FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 1996
or
_____ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from __________ to __________
Commission File Number 1-9450
METROPOLITAN REALTY CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2724893
(State of incorporation) (I.R.S. Employer Identification No.)
535 Griswold, Suite 748
Detroit, Michigan 48226
(Address of principal executive offices)
(313) 961-5552
(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 _____
The number of shares outstanding of the registrant's common stock as of March
31, 1996 was 4,532,169.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
METROPOLITAN REALTY CORPORATION
BALANCE SHEET
March 31, 1996 and December 31, 1995
===============================================================================================
March 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents .................................. $ 1,105,021 $ 2,446,221
Marketable securities ...................................... 14,965,938 13,326,733
Mortgage notes receivable:
Notes, earning ........................................... 22,714,161 22,757,998
Notes, related party ..................................... 4,198,195 4,206,330
Allowance for loan losses ................................ (1,600,000) (1,600,000)
------------ ------------
25,312,356 25,364,328
Accrued interest and other receivables ..................... 286,579 282,620
Other assets ............................................... 350,221 340,999
------------ ------------
Total assets ....................................... $ 42,020,115 $ 41,760,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable:
Shareholder ............................................ $ 11,000 $ 5,500
Trade .................................................. 72,253 120,032
Deferred income .......................................... 124,552 153,952
Deposits from borrowers for property taxes ............... 155,184 146,385
Other .................................................... 813 1,705
------------ ------------
Total liabilities .................................. 363,802 427,574
------------ ------------
Commitments ................................................ -- --
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding ........... -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 4,532,169 shares issued and outstanding .... 45,322 45,322
Additional paid-in-capital ............................... 43,355,529 43,355,529
Unrealized holding gains (losses) on marketable securities
available for sale ..................................... (2,082) 47,690
Distributions in excess of net investment income ......... (1,742,456) (2,115,214)
------------ ------------
Total shareholders' equity ......................... 41,656,313 41,333,327
------------ ------------
Total liabilities and shareholders' equity .. $ 42,020,115 $ 41,760,901
============ ============
<FN>
==============================================================================
The accompanying notes are an integral part of the financial statements.
1
METROPOLITAN REALTY CORPORATION
STATEMENT OF OPERATIONS
for the three months ended March 31, 1996 and 1995
and the year ended December 31, 1995
==========================================================================================
Three months ended Year ended
March 31, 1996 March 31, 1995 December 31, 1995
- ------------------------------------------------------------------------------------------
Income:
Interest income from mortgage notes $ 689,214 $ 676,630 $2,754,975
Investment income ................. 266,671 199,668 866,168
Miscellaneous income .............. 40,077 74,215 142,916
---------- ---------- ----------
Total income ................ 995,962 950,513 3,764,059
---------- ---------- ----------
Operating expenses:
General and administrative ........ 124,666 177,288 841,903
Change in allowance for loan losses -- -- 600,000
Net loss from foreclosed property
held for sale ................... -- 10,704 331,953
---------- ---------- ----------
Total operating expenses .... 124,666 187,992 1,773,856
---------- ---------- ----------
Net investment income ....... $ 871,296 $ 762,521 $1,990,203
========== ========== ==========
Net investment income per share ..... $ .19 $ .17 $ .44
========== ========== ==========
Weighted average shares of common
stock outstanding ................. 4,532,169 4,532,169 4,532,169
========== ========== ==========
<FN>
=============================================================================
The accompanying notes are an integral part of the financial statements.
2
METROPOLITAN REALTY CORPORATION
STATEMENT OF CASH FLOWS
for the three months ended March 31, 1996 and 1995
========================================================================================================
Three months ended
March 31, 1996 March 31, 1995
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net investment income ........................................... $ 871,296 $ 762,521
----------- -----------
Adjustments to reconcile net investment income to
net cash provided by operating activities:
Amortization of net loan origination fees ...................... (11,498) (11,454)
Depreciation expense ........................................... 739 17,764
Expiration of commitment and application fees .................. (29,400) --
Other .......................................................... 5,719 3,714
Increase in assets:
Accounts receivable ........................................... (3,959) (25,684)
Other assets .................................................. (9,961) (102,465)
Increase (decrease) in liabilities:
Accounts payable .............................................. (42,279) 28,590
Other liabilities ............................................. 7,907 50,722
----------- -----------
Total adjustments ................................. (82,732) (38,813)
----------- -----------
Net cash provided by operating activities ......... 788,564 723,708
----------- -----------
Cash flows from investing activities:
Purchase of marketable securities ............................... (2,011,406) --
Collections of principal from marketable securities ............. 316,710 197,610
Loan repayments ................................................. 78,032 68,761
Loan disbursements .............................................. (14,561) --
Commitment and loan extension fees received ..................... -- 15,000
----------- -----------
Net cash provided by (used in) investing activities (1,631,225) 281,371
----------- -----------
Cash flows used in financing activities, dividends paid .......... (498,539) (589,182)
----------- -----------
Net increase (decrease) in cash and cash equivalents ............. (1,341,200) 415,897
----------- -----------
Cash and cash equivalents, beginning of period ................... 2,446,221 3,529,334
----------- -----------
Cash and cash equivalents, end of period ......................... $ 1,105,021 $ 3,945,231
=========== ===========
<FN>
==============================================================================
The accompanying notes are an integral part of the financial statements.
