UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission file number 0-
December 31, 1994 7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4333 Edgewood Road N.E., Cedar 52499
Rapids, IA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (319) 398-
8975
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Beneficial Interest, $1 Par Value
(Title of Class)
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting shares of the
registrant held by non-affiliates at March 1, 1995 was
$10,627,892.
The number of shares of beneficial interest of the registrant
outstanding at March 1, 1995 was 3,880,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part I.
Item 1. Business
The Trust
USP Real Estate Investment Trust is an equity-oriented real
estate investment trust organized under the laws of the State
of Iowa pursuant to a Declaration of Trust as amended and
restated through April 23, 1984. The Trust was formed on
March 10, 1970 to provide its shareholders with an opportunity
to participate in the benefits of real estate investment and
at the same time enjoy the liquidity and marketability
resulting from the ownership of securities which are publicly-
traded.
USP has elected to qualify as a real estate investment trust
under the Internal Revenue Code. As a result of this
election, the Trust is not taxed on the portion of its income
which is distributed to shareholders, provided it distributes
at least 95% of its taxable income, has at least 75% of its
assets in real estate investments and meets certain other
requirements for qualification as a real estate investment
trust.
The Trust has no employees as all services necessary to
conduct the day-to-day operations are performed by AEGON USA
Realty Advisors, Inc. ("AEGON Realty Advisors") and its
affiliates. (See Note 5 to the Financial Statements.)
Investment Policy
The Trust's primary investment objective is to invest in real
estate which will provide the best available cash flow and
offer prospects for long-term appreciation in value. The
Trust selectively sells property when it is determined that a
sales transaction will economically benefit the Trust through
the realization of capital gains. The Trust has not acquired
property with a view to realizing appreciation from short-term
sales.
The Trust has sought to achieve its investment objectives by
investing principally in the direct ownership of real estate.
Short-term cash investments are made in high-quality
commercial paper, money market funds and certificates of
deposit.
At December 31, 1994, six commercial properties were being
leased on a managed basis and one property was leased on a net
lease basis. All managed properties, with one exception, have
at least one tenant representing more than 20% of the revenue
from that property, and the Kroger Company represents more
than 10% of the total revenue of the Trust under a lease
expiring in April 2012.
Source of Funds and Financing
The principal source of funds for investment by USP was $25
million in proceeds from its initial public offering of
shares. The Trust ceased the issuance of shares from this
offering in 1978. The Trust completed a secondary offering of
its shares in 1988, raising nearly $10 million. Since
substantially all of the Trust's net income must be
distributed to shareholders in order to qualify as a real
estate investment trust, USP has relied primarily on cash
generated from operations and property sales in excess of
shareholder distributions, along with long-term borrowings
secured by mortgages on specific properties, to finance real
estate investments. Outstanding indebtedness of USP may not,
according to the Declaration of Trust, exceed four hundred
percent of the Trust's net assets (shareholders' equity plus
accumulated depreciation). The aggregate principal amount of
long-term mortgage indebtedness and net assets of the Trust as
of December 31, 1994 were $16,853,303 and $26,340,050,
respectively.
The Trust may finance future real estate investments through
additional borrowings secured by mortgages on the Trust's real
estate properties. USP currently has no commitments or
arrangements for any such financing and there can be no
assurance that suitable financing will be available on terms
satisfactory to the Trust in the future. At December 31,
1994, the Trust had available a $500,000 bank line of credit
on an uncommitted basis, draws against which must be
collateralized by securities or other assets.
Mortgage Loans Receivable
In December 1990, the Trust sold Hickory Hills Shopping Center
in Hillsville, Virginia and College Square Shopping Center in
Jefferson City, Tennessee. The Trust provided mortgage loan
financing for these sales in the amount of $525,000 for
Hickory Hills and $1,125,000 for College Square. The loans
mature on December 20, 1997 and yield 9.5% to the Trust.
Competition
USP's portfolio competes with other similar properties in its
respective markets, some of which are newer than the USP
properties. A strengthening U.S. economy, a low level of
commercial real estate construction, and strong leasing
efforts were factors resulting in improvement in the occupancy
of Trust properties during the last three years. Overall
occupancy for the entire portfolio was 96% at December 31,
1994, 95% at December 31, 1993, and 92% at December 31, 1992.
