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Exhibit 13
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1993 ANNUAL REPORT
FIRST UNION
REAL ESTATE INVESTMENTS
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CONTENTS
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Company Profile 1
Letter to Securityholders 2
First Union in Focus 9
Summaries of Equity Investments 14
Selected Financial Data 18
Combined Financial Statements 20
Notes to Combined Financial Statements 24
Report of Independent Public Accountants 29
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 30
FINANCIAL HIGHLIGHTS
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Years Ended December 31,
1993 1992
(In thousands, except per share data)
Revenues $ 74,339 $ 74,567
Income from operations 10,276 12,657
Income before extraordinary loss(1) 15,224 18,432
Net income 13,984 18,432
Funds from operations (2) 21,301 23,300
Dividends declared 13,031 13,022
Per share
Income from operations $ .57 $ .70
Income before extraordinary loss (1) .84 1.02
Net income .77 1.02
Dividends declared .72 .72
MARKET PRICE AND DIVIDEND RECORD
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DIVIDENDS
1993 QUARTERS ENDED HIGH LOW DECLARED
December 31 $ 11 7/8 $ 9 5/8 $.18
September 30 11 1/8 9 5/8 .18
June 30 12 5/8 9 5/8 .18
March 31 12 1/8 9 .18
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$.72
====
1992 QUARTERS ENDED
December 31 $ 10 1/4 $ 8 1/4 $.18
September 30 9 8 .18
June 30 8 5/8 7 1/2 .18
March 31 8 5/8 6 3/4 .18
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$.72
====
<FN>
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 1993, the most recent record date, there were 6,408
record holders of the Trust's shares of beneficial interest. The Trust
estimates the number of beneficial owners at approximately 15,000.
(1) On November 1, 1993, the Trust repaid prior to their maturity dates $45
million of senior notes and $37.6 million of convertible debentures
resulting in a $1.2 million charge for the write off of unamortized issue
costs and payment of a redemption premium.
(2) The amount of funds from operations is calculated as income from
operations plus noncash charges for depreciation and amortization.
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COMPANY PROFILE
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First Union Real Estate Investments (Trust) is an equity real estate investment
trust specializing in acquiring, holding and managing real estate for current
yield and long-term appreciation for its owners. Each property in the portfolio
is managed separately; collectively all of the properties of the Trust are
managed as a business.
The Trust's investment portfolio presently includes equity ownership of
properties in three categories: retail, apartments and office buildings. The
Trust's ownership going forward will be focused in retail and apartments while
investments in office buildings will be de-emphasized. Retail properties
represent 62% of the Trust's assets on a historical cost basis, while
apartments and office buildings represent 15% and 20%, respectively. Other
Trust investments include parking facilities, mortgage investments and land.
The Trust's 33 properties are located in 17 states across the United States.
All Trust property investment decisions are market driven supported by a
research department that gathers and analyzes information on existing and
prospective markets for competitive purposes. Property management services are
provided by First Union Management, Inc. (FUMI), a separate property management
company whose shares are owned in trust for the benefit of First Union
shareholders. The properties are managed as individual entities and management
is organized into specialty categories by property type and geographic region.
Retail experts, for example, are involved only in retail properties and do not
lease or manage apartments. Each specialty category is supported by FUMI's
construction department which oversees all capital and tenant improvements.
Property management decisions concerning the various assets are made by FUMI
managers in their respective property categories. Within the Trust, asset
management and strategic planning decisions are made by senior management.
Asset acquisitions, divestitures and major capital expenditures are evaluated
by the Trust management and recommended to the Board of Trustees for approval.
First Union's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR) and as a qualified real estate investment trust, First Union pays no
federal income tax provided 95% of its taxable income is distributed to its
owners.
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February 1, 1994
TO OUR SECURITYHOLDERS:
December 31, 1993 marked the end of an era at First Union with the retirement
of our former Chairman and Chief Executive Officer, Donald S. Schofield. On
behalf of our management and trustees, we wish Don the very best in his
retirement.
As First Union's new Chairman and Chief Executive Officer, I look forward to
leading the Trust through the remainder of the 90's and into the next century.
My first priority will be to focus on the existing portfolio and maximize the
intrinsic value of our properties, set and attain targeted return on
shareholders' equity, and consistently work to improve both operating earnings
and funds from operations. My second priority will be to sell properties that
do not meet either our short-term earnings criteria or our long-term targeted
investment goals. My third priority will be to seek prudent acquisitions to
profitably grow the Trust. Our philosophy will be product focused and market
driven, rather than operations driven. Our strategic plan is to specialize in
retail and apartment properties with investments in stable and growing markets.
Our corporate culture and structure will be molded around developing and
training our human resources, and will include incentives for increased share
ownership by management.
Our annual report is designed to provide you with information relating to your
investment. In it we have set forth data with which you, the owners, can
measure our performance. As you know, measuring a real estate business, and in
particular a REIT, is different from other businesses, because 95% of the
taxable earnings must be distributed to the shareholders as dividends. Thus, it
is virtually impossible to accumulate retained earnings to grow the business.
Under these circumstances, increased earnings over the long run may be derived
from increased rents, decreased expenditures, profitable acquisitions and, very
often, inflation. The financial information provided reflects the historic
performance of the company. We will provide you, our owners, who stay with us
for the long term, the information and opportunity to assess our future
performance.
The most common measure of performance of a REIT is funds from operations,
which excludes the non-cash charges for depreciation and amortization. "Funds
From Operations," (FFO) as defined by the National Association of Real Estate
Investment Trusts (NAREIT), is net income, excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and amortization.
"Income From Operations," (IFO) is net income excluding gains (or losses) from
debt restructuring and sales of property. A significant component of IFO is
property "Net Operating Income" (NOI). Property NOI is property revenue and
mortgage investment income less real estate taxes and property expenses before
debt service, depreciation and amortization. We will report property net
operating income, income from operations, funds from operations, and dividend
distribution, along with return on shareholders' equity and other pertinent
information going forward on a consistent basis.
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PROPERTY NET OPERATING INCOME
Property Net Operating Income is a measure of revenue generated from rents
collected and mortgage investments, less property expenses, for each property
and collectively for each investment category. Property NOI for 1993 was $40.9
million compared to $42.2 million in 1992, or a decrease of 3%. Property NOI
for the past five years by investment category is as follows (amounts in
thousands):
1989 1990 1991 1992 1993
RETAIL $24,563 $25,596 $24,451 $24,685 $23,593
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APARTMENTS 1,822 2,412 2,936 3,879 5,303
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OFFICE 5,148 4,996 4,808 5,295 4,957
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PARKING 3,291 3,408 2,993 2,749 3,002
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MORTGAGES 11,631 10,411 8,773 5,611 4,033
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$46,455 $46,823 $43,961 $42,219 $40,888
During the past five years each of our asset investment categories has been
managed through interrelated services. With our restructuring in 1994, each
category will function independently from the others as separate operations.
Significant events relating to each category are reported below.
RETAIL OPERATIONS
Our retail portfolio consists of 17 malls totaling approximately 7.6 million
square feet and is 62% of our investments on a cost basis. In 1993, retail
operations generated 58% of our total property net operating income. Retail
property NOI was down 4% from 1992 primarily because of the recognition of a
$1.7 million lease termination fee in 1992, which did not recur in 1993.
Occupancy at year end for both 1993 and 1992 was 82%. During 1993, we signed
new leases for 413,000 square feet while 449,000 square feet were vacated, for
a net loss of 36,000 square feet.
Four new anchor tenants signed long-term leases at Two Rivers Mall, in
Clarksville, Tennessee, and Mountaineer Mall in Morgantown, West Virginia.
These include U.S. Factory Outlet (USFO), an off-price manufacturers' outlet
for approximately 300 suppliers operating 24 stores in 10 states; Wholesale
Depot, a cash and carry membership wholesale warehouse; and Wal-Mart. The
impact of the Wal-Mart lease was not realized in 1993, as the store opened on
January 4, 1994.
APARTMENT OPERATIONS
Our apartment portfolio consists of six communities totaling 1,700 units
located in two geographic areas, the Midwest and Southeast, and is 15% of our
investments on a cost basis. In 1993, apartment property NOI was up 37% from
1992, and generated 13% of total property net operating income. The increase in
apartment NOI resulted primarily from the full year recognition of operating
income from Walden Village in Atlanta, Georgia, which was classified as a
mortgage investment for part of 1992. Overall occupancy at year-end 1993 was
93%, compared to 95% in 1992.
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OFFICE BUILDING OPERATIONS
Our seven office buildings totaling nearly 1.6 million square feet, located
primarily in the midwestern and southern United States, make up approximately
20% of our investments on a cost basis. In 1993, office building operations
generated 12% of total property net operating income. Office building NOI was
down by 6% in 1993 compared to 1992. The primary reason for the decline was the
impact of a major tenant (totaling 46,000 square feet) vacating in December
1992. Average occupancy at the end of 1993 was 76%, compared to 75% for 1992. A
total of 96,000 square feet was leased in 1993 while 94,000 square feet
vacated, for a net gain of 2,000 square feet.
