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 September 30, 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
[LOGO]
METROPOLITAN REALTY CORPORATION
(Exact name of registrant as specified in its charter)
Michigan 38-2724893
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
September 30, 1996 was 4,532,169.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
METROPOLITAN REALTY CORPORATION
BALANCE SHEET
September 30, 1996 and December 31, 1995
===========================================================================================
September 30, December 31,
1996 1995
===========================================================================================
ASSETS:
Cash and cash equivalents ........................... $ 1,855,758 $ 2,446,221
Marketable securities ............................... 15,412,802 13,326,733
Mortgage notes receivable:
Notes, unaffiliated ............................... 22,953,242 22,757,998
Notes, affiliated ................................. 4,182,440 4,206,330
Allowance for loan losses ......................... (1,600,000) (1,600,000)
------------ ------------
25,535,682 25,364,328
Accrued interest and other receivables .............. 293,455 282,620
Other assets ........................................ 390,166 340,999
------------ ------------
Total assets ......................... $ 43,487,863 $ 41,760,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable:
Shareholder ..................................... $ 5,000 $ 5,500
Trade ........................................... 22,382 120,032
Deferred income ................................... 134,552 153,952
Deposits from borrowers for property taxes ........ 97,162 146,385
Other ............................................. 1,135 1,705
------------ ------------
Total liabilities .................... 260,231 427,574
------------ ------------
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 ................... (109,044) 47,690
Distributions in excess of net investment
income .......................................... (64,175) (2,115,214)
------------ ------------
Total shareholders' equity ........... 43,227,632 41,333,327
------------ ------------
Total liabilities and
shareholders' equity .......... $ 43,487,863 $ 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 and nine months ended
September 30, 1996 and 1995 and the year ended
December 31, 1995
=================================================================================================================================
Three months ended Nine months ended Year ended
=================================================================================================================================
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995 Dec. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Income:
Interest income:
From mortgage notes, unaffiliated . $ 601,755 $ 600,948 $ 1,784,719 $ 1,758,633 $ 2,363,121
From mortgage notes, affiliated ... 97,863 98,672 292,080 293,374 391,854
Investment income .................... 251,814 264,121 734,806 702,812 866,168
Miscellaneous income ................. 30,897 9,786 82,697 96,107 142,916
----------- ----------- ----------- ----------- -----------
Total income ..................... 982,329 973,527 2,894,302 2,850,926 3,764,059
----------- ----------- ----------- ----------- -----------
Operating expenses:
General and administrative ........... 109,448 308,074 344,725 601,261 841,903
Change in allowance for loan losses .. -- 850,000 -- 600,000 600,000
Net loss (income) from
foreclosed property held for sale .. -- (827) -- 334,238 331,953
----------- ----------- ----------- ----------- -----------
Total operating expenses ......... 109,448 1,157,247 344,725 1,535,499 1,773,856
----------- ----------- ----------- ----------- -----------
Net investment income (loss) ..... $ 872,881 $ (183,720) $ 2,549,577 $ 1,315,427 $ 1,990,203
=========== =========== =========== =========== ===========
Net investment income (loss) per share ... $ .19 $ (.04) $ .56 $ .29 $ .44
=========== =========== =========== =========== ===========
Weighted average shares of common
stock outstanding .................... 4,532,169 4,532,169 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 nine months ended September 30, 1996 and 1995
==================================================================================================
Nine months ended
==================================================================================================
Sept. 30, 1996 Sept. 30, 1995
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net investment income ..................................... $ 2,549,577 $ 1,315,427
----------- -----------
Adjustments to reconcile net investment income to
net cash provided by operating activities:
Amortization of loan origination fees ................... (39,300) (36,883)
Expiration of commitment fees ........................... (29,400) --
Depreciation expense .................................... 2,216 42,382
Change in allowance for loan losses ..................... -- 600,000
Valuation provision for foreclosed property ............. -- 314,421
Other ................................................... 26,155 15,861
Increase in assets:
Receivables ........................................... (10,835) (89,256)
Other assets .......................................... (51,382) (148,560)
Decrease in liabilities:
Accounts payable ...................................... (98,150) (44,132)
Deposits and other liabilities ........................ (49,793) (113,468)
----------- -----------
Total adjustments .......................... (250,489) 540,365
----------- -----------
Net cash provided by operating activities .. 2,299,088 1,855,792
----------- -----------
Cash flows from investing activities:
Purchases of marketable securities ........................ (7,034,140) (3,507,382)
Collections of principal from marketable securities ....... 4,765,182 899,855
Loan disbursements ........................................ (480,947) (402,047)
Loan repayments ........................................... 348,893 274,721
Commitment and loan extension fees received ............... 10,000 63,525
Cash proceeds from sale of foreclosed property, net ....... -- 92,157
Loan origination expenses paid ............................ -- (10,237)
Capital expenditures ...................................... -- (1,270)
----------- -----------
Net cash used in investing
activities ................................. (2,391,012) (2,590,678)
----------- -----------
Cash flows from financing activities:
Dividends paid ............................................ (498,539) (1,223,686)
----------- -----------
Net decrease in cash and cash equivalents ................... (590,463) (1,958,572)
Cash and cash equivalents, beginning of period .............. 2,446,221 3,529,334
----------- -----------
Cash and cash equivalents, end of period .................... $ 1,855,758 $ 1,570,762
=========== ===========
<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 and nine months ended
September 30, 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 and nine
months ended September 30, 1995 reflect certain reclassifications to
be consistent with the presentation adopted for the three months and
nine months ended September 30, 1996.