3
METROPOLITAN REALTY CORPORATION
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer to
the financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended
December 31, 1995.
The accompanying financial statements for the three months ended March
31, 1995 reflect certain reclassifications to be consistent with the
presentation adopted for the three months ended March 31, 1996.
2. Earnings per Share
The earnings per share for the three months ended March 31, 1996 and
1995 and the year ended December 31, 1995 are based on the weighted
average number of shares of common stock outstanding during the
period.
3. Marketable Securities
Marketable securities available for sale are carried at market value
and unrealized gains and losses are included in a separate component
of shareholders' equity. Shareholders' equity at March 31, 1996
includes net unrealized holding losses on marketable securities of
$2,082. Marketable securities at March 31, 1996 and December 31, 1995
consist of Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation mortgage-backed securities and U.S. Treasury
Notes. Realized gains and losses on sales of securities are determined
based upon specific identification.
The net loss on the sales of marketable securities included in
investment income in the accompanying statement of operations
aggregated $5,719 for the three months ended March 31, 1996 and $3,714
for the three months ended March 31, 1995. At March 31, 1996 and 1995,
all marketable securities are considered available for sale.
4
4. Mortgage Notes Receivable
Mortgage notes receivable as of the dates indicated are summarized as
follows:
====================================================================================================
March 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------
9.09% Mortgage note receivable, net of loan origination fees of
$26,537 at March 31, 1996 and $27,668 at December 31, $4,198,195 $4,206,330
1995, due monthly in installments of principal and interest of
$35,494 through December 2000
10.875% Mortgage note receivable, net of loan origination
fees of $6,172 at March 31, 1996 and $6,505 at December 31, 964,445 965,898
1995, due monthly in varying installments of principal and
interest through December 1999
9.3752% Mortgage note receivable, net of loan origination fees
of $7,988 at March 31, 1996 and $6,541 at December 31, 2,105,684 2,111,851
1995, due monthly in installments of principal and interest of
$18,298 through January 2000
9.26% Mortgage note receivable, net of loan origination fees of
$17,039 at March 31, 1996 and $17,951 at December 31, 1,805,709 1,812,889
1995, due monthly in varying installments of principal and
interest through April 2000
8.0% and 9.5% Mortgage note receivable, net of loan
origination fees of $5,731 at March 31, 1996 and $5,998 at 1,361,168 1,361,789
December 31, 1995, due monthly in varying installments of
principal and interest through August 2000
9.25% Mortgage note receivable, net of loan origination fees of
$8,452 at March 31, 1996 and $8,856 at December 31, 1995, 611,765 614,211
due monthly in installments of principal and interest of $5,800
through September 2000
7.25% Mortgage note receivable, net of loan origination fees of
$5,824 at March 31, 1996 and $6,103 at December 31, 1995, 667,516 669,449
due monthly in varying installments of principal and interest
through October 2000
10.5% Mortgage note receivable, net of loan origination fees of
$4,026 at March 31, 1996 and $4,194 at December 31, 1995, 939,264 940,653
due monthly in varying installments of principal and interest
through December 2000
11.25% Mortgage note receivable, net of loan origination fees
of $12,729 at March 31, 1996 and $13,272 at December 31, 2,095,647 2,100,907
1995, due monthly in installments of principal and interest of
$21,961 through October 2000
10.25% Mortgage note receivable, net of loan origination fees
of $3,542 at March 31, 1996 and $3,693 at December 31, 257,922 258,623
1995, due monthly in varying installments of principal and
interest through January 2001
11.25% Mortgage note receivable, net of loan origination fees
of $9,547 at March 31, 1996 and $9,954 at December 31, 1,571,735 1,575,680
1995, due monthly in installments of principal and interest of
$16,471 through October 2000
==============================================================================
5
4. Mortgage Notes Receivable, continued
============================================================================================================
March 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------
9.5% Mortgage note receivable through February 28, 1996
adjusted to 6.75% (based on the U.S. Treasury Securities $ 718,225 $ 719,601
