Financial highlights
Years Ended August 31
(Thousands of dollars except per share results) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Operating results
Income Before Gains on Sales of
Interests in Real Estate $ 11,106 $ 8,325 $ 10,125 $ 8,677 $ 8,750
Gains on Sales of Interests in Real Estate 119 12,362 3,875 -- 1,600
Net Income 11,225 20,687 14,000 8,677 10,350
Distributions Paid to Beneficiaries 16,302 16,121 15,386 14,860(1) 13,997
- -------------------------------------------------------------------------------------------------------------------
Per share results
Income Before Gains on Sales
of Interests in Real Estate $ 1.28 $ .96 $ 1.17 $ 1.01 $ 1.07
Gains on Sales of Interests in Real Estate .01 1.43 .45 -- .20
Net Income 1.29 2.39 1.62 1.01 1.27
Distributions Paid 1.88 1.86 1.78 1.72(1) 1.72
Distribution Rate at Fiscal Year End 1.88 1.88 1.80 1.72 1.72
- -------------------------------------------------------------------------------------------------------------------
Balance sheet data
Investments in Real Estate, at Cost $195,929 $154,281 $112,262 $ 64,612 $ 62,075
Total Assets 181,336 142,495 107,853 66,250 57,680
Total Mortgage and Bank Loans Payable 122,518 80,155 51,929 10,772 8,769
- -------------------------------------------------------------------------------------------------------------------
Funds from operations(2)
Years Ended August 31
(Thousands of dollars) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
Net income $ 11,225 $ 20,687 $ 14,000 $ 8,677 $ 10,350
Less: Gains on sales of interests in real estate 119 12,362 3,875 -- 1,600
- -------------------------------------------------------------------------------------------------------------------
11,106 8,325 10,125 8,677 8,750
Plus:
Depreciation and amortization:
Wholly owned and consolidated
partnerships(3) 5,044 3.322 2,685 2,101 1,977
Partnerships and joint ventures 3,214 3,229 4,119 3,960 3,766
Provision for losses(4) -- 1,795 320 320 320
- -------------------------------------------------------------------------------------------------------------------
Funds from operations $ 19,364 $ 16,671 $ 17,249 $ 15,058 $ 14,813
===================================================================================================================
Funds from operations ($ in millions)
BAR GRAPH APPEARED IN ANNUAL REPORT. THE VALUES APPEAR BELOW:
-------------------------------------------------------------
Fiscal Years
----------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
12.7 13.2 14.4 15.4 15.3 14.8 15.1 17.2 16.7 19.4
Dividend rate per share at fiscal year end
adjusted for share splits (in dollars)
BAR GRAPH APPEARED IN ANNUAL REPORT. THE VALUES APPEAR BELOW:
-------------------------------------------------------------
Fiscal Years
----------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1.40 1.52 1.60 1.68 1.72 1.72 1.72 1.80 1.88 1.88
(1) In 1992, distributions paid to beneficiaries and distributions paid per
share have been adjusted to reflect the annualized change from a semi-annual
distribution to a quarterly distribution (Actual amount paid during the
fiscal year was $11,145,000 or $1.29 per share).
(2) Defined as net income excluding gains or losses from sales of property, plus
depreciation and amortization and other non-cash charges and similar
adjustments for unconsolidated joint ventures. This does not represent cash
generated from operations as defined by Generally Accepted Accounting
Principles (GAAP) and is not necessarily indicative of cash available to
fund cash needs.
(3) Net of minority interest share of $241,000 and $219,000 in 1995 and 1994,
respectively.
(4) See Note 1 to consolidated financial statements.
Consolidated Balance Sheets
At August 31
1995 1994
- -------------------------------------------------------------------------------------------------------------------
Assets
Investments in Real Estate, At Cost (Notes 1, 3 and 7):
Apartment buildings $ 154,907,000 $ 116,918,000
Industrial properties 5,078,000 5,078,000
Shopping centers and retail stores 32,354,000 32,285,000
- -------------------------------------------------------------------------------------------------------------------
Total investments in real estate 192,339,000 154,281,000
Less accumulated depreciation 38,828,000 33,735,000
- -------------------------------------------------------------------------------------------------------------------
153,511,000 120,546,000
Land held for sale 3,590,000 --
Investments in Partnerships and Joint Ventures, At Equity
(Notes 1 and 2) 17,439,000 15,225,000
Advances to Partnerships and Joint Ventures 2,414,000 2,418,000
Notes Receivable 1,649,000 1,649,000
- -------------------------------------------------------------------------------------------------------------------
178,603,000 139,838,000
Less allowance for possible losses (Note 1) 2,775,000 3,235,000
- -------------------------------------------------------------------------------------------------------------------
175,828,000 136,603,000
Other Assets:
Cash and cash equivalents 1,098,000 2,152,000
Rents and sundry receivables 346,000 328,000
Deferred costs, prepaid real estate taxes and expenses, net 4,064,000 3,412,000
- -------------------------------------------------------------------------------------------------------------------
$ 181,336,000 $ 142,495,000
===================================================================================================================
Liabilities and Beneficiaries' Equity
Mortgage Notes Payable (Note 3) $ 78,198,000 $ 44,019,000
Bank Loans Payable (Note 3) 44,320,000 36,136,000
Tenants' Deposits and Deferred Rents 1,352,000 1,214,000
Accrued Pension and Retirement Benefits (Notes 1 and 4) 1,213,000 1,084,000
Accrued Expenses and Other Liabilities 3,954,000 2,886,000
- -------------------------------------------------------------------------------------------------------------------
129,037,000 85,339,000
- -------------------------------------------------------------------------------------------------------------------
Minority Interest in Consolidated Partnership (Note 1) 528,000 408,000
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 6)
Beneficiaries' Equity
($5.97 and $6.55 per share at August 31, 1995 and 1994)
(Notes 1 and 5):
Shares of Beneficial Interest, $1 Par; Authorized, Unlimited;
Issued and Outstanding 8,676,098 Shares in 1995 and 8,669,848
Shares in 1994 8,676,000 8,670,000
Capital Contributed in Excess of Par 53,133,000 53,039,000
Distributions in Excess of Net Income (10,038,000) (4,961,000)
- -------------------------------------------------------------------------------------------------------------------
51,771,000 56,748,000
- -------------------------------------------------------------------------------------------------------------------
181,336,000 $ 142,495,000
===================================================================================================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Income
For the years ended August 31
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Revenues
Gross revenues from real estate (Note 6) $ 36,978,000 $ 27,640,000 $ 21,083,000
Interest and other income 176,000 274,000 542,000
- -------------------------------------------------------------------------------------------------------------------
