incurred a disposition
fee of $25,000, payable to its Adviser. The Fund, also at closing, paid
brokerage commissions of $66,000.
9
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Vanguard Real Estate I, a Sales-Commission-Free Income Properties Fund (the
"Fund"), a Massachusetts business trust established in 1987, is a qualified
finite-life real estate investment trust ("REIT") under the Internal Revenue
Code of 1986. At September 30, 1995, the Fund's real estate investments
include three direct ownership commercial properties comprised of two shopping
centers and one residential apartment complex. Geographically, two of the
Fund's investments are located in the Mideast and one property is located in
the Pacific Southwest. The Fund's Declaration of Trust precludes the Fund from
reinvesting net proceeds from the sale or repayment of its real estate
investments in additional real estate investments after December 31, 1993 and
contemplates the liquidation of all of the Fund's investments after a period of
approximately seven to twelve years following completion of its initial public
offering or between June 30, 1994 and 1999, respectively.
On December 12, 1994, the Fund's Board of Trustees approved a Plan of
Liquidation and Termination (the "Liquidation Plan"). The Trustee's decision
to then adopt the Liquidation Plan was driven by several factors, including
real estate market conditions affecting each investment in the Fund's portfolio
and tax considerations affecting real estate investment trusts. The
Liquidation Plan provides that the Fund will dispose of all of its assets, wind
up its affairs, pay or adequately provide for the payment of all of its
liabilities and distribute for the benefit of its shareholders all of the
Fund's assets over 24 months, in complete cancellation and redemption of all
issued and outstanding shares of beneficial interest. Under the Liquidation
Plan, the Fund's Adviser (Aldrich, Eastman and Waltch, L.P.), Trustees and
officers are authorized and directed to take any and all actions as may be
necessary or convenient to market the assets of the Fund and convert them into
a form that may be distributed to shareholders. The Liquidation Plan provides
that the Fund's assets may be sold, conveyed, transferred or otherwise disposed
of when and on such terms and conditions as are deemed by the Trustees to be in
the best interests of the Fund and the shareholders.
The Fund is currently in the process of liquidating its real estate investments
and distributing the net proceeds to its shareholders in accordance with the
Liquidation Plan. It is contemplated that the Fund will be completely
liquidated and dissolved by December 12, 1996. To the extent that the Fund has
not disposed of all of its assets or made provision for all of its liabilities
on December 12, 1996, the Fund intends to form a liquidating trust, the
beneficiaries of which will be the shareholders of the Fund. All assets and
liabilities of the Fund not previously disposed of and discharged will be
transferred to the liquidating trust and the shares of the Fund would no longer
be traded. The beneficial interests in the liquidating trust would not be
readily transferable.
All Fund distributions paid subsequent to December 31, 1994 will be liquidating
distributions and will be non-taxable to a shareholder to the extent the
shareholder has remaining tax cost basis in the Fund's shares.
10
12
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 VS. NINE MONTHS ENDED SEPTEMBER 30, 1994
The Fund had net income of $1,970,000, or $.18 per share, for the nine months
ended September 30, 1995, as compared to net income of $2,808,000, or $.25 per
share for the nine months ended September 30, 1994. Included in net income in
1995 is a $64,000 gain realized in the third quarter of 1995 on the sale of the
Shoreview and Fairview Buildings, the remaining buildings in the Minnesota
Portfolio. The Fund completed the sale on July 28, 1995 and realized net
proceeds in the amount of $1,655,000. The terms of the sale are more fully
described in Note 6 to the accompanying financial statements. Excluding this
gain, and a $67,000 loss resulting from the sale of the Deluxe Check Building
of the Minnesota Portfolio in the third quarter of 1994, net income decreased
$969,000 for the nine-month period ended September 30, 1995 as compared to net
income for the same period in 1994. As more fully described below, this
decrease in net income reflects (i) decreases in net rental income, net income
from in-substance foreclosed assets, income from short-term investments, and
mortgage interest income, partially offset by decreases in administrative
expenses and depreciation and amortization expense, in each case as compared to
such items in 1994, and (ii) a provision for possible losses of $400,000 for
the nine months ended September 30, 1995, as compared to $780,000 for the
comparable period in 1994.
