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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, 1997 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.
27,965,298 Shares of Beneficial Interest outstanding as of June 30, 1997
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Total number of pages contained in this report: 9
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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, 1997 and
December 31, 1996 and "Combined Statements of Income and Combined Statements of
Changes in Cash" for the periods ended June 30, 1997 and 1996, 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
OF OPERATIONS.
FINANCIAL CONDITION
In January 1997, the registrant sold a shopping center in Wilkesboro,
NC for $9 million in cash. This sale resulted in a capital loss of $4.9 million
which was previously provided for by the registrant as part of a $14 million
noncash unrealized loss on the carrying value of certain assets identified for
disposition recorded in December 1995. The net proceeds were used to repay
short-term bank loans.
In February 1997, the registrant received repayment of its wraparound
mortgage loan investment secured by an apartment complex in Atlanta, GA. The
registrant received $16.2 million in cash and a 10%, $1.8 million second
mortgage secured by the management agreement on the apartment complex. The
proceeds were used to repay $3.4 million in underlying mortgage debt and invest
$12.8 million in short-term investments.
In April 1997, the registrant's affiliated management company completed
the acquisition of voting control of Imperial Parking LTD., (Impark) for $75
million, including the assumption of $26 million of debt. The acquisition was
funded with borrowing from the registrant's bank lines of credit and by issuing
approximately $10.5 million in non-voting common shares of Impark to its former
owners. Due to the former owners continued economic interest in Impark, and the
registrant's affiliated management company owning voting control of Impark, the
financial statements of Impark are consolidated with those of the registrant's,
with all asset and liability balances being recorded using carryover basis
accounting.
In the first six months of 1997, the registrant repaid mortgage loans
totaling $11.3 million. The mortgage loans had a weighted average interest rate
of 8.5% and maturity dates between 1998 and 2007.
In January 1997 and June 1997 the registrant issued 3,910,000 and
6,325,000 shares of beneficial interest, respectively, resulting in net proceeds
of $121 million. The net proceeds were used to repay $25.8 million in short-term
bank loans, repay $11.3 million in mortgage loans and invest $39 million in
Impark as noted above with the remainder invested in short-term money market
investments.
Except as noted above, there have been no material changes in financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the first six months of 1997 of
approximately $13 million was approximately $7 million greater than the same
period of 1996. This increase is primarily attributed to the increase in net
income before the preferred dividend and an increase in accounts payable and
accrued liabilities. Dividends paid in 1997 of $4.3 million to shares of
beneficial interest represented 33% of net cash from operating activities.
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As described above in the first quarter of 1997, the registrant
received $16.2 million from the repayment of a mortgage investment and $9
million from the sale of a mall. The proceeds were used to repay mortgage debt
related to the mortgage investment and repay amounts outstanding under the bank
credit agreement with the balance of the proceeds being invested temporarily in
short-term investments. The registrant also invested $9.1 million in its
existing portfolio, primarily to complete a tenant alteration at its office
technology center in Denver, CO, which is continuing with a re-tenanting and
conversion from a retail center to a modern commerce center.
In April 1997, the registrant's affiliated management company purchased
voting control of Impark for $75 million, including the assumption of $26
million in debt. The purchase was funded through cash held in short-term
investments and through short-term borrowings.
The net proceeds of $121 million from the January 1997 and June 1997
share offerings were used to repay mortgage and bank loans and invest in Impark.
The balance of the proceeds were invested temporarily in short-term investments.
During the remaining six months of 1997, the registrant has
approximately $1 million of mortgage principal payments and $10 million of
tenant and building improvements to fund. These commitments will be funded
through existing operations and bank credit facilities.
RESULTS OF OPERATIONS
Net income applicable to shares of beneficial interest for the second
quarter of 1997 and 1996 was $.7 million and $1 million, respectively. Net
income applicable to shares of beneficial interest for the second quarter of
1997 included the recognition of $.5 million as an increase in income from a
casualty loss at one of the registrant's shopping centers. Additionally, in
1997, net income applicable to shares of beneficial interest was reduced by the
accrual of a preferred dividend of $1.2 million. The preferred shares were
issued in October 1996.
Net income applicable to shares of beneficial interest for the first
six months of 1997 and 1996 was $1.7 million and $.1 million, respectively. Net
income applicable to shares of beneficial interest for 1997 included a non-cash
recognition of $.7 million of income from the repayment of a wraparound mortgage
investment, as the proceeds of $18 million exceeded the registrant's basis in
the wraparound investment and the recognition of $.5 million in income from a
casualty loss at one of the registrant's shopping centers. Net income applicable
to shares of beneficial interest for 1997 included $2.4 million for the accrual
of a preferred dividend for the preferred shares which were issued in October
1996. Net income applicable to shares of beneficial interest for 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.
In September 1996, the registrant invested in a joint venture that owns
eight shopping malls and 50% of another mall. The joint venture produced $.3
million in investment income and $.8 million in management fees for the
registrant's affiliated management company in the second quarter of 1997 and $.6
million in investment income and $1.6 million in management fees for the first
six months of 1997.
Mortgage investment income declined when comparing 1997 to 1996 due
primarily to the repayment of a wraparound mortgage investment in February 1997,
as noted previously.