weekly average yield adjusted to a constant maturity of 5 years
plus 1.5%) on March 1, 1996 to maturity, net of loan origination
fees of $8,845 at March 31, 1996 and $9,232 at
December 31, 1995, due monthly in varying installments of
principal and interest through February 2001
9.875% Mortgage note receivable, net of loan origination fees
of $15,026 at March 31, 1996 and $15,636 at December 31, 2,441,472 2,445,235
1995, due monthly in varying installments of principal and
interest through January 1999
10.25% and 9.75% Mortgage notes receivable, net of loan
origination fees of $16,107 at March 31, 1996 and $19,911 at 2,319,912 2,329,018
December 31, 1995, due monthly in varying installments of
principal and interest through April 1997
10.25% and 12.25% Mortgage notes receivable, net of loan
origination fees of $9,696 at March 31, 1996 and $11,989 at 2,230,596 2,239,156
December 31, 1995, due monthly in varying installments of
principal and interest through April 1997
10.25% Mortgage note receivable, net of loan origination fees
of $51,316 at March 31, 1996 and $52,570 at December 31, 1,740,623 1,741,822
1995, due monthly in installments of interest only through April
1995 at which time varying installments of principal and interest
will be due monthly through April 2003
Bank prime rate plus 1% Mortgage note receivable,
net of loan origination fees of $23,888 at March 31, 1996 and 434,966 420,406
1995, due monthly in installments of interest only until final
closing, July 1997, at which time payments of principal and interest
of $12,355 will be due monthly through July 2007
10.00% Mortgage note receivable due monthly in installments 447,512 450,810
of principal and interest of $4,889 through August 2000 ------------ ------------
26,912,356 26,964,328
Allowance for loan losses (1,600,000) (1,600,000)
------------ ------------
Mortgage notes receivable, net of allowance for loan losses $ 25,312,356 $ 25,364,328
============ ============
==============================================================================
The Company's portfolio of mortgage notes receivable are reported at
their principal outstanding balance net of charge-offs and deferred
loan fees and costs on originated loans. Interest income is generally
recognized when income is earned using the interest method. Loan
origination fees and certain direct loan origination costs are
deferred and the net amounts are amortized as adjustments of the
loans' yields.
6
4. Mortgage Notes Receivable, continued
The Company adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), as
amended by SFAS 118, on January 1, 1995. Under the new standard, a
loan is considered impaired, based on current information and events,
if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is based on the fair value of the underlying collateral. The
cumulative effect of adopting the provisions of SFAS No. 114 was not
significant.
The adequacy of the allowance for loan losses (substantially all of
the allowance is related to the provision for impaired loans as
discussed above) is periodically evaluated by the Company in order to
maintain the allowance at a level that is sufficient to absorb
probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of known and inherent risks in the loan
portfolio, including adverse circumstances that may affect the ability
of the borrower to repay interest and/or principal and the estimated
value of collateral. In determining the allowance for possible losses,
the Company has considered many indicators of value, including market
evaluations of the underlying collateral, the cost of money, operating
cash flow from the property during the projected holding period and
expected capitalization rates applied to the stabilized net operating
income of the specified property.
The allowance for credit losses is established through charges to
earnings in the form of a provision for loan losses. Increases and
decreases in the allowance due to changes in the measurement of
impaired loans are included in the provision for credit losses. Loans
continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is
considered probable. When a loan or portion of a loan is determined to
be uncollectible, the portion deemed uncollectible is charged against
the allowance and subsequent recoveries, if any, are credited to the
allowance.
At March 31, 1996, the total recorded investment in impaired loans, as
defined by SFAS 114, was $5,297,000. At March 31, 1996, all impaired
loans are classified as earning loans. The Company believes that the
allowance for loan losses of $1,600,000 at March 31, 1996 is at a
level that is sufficient to absorb probable credit losses in the
mortgage loan portfolio.