Net rental income (rental income less real estate taxes and property operating
expenses) decreased by $1,938,000, or 48%, from $4,031,000 for the nine months
ended September 30, 1994 to $2,093,000 for the nine months ended September 30,
1995. This decrease was primarily due to the disposition of the Seattle
Industrial Portfolio and the Deluxe Check Building (part of the Minnesota
Portfolio) in 1994, which generated for the Fund net rental income of
$2,416,000 and $465,000, respectively, for the nine months ended September 30,
1994. This decline was partially offset by an increase of $683,000 in net
rental income generated for the Fund in the nine months ended September 30,
1995 as compared to the similar 1994 period from the Sheffield Forest
Apartment Complex (as more fully described on page 12, this investment was
classified as an in-substance foreclosed asset from January 1, 1994 until the
Fund obtained title in April 1994), and a $179,000 increase in net rental
income from the Plaza del Amo Shopping Center as a result of the Fund obtaining
title in late July 1995, as more fully described below, to this property which
secured its former mortgage loan investment. In September 1994, the Fund
exercised its call right with respect to its Plaza del Amo shared-appreciation,
wrap-around mortgage loan investment. As a result, the entire balance of the
loan, less the unpaid balance of the senior mortgage on the Plaza property, was
due and payable in late March 1995. The borrower failed to tender payment of
the outstanding loan balance on the due date, resulting in default under the
terms of the loan. Effective July 31, 1995, the borrower transferred title to
the property, in lieu of foreclosure, to the Fund, with the borrower retaining
a residual interest in the shared-appreciation feature of the mortgage. The
terms of the transfer are more fully described in Note 4 to the accompanying
financial statements.
At September 30, 1995 and September 30, 1994, the overall occupancy rate of the
Fund's direct real estate investments, excluding Sheffield, was 98% and 97%,
respectively. The occupancy rate of Sheffield was 91% and 95% at September
30, 1995 and September 30, 1994, respectively. Leases for 1% of the rentable
space of the properties directly owned by the Fund, excluding Sheffield, expire
over the remainder of 1995. Leases for units at Sheffield 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 can be no
assurance that the Fund will be able to maintain its current occupancy and
level of income.
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For the nine months ended September 30, 1994, net income from in-substance
foreclosed assets was $341,000. No such income was generated for the same
period in 1995. In January 1994, the borrower under the Sheffield mortgage
loan investment (a limited partnership whose sole asset was the Sheffield
property) defaulted on the loan by making only a partial payment on the
then-due interest installment. On April 13, 1994, the Fund received title to
the underlying property by means of a transfer of all of the partnership
interests of the borrower in full satisfaction of the mortgage loan outstanding
and the investment was reclassified from an in-substance foreclosed asset to a
direct ownership investment. During the period of default, the borrower
remitted the net cash flow generated by the property to the Fund.
Investment income from short-term investments decreased by $83,000, or 29%,
from $284,000 for the nine months ended September 30, 1994 to $201,000 for the
same period of 1995. This decrease was primarily due to a decrease in the
average short-term investment balance for the nine months ended September 30,
1995, as compared to the same period of 1994, which decrease was partially
offset by an increase in prevailing short-term interest rates in 1995 as
compared to 1994.
Mortgage interest income decreased by $74,000, from $805,000 for the nine
months ended September 30, 1994 to $731,000 for the comparable period of 1995.
This decrease was primarily attributable to the transfer of Plaza del Amo to the
Fund in July 1995, which resulted in a decrease in mortgage interest income of
$164,000. This decrease was offset by an increase in mortgage interest income
due to a higher investment balance in REMIC securities in 1995 as compared to
such balance during the same period of 1994.