2. Earnings per Share
The earnings per share for the three months and nine months ended
September 30, 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 September 30, 1996
includes net unrealized holding losses on marketable securities of
$109,044. Marketable securities at September 30, 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 statements of operations
aggregated $11,958 and $26,155 for the three months and nine months
ended September 30, 1996, and $7,927 and $15,861 for the three months
and nine months ended September 30, 1995. At September 30, 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:
==================================================================================================================
September 30, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
9.09% Mortgage note receivable, net of loan origination fees of
$24,192 at September 30, 1996 and $27,668 at December 31, 1995, $4,182,440 $4,206,330
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
$5,477 at September 30, 1996 and $6,505 at December 31, 1995, 962,004 965,898
due monthly in varying installments of principal and interest through
December 1999
9.3752% Mortgage note receivable, net of loan origination fees of
$7,083 at September 30, 1996 and $6,541 at December 31, 1995, 2,097,903 2,111,851
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
$15,157 at September 30, 1996 and $17,951 at December 31, 1995, 1,791,762 1,812,889
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 $5,173 at September 30, 1996 and $5,998 at December 31, 1995, 1,360,272 1,361,789
due monthly in varying installments of principal and interest through
August 2000
9.25% Mortgage note receivable, net of loan origination fees of $7,617
at September 30, 1996 and $8,856 at December 31, 1995, due 607,013 614,211
monthly in installments of principal and interest of $5,800 through
September 2000
7.25% Mortgage note receivable, net of loan origination fees of $5,250
at September 30, 1996 and $6,103 at December 31, 1995, due 663,816 669,449
monthly in varying installments of principal and interest through
October 2000
10.5% Mortgage note receivable, net of loan origination fees of $3,675
at September 30, 1996 and $4,194 at December 31, 1995, due 936,924 940,653
monthly in varying installments of principal and interest through
December 2000
11.25% Mortgage note receivable, net of loan origination fees of
$11,597 at September 30, 1996 and $13,272 at December 31, 1995, 2,085,980 2,100,907
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
$3,233 at September 30, 1996 and $3,693 at December 31, 1995, 256,608 258,623
due monthly in varying installments of principal and interest through
January 2001
5
4. Mortgage Notes Receivable, continued
==================================================================================================================
September 30, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
11.25% Mortgage note receivable, net of loan origination fees of
$8,697 at September 30, 1996 and $9,954 at December 31, 1995, $ 1,564,485 $ 1,575,680
due monthly in installments of principal and interest of $16,471
through October 2000
9.5% Mortgage note receivable through February 28, 1996 adjusted
to 6.75% (based on the U.S. Treasury Securities weekly average yield 713,869 719,601
adjusted to a constant maturity of 5 years plus 1.5%) on March 1,
1996 to maturity, net of loan origination fees of $8,026 at June 30,
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
$13,756 at September 30, 1996 and $15,636 at December 31, 1995, 2,435,005 2,445,235
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 $8,205 at September 30, 1996 and $19,911 at December 31, 2,302,287 2,329,018
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 $4,937 at September 30, 1996 and $11,989 at December 31, 2,093,896 2,239,156
1995, due monthly in varying installments of principal and interest
through April 1997
10.25% Mortgage note receivable, net of loan origination fees of
$48,698 at September 30, 1996 and $52,570 at December 31, 1995, 1,739,158 1,741,822
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 September 30, 1996 and 1995, due 901,352 420,406
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 of
principal and interest of $4,889 through August 2000 440,908 450,810
------------ -----------
27,135,682 26,964,328
Allowance for loan losses (1,600,000) (1,600,000)
------------ -----------
Mortgage notes receivable, net of allowance for loan losses $ 25,535,682 $25,364,328
============ ===========
=============================================================================
6
4. Mortgage Notes Receivable, continued
The Company's portfolio of mortgage notes receivable are reported at
their principal outstanding balance net of charge-offs and deferred
loan origination 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.