Item 2. Properties
Real Estate Investments
The Trust has direct ownership of seven commercial real estate
properties. These real estate investments are diversified
geographically with 57% of the portfolio located in the
Southeast, 22% in the Southwest and 21% in the Great Lakes
Region based on the cost of the properties.
Properties owned by the Trust are leased to tenants either on
a managed basis or under net lease arrangements. As the owner
of managed property the Trust receives gross rentals and
incurs operating expenses, such as property taxes, insurance,
repairs, maintenance and common area utilities. Under net
lease arrangements, the tenant, rather than the Trust, pays
all operating expenses related to the leased premises. At
December 31, 1994, six commercial properties were being leased
on a managed basis and one property was leased on a net lease
basis.
The six managed commercial properties consisted of five
shopping centers and one business park. Managed commercial
properties comprised 95% of the Trust's investment portfolio
in 1994, compared to 95% in 1993 and 96% in 1992. Managed
commercial properties provided 91% of USP's annual revenue in
1994, compared to 92% in 1993 and 90% in 1992. All managed
properties, with one exception, have at least one tenant
representing more than 20% of the revenue from that property,
and the Kroger Company represents more than 10% of the total
revenue of the Trust under a lease expiring in April 2012.
The net leased property is an office/warehouse which
represented approximately 5% of the Trust's investment
portfolio in 1994, 5% in 1993 and 4% in 1992, and generated 6%
of the Trust's annual revenue in 1994, 1993, and 1992.
The Trust's real estate investments are not expected to be
substantially affected by federal, state or local laws and
regulations establishing ecological or environmental
restrictions on the development and operations of such
property. The existence and/or enactment of such provisions
may reduce the Trust's ability to fulfill its investment
objectives.
Recent Transactions
The Trust entered into a ten-year lease effective July 15,
1994 with a furniture store at First Tuesday Mall in
Carrollton, Georgia for 23,040 square feet of space. Under
the lease, rents of $62,208 per year commenced on August 1,
1994, with a scheduled rent increase after five years. In
order to secure this lease, the Trust paid a lease commission
of $33,606 which will be amortized over the lease term.
The Trust sold Midway Business Park in Tucson, Arizona on
September 16, 1994, realizing a gain of $788,588. The sale
price for Midway was $4,800,000 from which the Trust paid
selling expenses of $158,580 and retired mortgage indebtedness
on the property of $3,141,973. A portion of the net proceeds
was used to prepay a mortgage loan on First Tuesday Mall on
January 31, 1995. The prepayment amount, including a 1% fee
to the lender, was $1,147,526. The annual debt service on
this mortgage was $229,068, including interest at 10%.
Item 3. Legal Proceedings
Legal Proceedings
The Trust is not a party to any pending legal proceedings
which, in the opinion of management, are material to the
Trust's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Distribution Information
The Trust is required to distribute at least 95% of its
taxable income to continue its qualification as a real estate
investment trust. Although the Trust expects to continue
making distributions to shareholders, there is no assurance of
future distributions, since they are dependent upon earnings,
cash flow, the financial condition of the Trust and other
factors.
Income Tax Information
The percentages indicated below, multiplied by the amount of
distributions received or reinvested during the year, result
in the amount to be reported for income tax purposes. A Form
1099 is mailed to shareholders at the end of each year
reflecting the distributions paid by the Trust in that year.
<TABLE>
Dividend Character
<S> <C> <C> <C>
1994 1993 1992
Ordinary income 73.71% 78.03% 19.31%
Capital gains 26.29% _ 12.60%
Return of capital _ 21.97% 68.09%
Total 100.00% 100.00% 100.00%
Distributions .25 .24 .36
paid, per share
</TABLE>
Identification of Market and Price Range
At March 1, 1995, the Trust had 3,880,000 shares of beneficial
interest issued and outstanding to 2,394 shareholders of
record. The Trust's shares of beneficial interest are traded
over-the-counter on the National Association of Securities
Dealers Automated Quotation (NASDAQ) System under the symbol
USPTS. At March 1, 1995, the Trust's per share bid and asked
prices were $3.875 and $4.125, respectively, as obtained from
John G. Kinnard & Co., Inc., Minneapolis, Minnesota,
Wedbush/Morgan Securities, Inc., Newport Beach, California,
Stifel Nicolaus, St. Louis, Missouri, and Herzog, Heine,
Geduld, Inc., New York, New York, the principal market makers
for shares of the Trust. These prices reflect quotations
between dealers without adjustment for retail mark-up, mark-
down or commission and do not necessarily represent actual
transactions.