PARKING FACILITIES OPERATIONS
Parking facilities in Cleveland are approximately 3% of our investments on a
cost basis. Parking facilities operations generated 7% of the total property
net operating income in 1993. Parking facilities property NOI was up 9% from
1992, primarily because of a relatively low supply of well located parking
spaces in downtown Cleveland, coupled with strong demand.
MORTGAGE INVESTMENTS
Income from mortgage investments decreased by 28% primarily because a mortgage
loan secured by an office building in Pittsburgh, Pennsylvania, matured June
1993 and is now fully paid. The Trust's only remaining mortgage loans are a
first mortgage loan secured by an office building in Cleveland, maturing in
2011, and a wraparound mortgage loan secured by an apartment building in
Atlanta, Georgia, maturing in 1999.
INCOME FROM OPERATIONS
Income from operations is the combined NOI for our property and mortgage
categories less net financing costs and corporate overhead expenses. It is the
underlying key ingredient of funds from operations, and was $10.3 million, or
$0.57 per share, in 1993. This compares with $12.7 million, or $.70 per share,
in 1992. The five-year trend of income from operations is as follows (amounts
in thousands, except per share):
1989 1990 1991 1992 1993
INCOME FROM OPERATIONS $17,280 $15,917 $13,330 $12,657 $10,276
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PER SHARE $ 0.94 $ 0.88 $ 0.74 $ 0.70 $ 0.57
CAPITAL GAINS
Capital gains have been recognized from the sale of appreciated properties and
reflect increased value of acquisitions. In 1993, capital gains totaled $4.9
million primarily from an installment sale of a Pittsburgh
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office building by the Trust in 1983 to a partnership formed by Mellon Bank
Corporation. This property had been purchased by the Trust in 1972. Capital
gains were not comparable in 1993 and 1992 because the 10-year mortgage note
resulting from the installment sale matured in June 1993 (amounts in thousands,
except per share).
1989 1990 1991 1992 1993
INSTALLMENT GAIN $ 3,805 $ 4,319 $4,906 $5,577 $4,696
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OTHER GAINS 8,919 403 -0- 198 252
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TOTAL GAINS $12,724 $ 4,722 $4,906 $5,775 $4,948
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PER SHARE $ 0.69 $ 0.26 $ 0.27 $ 0.32 $ 0.27
FUNDS FROM OPERATIONS
Funds from operations were $21.3 million, or $1.18 per share, in 1993.
Comparable 1992 amounts were $23.3 million, or $1.29 per share. The
depreciation and amortization component of funds from operations was $11
million in 1993 and $10.6 million in 1992. Funds from operations for the past
five years are as follows (amounts in thousands):
1989 1990 1991 1992 1993
INCOME FROM OPERATIONS $17,280 $ 15,917 $13,330 $12,657 $10,276
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DEPRECIATION & AMORTIZATION 8,142 8,370 9,351 10,643 11,025
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FUNDS FROM OPERATIONS $25,422 $ 24,287 $22,681 $23,300 $21,301
Funds from operations per share for the past five years are as follows:
1989 1990 1991 1992 1993
INCOME FROM OPERATIONS $0.94 $ 0.88 $0.74 $0.70 $0.57
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DEPRECIATION & AMORTIZATION 0.44 0.46 0.51 0.59 0.61
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FUNDS FROM OPERATIONS $1.38 $ 1.34 $1.25 $1.29 $1.18
DIVIDEND DISTRIBUTION
The dividend payout of a REIT is often presented as a percentage of funds from
operations. Currently, a sampling of the industry average payout percentage is
approximately 80%. In 1993, our dividend payout percentage was 61% and totaled
$0.72 per share, representing a 7.5% yield based on the year-end closing share
price of $9.63. In 1992, our dividend of $0.72 was a lower payout percentage
compared to 1993.
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Shareholders of record on January 3, 1994, received their fourth quarter
dividend check dated February 1, 1994, or Dividend Investment Service statement
dated February 2, 1994, which reflected a dividend of $0.18 per share.
1989 1990 1991 1992 1993
DIVIDENDS DECLARED PER SHARE $1.44 $ 1.08 $0.93 $0.72 $ 0.72
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DIVIDENDS DECLARED AS A % OF FFO 104% 81% 74% 56% 61%
RETURN ON EQUITY
Return on shareholders' equity is measured by comparing income from operations
to the amount of shareholders' equity (amounts in thousands).
1989 1990 1991 1992 1993
INCOME FROM OPERATIONS $ 17,280 $ 15,917 $ 13,330 $12,657 $ 10,276
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SHAREHOLDERS' EQUITY 96,062 96,228 97,188 102,672 103,766
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RETURN ON SHAREHOLDERS' EQUITY 18% 17% 14% 12% 10%
CAPITAL AND TENANT IMPROVEMENTS
Capital and tenant improvements are accomplished with funds that are
re-invested in the properties to maintain the asset and enhance future value.
Improvements made over the last five years were as follows (amounts in
thousands):
1989 1990 1991 1992 1993
RETAIL $ 1,662 $ 2,855 $ 884 $4,509 $ 8,330
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APARTMENTS 11 479 678 1,809 1,467
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OFFICE 1,838 1,931 2,760 1,946 1,658
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PARKING 11 87 112 55 -
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$ 3,522 $ 5,352 $ 4,434 $8,319 $11,455
FINANCINGS
First Union raised a total of nearly $250 million through the public debt
markets over its 32-year history. During the third quarter of 1993, liabilities
were restructured by raising $135 million in additional debt via a senior note
offering and a mortgage loan.
During 1993, the company maintained its investment grade senior debt rating of
BBB- with Standard and Poor's and Duff and Phelps, while Moody's lowered the
rating to Ba2. The result of this split rating was an 8 7/8% rate on
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the $100 million senior notes. The notes, which were sold at 99.187 to yield
9%, are non-callable and are due October 1, 2003. A portion of the net proceeds
was used to reduce mortgage debt by $8.4 million and reduce bank borrowings by
approximately $6.2 million. The remainder of the net proceeds was used to call,
at par, the Trust's outstanding $45 million, 8 3/8% senior notes due in
December 1994, and at 101.025 the Trust's $37.6 million, 10 1/4% convertible
subordinated debentures due 2009. These new notes contain certain covenants
requiring maintenance of a minimum tangible net worth and limitations on
additional borrowings.
The mortgage loan was a $35 million, 10-year, LIBOR-based loan secured by our
shopping mall in St. Cloud, Minnesota. The initial rate for the first year is
5.6%, and the rate is capped at 9.5% over the life of the loan. The loan may be
prepaid at any time during its 10-year term without a penalty. The net proceeds
from this loan was used to reduce the Trust's short-term bank borrowings.
In December, one of our revolving lines of credit was converted to a $60
million five-year term loan, which will be amortized equally over five years.
We have an additional $20 million revolving credit line available that
terminates in July 1996. At December 31, 1993, there were no borrowings
outstanding under the $20 million line.
The combination of these financing transactions significantly increases our
financial flexibility, while extending our debt maturities. We had $38.5
million of available cash invested in short-term instruments on December 31,
1993.
A LOOK TOWARD OUR FUTURE
We have developed a five-year strategic plan that will become an integral
component of First Union's future. It is designed to maximize income and value
appreciation of real estate ownership by capitalizing on market opportunities
and extracting intrinsic value from real estate we presently own and will
acquire, while divesting ourselves of assets which do not meet our yield or
market requirements.
Our energies will be market and real estate driven, which is a shift from our
previous operations-driven philosophy. Our mission will be understanding the
businesses and needs of our retail tenants and apartment residents, and
expanding and developing our relationships and market knowledge to serve both
our existing and future tenants.
Our key assets are our public entity, our people and our existing portfolio of
properties, which provide a base of financial stability. While the overall
quality and condition of our portfolio has changed over the past five years, we
are hopeful that First Union can capitalize on opportunities within targeted
markets.
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Our vision is to create opportunities within the real estate industry, with our
primary focus remaining on retail and apartment categories. We intend to
accomplish strategic plan objectives with the program we have developed for
each property in our existing portfolio, including the sale of properties that
do not meet our return expectations, and an aggressive acquisition program. Our
organization will be realigned to meet these goals.
A major consideration in First Union's strategic plan is its corporate
restructuring. For instance, the retail management group consists solely of
retail experts with no overlap into apartment or office building decision
making, and will be geographically organized with representation and
specialization within each market. Each property category will have the support
of our construction department, a market research department and centralized
financial controls.
Finally, and most importantly, our strategic plan will provide for a
commonality of interests on the part of management and shareholders through an
incentive ownership program. This program will reward management for those
activities which most directly benefit and enhance shareholder value, and will
make it incumbent upon management to act in a manner that ensures the greatest
overall return to the owners of the Trust -- its shareholders.
With the information provided in this report, you should have a better
understanding of your investment as well as my priorities, vision and direction
for the Trust. I look forward to meeting many of you for the first time at our
Annual Meeting at 10:00 A.M. on Tuesday, April 12, 1994, in the National City
Bank Auditorium in downtown Cleveland. For those of you who plan to attend our
shareholder meeting, an invitation is enclosed. Kindly return the RSVP so that
we may accommodate all those who wish to attend. We welcome everyone who would
like to join us. The quality of our meeting will be reflected in the questions
posed by our shareholders, and while I'm presently one of the newest members of
the First Union team, I will do my best to answer all of them.