The Fund's financial statements have been prepared on the basis of a going
concern using historical cost. In December 1994, upon adoption of the
Liquidation Plan, the Fund classified all of its remaining investments as "held
for sale" and reduced the carrying value of such investments to the extent that
each investment's then-current carrying value exceeded its estimated "net
realizable value", defined as estimated fair market value less selling costs.
Prior to the adoption of the Liquidation Plan, depreciation on real estate
owned was computed using the straight-line method over 40 years for buildings,
and costs incurred in conjunction with the acquisition of real estate
investments were deferred and amortized on a straight-line basis over the life
of the loan for mortgage loan investments and the life of the property for
equity investments. Subsequent to adoption of the Liquidation Plan, no
depreciation or amortization expense related to the Fund's owned real estate
and acquisition costs has been recognized, since the Fund's real estate
investments are considered to be "held-for-sale" assets.
Administrative expenses decreased by $176,000, or 24%, from $719,000 for the
nine months ended September 30, 1994 to $543,000 for the comparable period of
1995. This decrease was primarily due to lower advisory and administrative
fees payable in the 1995 period, which fees are based on average invested real
estate assets. The Fund's average assets invested in real estate decreased
during 1995 due to the sale of the Seattle and Deluxe Check investments in the
latter half of 1994 and the sale of the remaining Minnesota Portfolio
properties consisting of the Shoreview and Fairview Buildings in July 1995.
The provision for possible losses is based upon management's regular evaluation
of the recoverability of each investment in the portfolio. During the quarter
March 31, 1995, the Fund charged $400,000 to its provision for possible losses
to write down the carrying value of the two remaining buildings in the
Minnesota Portfolio to their then-estimated fair market value less selling
costs.
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On September 12, 1995, the Fund declared a third quarter liquidating
distribution of $.05 per share, payable on October 31, 1995 to shareholders of
record as of September 29, 1995.
THREE MONTHS ENDED SEPTEMBER 30, 1995 VS. THREE MONTHS ENDED SEPTEMBER 30, 1994
The Fund had net income of $868,000, or $.08 per share, for the three-months
ended September 30, 1995, as compared to net income of $989,000, or $.09 per
share, for the same period of 1994. Excluding the gain realized on the sale of
the Shoreview and Fairview Buildings in the third quarter of 1995 and the loss
recorded on the sale of the Deluxe Check Building in the third quarter of 1994,
net income for the three months ended September 30, 1995 decreased by $252,000
from the comparable 1994 period. This decrease, as more fully described below,
was primarily due to decreases in net rental income, mortgage interest income
and investment income, partially offset by decreases in depreciation and
amortization expenses and administrative expenses, in each case as compared to
such items in the three-month period ended September 30, 1994.
Net rental income decreased by $433,000, or 35%, from $1,246,000 for the three
months ended September 30, 1994 to $813,000 for the three months ended
September 30, 1995. This decrease was primarily due to the sale of the Seattle
investment in October 1994, which generated for the Fund $816,000 of net rental
income for the three months ended September 30, 1994, and the sales of the
Deluxe Check building, in August of 1994, and the Fairview and Shoreview
buildings, in July of 1995, of the Minnesota Portfolio. The Minnesota
Portfolio generated for the Fund $147,000 of net rental income for the three
months ended September 30, 1994 as compared to $19,000 of net rental income for
the comparable period in 1995. This decline was partially offset by increases
of $247,000 and $178,000 in net rental income generated for the Fund in the
three months ended September 30, 1995 by the Fund's former mortgage loan
investments, Sheffield Forest and Plaza del Amo, respectively, as compared to
the same period in 1994. The Fund obtained title to Sheffield Forest and Plaza
del Amo in April 1994 and July 1995, respectively. In the case of Sheffield,
its net rental income for the 1994 period was reduced by significant
expenditures to remedy the effects of routine property maintenance deferred by
the former borrower. Plaza was classified as a mortgage loan during all of
1994.