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 September, 30, 1996, the total recorded investment in impaired
loans was $5,279,268. The allowance related to these loans totaled
$1,600,000. The average recorded investment in impaired loans was
approximately $5,294,000 with interest income of $403,109 for the nine
months ended September 30, 1996. All impaired loans were classified as
earning during 1996, with interest income recognized on an accrual
basis. The Company believes that the allowance for loan losses of
$1,600,000 at September 30, 1996 is at a level that is sufficient to
absorb probable credit losses in the mortgage loan portfolio.
7
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 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 property's 1995 operating income and
expenses are reflected in the statement of operations. The net loss
from foreclosed property held for sale totaled $334,238 for the nine
months ended September 30, 1995 and was largely attributable to a
$314,421 increase in the valuation provision.
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. For the quarters ending June 30 and September 30,
1996, no cash dividend was declared by the Board of Directors of the
Company in anticipation of the consummation of the restructuring of
the Company into a limited liability company in accordance with the
transaction discussed in Note 10.
7. Income Taxes
The Company currently intends to operate as a qualified real estate
investment trust under the Code (See Note 10). 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 distributes at least 95% of its net taxable investment income
to its shareholders. Accordingly, no provision for income taxes has
been made for the three and nine months ended September 30, 1996.
8. Related Party Transactions
The Company was involved in various transactions with affiliates as
follows:
Consulting fees under a contractual agreement aggregating $35,060 and
$33,390 were earned by an officer of the Company during the nine
months ended September 30, 1996 and 1995, respectively.
8
8. Related Party Transactions, continued
Fees aggregating $16,686 and $18,210 during the nine months ended
September 30, 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 $4,182,440 and
$4,206,330 at September 30, 1996 and 1995, respectively and earned the
Company $292,080 and $293,374 during the nine months ended September
30, 1996 and 1995, respectively.
During the nine months ended September 30, 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 $65,614 and $230,805, for the nine months ended
September 30, 1996 and 1995, respectively. Of the fees earned in 1996
and 1995, $10,164 and $163,083, respectively, relate to the
transaction discussed in Note 10.
9. Commitments
At September 30, 1996, the Company had outstanding loan commitments
aggregating $439,760.
10. Other
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 $27.5 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 September 30, 1996, $724,000
of professional fees have been incurred in connection with this
transaction, of which $362,000 have been deferred. A special meeting
of shareholders is scheduled for December 6, 1996 for the purpose of
voting upon the approval and adoption of the proposed restructuring.
If approved, the proposed restructuring is anticipated to be
consummated as soon as practicable thereafter.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The Company's net investment in mortgage loans represented 59% and 61%
of its assets, or $25,535,682 and $25,364,328, at September 30, 1996 and
December 31, 1995, respectively. The range of yields on outstanding mortgage
loans ranges from
9
7.06% to 12.25% The weighted average yield of these loans was 10.16% at
September 30, 1996 and 10.27% at December 31, 1995.
The overall average yield on interest earning assets was 8.8% for the
nine months ended September 30, 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 nine months ended September 30, 1996 was
$14.7 million. The average yield (based on total yield divided by average
amount of investments) on marketable securities was 6.0% for the nine months
ended September 30, 1996 and 5.8% for the year ended December 31, 1995.
Investment income from marketable securities increased $10,501 to
$228,932 for the third quarter of 1996 from $218,431 for the third quarter of
1995. Of the increase, $33,631 was the result of an increase in the average
amount invested in marketable securities, offset by a $23,130 decrease in the
average yield. Investment income from marketable securities increased $127,858
to $665,840 for the first nine months of 1996 from $537,982 for the first nine
months of 1995. Of the increase, $150,840 was the result of an increase in the
average amount invested in marketable securities, offset by a $22,982 decrease
in the average yield.