/S/ James C. Mastandrea
James C. Mastandrea
Chairman, President and
Chief Executive Officer
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FIRST UNION IN FOCUS
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First Union --
a real estate company
specializing in
retail and apartment properties --
is sharpening its focus
on Markets, on Growth, and
on Performance. First Union
has a strategic plan to improve
shareholder value through
targeted acquisitions, enhanced
management, and the sale
of assets that do not meet its
investment goals, in order
to achieve superior performance.
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FOCUS: THE MARKET
First Union is focused on consumer driven real estate markets -- shopping
centers and apartments. These categories of real estate have historically
demonstrated a greater stability in performance than other commercially focused
investments such as office buildings, and are well-suited to First Union's
particular real estate expertise.
Changing buying patterns among retail consumers, especially the shift to
value-conscious shopping, requires flexibility and both depth and breadth of
leasing experience in order to maintain competitiveness. First Union's retail
strategy, its value-oriented retail portfolio, and its relationships with key
tenants result in excellent positioning for superior future operating
performance.
Multi-family housing investments also offer significant potential returns for
those investors already located in growth markets or with the savvy to select
acquisition properties without overpaying in what has recently become a
seller's market in many cities. First Union's value-added capabilities and
market research will enable it to continue acquiring quality apartment
communities with the greatest opportunity for maximum overall returns.
By realigning its operating units and establishing a market driven investment
policy, First Union is positioning itself to take advantage of changing
consumer behavior in both the retail and apartment marketplaces. First Union
has organized its management team into specialized units by property type and
geographic region. As part of the initiative to strengthen the skills of the
management team, a research department and training facility have been created.
First Union recognizes that specialized knowledge and depth of experience can
provide competitive advantages to enhance portfolio growth.
We believe that informed, market driven decisions and actions afford greater
opportunity to enhance shareholder value.
FOCUS: GROWTH
First Union is committed to continuous growth in rental revenues, property net
operating income and portfolio asset values. We are long-term investors with
the skills required to make critical decisions over the short term which
protect rental revenues and enable us to grow our portfolio from a solid
foundation. As investors in shopping centers and apartments, we are
implementing the following strategies to achieve our growth plans:
o Tenant and Resident Relationships: We are focused on relationships with our
community of retail tenants and apartment residents who ultimately drive
our success. This is because successful retail tenant relationships result
in increased retail sales and percentage rents, expansions into new space,
cost effective multiple leasing relationships throughout our portfolio, and
leasing renewals over the long term. With our apartments, successful
resident relationships result in high occupancy rates, leasing referrals,
and reduced maintenance costs and turnover. For these reasons, tenant and
resident relationships are of the highest priority for our management team.
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[PHOTO OF MOUNTAINEER MALL]
FIRST UNION'S MOUNTAINEER MALL IN MORGANTOWN, WEST VIRGINIA, HAS RECOVERED FROM
THE LOSS OF TWO OF ITS FOUR ANCHOR TENANTS WHEN A COMPETING MALL OPENED NEARBY.
LAST YEAR, OUR RETAIL SPECIALISTS RESPONDED BY SIGNING TWO NEW VALUE-PRICED
ANCHOR TENANTS, INCLUDING WAL-MART. ONE OF THE MOST SUCCESSFUL RETAILERS IN THE
COUNTRY, WAL-MART OCCUPIES 126,000 SQUARE FEET OF SELLING SPACE AND OPENED IN
JANUARY 1994.
[PHOTO OF MEADOWS OF CATALPA APARTMENT COMPLEX]
IN THE MEADOWS OF CATALPA, FIRST UNION OWNS A 323-UNIT APARTMENT COMMUNITY IN
DAYTON, OHIO, WHERE THE LOCAL ECONOMY'S TRADITIONALLY STRONG MANUFACTURING BASE
IS NOW EVOLVING INTO ADVANCED TECHNOLOGY INDUSTRIES. EXCELLENT RECREATIONAL
FACILITIES ADD TO THE APPEAL OF THIS PROPERTY, WHICH HAS STABILIZED AN
OCCUPANCY RATE NEAR 95%.
[PHOTO OF KANDI MALL]
KANDI MALL, IN WILLMAR, MINNESOTA, WAS ACQUIRED BY FIRST UNION IN 1979. AFTER
SEVERAL EXPANSIONS AND RENOVATIONS, IT IS NOW A 448,000-SQUARE-FOOT REGIONAL
MALL WITH SUCCESSFUL ANCHORS LEADING ITS STEADILY IMPROVING OCCUPANCY AND
SALES.
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o Leasing and Management: We are committed to more effective marketing and
management of our existing properties to produce higher income yields. By
restructuring management into teams responsible for specific property types
and geographic regions, we are positioned to apply new strength to this
process.
o Expansion and Renovation: First Union's management team and construction
staff are continually evaluating opportunities to expand and renovate
properties. To better serve the needs of our tenants, expansions and
renovations take advantage of the opportunities to create and enhance asset
values throughout our portfolio.
o Portfolio and Individual Property Acquisitions: As an experienced public
real estate company, First Union is positioned to evaluate and acquire
attractive retail and apartment assets located in targeted markets in
accordance with our growth strategy. The execution of First Union's growth
strategy will be accomplished through the acquisition of complementary real
estate portfolios and individual properties.
o Risk Management: First Union's management recognizes that the activities
relating to our future growth entail risks that must be carefully managed.
For this reason, management has successfully restructured the Trust's
liabilities to significantly extend debt maturities and enhance financial
flexibility. Management's acquisition philosophy will be to reduce risk by
minimizing the downside of an investment, while maximizing the potential
upside. Prudent risk management enables First Union to operate with
flexibility as we implement our growth strategy.
o Management Incentives: To reinforce First Union's growth objectives, we
have adopted a program to provide ownership incentives for management that
reward performance which enhances shareholder value. We believe that
sharing our success, as well as our risk, with management is the most
effective method to motivate our team to achieve superior results in the
interest of shareholders.
FOCUS: PERFORMANCE
First Union believes that the strengths and talents of its people are the keys
to achieving superior performance and providing greater value to shareholders.
As part of management's initiative to improve performance, we have delegated
property decision making responsibility to the managers of the respective
property categories. Each member of the organization has been asked to focus on
personal and professional growth in order to complement the growth we
anticipate from our portfolio.
Improved relations, with all those whose businesses, personal lives, and
investment programs are connected to our company, is a key goal for all of us
at First Union. We have established a program to improve our relationships with
investors, tenants, bankers, and vendors, based on better communications and
responsiveness. Our expectation is that this continuing effort to improve our
relationships will provide significant benefits to our real estate operations
which will translate into enhanced shareholder value over the long term.
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[PHOTO OF FAIRGROUNDS SQUARE MALL]
FAIRGROUNDS SQUARE, A 528,000-SQUARE-FOOT ENCLOSED MALL IN READING,
PENNSYLVANIA, BENEFITS FROM ITS LOCATION WITHIN THE MARKET, AS DEMONSTRATED BY
ITS HISTORICAL OCCUPANCY RATE OF NEARLY 100%. FIRST UNION RETAIL SPECIALISTS
ASSIGNED TO THE REGION PROVIDE THE TYPE OF ATMOSPHERE SHOPPERS EXPECT AND
MERCHANTS DEMAND.
[PHOTO OF SOMERSET LAKES APARTMENT COMPLEX]
WITH SOMERSET LAKES, A 360-UNIT APARTMENT PROPERTY IN INDIANAPOLIS, INDIANA,
FIRST UNION IS POSITIONED IN A STABLE MARKET, WITHIN AN ECONOMICALLY STRONG
MIDWEST METROPOLIS. ACQUIRED IN 1988 AND RECENTLY UPGRADED, IT WAS 93% OCCUPIED
AS OF THE END OF 1993. MANAGEMENT OF THIS PROPERTY IS THE RESPONSIBILITY OF
FIRST UNION'S MIDWESTERN APARTMENT SPECIALIST TEAM.
[PHOTO OF CROSSROADS CENTER (ST. CLOUD, MN)]
CROSSROADS CENTER, LOCATED IN ST. CLOUD, MINNESOTA, IS FIRST UNION'S LARGEST
MALL. IT HAS SUSTAINED A HISTORICAL OCCUPANCY RATE GREATER THAN 95%. AT 743,000
SQUARE FEET WITH EXPANSION POSSIBILITIES, THIS MAJOR RETAIL HOLDING IS A STABLE
INVESTMENT WITH GROWTH POTENTIAL.