37,154,000 27,914,000 21,625,000
- -------------------------------------------------------------------------------------------------------------------
Expenses
Property operating expenses 14,859,000 11,758,000 8,959,000
Depreciation and amortization (Note 1) 5,286,000 3,541,000 2,784,000
General and administrative expenses (Notes 1 and 4) 3,091,000 2,528,000 1,873,000
Mortgage and bank loan interest 8,908,000 4,162,000 2,222,000
Provisions for losses on investments (Note 1) -- 1,795,000 320,000
- -------------------------------------------------------------------------------------------------------------------
32,144,000 23,784,000 16,158,000
- -------------------------------------------------------------------------------------------------------------------
Income before minority interest, equity in income of
partnerships and joint ventures and gains on sales
of interests in real estate 5,010,000 4,130,000 5,467,000
Minority interest (285,000) (221,000) (92,000)
Equity in income of partnerships and joint ventures
(Notes 1 and 2) 6,381,000 4,416,000 4,750,000
Gains on sales of interests in real estate 119,000 12,362,000 3,875,000
- -------------------------------------------------------------------------------------------------------------------
Net income $ 11,225,000 $ 20,687,000 $ 14,000,000
===================================================================================================================
Net Income Per Share (Note 1) $ 1.29 $ 2.39 $ 1.62
===================================================================================================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of
Beneficiaries' Equity
For the three years ended August 31, 1995
Shares Capital
of beneficial contributed Distributions
interest in excess in excess
$1 par of par of net income
- -------------------------------------------------------------------------------------------------------------------
Balance, September 1, 1992 $ 8,640,000 $ 52,595,000 $ (8,141,000)
Net income -- -- 14,000,000
Shares issued upon exercise of options (Note 5) 9,000 135,000 --
Distributions paid to beneficiaries ($1.78 per share) -- -- (15,386,000)
- -------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1993 8,649,000 52,730,000 (9,527,000)
Net income -- -- 20,687,000
Shares issued upon exercise of options (Note 5) 21,000 309,000 --
Distributions paid to beneficiaries ($1.86 per share) -- -- (16,121,000)
- -------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1994 8,670,000 53,039,000 (4,961,000)
Net income 11,225,000
Shares issued upon exercise of options (Note 5) 6000 94,000
Distributions paid to beneficiaries ($1.88 per share) (16,302,000)
- -------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1995 $ 8,676,000 $ 53,133,000 $ (10,038,000)
===================================================================================================================
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
For the years ended August 31
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 11,225,000 $ 20,687,000 $ 14,000,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in income of consolidated partnership 285,000 221,000 92,000
Depreciation and amortization 5,286,000 3,541,000 2,784,000
Gains on sales of interests in real estate (119,000) (12,362,000) (3,875,000)
(Decrease) increase in allowance for possible losses (460,000) 1,795,000 320,000
Change in assets and liabilities:
Rents and sundry receivables (18,000) 161,000 (102,000)
Deferred costs, prepaid real estate taxes
and expenses, net. (837,000) 536,000 (1,544,000)
Accrued pension and retirement benefits 130,000 4,000 (3,000)
Accrued expenses and other liabilities 1,042,000 1,028,000 915,000
Tenants' deposits and deferred rents 138,000 298,000 447,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,672,000 15,909,000 13,034,000
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Investments in wholly owned real estate (38,058,000) (37,144,000) (48,333,000)
Investments in partnerships and joint ventures (983,000) (471,000) (7,416,000)
Cash proceeds from sales of real estate investments -- 14,540,000 5,175,000
Increase in advances to partnerships and joint ventures (749,000) (429,000) (414,000)
Cash distributions from partnerships and joint ventures
(less than) in excess of equity in income (127,000) 2,529,000 2,463,000
Net cash (distributions to) contributions from
minority partners (165,000) (144,000) 240,000
Decrease (increase) in notes receivable -- 6,000 (363,000)
Decrease in U.S. Treasury obligations -- 2,589,000 9,965,000
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,082,000) (18,524,000) (38,683,000)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Principal installments on mortgage notes payable (821,000) (576,000) (385,000)
Increase in mortgage notes payable 35,000,000 -- 27,240,000
Prepayment of mortgage notes payable -- (2,164,000) --
Proceeds from bank loan payable 39,379,000 36,136,000 14,300,000
Increase in bank loan payable (35,000,000) (14,300,000) --
Shares of beneficial interest issued 100,000 330,000 144,000
Distributions paid to beneficiaries (16,302,000) (16,121,000) (15,386,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 22,356,000 3,305,000 25,913,000
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,054,000) 690,000 264,000
Cash and cash equivalents, beginning of year 2,152,000 1,462,000 1,198,000
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,098,000 $ 2,152,000 $ 1,462,000
===================================================================================================================
Supplemental disclosure of non-cash investing activities:
Net assets acquired $ 3,590,000 -- --
Liabilities assumed primarily bank loans payable (3,804,000) -- --
- -------------------------------------------------------------------------------------------------------------------
$ (214,000) -- --
===================================================================================================================
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Years Ended August 31, 1995, 1994 and 1993
1. Summary of significant accounting policies
Consolidation
The consolidated financial statements of the Trust include the accounts of
twelve wholly owned subsidiaries, two are Delaware corporations, one is a
Nebraska corporation, one is a Virginia corporation and eight are Florida
corporations. One partnership in which the Trust is a 65% general partner, and
has control as provided in the partnership agreement, has been consolidated for
financial statement presentation. The minority partne's interest is 35%. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Partnership and joint venture investments
In accordance with the American Institute of Certified Public Accountant'
Statement of Position 78-9, "Accounting for Investments in Real Estate
Ventures," the Trust accounts for its investment in partnerships and joint
ventures which it does not control using the equity method of accounting. These
investments, which represent 25-to-87.5% non-controlling ownership interests,
are recorded initially at the Trus's cost and subsequently adjusted for the
Trust's net equity in income and cash contributions and distributions.