<TABLE>
Market Price Range
<C> <C> <C> <C> <C>
Over-the-Counter Bid Price
Quarter Ended High Low Close
1994
March 31 3 3/8 3 3 1/8
June 30 3 1/8 2 3/4 3
September 30 3 3/8 3 3 1/4
December 31 3 1/4 2 7/8 3
1993
March 31 2 3/8 1 9/16 2 3/8
June 30 2 3/4 2 3/8 2 5/8
September 30 3 3/8 2 5/8 3 3/8
December 31 4 1/4 3 1/4 3 3/8
</TABLE>
Item 6. Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 1994 1993 1992 1991 1990
31
Revenue 6,179,495 6,272,463 5,929,073 6,478,555 7,241,400
Earnings from 934,605 715,746 282,401 627,661 701,534
Operations
Net Gain on Sale or
Disposition of 788,588 _ 175,991 181,359 710,506
Property
Provision for _ _ _ _ (200,000)
Valuation Loss
Net Earnings 1,723,193 715,746 458,392 809,020 1,212,040
Distributions to 1,008,800 931,200 1,241,600 2,134,000 2,328,000
Shareholders
Per Share*
Earnings from .24 .18 .07 .16 .18
Operations
Net Earnings .44 .18 .12 .21 .31
Distributions to .26 .24 .32 .55 .60
Shareholders
Real Estate and
Mortgage Loans 31,237,604 35,782,150 36,631,659 37,328,542 41,562,326
Receivable
Total Assets 34,333,593 37,487,867 38,235,283 40,132,321 45,122,439
Mortgage Loans 16,853,303 20,387,645 20,855,442 21,557,645 25,024,932
Payable
Total Liabilities 17,720,310 21,588,977 22,120,939 23,234,769 26,899,907
Shareholders' Equity 16,613,283 15,898,890 16,114,344 16,897,552 18,222,532
</TABLE>
* Per share amounts for Earnings from Operations and Net
Earnings are based on the weighted average number of
shares outstanding for each period. Per share amounts
for Distributions to Shareholders are based on the actual
number of shares outstanding on the respective record
dates.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The discussion that follows should be read in the general
context of the discussion in "Item 1 Business" and "Item 2
Properties" on pages 2 and 3 of this report.
Results of Operations
Growth in the U.S. economy continued in 1994 at a robust pace.
Job growth was significant as evidenced by a 3 million year-to-
year increase in non-agricultural employment through mid-1994,
outpacing the 2.1 million gain during the same period a year
earlier. Retail sales increased at an estimated annual pace
of 7.8% during the first nine months of 1994 compared to 6.3%
over the same period in 1993. The Trust benefited from these
positive economic factors and experienced improvements in
portfolio occupancy rate and operating results in 1994.
The Trust sold Midway Business Park in Tucson, Arizona on
September 16, 1994 for $4,800,000, recognizing a gain on the
sale of $788,588. In October 1994, the Trust completed the
repair of Presidential Business Park in Atlanta, Georgia,
which was damaged by fire in the fourth quarter of 1993. The
Trust was insured against this loss including loss of rents
from displaced tenants. Therefore, there was no significant
impact on earnings from this event.
On February 1, 1995, the Trust announced that it had begun
exploring strategic alternatives to maximize shareholder
value. Such alternatives may include a business combination
or sale of the Trust's assets. The decision reflects the
opinion of the Trust's board of trustees that recent market
prices for the Trust's shares have not adequately reflected
the value of the Trust.