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SUMMARY OF EQUITY INVESTMENTS BY PROPERTY TYPE
As of December 31, 1993 (square feet in thousands)
YEAR MOST
RECENTLY SQUARE TOTAL
DIRECT EQUITY YEAR EXPANDED/ FEET SQUARE TOTAL
INVESTMENTS LOCATION ACQUIRED RENOVATED OWNED FEET(1) OCCUPANCY(2) ANCHOR TENANTS
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SHOPPING MALLS
EASTERN
Middletown(3) Fairmont, WV 1970 1990 471(3) 471 88% Hill's, Hess's, Stone & Thomas
Wyoming Valley(3) Wilkes Barre, PA 1972 1991 909(3) 909 97% JCPenney, Sears, Bon-Ton, Hess's
Mountaineer Morgantown, WV 1978 1993 598 656 64%(4) Montgomery Ward, Stone & Thomas
U.S. Factory Outlet, Giant Eagle(5),
Wal-Mart(4)
Fingerlakes Auburn, NY 1981 1992 403 403 84% JCPenney, Sears, Kmart
Fairgrounds Square Reading, PA 1981 1989 429 528 97% JCPenney, Phar-Mor, Boscov's(6)
Wilkes Wilkesboro, NC 1983 1984 359 359 69% JCPenney, Belk, F.W. Woolworth(7)
MIDWESTERN
North Valley Denver, CO 1969 1988 452 452 66% Montgomery Ward, Burlington Coat Factory
Crossroads St. Cloud, MN 1972 1986 636 743 99% Sears, JCPenney, Dayton's(5), Target(8)
Two Rivers Clarksville, TN 1975 1993 233 233 73% Wholesale Depot, U.S. Factory Outlet
Crossroads Fort Dodge, IA 1977 1988 328 425 85% JCPenney, Sears(9), Younkers
Westgate Towne Centre Abilene, TX 1977 1987 291 386 36% Montgomery Ward(8), 50-Off
Kandi Willmar, MN 1979 1992 448 448 83% Kmart, JCPenney, Herberger's
WESTERN
Valley North Wenatchee, WA 1973 1981 170 170 97% JCPenney, Payless Drug
Mall 205 Portland, OR 1975 1988 257 434 96% Montgomery Ward(8), Emporium, Payless
Drug
Plaza 205 Portland, OR 1978 1983 167 167 100% Nautilus Plus(5), Office Max
Peach Tree Marysville, CA 1979 1985 435 435 51%(10) Food 4 Less
Valley Yakima, WA 1980 1988 308 418 91% Sears(5), Lamonts, Payless Drug
----- ----- ---
6,894 7,637 82%
===== ===== ===
ANCHOR STORES 4,092 95%
----- ---
SPECIALTY STORES 3,545 67%
----- ---
<FN>
(1) Total leasable area of property includes retail tenant stores not owned by the Trust.
(2) Occupancy rates shown are as of December 31, 1993 and are based on the total square feet at each property, except apartments
which are based on the number of units.
(3) The Trust owns a 50% interest in these malls, but lists 100% of the square feet.
(4) The occupancy rate at December 31, 1993 does not include Wal-Mart for 126,390 square feet, which opened in January 1994.
When Wal-Mart opened, total occupancy increased to 81%.
(5) These anchor tenants own their buildings and ground lease the land from First Union.
(6) Boscov's owns its building and pad site.
(7) Store is vacant but F.W. Woolworth is obligated to pay rent until the end of the lease.
(8) Target and Montgomery Ward own their pad sites and buildings and operate at the malls under construction, operation and
reciprocal easement agreements.
(9) Sears occupies its store under a lease with an unrelated third party.
(10) A temporary tenant occupied 70,162 square feet as of December 31, 1993.
14
17
YEAR MOST
DIRECT EQUITY YEAR RECENTLY TOTAL
INVESTMENTS LOCATION ACQUIRED RENOVATED UNITS OCCUPANCY(2)
- ---------------------------------------------------------------------------------------------
APARTMENTS
MIDWESTERN
Somerset Lakes Indianapolis, IN 1988 1992 360 93%
Meadows of Catalpa Dayton, OH 1989 1992 323 94%
SOUTHEASTERN
Briarwood Fayetteville, NC 1991 1992 273 97%
Woodfield Gardens Charlotte, NC 1991 1992 132 89%
Windgate Place Charlotte, NC 1991 1992 196 90%
Walden Village Atlanta, GA 1992 1993 380 91%
----- ----
1,664 93%
===== ====
- ---------------------------------------------------------------------------------------------
OFFICE BUILDINGS TOTAL
SQUARE FEET
MIDWESTERN OWNED
55 Public Square Cleveland, OH 1963 1992 397 88%
Rockwell Avenue Cleveland, OH 1979 1993 237 64%
Ninth Street Plaza Cleveland, OH 1985 1993 147 63%
Circle Tower Indianapolis, IN 1974 1988 103 74%
300 Sixth Avenue Pittsburgh, PA 1979 1991 226 74%
SOUTHERN
Henry C. Beck Shreveport, LA 1974 - 185 82%
Landmark Towers Oklahoma City, OK 1977 1987 259 73%
----- ----
1,554 76%
===== ====
- ---------------------------------------------------------------------------------------------
OTHER SPACES
Land - Huntington Building Cleveland, OH 1961 - -
Parking Garage Cleveland, OH 1975 1988 1,100
Parking Facility Cleveland, OH 1977 - 300
15
18
SUMMARY OF EQUITY INVESTMENTS BY GEOGRAPHIC REGION
[MAP OF THE UNITED STATES SHOWING THE LOCATION OF EACH PROPERTY,
BY TYPE, THAT IS LISTED ON PAGES 14 AND 15.]
REGION PROPERTY TYPE
o Eastern Shopping Malls
o Southeastern Office Buildings
o Southern Apartments
o Midwestern Other
o Western Mortgage Loan Investments
[Chart]
PIE CHART SHOWING THE PERCENT OF ASSETS OWNED BY PROPERTY TYPE:
Shopping Malls 62%
Office Buildings 20%
Apartments 15%
Other 3%
16
19
FINANCIAL CONTENTS
Selected Financial Data 18
Combined Balance Sheets 20
Combined Statements of Income 21
Combined Statements of Changes in Cash 22
Combined Statements of Shareholders' Equity 23
Notes to Combined Financial Statements 24
Report of Independent Public Accountants 29
Management's Discussion and Analysis of
Financial Condition and Results of Operations 30
Trustees, Directors and Officers 32
17
20
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
1983 1984 1985 1986 1987
(In thousands, except per share data)
OPERATING RESULTS
Revenues $66,486 $70,271 $73,043 $72,570 $73,892
Income from operations 16,727 19,932 21,890 21,403 19,360
Capital gains 3,495 3,755 2,314 4,093 6,656
Income before extraordinary loss(1) 20,222 23,687 24,204 25,496 26,016
Net income 20,222 23,687 24,204 25,496 26,016
Funds from operations(2) 23,290 26,316 28,673 28,477 26,445
Dividends declared 14,966 19,372 24,031 26,357 27,202
- ------------------------------------------------------------------------------------------------------------------
Per share of beneficial interest(3)
Income from operations $1.03 $1.13 $1.15 $1.13 $1.02
Income before extraordinary loss(1) 1.22 1.32 1.27 1.35 1.37
Net income 1.22 1.32 1.27 1.35 1.37
Dividends declared(3) .91 1.11 1.27 1.40 1.44
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Gross Assets before deducting
accumulated depreciation(4) $373,990 $430,775 $416,221 $495,424 $429,815
Long-term obligations(5) 137,915 172,329 154,890 177,810 162,960
Total equity(6) 107,866 149,778 147,714 147,102 145,083
Total equity before deducting
accumulated depreciation(4)(6) 147,971 194,637 198,325 201,304 203,739
- ------------------------------------------------------------------------------------------------------------------
Per share of beneficial interest(3)(4)(6)(7)
Net assets $5.71 $7.21 $7.15 $7.13 $7.05
Net assets before deducting
accumulated depreciation 7.82 9.35 9.58 9.72 9.86
- ------------------------------------------------------------------------------------------------------------------
<FN>
This selected financial data should be read in conjunction with the Combined Financial Statements and notes thereto.
(1) On November 1, 1993, the Trust repaid prior to their maturity dates $45 million of senior notes and $37.6 million of
convertible debentures resulting in a $1.2 million charge for the write off of unamortized issue costs and payment of a
redemption premium.
(2) The amount of funds from operations is calculated as income from operations plus noncash charges for depreciation and
amortization.
(3) All per share amounts have been adjusted for a 4% share dividend declared December 5, 1990, and distributed February 1, 1991.
(4) Certain amounts for 1983 through 1992 have been reclassified to conform with the presentation of 1993 balances. (See Note 1
to Combined Financial Statements, Summary of Significant Accounting Policies).
(5) Includes senior notes and mortgage loans, including current portion, for all years. Also, included in 1993 is the $60 million
five-year term loan. (See Note 5 to Combined Financial Statements, Bank Loans).
(6) Includes shareholders' equity and convertible securities net of unamortized issue costs through 1992 as the convertible
debentures were repaid on November 1, 1993. (See footnote(1) above).
(7) Includes the effect of vested options.