Investment income from money market securities decreased $22,808 to
$22,882 for the third quarter of 1996 from $45,690 for the third quarter of
1995. Of the decrease, $11,850 was the result of a decrease in the average
amount invested in money market securities combined with a $10,958 increase in
the average yield. Investment income from money market securities decreased
$95,864 to $68,966 for the first nine months of 1996 from $164,830 for the
first nine months of 1995. Of the decrease, $79,727 was the result of a
decrease in the average amount invested in money market securities combined
with a $16,137 decrease in average yield.
Interest income from mortgage notes decreased to $699,618 for the
third quarter of 1996 from $699,620 for the third quarter of 1995. Of the
decrease, $12,063 was the result of a decrease in average yield offset by a
$12,061 increase in the average amount invested in mortgage notes. Interest
income from mortgage notes increased $24,792 to $2,076,799 for the first
nine months of 1996 from $2,052,007 for the first nine months of 1995. Of
the increase, $33,857 was the result of an increase in the average amount
invested in mortgage notes offset by a $9,065 decrease in average yield.
Operating expenses in the third quarter of 1995 included an $850,000
increase in the allowance for loan losses. General administrative expenses
decreased $198,626 to $109,448 for the third quarter of 1996 from
$308,074 for the third quarter of 1995 due primarily to a reduction in costs
associated with the Company's proposed restructuring into a limited liability
company. As a result, operating expenses decreased $1,047,799 to $109,448 for
the third quarter of 1996 from $1,157,247 for the third quarter of 1995.
Operating expenses in the first nine months of 1995 included a $600,000
increase in the allowance for loan losses and a $334,238 net loss from
foreclosed property held for sale. General administrative expenses decreased
$256,536 to $344,725 for the first nine months of 1996 from $601,261 for the
first nine months of 1995 due primarily to a reduction in costs associated
with the Company's proposed restructuring into a limited liability company. As
a result, operating expenses decreased $1,190,774 to $344,725 for the first
nine months of 1996 from $1,535,499 for the first nine months of 1995.
10
Net investment income increased to $872,881, or $.19 per share, for
the third quarter of 1996 from a $183,720 net loss, or $.04 loss per share,
for the third quarter of 1995 as a result of the items discussed above. Net
investment income increased to $2,549,577, or $.56 per share, for the first
nine months of 1996 from $1,315,427, or $.29 per share for the first nine
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 the recoverability of the Company's
loans. The Company believes that the allowance for loan losses of $1,600,000
at September 30, 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 totaled $334,238 for the nine months ended
September 30, 1995 and was largely attributable to a $314,421 increase in the
valuation provision.
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 $9,450 and $28,350 for the three and nine months ended
September 30, 1996 and $9,450 and $52,450 for the three and nine months ended
September 30, 1995, respectively.
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
11
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 September 30, 1996, the Company had $25,535,682 invested
in net mortgage loans, $8,407,322 invested in marketable mortgage-backed
securities, $7,005,480 invested in U.S. Treasury Notes and $1,740,954 invested
in money market funds. The Company does not invest in high-risk
mortgage-backed securities, such as interest only strips or residual tranches.
However, there can be no assurance that cash flows will materialize as
scheduled as a result of prepayments of the underlying mortgages or that the
proceeds can be invested in securities that will provide comparable yields.
At September 30, 1996, the Company had outstanding loan commitments
aggregating $439,760. 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.
The Company expects to invest the balance of its available assets in
mortgage loans to real estate projects during the balance of 1996 and 1997;
however, management will continue its prudent approach of approving funding
only of those loans which meet appropriate underwriting criteria.
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 $27.5 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
September 30, 1996, $724,000 of professional fees have been incurred in
connection with this transaction, of which $362,000 have been deferred. A
special meeting of shareholders is scheduled for December 6, 1996 for the
purpose of voting upon the approval and adoption of the proposed
restructuring. If approved, the proposed restructuring is anticipated to be
consummated as soon as practicable thereafter.
The Company's policy is to declare and pay cash dividends on a
quarterly basis. The Company paid dividends totaling $.11 per share during the
first nine months of 1996, all of which was ordinary income to shareholders.
The Company did not declare a dividend in the second and third quarters of
1996 as a result of the circumstances discussed in Note 10 to the Financial
Statements. The Company paid dividends totaling $.27 per share during the
first nine months of 1995.
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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: November 14, 1996 By: /s/ Jay B. Rising
---------------------------
Jay B. Rising, President
(Chief Executive Officer and
Chief Financial Officer)
By: /s/ Russell P. Flynn
---------------------------
Russell P. Flynn, Treasurer
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