5. Real Estate Owned
A sale of the property which was foreclosed by the Company in 1992 was
consummated on August 1, 1995. In accordance with the terms of the
purchase agreement, the Company received $100,000 of the purchase
price at the August 1, 1995 settlement date. The remaining $455,000 of
the purchase price will be paid, pursuant to the terms of the mortgage
note bearing interest at 10% per annum, in monthly installments of
principal and interest of $4,889 commencing in September 1995 until
maturity in August 2000, at which time the remaining unpaid
7
5. Real Estate Owned, continued
principal of approximately $375,000 is due. The mortgage note is
guaranteed by the borrower and may be prepaid in whole or in part at
any time.
6. Dividends
Under pertinent provisions of the Internal Revenue Code (the "Code"),
a real estate investment trust may consider a dividend declared in a
subsequent year to be a distribution of income of the immediately
prior year and thus reduce income subject to income tax. On March 13,
1996, the Board of Directors of the Company declared a cash dividend
of $.11 per share of common stock, to its shareholders of record on
March 25, 1996, payable on March 29, 1996. Of this dividend, $.01 was
payable from income earned by the Company in 1995 and $.10 was payable
from 1996 income. These dividends are taxable to shareholders as
ordinary income.
7. Income Taxes
The Company intends to operate at all times to qualify as a real
estate investment trust under the Code. In general, each year
qualification is met, income is not subject to federal income tax at
the Company level to the extent distributed to shareholders. The
Company thus intends to distribute at least 95% of its net investment
income to its shareholders. Accordingly, no provision for income taxes
has been made for the three months ended March 31, 1996.
8. Related Party Transactions
The Company was involved in various transactions with affiliates as
follows:
Consulting fees under a contractual agreement aggregating $11,687 and
$11,300 were earned by an officer of the Company during the three
months ended March 31, 1996 and 1995, respectively.
Fees aggregating $5,512 and $7,040 during the three months ended March
31, 1996 and 1995, respectively were earned by a shareholder of the
Company for providing various investment and other services to the
Company.
During 1995, one of the Company's board members became the vice
president of an entity which has a mortgage note with the Company. The
carrying amount of the mortgage note receivable totaled $4,198,195 and
$4,206,330 at March 31, 1996 and 1995, respectively and earned the
Company $97,216 and $96,919 during the three months ended March 31,
1996 and 1995, respectively.
During the quarter ended March 31, 1996 and 1995, one of the Company's
directors was a member of a law firm which provides legal services to
the Company. Fees for legal services provided by the law firm amounted
to $13,472 and $79,251, of which $3,500 and $52,645 are deferred by
the Company (see Note 10), for the three months ended March 31, 1996
and 1995, respectively.
8
9. Commitments
At March 31, 1996, the Company had outstanding loan commitments
aggregating $906,000.
10. Other
On September 8, 1995, the Company's Board of Directors gave its
approval for a proposed restructuring of the Company into a limited
liability company ("LLC") and the generation of additional capital
through the LLC. The Company expects to raise new capital of $25 to
$50 million through the private placement of securities by the LLC.
Distributions to current company shareholders under the proposed LLC
restructuring are expected to remain consistent with current levels.
At March 31, 1996, $656,000 of professional fees have been incurred in
connection with this transaction, of which $328,000 have been
deferred.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations
The Company's investment in mortgage loans represented 60% and 61% of
its assets, or $25,312,356 and $25,364,328, at March 31, 1996 and December 31,
1995, respectively. The range of yields on mortgage loans closed from
the Company's inception through March 31, 1996 ranges from 7.06% to 12.25%.
The overall average yield on interest earning assets was 9.0% for the
three months ended March 31, 1996 and 8.7% for the year ended December 31,
1995. The average amount held in marketable securities net of unrealized
holding gains and losses for the three months ended March 31, 1996 was $14.1
million. The average yield (based on total yield divided by average amount of
investments) was 6.6% for the three months ended March 31, 1996 and 5.8% for
the year ended December 31, 1995.
Investment income from marketable securities increased $91,265 to
$236,281 for the first quarter of 1996 from $145,016 for the first quarter of
1995. Of the increase, $46,816 was the result of an increase in the average
yield and $44,449 was the result of an increase in average amount invested in
marketable mortgage-backed securities.
Investment income from money market securities decreased $24,255 to
$30,390 for first quarter of 1996 from $54,652 for the first quarter of 1995.
Of the decrease, $31,242 was the result of a decrease in the average amount
invested in money market securities offset by a $6,987 increase in the
average yield.
9
Interest income from mortgage notes increased $12,584 to $689,214 for
the first quarter of 1996 from $676,630 for the first quarter of 1995. Of the
increase, $13,893 was the result of an increase in average earning loans
offset by a $1,309 decrease in average yield.