[FIRST UNION LOGO]
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21
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
1988 1989 1990 1991 1992 1993
(In thousands, except per share data)
OPERATING RESULTS
Revenues $73,390 $76,963 $76,861 $74,941 $74,567 $74,339
Income from operations 18,129 17,280 15,917 13,330 12,657 10,276
Capital gains 5,269 12,724 4,722 4,906 5,775 4,948
Income before extraordinary loss(1) 23,398 30,004 20,639 18,236 18,432 15,224
Net income 23,398 30,004 20,639 18,236 18,432 13,984
Funds from operations(2) 25,602 25,422 24,287 22,681 23,300 21,301
Dividends declared 26,967 26,438 19,632 16,827 13,022 13,031
- ---------------------------------------------------------------------------------------------------------
Per share of beneficial interest(3)
Income from operations $ .97 $ .94 $ .88 $ .74 $ .70 $ .57
Income before extraordinary loss(1) 1.25 1.63 1.14 1.01 1.02 .84
Net income 1.25 1.63 1.14 1.01 1.02 .77
Dividends declared(3) 1.44 1.44 1.08 .93 .72 .72
- ---------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Gross Assets Before Deducting
accumulated depreciation(4) $441,909 $442,304 $454,778 $461,077 $445,881 $495,445
Long-term obligations(5) 173,880 178,174 122,659 119,049 109,733 257,355
Total equity(6) 132,689 132,994 133,073 134,047 139,547 103,766
Total equity before deducting
accumulated depreciation(4)(6) 197,245 201,274 209,001 217,848 231,973 205,590
- ---------------------------------------------------------------------------------------------------------
Per share of beneficial interest(3)(4)(6)(7)
Net assets $6.61 $6.73 $6.80 $6.89 $7.18 $5.93
Net assets before deducting
accumulated depreciation 9.79 10.11 10.58 11.06 11.77 11.45
- ----------------------------------------------------------------------------------------------------------
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22
COMBINED BALANCE SHEETS
1993 1992
As of December 31, (In thousands)
ASSETS
INVESTMENTS IN REAL ESTATE
Land $ 40,284 $ 40,219
Buildings and improvements 368,776 357,274
--------- ---------
409,060 397,493
Less -- Accumulated depreciation (101,824) (92,426)
--------- ---------
Total investments in real estate 307,236 305,067
MORTGAGE LOANS RECEIVABLE,
including current portion of $146,000 35,550 39,573
OTHER ASSETS
Cash and cash equivalents 38,523 992
Accounts receivable and prepayments 4,621 3,941
Deferred charges, net 2,506 2,469
Unamortized debt issue costs 5,185 1,413
--------- ---------
$ 393,621 $ 353,455
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage loans, including current portion of $3,788,000 $ 92,355 $ 59,733
Senior notes 105,000 50,000
Bank loans 60,000 67,000
Accounts payable and accrued liabilities 14,356 13,294
Deferred obligations 10,394 10,588
Deferred capital gains and other deferred income 7,750 12,528
--------- ---------
289,855 213,143
--------- ---------
Convertible subordinated debentures
(less $750,000 held in treasury) 37,640
---------
SHAREHOLDERS' EQUITY
Shares of beneficial interest, $1 par, unlimited
authorization, outstanding 18,109 18,086
Additional paid-in capital 59,446 59,328
Undistributed income from operations 20,732 19,358
Undistributed capital gains 5,479 5,900
--------- ---------
Total shareholders' equity 103,766 102,672
--------- ---------
$ 393,621 $ 353,455
========= =========
<FN>
The accompanying notes are an integral part of these statements.
[FIRST UNION LOGO]
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23
COMBINED STATEMENTS OF INCOME
1993 1992 1991
For the years ended December 31, (In thousands, except per share data)
REVENUES
Rents $ 70,131 $ 68,626 $ 65,669
Interest -- Mortgage loans 4,033 5,611 8,773
-- Short term investments 175 330 499
-------- --------- ----------
74,339 74,567 74,941
-------- --------- ----------
EXPENSES
Property operating 24,887 23,085 21,843
Real estate taxes 7,726 7,749 7,597
Depreciation and amortization 11,025 10,643 9,351
Interest -- Mortgage loans 5,777 6,182 6,493
-- Senior notes 5,779 4,199 4,199
-- Convertible debentures 3,214 3,858 3,858
-- Bank loans and other 3,747 4,694 6,221
General and administrative 1,908 1,500 2,049
-------- --------- ----------
64,063 61,910 61,611
-------- --------- ----------
INCOME FROM OPERATIONS 10,276 12,657 13,330
CAPITAL GAINS 4,948 5,775 4,906
-------- --------- ----------
Income before extraordinary loss from
early extinguishment of debt 15,224 18,432 18,236
Extraordinary loss from early
extinguishment of debt 1,240
-------- --------- ----------
NET INCOME $ 13,984 $ 18,432 $ 18,236
======== ========= ==========
PER SHARE DATA
Income from operations $ .57 $ .70 $ .74
Capital gains .27 .32 .27
-------- --------- ----------
Income before extraordinary loss from
early extinguishment of debt .84 1.02 1.01
Extraordinary loss from early
extinguishment of debt .07
-------- --------- ----------
Net income $ .77 $ 1.02 $ 1.01
======== ========= ==========
Dividends declared $ .72 $ .72 $ .93
======== ========= ==========
ADJUSTED SHARES OF BENEFICIAL INTEREST 18,096 18,086 18,098
======== ========= ==========
<FN>
The accompanying notes are an integral part of these statements.
[FIRST UNION LOGO]
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24
COMBINED STATEMENTS OF CHANGES IN CASH
1993 1992 1991
For the years ended December 31, (In thousands)
CASH PROVIDED BY (USED FOR) OPERATIONS:
Net income $ 13,984 $ 18,432 $ 18,236
Adjustments to reconcile net income to net
cash provided by operations -
Depreciation and amortization 11,025 10,643 9,351
Extraordinary loss from early
extinguishment of debt 1,240
Capital Gains (4,948) (5,775) (4,906)
Increase in deferred charges, net (96) (53) (731)
Increase in deferred interest on mortgage
investments, net (401) (387) (1,795)
Increase in deferred obligations 110 95 1,215
Recognition of deferred income, net (82) (1,865) (1,082)
Net changes in other assets and liabilities 79 501 (396)
-------- --------- ----------
Net cash provided by operations 20,911 21,591 19,892
-------- --------- ----------
CASH PROVIDED BY (USED FOR) INVESTING:
Principal received from mortgage investments 4,424 11,326 7,007
Investments in properties (12,863) (10,305) (5,876)
Proceeds from sales of properties, net 266 641
Other (31)
-------- --------- ----------
Net cash provided by (used for) investing (8,173) 1,662 1,100
-------- --------- ----------
CASH PROVIDED BY (USED FOR) FINANCING:
Increase (decrease) in short term loans (7,000) (13,000) 3,600
Issuance of senior notes 100,000
Repayment of senior notes (45,000)
Repayment of convertible debentures (37,591)
Increase in mortgage loans 44,300 8,000
Repayment of mortgage loans -- Normal payments (3,245) (3,615) (3,610)
-- Balloon payments (8,433) (13,701)
Purchase of First Union securities (420)
Debt issue costs paid (4,913) (357) (126)
Dividends paid (13,026) (13,022) (13,571)
Other (299) 74 (29)
-------- --------- ----------
Net cash provided by (used for) financing 24,793 (35,621) (14,156)
-------- --------- ----------
Increase (decrease) in cash and cash equivalents 37,531 (12,368) 6,836
Cash and cash equivalents at beginning of year 992 13,360 6,524
-------- --------- ----------
Cash and cash equivalents at end of year $ 38,523 $ 992 $ 13,360
======== ========= ==========
The accompanying notes are an integral part of these statements.
[FIRST UNION LOGO]
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25
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except footnotes)
SHARES OF ADDITIONAL UNDISTRIBUTED UNDISTRIBUTED
BENEFICIAL PAID-IN INCOME FROM CAPITAL
INTEREST CAPITAL OPERATIONS(1) GAINS
BALANCE DECEMBER 31, 1990 $18,133 $59,656 $12,960 $5,479
Net income 13,330 4,906
Dividends paid or accrued (11,921) (4,906)
Shares purchased (47) (373)
Other (29)
---------- --------- ---------- --------
BALANCE DECEMBER 31, 1991 18,086 59,254 14,369 5,479
Net income 12,657 5,775
Dividends paid or accrued (7,668) (5,354)
Other 74
---------- --------- ---------- --------
BALANCE DECEMBER 31, 1992 18,086 59,328 19,358 5,900
Net income 9,036 4,948
Dividends paid or accrued (7,662) (5,369)
Shares issued -
Under share option agreements 21 174
Upon conversion of debentures, net 2 47
Other (103)
----------- --------- ---------- --------
BALANCE DECEMBER 31, 1993 $18,109 $59,446(2) $20,732 $5,479
=========== ========= ========== ========
<FN>
(1) Includes the balance of cumulative undistributed net loss of First Union Management, Inc. of $331,000; $230,000;
$73,000 and $71,000 as of December 31, 1990, 1991, 1992 and 1993, respectively.
(2) Cumulative distributions in excess of the Trust's net income from inception are $11,330,000.
The accompanying notes are an integral part of these statements.
