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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter Ended June 30, 1996 Commission File Number 1-6249
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First Union Real Estate Equity and Mortgage Investments
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(Exact name of registrant as specified in its charter)
Ohio 34-6513657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification) No.)
Suite 1900, 55 Public Square
Cleveland, Ohio 44113-1937
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 781-4030
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
17,459,144 Shares of Beneficial Interest outstanding as of June 30, 1996
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Total number of pages contained in this report: 11
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements.
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The combined financial statements included herein have been prepared by
the registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the registrant believes that the disclosures
contained herein are adequate to make the information presented not misleading.
It is suggested that these combined financial statements be read in conjunction
with the combined financial statements and the notes thereto included in the
registrant's latest annual report on Form 10-K.
The unaudited "Combined Balance Sheets" as of June 30, 1996 and
December 31, 1995 and "Combined Statements of Income and Combined Statements of
Changes in Cash" for the periods ended June 30, 1996 and 1995, of the
registrant, and "Notes to Combined Financial Statements," are included herein.
These financial statements reflect, in the opinion of the registrant, all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the combined financial position and results of operations for the
respective periods in conformity with generally accepted accounting principles
consistently applied.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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Financial Condition
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In February 1996, the registrant sold two office buildings and a
parking garage in Cleveland, OH for $1.8 million in cash and a $7 million, 8%
note secured by the properties. This sale resulted in a capital loss of $5.6
million which was provided for by the registrant as part of a $14 million
noncash unrealized loss on the carrying value of certain assets which was
recorded in December 1995.
The registrant obtained a $12.5 million mortgage loan in January 1996.
The mortgage loan is secured by an apartment complex in Durham, NC and is at an
interest rate of 6.875%. In April 1996, the registrant obtained two mortgage
loans secured by apartment complexes in Indianapolis, IN and Cincinnati, OH. The
loans for $15 million and $9 million are at interest rates of 7.65% and 7.395%,
respectively. Proceeds from these three mortgage loans totaling $36.5 million
were used to repay short-term bank loans.
In June 1996, the registrant received repayment of its $7 million
mortgage investment. The mortgage investment had been part of the consideration
received in the registrant's sale in February 1996, of the two office buildings
and a parking garage discussed above. The proceeds of this mortgage investment
were used to repay short-term bank loans and the $5 million, 8.6% medium term
note which was due in July 1996.
In June 1996, the registrant announced the signing of a contract to
acquire nine regional malls for $319 million. The registrant intends to acquire
these properties with a joint venture partner, and intends to fund its equity
investment in the joint venture through short-term bank loans. This transaction
is contingent upon completion and acceptance of due diligence and is expected to
close in September 1996.
Except as noted above, there has been no material change in the
registrant's financial condition from December 31, 1995.
Liquidity and Capital Resources
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Net cash provided by operations for the six months ended June 30, 1996
of $5.7 million was approximately $1.9 million below the same period in the
prior year. This decline in cash provided by operations during 1996 is primarily
attributed to the decrease in accrued liabilities when comparing the six months
ended June 30, 1996 to the same period in the prior year. Dividends paid in 1996
of $3.9 million represented 68% of net cash from operating activities.
Net cash used for investing of $8 million for the first six months of
1996 included $8.8 million in proceeds received from the sale of two office
buildings and a parking garage, which was offset by reinvesting $13 million in
building and tenant improvements. The expenditures were primarily made to
complete the renovations of two retail properties and a retail anchor tenant
building which began in 1995 and construct an office tenant alteration at North
Valley Center which is being converted from a retail mall to an office complex.
Additionally, the registrant advanced $3.4 million as a deposit on its
purchase of nine regional malls, as noted previously.
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Net cash provided by financing of $6.3 million, during the first six
months of 1996 included $36.5 million from three new mortgage loans secured by
apartment complexes. The proceeds were used to repay short-term bank loans.
Also, the registrant purchased 950,000 of its shares of beneficial interest for
$7.1 million using funds available under its bank credit facilities. This
purchase was part of a settlement agreement with a minority shareholder.
During the remaining six months of 1996, the registrant has
approximately $1.7 million in mortgage principal payments, approximately $5
million in tenant and building improvements, and a $27 million investment in a
joint venture to acquire nine regional shopping malls. The registrant intends to
fund the debt repayments, planned capital expenditures, and its investment in a
joint venture through short-term bank loans and cash flow generated from
operations. Additionally, the registrant repaid the $5 million, 8.6% medium
term note with cash available from the repayment of a mortgage investment in
July 1996.
Results of Operations
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Net income was $1 million and $1.3 million for the three months ending
June 30, 1996 and 1995, respectively. Net income in 1995 included $150,000 of
proxy and litigation expenses.
Net income for the first six months of 1996 was $.1 million as compared
to $27.4 million in 1995. Net income for 1995 included a capital gain of $29.9
million and a $4.3 million, non-cash charge for the cumulative effect of a
change in accounting method. The amount in 1996 included two non-recurring,
non-cash charges totaling $1.3 million for the write-off of a tenant allowance
and the termination of an employment contract. The amount in 1995 included $1.1
million of proxy and litigation expenses.
Income from operations was $.1 million for the first six months of 1996
compared to $1.9 million in 1995.