1994 compared to 1993
Rental income was $5,960,114 in 1994 compared to $6,077,305 in
1993 which represents a decrease of 2%. However, rental
income from properties owned throughout both years increased
3% from $5,082,726 in 1993 to $5,222,406 in 1994 primarily due
to higher occupancy rates. Interest income was $219,381 in
1994 compared to $195,158 in 1993, an increase of 12%, due to
higher investable cash balances and higher interest rates
received on these balances in 1994.
Kingsley Square in Orange Park, Florida recorded higher rents
of $50,000 (7% over 1993) as a result of increases in average
occupancy and rental rates. The Trust entered into a new
lease in 1994 with a furniture store for 23,040 square feet at
First Tuesday Mall in Carrollton, Georgia which was the
primary reason for a $42,000 or 5% increase in rents at this
property. (See discussion under "Item 2 Properties - Recent
Transactions.") Rental income at Mendenhall Commons in
Memphis, Tennessee increased $52,000 or 6% due primarily to
increased tenant expense recoveries. Presidential Drive in
Atlanta, Georgia recorded a revenue increase of $62,000 or 25%
in 1994 due to increased rental rates and recovery of
delinquent rents which had been considered uncollectible. As
mentioned above, insurance covered the loss of rents from
several tenants which were displaced at this property during a
portion of 1994. North Park Plaza in Phoenix, Arizona and
Yamaha Warehouse in Cudahy, Wisconsin recorded moderate
revenue increases in 1994. Geneva Square in Lake Geneva,
Wisconsin was the only property showing a decline in revenues,
as rental income fell $91,000 or 8% due to a decrease in
occupancy from 1993, a year in which the property operated at
100% occupancy for most of the year.
Property expenses before depreciation were $1,928,502 in 1994
compared to $1,957,429 in 1993 which represents 32% of rental
income for both years. The primary reason for the decrease
was the sale of Midway in September 1994. Midway's property
expenses before depreciation declined $106,000 in 1994 due to
the partial year of operation by the Trust. On a same
property basis, property expenses before depreciation
increased to $1,594,949 in 1994 from $1,517,985 in 1993. Real
estate taxes increased $12,000 in 1994 as a result of an
$82,000 increase at Mendenhall Commons due to a tax refund
received in 1993, which was partially offset by tax decreases
at First Tuesday, North Park, and Midway (due to the partial
year of operation). All wages and salaries were incurred in
connection with the operation of Midway, the sale of which
resulted in a $12,000 decrease in this expense. Repairs and
maintenance expense increased $28,000 as a result of a $68,000
increase at First Tuesday due to higher remodeling
expenditures for new and existing tenants, which was partially
offset by a $42,000 decline at Midway due to the partial year
of operations. Other property expenses were $33,000 lower in
1994 because of a consulting fee paid in 1993 to obtain the
tax refund at Mendenhall and a reduction in advertising
expense in 1994. Depreciation expense declined $68,000 in
1994 due primarily to the Midway sale. Interest expense
decreased $244,000 as a result of lower interest rates
negotiated in connection with refinancing the mortgage loans
on Geneva Square and Midway in the first quarter of 1994 and
the payoff of the mortgage on Midway upon sale of the
property. Administrative expense increased $28,000 in 1994 as
a result of increases in legal, mailing, and printing costs.
Earnings from operations were $934,605 in 1994 compared to
$715,746 in 1993 which represents an increase of 31% primarily
due to the significant decline in total expenses, as more
fully described above. With the $788,588 gain recognized on
the sale of Midway, 1994 net earnings were $1,723,193 compared
to 1993 net earnings of $715,746.
1993 compared to 1992
Rental income was $6,077,305 in 1993 compared to $5,720,060 in
1992 which represents an increase of 6%. The Trust's
properties enjoyed generally higher occupancy rates in 1993
which caused base rents and tenant expense recoveries to
increase. Revenue at Kingsley Square in Orange Park, Florida
increased by $93,000 or 16% due to higher occupancy resulting
from new leasing activity in connection with an exterior
renovation project completed in 1992. Geneva Square in Lake
Geneva, Wisconsin enjoyed 100% occupancy during most of the
year resulting in an increase in rents of $97,000 or 10%.