Operating expenses decreased $63,326, or 34%, to $124,666 for the
first quarter of 1996 from $187,992 for the first quarter of 1995. This
decrease results from a $52,622 decrease in general and administrative
expenses, due primarily to decreased professional service and loan advisory
fees, and a $10,704 net loss from foreclosed property held for sale incurred
in 1994.
Net investment income increased 14% to $871,296 for the first three
months of 1996 from $762,521 for the first three months of 1995 as a result of
the items discussed above.
Management reviews, on a regular basis, factors which adversely affect
its mortgage loans, including occupancy levels, rental rates and property
values. It is possible that economic conditions in Southeast Michigan and the
nation in general may adversely affect certain of the Company's other loans.
The Company believes that the allowance for loan losses of $1,600,000 at March
31, 1996 is at a level that is sufficient to absorb probable credit losses in
the mortgage loan portfolio.
On December 23, 1992, the Company obtained an apartment building
located in Detroit, Michigan, through a foreclosure sale. This property was
the collateral for a construction loan under which the borrower defaulted
during 1992. The carrying value of the property was written down to its
estimated fair value at the time of foreclosure of $2,100,000, based upon a
July 1992 independent appraisal, net of a $140,000 valuation allowance for the
estimated costs to sell the property. At December 31, 1994 the carrying value
of the property was reduced to $900,000 to reflect an updated property
valuation based on the results of the Company's marketing efforts to locate a
buyer for the property. The carrying value of the property was further written
down to $555,000 during the quarter ended June 30, 1995 as the result of an
offer to purchase the property.
On August 1, 1995, the sale of this property was consummated. In
accordance with the terms of the purchase agreement, the Company received
$100,000 of the purchase price at the August 1, 1995 settlement date. The
remaining $455,000 of the purchase price will be paid, pursuant to the terms
of a mortgage note bearing interest at 10% per annum, in monthly installments
of principal and interest of $4,889 commencing in September 1995 until
maturity in August 2000, at which time the remaining unpaid principal of
approximately $375,000 is due. The mortgage note is guaranteed by the borrower
and may be prepaid in whole or in part at any time. The net loss from
foreclosed property held for sale totalled $10,704 for the three months ended
March 31, 1995.
During 1994, the Company reached settlements with the guarantors of
the foreclosed loan aggregating $320,000. These settlements are payable over
four to eight years, with interest rates ranging from non-interest bearing to
7.5%. Income from settlements is recorded as miscellaneous income when
received and totaled $9,500 and $34,000 for the three months ended March 31,
1996 and 1995, respectively.
10
Although the Company expects to have the balance of its available
assets invested in mortgage loans to real estate projects by the end of 1996,
management will continue its prudent approach of approving funding only of
those loans which meet appropriate underwriting criteria.
Liquidity and Capital Resources
Funds that have not yet been invested in mortgage loans are primarily
invested in marketable mortgage-backed securities until needed for the
Company's operations or investments in mortgage loans. Income and principal
received with respect to the Company's investment in mortgage loans are also
invested in marketable securities pending distribution to shareholders in the
form of dividends or reinvestment in mortgage loans. At March 31, 1996, the
Company had $25,312,356 invested in net mortgage loans, $9,459,688 invested in
marketable mortgage-backed securities, $5,506,250 invested in U.S. Treasury
Notes and $918,266 invested in money market funds.
At March 31, 1996, the Company had outstanding loan commitments
aggregating $906,000. The source of funds to satisfy these commitments will be
the Company's marketable securities. The Company anticipates that its sources
of cash are more than adequate to meet its liquidity needs.
On September 8, 1995, the Company's Board of Directors gave its
approval for a proposed restructuring of the Company into a limited liability
company ("LLC") and the generation of additional capital through the LLC. The
Company expects to raise new capital of $25 to $50 million through the private
placement of securities by the LLC. Distributions to current company
shareholders under the proposed LLC restructuring are expected to remain
consistent with current levels. At March 31, 1996, $656,000 of professional
fees have been incurred in connection with this transaction, of which $328,000
have been deferred.
The Company's policy is to declare and pay cash dividends on a
quarterly basis. The Company paid dividends totalling $.11 per share during
the first three months of 1996, all of which was ordinary income to
shareholders. The Company paid dividends totalling $.13 per share during the
first three months of 1995.
11
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.
METROPOLITAN REALTY CORPORATION
Dated: ________________ By: _____________________________________
Jay B. Rising, President
(Chief Executive Officer and
Chief Financial Officer)
12