The $29.9 million capital gain in 1995 resulted from the sale of the
registrant's 50% interests in two malls in Wilkes-Barre, PA and Fairmount, WV
for $29.5 million in cash, a $6 million mortgage at an interest rate of 9%
secured by one of the malls and also secured by partnership units of Crown
American Properties L.P., and the assumption by the purchaser of $4.7 million of
mortgage debt. The proceeds from this sale were invested in short-term
securities until properties were acquired in 1995 in a tax-free exchange.
In 1995, the registrant recorded a non-cash charge of $4.3 million for
the cumulative effect of the change in accounting method for leasing costs.
Previously, the registrant deferred internal leasing costs and amortized these
costs over the lives of the consummated leases. This change in the method of
accounting was made retroactive to January 1995 and, consequently, 1995 amounts
have been restated to reflect this change.
Property net operating income, which is calculated as revenue generated
from rents and mortgage investment interest less property operating expenses and
real estate taxes, was $11.3 million and $11.1 million for the three months
ended June 30, 1996 and 1995, respectively. Property net operating income for
properties in the portfolio for 1996 and 1995 and the apartment complex acquired
in June 1996, increased by $.8 million over 1995. This increase is partially
offset by the loss of property net operating income from the sale of three
office buildings and a parking garage sold in December 1995 and February 1996
resulting in a net increase of $.1 million. Additionally, mortgage investment
income increased by $.1 million due to the addition of a mortgage obtained in
connection with the sale of the two office buildings and a parking garage noted
previously. This mortgage was repaid in June 1996. Property net operating income
increased by $.2 million when comparing the first six months of 1996 to the same
period of 1995. This increase is primarily due to the addition of two mortgage
investments in January 1995 and February 1996, respectively. Property net
operating income from property operations for the first six months of 1996 was
comparable to that of 1995.
In the second quarter and first six months of 1995, the registrant had
an average of $8 million and $13 million, respectively, in short-term
investments from the proceeds of the sale of its 50% interest in two malls.
These funds were used to purchase a retail property and an apartment complex in
April and June of 1995, respectively.
Mortgage interest expense increased when comparing 1996 to 1995 due to
the three new mortgage loans, noted previously, totaling $36.5 million obtained
in January and April of 1996. However, the registrant's refinancing in the
fourth quarter of 1995 of four mortgage loans totaling $48 million at an average
interest rate of 9.25% for one mortgage loan at 7.49% partially offsets the full
effect of the increase in mortgage interest expense from the addition of the
three mortgage loans in 1996.
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Bank loans increased when comparing 1996 to 1995 due to increased
borrowings on the bank credit facilities during the last half of 1995 and first
six months of 1996. The borrowings were used to fund the registrant's capital
improvement program and to purchase 950,000 shares of beneficial interest in
January 1996. For the six months ended June 30, 1996, the registrant had an
average of $59 million of bank lines of credit outstanding as compared to an
average of $42 million in 1995.
Depreciation and amortization expense for the first six months of 1996
increased over the same period in 1995 by approximately $1 million. This
increase was caused by a non-recurring $680,000 non-cash, write-off of a tenant
allowance due to the registrant replacing an anchor tenant at one of its malls.
Additionally, the remaining increase in depreciation expense, when comparing
1996 to 1995, was caused by the registrant's capital improvement program during
the last half of 1995 and first quarter of 1996.
General and administrative expenses in the first six months of 1996
included a non-recurring, non-cash charge of $650,000 for the termination of an
employment contract of a former executive. Additionally, proxy and litigation
expenses of $1.1 million were included in general and administrative expenses in
the first six months of 1995.
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
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None.
Item 2. Changes in Securities.
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None.
Item 3. Defaults Upon Senior Securities.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
Item 5. Other Information.
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None.
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Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits:
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Exhibit (11) - Statements Re: Computation of Per Share
Earnings.
Exhibit (12) - Statements Re: Ratios of Combined Income
from Operations and Combined Net Income to
Fixed Charges
Exhibit (20) - Financial Statements (Unaudited)
Combined Balance Sheets as of June 30, 1996
and December 31, 1995
Combined Statements of Income for the Three
and Six Months ended June 30, 1996 and 1995
Combined Statements of Changes in Cash for
the Three and Six Months ended June 30,
1996 and 1995
Notes to Combined Financial Statements
Exhibit (27) - Financial Data Schedule
(b) Reports on Form 8-K:
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Report dated June 12, 1996 regarding proposed
acquisition of retail properties.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Union Real Estate Equity and
Mortgage Investments
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(Registrant)
Date: August 13, 1996 By: /s/James C. Mastandrea
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James C. Mastandrea, Chairman
President, Chief Executive Officer
and Chief Financial Officer
Date: August 13, 1996 By: /s/John J. Dee
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John J. Dee, Senior Vice
President, Chief Accounting
Officer
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Index to Exhibits
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Page
Number
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Exhibit (11) - Statements Re: Computation of Per Share
Earnings .............................................. 8
Exhibit (12) - Statements Re: Ratios of Combined Income from Operations
and Combined Net Income to Fixed Charges............... 9
Exhibit (20) - Financial Statements (unaudited)
Combined Balance Sheets as of June 30, 1996
and December 31, 1995.................................. 10
Combined Statements of Income for the Three and Six
Months ended June 30, 1996 and 1995.................... 10
Combined Statements of Changes in Cash for the
Three and Six Months ended June 30, 1996 and 1995...... 10
Notes to Combined Financial Statements................. 10
Exhibit (27) - Financial Data Schedule........................................ 11
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