Statements of cash flows
The Trust considers all highly liquid short-term investments with an original
maturity of 3 months or less to be cash equivalents. Cash paid for interest was
$8,619,000, $3,948,000, and $1,985,000 for the years ended August 31,1995, 1994
and 1993, respectively.
Depreciation
The Trust, for financial reporting purposes, depreciates its buildings,
equipment and leasehold improvements over their estimated useful lives of 10 to
45 years, using the straight-line method of depreciation. For Federal income tax
purposes, the Trust currently uses the straight-line method of depreciation and
the useful lives prescribed by the Internal Revenue Code.
It is the Trust's policy to capitalize interest and real estate taxes related to
construction in progress and to depreciate these costs over the life of the
related assets in order to more properly match revenues and expenses. These
items are capitalized for income tax purposes and amortized or depreciated in
accordance with the provisions of the Internal Revenue Code.
Allowance for possible losses
Management reviews the net realizable value of the Trust's portfolio
periodically to determine whether an allowance for possible losses is necessary.
The carrying value of the Trust's investments is evaluated on an individual
investment basis, and to the extent management's estimate of the net realizable
value of each investment is less than its carrying value, a provision for
possible losses is established. During 1994, a provision of approximately
$1,795,000 was recorded for certain investments in the Trus's portfolio, based
upon independent appraisals and managemen's estimates of the potential income
or loss associated with each property to realize the adjusted carrying value.
Benefit plans
The Trust has provided pension benefits since 1970 for all employees, excluding
the Chairman and CEO for whom retirement benefits are provided in an employment
contract. The Trust's policy is to fund such accrued benefit costs. Refer to
footnote 4 for further discussion of current year changes to benefit plans.
With regard to the Chairman and CEO's employment contract, no provision was
required for fiscal years ended August 31, 1995, 1994 and 1993, respectively.
Income taxes
The Trust has elected to qualify as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code and intends to remain so
qualified. Accordingly, no provision has been made for Federal income taxes on
income resulting from those sales of real estate investments which have or will
be distributed to shareholders within the prescribed time limits. However, taxes
are provided for those gains which are not anticipated to be distributed to
shareholders.
The Trust is subject to a Federal excise tax computed on a calendar year. The
excise tax equals 4% of the excess, if any, of 85% of the Trust's ordinary
income plus 95% of the Trust's capital gain net income for the calendar year
over cash distributions during the calendar year, as defined. The Trust has in
the past distributed a substantial portion of its taxable income in the
subsequent fiscal year and may also follow this policy in the future.
A provision for excise tax was made in 1994 in the amount of $400,000. No
provision for excise tax was made for fiscal years 1995 and 1993 as no tax was
due.
The tax status of distributions paid to beneficiaries was composed of the
following for the calendar years ended December 31, 1994 and 1993.
1994 1993
Ordinary income $ .65 $ .96
Capital gains 1.23 .84
-------------------
$1.88 $ 1.80
===================
The tax status of distributions paid to beneficiaries for the calendar year
ending December 31, 1995 will be determined upon preparation of the Trus's
federal income tax return. Management expects such distributions to consist of
ordinary income.
Net income per share
Earnings per share are based on the weighted average number of shares
outstanding which were 8,670,810 in 1995, 8,663,646 in 1994 and 8,643,223 in
1993.
Reclassifications
Certain accounts in the 1993 financial statements have been reclassi-fied to
conform with the 1994 presentation.
2. Investments in partnerships and joint ventures The following presents
summarized financial information for the Trust's investments in 27 and 28
partnerships and joint ventures at August 31, 1995 and 1994 respectively, and
the Trust's equity in income for the years ended August 31, 1995, 1994 and 1993.