[FIRST UNION LOGO]
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26
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Investments ("Trust") and First Union Management,
Inc., ("Company") are in the real estate industry and do not have
operations outside this industry. The accounting policies of the Trust and
Company conform to generally accepted accounting principles and give
recognition, as appropriate, to common practices within the real estate
industry.
Under a trust agreement, the shares of the Company are held for the
benefit of the shareholders of the Trust. Accordingly, the financial
statements of the Company and the Trust have been combined.
Most of the Trust's properties are currently leased to the Company.
The remaining properties are leased to other parties, under net leases with
original terms expiring by 1998 and with renewal options available
thereafter.
The Trust and Company capitalize costs related to investments in
mortgage loans and the acquisition and leasing of real estate, including
employees' salaries and related costs. These acquisition and leasing costs
capitalized were approximately $0.9 million, $1.7 million and $1.4 million
in 1993, 1992 and 1991, respectively. The Trust also charges against
capital gains a portion of those costs related to the sale of such real
estate interests.
The Trust follows the recommendations set forth in the Statement of
Position on Accounting Practices of Real Estate Investment Trusts issued by
the American Institute of Certified Public Accountants in evaluating the
need for an allowance for loan losses.
Tenant leases generally provide for billings of certain operating
costs, and retail tenant leases generally provide for percentage rentals,
in addition to fixed minimum rentals. The Company accrues the recovery of
operating costs based on actual costs incurred and accrues percentage
rentals based on current estimates of each retail tenant's sales. For the
years ended December 31, 1993, 1992 and 1991, such additional income
approximated $17.9 million, $16.4 million, and $16.3 million, respectively.
At December 31, 1993 and 1992, buildings and improvements included
$9.5 million of leasing costs. Also included in buildings and improvements
were equipment and appliances of $3.7 million at December 31, 1993 and $2.9
million at December 31, 1992.
Depreciation for financial reporting purposes is computed using the
straight-line method. Buildings and improvements are depreciated over their
estimated useful lives of 40 to 64 years and equipment and appliances over
five to 10 years. Leasing costs are amortized over the lives of the
respective leases. Routine maintenance and repairs, including replacements,
are charged to expense; however, replacements which improve or extend the
lives of existing properties are capitalized.
Net income per share of beneficial interest has been computed based on
weighted average shares and share equivalents outstanding for the
applicable period.
Certain amounts for 1992 and 1991 have been reclassified to conform
with the presentation of 1993 balances.
2. COMBINED STATEMENTS OF CHANGES IN CASH
The Trust considers all highly liquid short term investments with original
maturities of three months or less to be cash equivalents.
In June 1992, the Trust became the owner of an apartment complex in
Atlanta, Georgia, through a deed in lieu of foreclosure. The Trust
transferred $11.4 million from its mortgage investments to investments in
real estate while recognizing $371,000 of income in accordance with the
accounting Statement of Position 92-3, "Accounting for Foreclosed Assets."
This was a noncash transaction.
In June 1991, the Trust became the owner of three apartment complexes
in North Carolina through foreclosure sales. In these noncash transactions,
the Trust transferred $15.1 million from its mortgage investments to
investments in real estate.
The Trust paid interest expense of $17.9 million, $18.7 million and
$19.6 million in 1993, 1992 and 1991, respectively.
[FIRST UNION LOGO]
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27
3. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
On November 1, 1993, the Trust repaid prior to their maturity dates $45
million of 8 3/8% senior notes at par and $37.6 million of 10 1/4%
convertible subordinated debentures at a premium of 1.025%. The maturity
date of the senior notes was December 1994 and the convertible debentures
was July 2009. The early extinguishment of debt resulted in an
extraordinary charge of $1.2 million for the write-off of unamortized issue
costs and payment of a redemption premium.
4. INVESTMENTS IN MORTGAGE LOANS
As of December 31, 1993, the Trust had the following investments in
mortgage loans (dollar amounts in thousands):
CURRENT
EFFECTIVE
RATE ON NET LOAN PRIOR NET
INVESTMENT AMOUNT LIENS INVESTMENT
First mortgage loan secured by
office building in Cleveland, Ohio,
maturing in 2011 10% $19,585 $19,585
Wraparound mortgage loan secured
by apartment building in Atlanta,
Georgia, maturing in 1999 14% 15,965 $ 4,260 11,705
------- ------- -------
$35,550 $ 4,260 $31,290
======= ======= =======
5. BANK LOANS
As of December 31, 1993, the Trust's $60 million revolving credit agreement
was converted to a five year term loan, requiring a 20% reduction on the
last day of the following five years. Any amounts borrowed between $30
million and $60 million are secured by real estate assets. The $60 million
outstanding is at a variable interest rate averaging 4.18% at December 31,
1993. The Trust also has a $20 million revolving credit with another bank
which terminates in July 1996. As of December 31, 1993, there were no
amounts borrowed under this credit agreement. The agreements can be
terminated by the Trust upon one or seven days notice to the banks.
Interest under these agreements may be calculated based on various
alternatives, at the option of the Trust, including the lenders' base rate,
LIBOR, certificate of deposit rate or current bank cost of funds.
Commitment fees not greater than 1/4% per annum are payable on the
unused portion of the revolving credits. These agreements contain certain
requirements including maintaining minimum cash flow, net worth, leverage
and fixed charges ratios, as defined. The Trust was in compliance with all
the requirements as of December 31, 1993.
6. MORTGAGE LOANS PAYABLE
As of December 31, 1993, the Trust had outstanding $92.4 million of
mortgage loans due in installments extending to the year 2031. Interest
rates on fixed rate mortgages range from 7.75% to 10%. A $35 million
mortgage is at a variable rate presently 5.63% for the first year which is
tied to LIBOR with a maximum rate of 9.5%. The mortgage requires the Trust
to maintain minimum net worth, liquidity and debt service coverage ratios,
of which the Trust was in compliance at December 31, 1993. Principal
payments due during the five years following December 31, 1993, are $3.8
million, $16.1 million, $3.9 million, $4.3 million and $8.7 million,
respectively.
7. SENIOR NOTES
As of December 31, 1993, the Trust had $105 million in senior notes
outstanding. The interest rate is 8 7/8% on $100 million maturing in
October 2003 and 8.6% on $5 million maturing in July 1996. The $100 million
senior notes are noncallable, limit future borrowings by the Trust and
require maintenance of a minimum net worth. The Trust was in compliance
with all requirements as of December 31, 1993.
8. SHARE OPTIONS
The Trust has a share option plan for key personnel. The plan provides that
option prices be at the fair market value of the shares at the date of
grant and that option rights granted expire ten years after the date
granted. This plan, adopted in 1981, originally reserved 624,000 shares for
the granting of incentive and nonstatutory share options. Subsequently, the
[FIRST UNION LOGO]
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28
shareholders approved amendments to the plan reserving an additional
200,000 shares, for a total of 824,000 shares, for the granting of options
and extending the expiration date to December 31, 1996. The amendments do
not affect previously issued options.
The activity of the plan is summarized for the years ended December 31
in the following table:
1993 1992 1991
Granted 25,000 63,000 55,000
Exercised 20,925 - -
Cancelled 9,500 3,619 2,080
Available 239,610 255,110 114,491
As of December 31, 1993, options on 437,897 shares were outstanding at
prices ranging from $8.25 to $24.76 per share.
The Trust and Company have an agreement whereby, as of December 31,
1993, the Company may purchase up to 176,490 shares from the Trust at
prices ranging from $8.25 to $24.76 per share to satisfy the Company's
obligations to deliver shares to certain of its key employees pursuant to
options previously granted. The option agreements with the Company's
employees provide that option prices be at the fair market value of the
Trust shares at the date of grant and that option rights granted expire ten
years after the date granted.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The disclosure of the estimated fair value of financial instruments is made
in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Trust, using available market information as of December 31, 1993, and
appropriate valuation methods. Considerable judgement is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Trust could realize in a current market exchange.
The use of different market assumptions and methods of estimation may have
a material effect on the estimated fair value amounts.
As of December 31, 1993, the carrying amount and estimated fair value of
financial instruments were as follows
(dollar amounts in thousands):
CARRYING ESTIMATED
AMOUNT FAIR VALUE
ASSETS
Cash and cash equivalents $38,523 $38,523
Accounts receivable and prepayments 4,621 4,621
Mortgage loans receivable 35,550 40,417
LIABILITIES
Accounts payable and accrued liabilities 14,356 14,356
Bank loans 60,000 60,000
Mortgage loans payable 92,355 93,507
Senior notes 105,000 105,000
Deferred obligations 10,394 14,801
Cash and cash equivalents, accounts receivable and prepayments, accounts
payable and accrued liabilities - The carrying amounts are a reasonable
estimate of their fair value because each item is of short duration.
Mortgage loans receivable - The fair value of the wraparound mortgage
investment secured by a property in Atlanta, Georgia and a first mortgage
secured by an office building in Cleveland, Ohio, are calculated as the net
present value of future cash flows. The discount rates used are an
estimate based on current lending rates and market conditions. Management
intends to hold the mortgage loans receivable to maturity.