Short-term investment income increased in 1997 as compared to 1996 due
to the registrant having an average of $31 million invested in short-term
securities in 1997 versus minimal short-term investments in 1996.
Property net operating income, which is rental and parking revenues
less property operating expenses and real estate taxes was $.6 million and $2.1
million greater when comparing the second quarter of 1997 to that of 1996 on a
comparable and non-comparable basis, respectively. The comparable office
property portfolio benefited from increased occupancy at a former retail center
in Denver, CO which is in the process of being converted into a commerce center
and a favorable real estate tax reduction at a Cleveland, OH office building.
Property net operating income at the comparable retail, parking and apartment
portfolios was consistent when comparing the second quarter of 1997 to that of
1996. On a non-comparable basis, the acquisition of Impark in April 1997
produced $1.5 million of property net operating income.
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Property net operating income was $1.1 million and $2.6 million greater
when comparing the first six months of 1997 to the same period of 1996 on a
comparable and non-comparable basis, respectively. The comparable office
property portfolio produced $1 million in increased property net operating
income when comparing 1997 to 1996 primarily due to increased occupancy at a
former retail center in Denver CO. and at office buildings in Cleveland, OH
and Indianapolis, IN and a favorable real estate tax reduction in Cleveland,
OH. The comparable retail portfolio produced an additional $.4 million in
property net operating income due to increased rents generated at a mall in
St. Cloud, MN and due to the addition of an anchor tenant in Morgantown, WV.
The comparable parking portfolio had a decline of $.3 million in property net
operating income primarily due to increased real estate tax expense and the
expiration of a fixed minimum rent contract. The acquisition of Impark in
April 1997 produced $1.5 million in property operating income on a
non-comparable basis.
Mortgage interest expense increased when comparing the six months of
1997 to that of 1996 due to three mortgage loans totaling $36.5 million obtained
in 1996. However, the registrant's repayment of $11.3 million of mortgage loans
during the first six months of 1997 partially offsets the full effect of the
increase in mortgage expense from the addition of the three mortgages in 1996.
Interest on bank loans decreased when comparing the six months ended
June 30, 1997 to the same period of 1996. In 1997, the registrant had an average
of $11 million in bank borrowing versus $59 million in 1996. The net proceeds
from the sale of preferred shares of beneficial interest in October 1996, the
proceeds from a sale of a shopping mall in January 1997 and a portion of the net
proceeds from the sale of shares of beneficial interest in January 1997 and June
1997 were used to repay short-term bank loans. However, partially offsetting the
decrease in bank loan interest and other expense is the addition, in April 1997,
of approximately $25 million in bank loans assumed in the acquisition of Impark
and the accrual of the liability associated with a put right which is attached
to the Impark common shares issued to the former owners of Impark as part of the
acquisition consideration.
Depreciation and amortization expense increased when comparing the
second quarter of 1997 to 1996. This increase in depreciation expense is
primarily attributed to the amortization of goodwill related to the acquisition
of Impark. Additionally, depreciation and amortization expense increased when
comparing the first six months of 1997 to the same period of 1996. This increase
in depreciation expense is caused primarily by the amortization of intangible
assets from the acquisition of Impark and the registrant's capital improvement
program. These increases are partially offset by the non-recurring, non-cash
$680,000 write-off of a tenant allowance which occurred in the first quarter of
1996 when the registrant replaced an anchor tenant at one of its malls.
General and administrative expenses for the second quarter and six
months of 1997 increased when compared to the same periods of 1996. The increase
is mainly attributed to the general and administrative expenses from the
management of the nine properties acquired in a joint venture for the six months
of 1997 and the acquisition of Impark in the second quarter of 1997. The
increase in general and administrative expenses for the six months of 1997 was
partially offset by a non-recurring, non-cash charge of $650,000 in 1996 for the
termination of an employment contract of a former executive.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
Exhibit (20) - Financial Statements (Unaudited)
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Combined Balance Sheets as
of June 30, 1997 and
December 31, 1996
Combined Statements of Income for
the Three and Six Months
ended June 30, 1997 and
1996
Combined Statements
of Changes in Cash for the
Three and Six Months ended
June 30, 1997 and 1996
Notes to Combined
Financial Statements
(b) REPORTS ON FORM 8-K:
Report dated June 4, 1997 regarding sale of 6,325,000
shares of beneficial interest.
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SIGNATURES
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, 1997 By: /s/James C. Mastandrea
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James C. Mastandrea, Chairman
President and Chief Executive Officer
Date: August 13, 1997 By: /s/Steven M. Edelman
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Steven M. Edelman, Executive Vice
President, Chief Financial Officer
Date: August 13, 1997 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 (20) - Financial Statements (unaudited)
Combined Balance Sheets as of June 30, 1997
and December 31, 1996.................................. 9
Combined Statements of Income for the Three and Six
Months ended June 30, 1997 and 1996................... 9
Combined Statements of Changes in Cash for the
Three and Six Months ended June 30, 1997 and 1996..... 9
Notes to Combined Financial Statements................. 9
Exhibit (27) - Financial Data Schedule.................................... 10
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