At August 31
1995 1994
- -------------------------------------------------------------------------------------
Assets
Investments in Real Estate at Cost:
Apartment buildings $103,683,000 $ 102,395,000
Industrial property 1,250,000 1,237,000
Shopping centers and retail stores 132,597,000 122,248,000
Land 4,445,000 7,051,000
-----------------------------
Total investments in real estate 241,975,000 232,931,000
Less accumulated depreciation 69,918,000 63,639,000
-----------------------------
172,057,000 169,292,000
Cash and cash equivalents 7,303,000 3,566,000
Other assets 4,544,000 5,454,000
-----------------------------
Total assets 183,904,000 178,312,000
-----------------------------
Liabilities and Partners' Equity
Mortgage notes payable 136,004,000 131,002,000
Bank loans payable 8,277,000 11,928,000
Due to the Trust 2,414,000 2,418,000
Other liabilities 4,571,000 4,729,00
-----------------------------
Total liabilities 151,266,000 150,077,000
-----------------------------
Total partners' equity 32,638,000 28,235,000
Partners' share (15,199,000) (13,010,000)
-----------------------------
Investment in partnerships and joint ventures $ 17,439,000 $ 15,225,000
=============================
For the years ended August 31
1995 1994 1993
- -------------------------------------------------------------------------------------------------------
Gross revenues from real estate $ 52,339,000 $ 51,088,000 $ 55,700,000
-----------------------------------------------
Expenses:
Property operating expenses 20,477,000 22,601,000 21,713,000
Mortgage and bank loan interest 12,463,000 12,668,000 16,379,000
Depreciation and amortization 6,502,000 6,406,000 8,179,000
-----------------------------------------------
39,442,000 41,675,000 46,271,000
-----------------------------------------------
12,897,000 9,413,000 9,429,000
Partners' share (6,516,000) (4,997,000) (4,679,000)
-----------------------------------------------
Equity in income of partnerships and
joint ventures $ 6,381,000 $ 4,416,000 $ 4,750,000
===============================================
Mortgage notes payable which are secured by the related properties, are due in
installments over various terms extending to the year 2020 with interest rates
ranging from 7.5% to 10.5% with an average interest rate of 8.89%. Principal
payments are due as follows:
Fiscal year ending
1996 $ 8,474,000
1997 3,213,000
1998 5,571,000
1999 35,776,000
2000 28,831,000
2001 and thereafter 54,139,000
------------
$136,004,000
============
The liability under each mortgage note is limited to the particular property
except for two loans in the amount of $28,761,000 which are guaranteed by the
partners of the respective partnerships, including the Trust. In addition, a
bank loan in the amount of $1,306,000 has been guaranteed by the partners of the
partnership including the Trust.
The Trust's investments in certain partnerships and joint ventures reflect cash
distributions in excess of the Trus's net investments totaling $6,352,000 and
$6,270,000 at August 31, 1995 and 1994, respectively.The Trust is generally
entitled to a priority return on these investments.
The Trust has a 50% partnership interest in Lehigh Valley Mall Associates which
is included in the amounts above. Summarized financial information for this
investment which is accounted for by the equity method follows:
For the years ended
8/31/95 8/31/94 8/31/93
- --------------------------------------------------------------------------------
Total assets $20,858,000 $19,894,000 $20,711,000
Revenues 13,667,000 13,391,000 13,182,000
Net income 7,548,000 6,521,000 6,292,000
Equity in income of partnership 3,774,000 3,260,000 3,146,000
3. Mortgage notes and bank loans payable
Mortgage notes payable which are secured by the related properties are due in
installments over various terms extending to the year 2008 with interest at
rates ranging from 6.79% to 9.50% with an average interest rate of 8.2%.
Principal payments are due as follows:
Fiscal Year ending
1996 $ 1,157,000
1997 1,256,000
1998 1,358,000
1999 1,455,000
2000 34,535,000
2001 and thereafter 38,437,000
------------
$ 78,198,000
============
In March, 1995 the Trust modified its existing $110 million credit facility by
obtaining a $35 million five-year term loan at a fixed rate of interest of 8.62%
for the first three years. The Trust has the option of accepting a fixed or
floating rate for years four and five.
As of August 31, 1995, the Trust had available $75,000,000 of unsecured
revolving line of credit of which $51,308,000 had been borrowed ($44,320,000
directly by the Trust and $6,988,000 through partnerships and joint ventures).
As of August 31, 1994, the Trust had available $55,000,000 of unsecured
revolving lines of credit of which $46,655,000 had been borrowed ($36,136,000
directly by the Trust and $10,519,000 through partnerships and joint ventures).
Under the line of credit, the Trust must maintain minimum net worth and net
operating income levels, as defined in the loan document. The line of credit is
due to mature on April 30, 1997 and bears interest at LIBOR plus 185 basis
points or the prime rate. The weighted average interest rates based on amounts
borrowed were 7.98% and 6.5% for the fiscal years ended August 31, 1995 and
1994, respectively.
During 1995, the Trust purchased interest rate protection at a cost of $250,000
on $15,000,000 of outstanding debt at a 30-day LIBOR rate of 7.5% plus 185 basis
points limiting the maximum rate to 9.35% for three years. The Trust also
limited its exposure to increases in LIBOR on $20,000,000 of its floating rate
debt by entering into a swap agreement which fixes a rate of 6.12% verses 30-day
LIBOR.
The Trust is exposed to credit loss in the event of non-performance by
counterparties to the interest rate protection agreements; however, the Trust
does not anticipate non-performance by the counterparties. At August 31, 1995,
the Trust was in compliance with all debt covenants.
The carrying values of the mortgage notes and bank loans payable at August 31,
1995 and 1994 were approximately equal to their respective fair values, as
determined by using year-end interest rates and market conditions. At August 31,
1995, the fair values of the interest rate protection and swap agreements
referred to above were approximately $184,000 and $(230,000), respectively.