Mortgage loans payable and deferred obligations - The mortgage loans
payable are aggregated by maturity and discounted at rates based on current
lending rates and market conditions to determine their fair value. The
deferred obligations are
[FIRST UNION LOGO]
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29
discounted based on current lending rates and market conditions. Management
intends to repay the mortgage loans and deferred obligations as they become
due.
Senior notes and bank loans - The fair value is the carrying amount because
market interest rates approximate the interest rates of these debt
securities. Management intends to repay these debt securities as they
become due.
10. SHAREHOLDER RIGHTS PLAN
In March 1990, the Board of Trustees declared a dividend consisting of one
right to purchase one share of beneficial interest of the Trust with
respect to each share of beneficial interest.
The rights may be exercised only if a person or group acquires 15% or
more of the outstanding shares of beneficial interest, makes a tender
offer for at least 15% of the outstanding shares of beneficial interest,
or is declared to be an "adverse person." The exercise price of each right
is $50.
If a person or group acquires 15% or more of the outstanding shares of
beneficial interest (except in a tender offer approved by the Board of
Trustees), is declared to be an "adverse person," or engages in certain
self-dealing transactions with the Trust ("flip-in events"), each right
(other than rights owned by a 15% owner of an "adverse person") entitles
the holder to purchase one share of beneficial interest of the Trust for
par value (now $1 per share). If the Trust is acquired in a merger or
other business combination ("flip-over events"), each right entitles the
holder to purchase, for $1, shares of the acquiring company having a
market value equal to the market value of one share of beneficial interest
of the Trust.
The rights may be redeemed by the Trust at a price of $0.01 per right
at any time prior to the earlier of a "flip-in" or "flip-over" event or
the expiration of the rights on March 30, 2000.
11. CAPITAL GAINS
In 1993, 1992 and 1991, the Trust recognized capital gains of $4.7
million, $5.6 million and $4.9 million, respectively, from an installment
sale which occurred in a prior year. Also, in 1993 and 1992 the Trust
recognized approximately $250,000 and $200,000, respectively, from sales
of small land parcels.
The final portion of the capital gain from the prior year installment
sale was recognized during 1993.
12. FEDERAL INCOME TAXES
No provision for current or deferred income taxes has been made by the
Trust on the basis that it qualified under Sections 850-860 of the
Internal Revenue Code as a real estate investment trust and has
distributed all of its taxable income to shareholders.
The Trust and Company treat certain items of income and expense
differently in determining net income reported for financial reporting and
tax purposes. Such items resulted in a net reduction in income for tax
reporting purposes of approximately $2.9 million for 1993, $4.4 million
for 1992 and $3.3 million for 1991.
As of December 31, 1993, net investments in real estate for financial
reporting purposes were approximately $62 million greater than for tax
purposes.
The 1993 quarterly allocation of cash dividends per share for
individual shareholders' income tax purposes was as follows:
LONG-TERM ORDINARY TOTAL
DATE PAID CAPITAL GAINS INCOME PAID
February 1 $.058 $.122 $.18
April 30 .058 .122 .18
July 30 .058 .122 .18
October 29 .058 .122 .18
----- ----- ----
$.232 $.488 $.72
===== ===== ====
The total long-term capital gains and ordinary income per share amounts
for the year ended December 31, 1992 were $0.332 and $0.388, respectively,
and for the year ended December 31, 1991, were $0.302 and $0.448,
respectively.
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13. LEGAL CONTINGENCY
The Trust has pursued legal action against the State of California
associated with the 1986 flood of Peach Tree Mall. In September 1991, the
court ruled in favor of the Trust on the liability portion of this inverse
condemnation suit, which the State of California appealed. The Trust is
proceeding with its damage claim. No recognition of potential income has
been made in the accompanying financial statements.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited condensed summary of the combined results of
operations by quarter for the years ended December 31, 1993 and 1992. In
the opinion of the Trust and Company, all adjustments (consisting of
normal recurring accruals) necessary to present fairly such interim
combined results in conformity with generally accepted accounting
principles have been included.
QUARTERS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(In thousands, except per share data)
1993
Revenues $ 18,216 $ 18,455 $ 18,706 $ 18,962
---------- --------- ---------- --------
Income from operations 2,847 2,879 2,901 1,649
Capital gains 1,510 3,257 181
---------- --------- ---------- --------
Income before extraordinary
loss from early extinguishment of debt 4,357 6,136 2,901 1,830
Extraordinary loss from early
extinguishment of debt 1,240
---------- --------- ---------- --------
Net income $ 4,357 $ 6,136 $ 2,901 $ 590
========== ========= ========== ========
Per share
Income from operations $ .16 $ . 16 $ .16 $ .09
Capital gains .08 .18 .01
---------- --------- ---------- --------
Income before extraordinary
loss from early extinguishment of
debt .24 .34 .16 .10
Extraordinary loss from early
extinguishment of debt .07
---------- --------- ---------- --------
Net income $ .24 $ .34 $ .16 $ .03
========== ========= ========== ========
1992
Revenues $ 18,176 $ 18,474 $ 18,891 $ 19,026
---------- --------- ---------- --------
Income from operations 3,024 3,273 3,207 3,153
Capital gains 1,328 1,371 1,551 1,525
---------- --------- ---------- --------
Net income $ 4,352 $ 4,644 $ 4,758 $ 4,678
========== ========= ========== ========
Per share
Income from operations $ .17 $ .18 $ .18 $ .17
Capital gains .07 .08 .08 .09
---------- --------- ---------- --------
Net income $ .24 $ .26 $ .26 $ .26
========== ========= ========== ========
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SECURITYHOLDERS AND TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS:
We have audited the accompanying combined balance sheets of First Union Real
Estate Equity and Mortgage Investments (an unincorporated Ohio business trust,
also known as First Union Real Estate Investments) and First Union Management,
Inc. (a Delaware corporation) as of December 31, 1993 and 1992, and the related
combined statements of income, shareholders' equity and changes in cash for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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, the financial statements referred to above present fairly,
in all material respects, the combined financial position of First Union Real
Estate Equity and Mortgage Investments and First Union Management, Inc. as of
December 31, 1993 and 1992, and the results of their operations and their
changes in cash for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
Cleveland, Ohio,
February 1, 1994. ARTHUR ANDERSEN & CO.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
FINANCIAL CONDITION
In September 1993, the Trust obtained a $35 million mortgage loan secured by
Crossroads Center in St. Cloud, Minnesota. The loan has a variable interest
rate tied to LIBOR and is presently 5.63% for the first year. The Trust
purchased an interest rate cap with a ceiling of 9.5% on the loan during its 10
year term. The proceeds of the loan were used to repay short-term bank loans.
Additionally, on October 1, 1993, the Trust issued $100 million of non-callable
senior notes at 99.187 with a coupon rate of 8.875%, due October 1, 2003.
Proceeds from this note offering were used to repay $8.4 million in mortgage
loans, reduce short-term bank loans and on November 1, 1993, repay $45 million
of 8.375% senior notes, at par, and $37.6 million of 10.25% convertible
debentures, at 101.025. In December 1993, the Trust obtained a $9.3 million
mortgage loan secured by a parking garage. The loan has a fixed interest rate
of 8.55% and the proceeds were invested in short-term investments. At December
31, 1993, the Trust borrowed the entire balance of $60 million under one of its
bank lines since that line converted to a five year term loan based on the
outstanding balance as of that date.
LIQUIDITY AND CAPITAL RESOURCES
During 1993, the Trust restructured its outstanding debt maturities by issuing
the $100 million of senior notes and repaying the $45 million in senior notes
and the $37.6 million in convertible debentures. The $45 million in senior
notes would have been due in December 1994 and the convertible debentures
required sinking fund payments of $1 million in 1995 and $1.9 million
thereafter until 2008. Consequently, the senior note issue extended the
maturity date of outstanding debt.
Although the proceeds from the $35 million mortgage loan in September 1993 were
used to repay bank lines of credit during 1993, at December 31, 1993, the Trust
borrowed the entire $60 million under the bank line which converted to a five
year term loan. The Trust has nothing borrowed against its $20 million bank
line which terminates in July 1996. This facility continues to function as a
revolving credit line until it terminates. With $38.5 million in short-term
investments at December 31, 1993, the Trust had a net borrowed position under
the bank lines of $21.5 million.
Future cash needs, such as capital expenditures, repayment of the $60 million
term loan, the $5 million of 8.6% senior notes maturing in 1996, and a mortgage
loan balloon of $12 million in 1995 will be met by a combination of cash from
operations, short-term investments, new bank credit facilities, mortgage
financing and either privately or publicly issued securities.
RESULTS FROM OPERATIONS
Income before the extraordinary loss in 1993 was $15.2 million, as compared to
$18.4 million in 1992. In 1993, the Trust recorded an extraordinary loss of
$1.2 million representing the write off of unamortized issue costs associated
with the $45 million senior notes and $37.6 million convertible debentures
which were repaid prior to their maturity, as well as the redemption premium
required with the call of the convertible debentures. Capital gains of $4.7
million and $5.6 million were included in net income in 1993 and 1992,
respectively, from a prior year installment sale. The recognition of this gain
was completed in 1993. The remaining capital gains of approximately $250,000
and $200,000 in 1993 and 1992, respectively, were the result of small land
parcel sales.