Mortgage interest income decreased by $164,000, or 58%, from $285,000 for the
three months ended September 30, 1994 to $121,000 for the comparable period of
1995. This decrease was primarily attributable to the transfer of title to the
Fund of the Plaza del Amo Shopping Center in July 1995. Plaza provided
mortgage interest income of $275,000 for the three months ended September 30,
1994 as compared to $91,000 for the same period of 1995.
Short-term investment income decreased by $47,000, or 37%, from $127,000 for
the three months ended September 30, 1994 to $80,000 for the comparable period
of 1995. This decrease was primarily due to a lower average short-term
investment balance for the three months ended September 30, 1995 as compared to
the three months ended September 30, 1994. This decrease was partially offset
by an increase in prevailing short-term interest rates in 1995 as compared to
1994.
Administrative expenses decreased by $82,000, or 35%, from $234,000 for the
three months ended September 30, 1994 to $152,000 for the comparable period of
1995. This decrease was primarily due to lower advisory and administrative
fees, payable in 1995 period, which fees are based on average invested real
estate assets. The Fund's assets invested in real estate decreased during the
1995 period due to the sale of the Seattle and Deluxe Check investments in the
latter half of 1994, and the sale of the remaining two properties of the
Minnesota Portfolio in July 1995.
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As described above in the comparison of results for the nine months ended
September 30, 1995 vs. September 30, 1994, the Fund is in the process of
liquidating its real estate investments consistent with its Plan of Liquidation
adopted on December 12, 1994 and considers its assets to be held for sale.
Accordingly, no depreciation or amortization expense has been recorded in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During the Fund's liquidation period, its ability to make quarterly
distributions will be dependent upon its financial condition, earnings and cash
flow, cash position and future working capital requirements. As a result of
1994 property sales, and the subsequent year-end liquidating distribution of
the proceeds from such sales, the book value of the Fund's shares has been
significantly reduced. Accordingly, the amount of future income the Fund may
be expected to generate will also be reduced. Further, as a result of the
adoption of the Liquidation plan, the Fund's remaining investments are being
held for sale, rather than the production of income, and, accordingly income
from real estate can be expected to continue to decline throughout the Fund's
liquidation period as the Fund's remaining properties are sold.
Future quarterly liquidating distributions to shareholders, excluding any
amounts distributed from net proceeds from property sales, will be largely
dependent upon the amount of funds from operations generated by the Fund during
its liquidation period. For the nine months ended September 30, 1995, funds
from operations (defined as net income before gains or losses plus depreciation
and amortization and provision for possible losses) in the amount of
$2,306,000, or $.21 per share, exceeded by $653,000 the amount of paid and
accrued distributions to shareholders ($.15 per share) for the period. Funds
from operations are generated from the ongoing operations of the Fund's direct
real estate investments and interest income on short-term investments.
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 during the
liquidation period 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 are defined
as cash and cash equivalents including the Fund's investment in marketable
securities, 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 September 30, 1995 aggregated approximately $7.7 million, representing 6.7%
of the initial public offering proceeds, compared to working capital reserves
of $5.7 million at December 31, 1994, which represented 5.0% of the Fund's
initial offering proceeds.
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
September 30, 1995, 413,725 shares have been repurchased at an aggregate cost
of $3,134,000. No shares have been repurchased since September 1993 and the
Fund's management, in light of adoption of the Liquidation Plan, does not
expect the Fund to repurchase any additional shares.
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, if any.
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
requirements.
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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.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
A Financial Data Schedule for the nine months ended
September 30, 1995, was submitted in electronic
format only.
(b) Reports on Form 8-K
The Fund filed no reports on Form 8-K during the third quarter
ended September 30, 1995.
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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 November 14, 1995 /s/ John J. Brennan
__________________________________ ___________________________
John J. Brennan
President
DATE November 14, 1995 /s/ Ralph K. Packard
__________________________________ ___________________________
Ralph K. Packard
Vice President & Controller
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