North Park Plaza in Phoenix, Arizona recorded a revenue gain
of $61,000 or 6% due to a higher average occupancy rate during
the year. Midway Business Park in Tucson, Arizona also had
improved occupancy resulting in a revenue increase of
$121,000, a gain of 14% from the prior year. Rents at the
Trust's other four properties were stable over the two year
period, with two properties recording moderate increases in
1993 and two properties recording moderate decreases in 1993.
Interest income was $195,158 in 1993 compared to $209,013 in
1992, a decline of 7%, due to reduced funds available for
investment.
Property expenses before depreciation were $1,957,429 in 1993
compared to $1,958,575 in 1992 which represents 32% and 35% of
rental income, respectively. Contributing to the decrease in
property expenses was a $73,000 reduction in real estate
taxes, primarily attributable to a tax refund at Mendenhall
Commons in Memphis, Tennessee, which was also passed through
to tenants pursuant to their leases. In addition, wages and
salaries declined by $32,000 as a result of restructuring the
on-site management office at Midway Business Park. These
decreases were offset by a $129,000 increase in repairs and
maintenance attributable to several properties and a $7,000
increase in property insurance expense due to higher premiums.
Management fees also increased $19,000 corresponding to the
increase in rental income. Other property expenses decreased
by $55,000 as the Trust reduced advertising and lease
commission expenses from the relatively high levels of 1992, a
year in which a significant amount of new leasing occurred.
Administrative expenses were also lower in 1993, decreasing
$54,000 due primarily to the Trust not obtaining a third-party
appraisal opinion for its real estate portfolio.
The net effect of significantly higher revenues and marginally
lower expenses was an increase in net earnings to $715,746 in
1993 compared to $458,392 in 1992, a gain of 56%.
Liquidity and Capital Resources
The Trust's capital resources consist of its current equity in
real estate investments and mortgage loans receivable. The
Trust maintains its properties in good condition and provides
adequate insurance coverage. Liquidity is represented by cash
and cash equivalents ($2,086,511 at December 31, 1994), a
$500,000 line of credit (see discussion under "Item 1 Business
- - Source of Funds and Financing"), and the continued operation
of the Trust's real estate portfolio. This liquidity is
considered sufficient to meet current obligations.
Net cash provided by operating activities, as shown in the
Statements of Cash Flows, was $1,564,985 for the year ended
December 31, 1994. Major applications of cash in 1994
included $305,050 for capital expenditures on real estate
properties, $970,000 for dividends to shareholders, and
$585,070 in principal payments on mortgage loans payable. In
addition, capital expenditures of approximately $170,000 are
anticipated for 1995.
The Trust's debt service commitments for mortgage loans
payable are described in Note 6 to the Financial Statements.
In January 1995, the Trust used cash of $1,147,526 to prepay a
mortgage loan on First Tuesday Mall. (See Note 6 to the
Financial Statements.) The Publix Supermarkets lease at
Kingsley Square was extended effective February 11, 1995 for a
five-year term. The lease extension requires the Trust to
contribute up to $250,000 toward remodeling costs at the
Publix store. (See Note 7 to the Financial Statements.) As
of December 31, 1994, there were no other material
commitments.
The Board of Trustees continues to monitor occupancies,
leasing activity, overall Trust operations, liquidity, and
financial condition in determining quarterly distributions to
shareholders.
Inflation
Low to moderate levels of inflation during the past few years
have favorably impacted the Company's operation by stabilizing
operating expenses. At the same time, low inflation has the
indirect effect of reducing the Company's ability to increase
tenant rents. The Trust's properties have tenants whose
leases include expense reimbursements and other provisions to
minimize the effect of inflation. These factors, in the long
run, are expected to result in more attractive returns from
the Trust's real estate portfolio as compared to short-term
investment vehicles.