4. Benefit Plans
Prior to February 28, 1995, the Trust maintained a noncontributory, defined
benefit pension plan for all eligible employees. Benefits under the plan were
generally based on years of service and final pay. Pension costs were accrued
and funded annually from entry date in the plan to projected retirement date and
included service costs for benefits earned during the period, interest costs on
the projected benefit obligation less the return on plan assets. Pension cost
was $94,000 and $88,000 for the years ended August 31, 1994 and 1993
respectively. The actual return on plan assets was ($30,000) for the year ended
August 31, 1994. The funding status of the pension plan at August 31, 1994 was:
Actuarial present value of benefit obligations:
Vested benefit obligation $1,675,000
Accumulated benefit obligation 1,680,000
Projected benefit obligation 2,067,000
Plan assets at market value 1,567,000
Key assumptions used in these determinations were:
Discount rate 7.0%
Rate of increase in compensation levels 5.0%
Expected long-term rate of return 8.5%
Effective February 28, 1995 the Trust funded $169,000 and the pension plan was
terminated. All participants were paid their accumulated benefit obligation and
the Trust received a favorable determination letter from the I.R.S.
During 1995 the Trust adopted a 401(k) Plan in which substantially all of the
officers and employees are eligible to participate. The Plan permits eligible
participants, as defined in the Plan agreement, to defer up to 15% of their
compensation, and the Trust, at its discretion, may match a percentage of the
employee' contributions. The employees' contributions are fully vested and
contributions from the Trust vest in accordance with an employee's years of
service as defined in the plan agreement.
During 1995, the Trust also adopted a Supplemental Retirement Plan (the
"Supplemental Plan") covering certain senior management employees. The
Supplemental Plan provides eligible employees through normal retirement date, as
defined in the plan agreement, a benefit amount similar to that which would have
been received under the provisions of the terminated pension plan referred to
above. As of August 31, 1995, the Trust has recorded $168,000 of contributions
due under the provisions of this plan.
5. Stock Option Plans
In December 1990, the shareholders approved an incentive stock option plan for
key employees and a stock option plan for non-employee trustees, covering
200,000 and 100,000 shares of beneficial interest, respectively. Under the terms
of the plans, the purchase price of shares subject to each option granted will
be at least equal to the fair market value of the shares on the date of grant.
Options under the incentive stock option plan may be exercised as determined by
the Trust, but in no event later than 10 years from the date of grant. In
December 1993, the Board of Trustees amended the incentive stock option plan for
key employees, to increase the number of shares subject to option to 400,000
shares, to change the name of the plan to "1990 Incentive and Non Qualifying
Stock Option Plan" and to expand some provisions of the plan. The stock option
plan for non-employee trustees provides for annual grants of 1,000 options
(becoming exercisable in four equal installments). The options expire 10 years
after the date of grant.
In December 1993, the Board of Trustees adopted a non-qualifying stock option
plan covering 100,000 shares. The Trust granted options on February 1, 1994
having a term of 10 years and subject to the other terms and conditions set
forth in the plan. All 100,000 shares are outstanding at 8/31/95.
Changes in options outstanding are as follows:
Plan For Plan For
Key Non-Employee
Employees Trustees
Options outstanding at 8/31/93 89,500 23,250
Options granted 85,000 6,000
Options exercised (20,625) 0
---------------------------
Options outstanding at 8/31/94 153,875 29,250
Options granted 97,000 6,000
Options exercised (6,250) 0
---------------------------
Options outstanding at 8/31/95 244,625 35,250
===========================
As of August 31, 1995, options for 282,000 shares had been granted pursuant to
the incentive stock option plan of which 244,625 remain outstanding at $16.00 to
$24.625 per share and options for 36,000 shares had been granted, pursuant to
the stock option plan for non-employee trustees of which 35,250 shares remain
outstanding at $15.75 to $25.375 per share.
6. Commitments and Contingencies
Environmental matters have arisen at certain properties in which the Trust has
an interest. The Trust retained environmental consultants in order to
investigate these matters. At one property, in which the Trust has a 50%
ownership interest, groundwater contamination exists which the Trust alleges was
caused by the former tenant. Estimates to remediate this property, which are
subject to the length of monitoring and the extent of remediation required,
range in total from $400,000 to $1,600,000. In addition, above normal radon
levels have been detected at two wholly owned properties. The estimated cost to
remediate these properties is approximately $380,000, which costs were received
as a credit from the sellers as part of the initial acquisitions.
The Trust has recorded its share of these liabilities totaling $688,000 related
to the consultants' evaluation of these matters which, in certain instances, are
subject to applicable state approvals of the remediation plans. In Management's
opinion, no material incremental cost will be incurred on these properties. The
Trust will pursue recovery of remediation costs from all of the responsible
parties, including its tenants and partners.
The Trust has been named as a defendant in a suit brought by persons and their
affiliates who are partners of the Trust in three partnerships. The Trust is
vigorously defending the suit and has denied the plaintiffs' allegations. The
Trust also believes that it has viable claims against certain of the same
partners (or their affiliates) which it is asserting. As the pleadings are not
yet closed and discovery is still continuing, it is not possible to judge the
ultimate outcome of these suits at this time. However, Management does not
believe that resolution of these matters will have a material effect on the
Trust's financial condition or results of operations.
The Trust has committed up to $1,900,000 of cash contributions to the
partnership which owns Laurel Mall for costs related to the recent expansion.
The actual amount to be funded will be determined by the amount of permanent
financing obtained by the partership.
Future minimum rentals receivable under non-cancelable operating leases at
August 31, 1995 are as follows:
1996 $ 4,634,000
1997 4,548,000
1998 4,256,000
1999 3,632,000
2000 3,474,000
Thereafter 18,646,000
-----------
$39,190,000
===========
7. Acquisitions
The Trust acquired one property during the year ended August 31, 1995 for
approximately $34,000,000 (including improvements) which was accounted for by
the purchase method. The results of the property were included in the Trust's
financial statements from the acquisition date. The pro forma financial
information may not be indicative of results that would have been reported if
the acquisition had occurred on September 1, 1994. Also, amounts presented below
may not be indicative of future results.