Net income was $18.4 million in 1992, as compared to $18.2 million in 1991.
Included in net income was $5.6 million and $4.9 million of capital gains in
1992 and 1991, respectively, from a prior year installment sale. Also, during
1992, capital gains of $200,000 were recognized from the sales of small land
parcels.
Income from property operations, which is rents less property operating
expenses and real estate taxes, increased by $2.0 million when comparing
properties in the portfolio for all of 1993 and 1992 and the apartment complex
obtained in June 1992. However, this increase was offset by the recognition in
1992 of a lease termination fee of $1.7 million and $371,000 from the
difference between the fair market value of the apartment complex acquired in
June 1992 and the Trust's wraparound mortgage secured by that property.
Income from property operations increased by $1.6 million in 1992 as compared
to 1991. The apartment complex acquired in June 1992 and three apartment
complexes acquired in June 1991 accounted for $900,000 of this increase.
[FIRST UNION LOGO]
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The remainder of this increase was primarily from a lease termination fee
received in a prior year when an anchor tenant vacated.
Mortgage investment income declined when comparing 1993 to 1992 and 1992 to
1991. The decrease, when comparing 1993 to 1992, was primarily attributed to
the receipt of the final installment of a mortgage investment from the 1983
sale of an office building. Additionally, when comparing 1993 to 1992,
mortgage investment income declined due to the conversion of a mortgage
investment to an equity investment in the Atlanta apartment complex acquired in
June 1992. When comparing 1992 to 1991, mortgage investment income decreased
due to the conversion of four mortgage investments to investments in apartment
complexes, one in 1992 and the other three in June 1991. The normal
amortization of another mortgage investment, secured by the office building
sale noted previously, accounted for the remaining decrease in mortgage
investment income when comparing 1992 to 1991.
Mortgage loan interest expense declined when comparing 1993 to 1992 due to the
repayment of $14.8 million of mortgage loans in December 1992 and October 1993.
The mortgage loan interest expense on the $35 million loan obtained in
September 1993 partially offsets the effect on mortgage loan interest expense
of these repayments. Mortgage loan interest expense will increase by $2.2
million in 1994 due to the $35 million and $9.3 million mortgage loans obtained
during 1993. The offset to this increased expense will depend on the use of the
proceeds from the loans. As of December 31, 1993, most of the net proceeds were
invested in short-term investments and a portion was also used to reduce bank
loans. The interest rate on the short-term investments is less than the
interest rate on the mortgage loans. The Trust is reviewing other mortgage
loans to prepay and real estate investments to purchase in order to increase
the yield on these funds.
The increase in depreciation and amortization expense when comparing 1993 to
1992 and 1992 to 1991 was the result of the apartment acquisitions in 1992 and
1991 and tenant improvements associated with leasing space to new tenants over
the three year period.
As noted previously, the Trust issued $100 million of senior notes at a coupon
rate of 8.875% on October 1, 1993. In addition to repaying $8.4 million of
mortgage loans, the proceeds from the senior note issue were used to retire the
$45 million of 8.375% senior notes and the $37.6 million of 10.25% convertible
debentures on November 1, 1993. Because of the one month difference between the
receipt of proceeds from the issuance of the $100 million of 8.875% senior
notes and the repayment of the $45 million senior notes and the $37.6 million
convertible debentures (necessitated by the 30-day call provisions required by
the indentures of the retired debt), additional nonrecurring interest expense
of $435,000, net of short-term investment income and reduced interest expense
on bank loans, was incurred in 1993. In 1994, the net effect of having issued
the new senior notes and repaying other debt will be negligible.
Interest expense on bank loans decreased when comparing 1993 to 1992 due to
lower average interest rates of approximately 60 basis points and lower average
balances outstanding during 1993. The average balance borrowed during 1993 was
reduced by the proceeds from the $35 million mortgage loan. When comparing
interest expense on bank loans for 1992 and 1991, interest expense declined due
to a drop in average interest rates of approximately 200 basis points and the
repayment of approximately $13 million of bank loans during the second and
third quarters of 1992.
General and administrative expenses increased in 1993 resulting primarily from
expensing costs which are normally charged against acquisitions and
dispositions of investments because no such transactions occurred in 1993.
General and administrative expenses decreased in 1992 compared to 1991
primarily due to less legal and professional fees incurred when the
acquisitions were completed for three apartment complexes in 1991.
FUNDS FROM OPERATIONS AND DIVIDENDS PAID
Funds from operations are calculated as income from operations plus noncash
charges for depreciation and amortization. For 1993, 1992, and 1991, funds from
operations were $21.3 million, $23.3 million, and $22.7 million, respectively,
and dividends paid to holders of shares of beneficial interest were $13
million, $13 million, and $13.6 million, respectively.
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First Union Real Estate Investments
55 Public Square, Suite 1900
Cleveland, Ohio 44113-1937
FIRST UNION REAL ESTATE INVESTMENTS
FIRST UNION MANAGEMENT, INC.
TRUSTEES
James C. Mastandrea
Chairman, President and
Chief Executive Officer
Otes Bennett, Jr.
Retired Chairman
The North American Coal Corporation
Independent coal producer
and diversified manufacturer
William E. Conway
Chairman and Chief Executive Officer
Fairmount Minerals, Ltd.
Miner and processor of industrial minerals
Daniel G. DeVos
Chairman, President and
Chief Executive Officer
Landquest International
Private real estate investment firm
Allen H. Ford
Consultant; Former Senior Vice President
Finance and Administration
The Standard Oil Company (BP America)
Integrated domestic petroleum company
Russell R. Gifford
President and Chief Executive Officer
The East Ohio Gas Company
Natural gas distribution company
Stephen R. Hardis
Vice Chairman and Chief Financial
and Administrative Officer
Eaton Corporation
Manufacturer of highly engineered products
E. Bradley Jones
Retired Chairman and
Chief Executive Officer
Republic Steel Corporation
Integrated steel company
William A. Parker, Jr.
Chairman
Cherokee Investment Company
Private Investments
OFFICERS
James C. Mastandrea
Chairman, President and
Chief Executive Officer
John J. Dee
Senior Vice President -
Controller
Steven M. Edelman
Senior Vice President -
Asset Management
Paul F. Levin
Vice President -
General Counsel
and Secretary
William L. Arnold
Vice President -
Special Counsel
Thomas T. Kmiecik
Vice President -
Treasurer
Edward Geller
Assistant Vice President
Gregory C. Scott
Assistant Controller
David W. Reimer
Assistant Controller
Helen B. Heacox
Assistant Secretary
DIRECTORS
Adolph Posnick
Retired Chairman and Chief Executive Officer
Ferro Corporation
Manufacturer of specialty materials
for industry
Henry G. Piper
Retired Chairman
Brush Wellman, Inc.
Producer of high performance
engineered materials for industry
Renold D. Thompson
Vice Chairman
Oglebay Norton Company
Raw materials and Great Lakes
marine transportation company
OFFICERS AND MANAGERS
Adolph Posnick
Chairman and Secretary
Gene W. Newman
President - Retail Division
Daniel E. Nixon, Jr.
Vice President - Eastern Retail Leasing
Dennis M. Bartelme
Vice President - Midwestern Retail Leasing
Susan J. Niedermeyer
Manager - Western Retail Leasing
George S. Sirow
Vice President - Apartment Division
Judy N. Carroll
Manager - Midwestern Apartments
Karen F. Redman
Manager - Southeastern Apartments
Anthony J. Janca
Assistant Vice President - Office Buildings
Joseph W. Kearney
Controller and Assistant Secretary
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SECURITYHOLDER INFORMATION
ANNUAL MEETING
Securityholders of First Union Real Estate Investments are cordially invited to
the Annual Meeting of Shareholders at 10:00 A.M. on Tuesday, April 12, 1994, in
the National City Bank Auditorium on the fourth floor of the National City
Center Annex Building at 1900 East Ninth Street, Cleveland, Ohio.
DIVIDEND INVESTMENT SERVICE
The Trust provides a Dividend Investment Service which enables shareholders of
record to automatically invest dividends as well as voluntary cash payments in
additional shares of beneficial interest. A brochure describing the benefits of
the service and an authorization form may be obtained by writing to Thomas T.
Kmiecik, Vice President - Treasurer, at First Union headquarters.
FORM 10-K
A copy of the annual report filed with the Securities and Exchange Commission
on Form 10-K is also available to securityholders, without charge, at First
Union headquarters.
HEADQUARTERS
55 Public Square
Suite 1900
Cleveland, Ohio 44113-1937
(216) 781-4030
(216) 781-7467 Fax
TRANSFER AGENT AND REGISTRAR
National City Bank
Corporate Trust Department
1900 East Ninth Street
Cleveland, Ohio 44114-3484
(216) 575-2497
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen & Co.
Cleveland, Ohio
First Union Real Estate Investments
55 Public Square, Suite 1900
Cleveland, Ohio 44113-1937