Item 8. Financial Statements and Supplementary Data
<TABLE>
Balance Sheets
<S> <C> <C>
December 31,
1994 1993
Assets
Real estate
Land 9,666,409 11,241,492
Buildings and improvements 29,985,157 32,873,694
39,651,566 44,115,186
Less accumulated depreciation (9,726,767) (9,668,323)
29,924,799 34,446,863
Mortgage loans receivable,
net of deferred gain 1,312,805 1,335,287
Real estate and mortgage loans 31,237,604 35,782,150
receivable
Cash and cash equivalents 2,086,511 681,277
Rents and other receivables 535,792 648,811
Prepaid and deferred expenses 316,921 324,577
Taxes held in escrow 156,765 51,052
34,333,593 37,487,867
Liabilities and Shareholders'
Equity
Liabilities
Mortgage loans payable 16,853,303 20,387,645
Accounts payable and accrued 494,922 811,215
expenses
Distribution declared 271,600 232,800
Tenant deposits 73,989 132,541
Other 26,496 24,776
17,720,310 21,588,977
Shareholders' Equity
Shares of beneficial interest,
$1 par value,
20,000,000 shares authorized,
3,880,000
shares issued and outstanding 3,880,000 3,880,000
Additional paid-in capital, net
of cumulative
distributions in excess of
earnings
of $16,382,559 in 1994 and 1993 12,018,890 12,018,890
Undistributed net earnings 714,393 _
16,613,283 15,898,890
34,333,593 37,487,867
<FN>
See the accompanying notes to financial statements.
<FN>
</TABLE>
<TABLE>
Statements of Earnings
<S> <C> <C> <C>
Years Ended December 31,
1994 1993 1992
Revenue
Rents 5,960,114 6,077,305 5,720,060
Interest 219,381 195,158 209,013
6,179,495 6,272,463 5,929,073
Expenses
Property expenses:
Real estate taxes 800,921 789,315 862,456
Wages and salaries 19,354 31,618 63,414
Repairs and maintenance 505,915 477,718 349,214
Utilities 141,019 140,662 137,548
Management fee 277,945 287,608 268,259
Insurance 56,246 70,088 62,630
Other 127,102 160,420 215,054
Property expenses,
excluding 1,928,502 1,957,429 1,958,575
depreciation
Depreciation 960,227 1,027,956 1,014,188
Total property expenses 2,888,729 2,985,385 2,972,763
Interest 1,953,117 2,196,729 2,245,934
Administrative expense 403,044 374,603 427,975
5,244,890 5,556,717 5,646,672
Earnings from operations 934,605 715,746 282,401
Net gain on sale of 788,588 _ 175,991
property
Net earnings 1,723,193 715,746 458,392
Net earnings per share .44 .18 .12
Distributions to 1,008,800 931,200 1,241,600
shareholders
Distributions to .26 .24 .32
shareholders per share
<FN>
See the accompanying notes to financial statements.
<FN>
</TABLE>
<TABLE>
Statements of Cash Flows
<S> <C> <C> <C>
Years Ended
December 31,
1994 1993 1992
Cash flows from operating
activities:
Rents collected 5,997,838 5,996,819 5,833,233
Interest received 217,707 195,084 212,800
Payments for operating (2,716,513) (2,389,521) (2,591,358)
expenses
Interest paid (1,934,047) (2,165,600) (2,219,523)
Net cash provided by 1,564,985 1,636,782 1,235,152
operating activities
Cash flows from investing
activities:
Proceeds from property sales, 4,641,420 _ 209,329
net of closing costs
Capital expenditures (305,050) (212,959) (591,107)
Principal collections on 22,482 20,452 226,404
mortgage loans receivable
Other, net 64,071 (297,224) 99,510
Net cash provided (used) by 4,422,923 (489,731) (55,864)
investing activities
Cash flows from financing
activities:
Principal portion of
scheduled mortgage loan (585,070) (495,561) (457,296)
payments
Principal repayment on (3,141,973) _ (268,833)
mortgage loans payable
Net proceeds from refinancing 114,369 _ _
Distributions paid to (970,000) (931,200) (1,396,800)
shareholders
Net cash used by financing (4,582,674) (1,426,761) (2,122,929)
activities
Net increase (decrease) in
cash and cash 1,405,234 (279,710) (943,641)
equivalents
Cash and cash equivalents at 681,277 960,987 1,904,628
beginning of year
Cash and cash equivalents at 2,086,511 681,277 960,987
end of year
Reconciliation of net
earnings to net cash
provided by operating
activities:
Net earnings 1,723,193 715,746 458,392
Gain on sale of property (788,588) _ (175,991)
Earnings from operations 934,605 715,746 282,401
Depreciation 960,227 1,027,956 1,014,188
Amortization 58,975 31,129 27,291
Decrease (increase) in rents 38,571 (84,503) 24,593
and other receivables
Decrease (increase) in
prepaid and deferred (16,921) (32,199) 19,027
expenses
Decrease (increase) in taxes (105,713) (9,857) 105,127
held in escrow
Decrease in accounts payable
and accrued (302,238) (25,290) (224,715)
expenses
Increase (decrease) in (2,521) 13,800 (12,760)
advance rents
Net cash provided by 1,564,985 1,636,782 1,235,152
operating activities
<FN>
See the accompanying notes to financial statements.