Year ended August 31, 1995 (unaudited)
Pro forma total revenues $37,815,000
Pro forma net income 11,103,000
Pro forma earnings per share 1.28
The Trust acquired two properties during the year ended August 31, 1994 for
approximately $36,100,000 which were accounted for by the purchase method. The
results of each property were included from the respective acquisition date. In
addition, in settlement of a partner's obligation to the Trust, the Trust
acquired a partner's 50% interest in the partnership owning a shopping center in
which the Trust previously held a 50% partnership interest. The pro forma
financial information may not be indicative of results that would have been
reported if the acquisitions had occurred on September 1, 1993. Also, amounts
presented below may not be indicative of future results.
Year ended August 31, 1994 (unaudited)
Pro forma total revenues $32,136,000
Pro forma net income $20,744,000
Pro forma earnings per share $ 2.39
8. Summary of quarterly results (unaudited)
The following presents a summary of the unaudited quarterly financial
information for the years ended August 31, 1995 and 1994 (thousands of dollars,
except per share data).
For the year ended August 31, 1995
1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 8,555 $ 9,548 $ 9,495 $ 9,556 $ 37,154
Income before gain on sale of interest in real estate 3,345 2,713 2,569 2,479 11,106
Gain on sale of interest in real estate -- 119 -- -- 119
Net income 3,345 2,832 2,569 2,479 11,225
Net income per share:
Income before gain on sale of interest in real estate $ .39 $ .32 $ .30 $ .27 $ 1.28
Gain on sale of interest in real estate -- .01 -- -- .01
---------------------------------------------------
Total $ .39 $ .33 $ .30 $ .27 $ 1.29
===================================================
For the year ended August 31, 1994
1st 2nd 3rd 4th Total
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 6,480 $ 6,525 $ 7,263 $ 7,646 $ 27,914
Income before gains on sales of interests in real estate 2,957 2,612 2,342 414 8,325
Gains on sales of interests in real estate 12,223 106 -- 33 12,362
Net income 15,180 2,718 2,342 447 20,687
Net income per share:
Income before gain on sale of interest in real estate $ .34 $ .30 $ .27 $ .05 $ .96
Gains on sale of interest in real estate 1.41 .01 -- .01 1.43
---------------------------------------------------
Total $ 1.75 $ .31 $ .27 $ .06 $ 2.39
===================================================
Report of Independent Public Accountants
To the Shareholders and Trustees of Pennsylvania Real Estate
Investment Trust:
We have audited the accompanying consolidated balance sheets of Pennsylvania
Real Estate Investment Trust (a Pennsylvania Trust) and Subsidiaries as of
August 31, 1995 and 1994, and the related consolidated statements of income,
beneficiaries' equity and cash flows for each of the three years in the period
ended August 31, 1995. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1995 and 1994
financial statements of Lehigh Valley Mall Associates, a partnership in which
the Trust has a 50 percent interest which is reflected in the accompanying
financial statements using the equity method of accounting. The equity in net
income of Lehigh Valley Mall Associates represents 32 percent and 16 percent of
net income, in 1995 and 1994, respectively. The financial statements of Lehigh
Valley Mall Associates were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to the amounts included
for Lehigh Valley Mall Associates, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Pennsylvania Real Estate Investment Trust and
Subsidiaries as of August 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Philadelphia, PA
October 19, 1995
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
On August 31, 1995 liquidity was provided by cash and cash equivalents of $4.9
million, including the Trust's proportionate share of cash held by partnerships
and joint ventures and by the unused portion of the Trust's line of credit in
the amount of $23.7 million.
Management does not foresee a shortfall between its available resources and
projected uses of funds. However, events such as acquisitions of properties,
reduction in the Trust's lines of credit, failure of the Trust's partners to
make capital contributions when due could result in the need to explore
additional sources of funds. These sources could include refinancing of existing
mortgage debt, sale of assets, securing loans on the 12 properties presently
unencumbered by debt, other securitized borrowings or the sale of shares of
beneficial interest.
Lines of credit
During 1995 the Trust obtained a $110 million credit facility from four
commercial banks. Included in the facility is a $75 million unsecured revolving
credit facility which expires in April 1997, with provisions for annual
extensions. The variable interest rate is LIBOR plus 185 basis points or the
prime rate. At August 31, 1995 the rate in effect was 7.70%, and the outstanding
amount was $51.3 million. Of the $51.3 million in use on that date, $7 million
was borrowed by partnerships in which the Trust or its wholly-owned subsidiaries
have an interest. The Trust's pro rata share of that amount was $4.8 million. At
August 31, 1995, $23.7 million was available under the line of credit.
In April 1995, the Trust converted a portion of the credit facility to a $35
million term loan which matures in five years and has an interest rate of 8.62%
for three years with the rate in the fourth and fifth years to be reset on a
fixed or floating rate at the option of the Trust. The term loan replaced a
floating rate facility priced at 200 basis points over LIBOR. The loan is
secured by mortgages on four properties with release provisions.
In connection with the line of credit and term loan, the Trust has agreed to
certain covenants, including maintaining minimum net worth and net operating
income levels as defined in the loan documents. The Trust has never failed to be
in compliance with those covenants.
Interest rate protection
In order to reduce exposure to variable interest rates, the Trust purchased a
three-year interest rate cap on $15 million at a 30-day LIBOR rate of 7.5%
limiting the maximum rate to 9.35%. In June, 1995 the Trust entered into a
6-year interest rate swap agreement with CoreStates Bank, NA on $20 million
which fixes a rate of 6.12% per annum versus 30-day LIBOR. When combined with
the 1.85% interest rate spread on the Trus's revolving credit agreement, the
Trust has effectively locked in a rate of 7.97%. As a result of these
transactions the Trust has fixed or hedged $35 million of the $51 million
outstanding balances on its revolving credit facilities.
Contingent liability
Three loans, totalling $30,067 million, are secured by properties in which the
Trust has an interest and are not limited in recourse to the real estate (see
Note 2 of notes to Consolidated Financial Statements). The Trust's contingent
liability for these loans is $12,239 million.
Significant capital events
In November, 1995 the Trust acquired Boca Palms Apartments in Boca Raton,
Florida. The total cost of $34 million includes improvements and renovations
still in progress. The source of the funds was a borrowing through the Trust's
credit facilities. The property contains 522 luxury apartments in a garden
setting.
During the next three years mortgage loans secured by properties owned by six
partnerships in which the Trust or a wholly-owned subsidiary has an interest
mature by their terms. The Trust's proportionate share of these loans which
total $52 million is $22.7 million.
The partnership owning Eagle's Nest Apartments has received a commitment from
the present lender to extend the loan term by five years to mature in 2000 at an
interest rate of 8.235%, reduced from 9.875%. Principal payments will be based
on a 25-year amortization schedule. The Trust's proportionate share of the loan
is $8.075 million.
Two of the partnerships have applied for financing. In one case (Laurel Mall),
while the loan is not due until 1998, the present lender has approved a
modification of the loan to expire in 2003 with amortization payments based on a
20-year schedule. The interest rate will be fixed for the full term at
approximately 7.70%. The present rate is 8.29% on the existing obligation which,
when fully funded, will be $30.6 million. The Trust's proportionate share of the
loan is $11.2 million. The other partnership (Windsong Apartments) has applied
for a loan of $4.0 million to refinance the present balance of $3.6 million. The
excess proceeds will be used for property improvements and closing expenses. The
Trust's proportionate share of the loan is $1.4 million.
One partnership (Forestville Shopping Center) in which the Trust has a 75%
interest has been notified that the lender is exercising its right to call the
loan for repayment in March, 1996. The Trust's proportionate share of the loan
is $1.4 million. The present interest rate is 9.75%.
The Trust's proportionate share of loans on two other properties will be
approximately $800,000 upon maturity in 1998. Management has not yet addressed
refinancing these obligations.
Lehigh Valley Mall will be renovated at an estimated cost of $5.2 million, the
Trus's share of which is $2.6 million. It is expected that the property will be
refinanced in an amount sufficient to repay the existing debt of approximately
$22 million, the cost of the renovations and provide excess capital which will
be distributed to the owners, the Trust's share of which will be approximately
$15 million. The interest rate under discussion is less than 8% for a ten-year
term with principal payments based on a 25-year amortization schedule. The
present rate is 9.07% on the existing obligations.
Following the end of the year, a 30-year fully self amortizing loan was obtained
by a wholly owned subsidiary of the Trust at an average interest rate of 5.9%
secured by a mortgage on Shenandoah Apartments, West Palm Beach Florida. The
funds were used to pay down the Trust's line borrowings which had a rate of
7.70% at August 31, 1995.
Environmental matters
At August 31, 1994 the Trust's reserve for environmental remediation costs was
$597,000. During 1995 $288,000 was charged to the reserve, leaving a balance of
$309,000. In addition the Trust received a credit of $380,000 for environmental
matters in connection with the acquisition of two properties. There can be no
assurance that these amounts will be adequate to cover future environmental
costs.
Competition
The Trust's shopping centers compete with other shopping centers in their trade
areas as well as alternative retail formats, such as catalogues and home
shopping networks. Apartment properties compete for tenants with other
multi-family properties in their markets. Economic factors, such as employment
trends and the level of interest rates, impact shopping center sales as well as
a prospective tenant's choice to or own his/her residence.
Inflation
Inflation can have many effects on the financial performance of the Trust.
Shopping center leases often provide for the payment of rents based on a
percentage of sales which may increase with inflation. Leases may also provide
for tenants to bear all or a portion of operating expenses which may reduce the
impact of such increases on the Trust. Apartment leases are normally for a
one-year term which may allow the Trust to seek increased rents as leases are
renewed or when new tenants are obtained.
Results of Operations
Fiscal 1995 compared with Fiscal 1994
Net income for the fiscal year ended August 31, 1995 before gains on sales of
interests in real estate, increased to $11,106,000 from $8,325,000 for the
comparable period in 1994. In the 1995 period, the gain on the sale of an
interest in real estate was $119,000 as compared to the 1994 period which
included gains on sales of interests in real estate totaling $12,362,000.
Gross revenues from real estate increased to $36,978,000 from $27,640,000,
primarily due to revenues from Boca Palms Apartments, which was acquired in
November 1994, and increased revenues from Hidden Lakes Apartments, Palms of
Pembroke Apartments and Mandarin Corners Shopping Center which were acquired or
became wholly-owned in the prior fiscal year.
Principally, as a result of the increase in the Trust's wholly-owned portfolio,
operating expenses increased to $14,859,000 from $11,758,000, depreciation and
amortization increased to $5,268,000 from $3,541,000 and mortgage and bank loan
interest increased to $8,908,000 from $4,162,000.
Interest and other income decreased to $176,000 from $274,000 due to maturing of
invested Treasury obligations.
For the fiscal year ended August 31, 1995, $460,000 was charged against the
allowance for possible losses. No additional provision is considered necessary
at this time.
General and administrative expenses increased to $3,091,000 from $2,528,000 due
to the addition of management and administrative personnel and an increase in
pension costs.
Equity in income of partnerships and joint ventures increased to $6,381,000 from
$4,416,000 primarily due to (i) improved performance of apartments and shopping
centers of $940,000 including a lease termination fee received from a shopping
center tenant in the amount of $220,000 and (ii) non-recurring environmental
costs and reserves of $760,000 associated with five properties in fiscal 1994.
Fiscal 1994 Compared With Fiscal 1993
Net income for the fiscal year 1994 increased to $20,687,000 from $14,000,000
for the comparable period in 1993, principally as a result of an increase in
gains on sales of interests in real estate of $8,487,000 and the results of
operations from newly acquired properties. This was offset by an increase in the
provision for losses on investments of $1,475,000.
In the fiscal year 1994, the Trust sold interests in Village Shopping Center,
Gary, Indiana (which was wholly owned); Commons of Chicago Ridge, Chicago Ridge,
Illinois and Sheridan Village Shopping Center, Peoria, Illinois. The gains
totaled $12,362,000. In the comparable period in fiscal 1993, the Trust sold
interests in Park Hills Plaza and Valley Forge Mall and realized gains totaling
$3,875,000.
Gross revenue from wholly owned and controlled real estate increased to
$27,640,000 from $21,083,000, primarily due to revenue from Cobblestone
Apartments acquired in December 1992, Shenandoah Village Apartments acquired in
August 1993, Emerald Point, Virginia Beach, Virginia, acquired in February 1993,
Hidden Lakes Apartments, Dayton, Ohio, acquired in February 1994, and Mandarin
Corners Shopping Center which became a wholly owned property in February 1994.
Principally, as a result of these acquisitions, operating expenses for wholly
owned and controlled properties increased to $11,758,000 from $8,959,000;
depreciation and amortization increased to $3,541,000 from $2,784,000; and
mortgage and bank loan interest increased to $4,162,000 from $2,222,000.
Provision for losses on investments increased to $1,795,000 from $320,000. (See
Note 1 to consolidated financial statements.)
Interest and other income decreased to $274,000 from $542,000, due to maturing
of invested Treasury obligations, a portion of such proceeds having been
invested in real estate.
General and administrative expenses increased to $2,528,000 from $1,873,000, due
to the addition of a new president for the Trust and an increase in officers'
compensation and professional fees, including legal fees dealing with litigation
with a partner.
Equity in income of partnerships and joint ventures decreased from $4,750,000 to
$4,416,000 primarily due to recognition of environmental costs and reserves
associated with five properties which totaled $760,000 as compared to $50,000 in
the prior year. This was offset by an increase in equity in income from
Countrywood Apartments acquired in August 1993 of $158,000 and the disposition
of the Commons of Chicago Ridge, Chicago Ridge, Illinois in October 1993 which
incurred a loss of $368,000 for fiscal 1993.
Fiscal 1993 Compared With Fiscal 1992
Net income for the fiscal year 1993 increased to $14,000,000 from $8,677,000 for
the comparable period of 1992, principally as a result of gains on sales of
interests in real estate of $3,875,000. The acquisition of Cobblestone
Apartments added $461,000 and improved performance of existing properties such
as Lehigh Valley Mall added $740,000. The properties sold were Valley Forge Mall
and Park Hills Plaza.
Gross revenue from real estate increased to $21,083,000 from $16,064,000,
primarily due to the revenues from Cobblestone Apartments which was acquired in
December, 1992 and Emerald Point acquired in February, 1993. Interest and other
income decreased to $542,000 from $795,000 due to the maturing of invested
Treasury obligations, as well as a reduction in the rates received on such
investments.
Property operating expenses increased to $8,959,000 from $6,607,000 primarily
due to operating expenses on Cobblestone Apartments and Emerald Point.
Mortgage and bank interest expense increased to $2,222,000 from $945,000
primarily due to the acquisition of Cobblestone Apartments and Emerald Point and
interest expense on Camp Hill Plaza Apartments which was financed in February
1992. Interest expense was reduced by $460,000 due to the prepayment of
mortgages in February 1992 on Kenwood Gardens and Lakewood Hills.
Equity in income of partnerships and joint ventures increased by $1,100,000,
primarily due to an increase in gross rental income of $840,000 from Lehigh
Valley Mall and $250,000 from the Commons of Chicago Ridge and a reduction in
the interest rate on borrowings for Sheridan Village Shopping Center which
reduced its mortgage interest expense by $134,000.
The net income from Marylander Apartments declined by $100,000 because of an
increase in vacancies to 12% from 10% and an increase of 10% in operating
expenses.
Market price and distribution record
The following table shows the high and low sales prices for PREIT shares on the
American Stock Exchange and cash distributions paid for the periods indicated.
Quarters Distributions
Ended High Low Paid
Fiscal Year 1995
- ------------------------------------------------------------------------
November 30 $21.25 $18.50 $ .47
February 28 23.63 19.88 .47
May 31 21.75 20.13 .47
August 31 21.88 21.25 .47
-----
$1.88
=====
Fiscal Year 1994
- ------------------------------------------------------------------------
November 30 $26.00 $23.25 $ .45
February 28 25.38 22.00 .47
May 31 24.75 22.25 .47
August 31 24.63 22.88 .47
-----
$1.86
=====
As of November 3, 1995, there were approximately 1,525 shareholders of the
Trust's shares of beneficial interest.