<FN>
</TABLE>
<TABLE>
Statements of Shareholders' Equity
<S> <C> <C> <C> <C>
Years Ended December 31, 1994, 1993 and 1992
Shares of Additional Undistributed Total
Beneficial Paid-In Net Shareholders'
Interest Capital Earnings Equity
Balance at January 1, 1992 3,880,000 13,017,552 _ 16,897,552
Net earnings _ _ 458,392 458,392
Distributions to _ (783,208) (458,392) (1,241,600)
shareholders
Balance at December 31, 3,880,000 12,234,344 _ 16,114,344
1992
Net earnings _ _ 715,746 715,746
Distributions to _ (215,454) (715,746) (931,200)
shareholders
Balance at December 31, 3,880,000 12,018,890 _ 15,898,890
1993
Net earnings _ _ 1,723,193 1,723,193
Distributions to _ _ (1,008,800) (1,008,800)
shareholders
Balance at December 31, 3,880,000 12,018,890 714,393 16,613,283
1994
<FN>
See the accompanying notes to financial statements.
<FN>
</TABLE>
Notes to Financial Statements
1. Accounting Policies
The Trust is predominantly in the business of investing in
real estate. Investments in real estate are stated at cost.
The Trust provides an allowance for valuation of real estate
when it is determined that the values have permanently
declined below recorded book value.
Expenditures for repairs and maintenance which do not add to
the value or extend the useful life of property are expensed
when incurred. Additions to existing properties, including
replacements, improvements and expenditures which do add to
the value or extend the useful life of property, are
capitalized. Depreciation is calculated using the straight-
line method over the estimated useful lives of the respective
assets.
The Trust follows the operating method of accounting for
leases, whereby scheduled rental income is recognized on a
straight-line basis over the lease term. Contingent rental
income is recognized in the period in which it arises.
Interest on mortgage loans receivable and amortization of
discounts are recognized as income over the period the
respective loans are outstanding. The Trust provides for
possible losses on mortgage loans, rents and other receivables
when it is determined that collection of such receivables is
doubtful. Rents and other receivables are stated net of an
allowance for uncollectible accounts of $100,744 in 1994 and
$166,782 in 1993. Cash equivalents include investments with
original maturities of three months or less.
Gains on real estate sales are recognized for financial
accounting purposes in accordance with Financial Accounting
Standard No. 66, Accounting for Sales of Real Estate.
Deferred gains are recognized as income using the installment
method. Net earnings per share are computed using the
weighted average number of shares outstanding during the year.
2. Real Estate
Investments in real estate consist entirely of managed and net
leased commercial property. Information regarding the Trust's
investment in each property is presented in the Schedule of
Real Estate and Accumulated Depreciation below.
<TABLE>
Schedule of Real Estate and Accumulated Depreciation
<S> <C> <C> <C> <C>
Initial Cost to Trust
Property Description Amount of Land Buildings & Subsequent Cost
Encumbrance Improvements Capitalized
Managed
Kingsley Square 1,077,027 450,000 3,311,660 1,208,454
Orange Park, FL
First Tuesday Mall 1,844,706 595,000 4,347,697 2,056,768
Carrollton, GA
Geneva Square 2,947,504 477,166 4,965,000 771,808
Lake Geneva, WI
Mendenhall Commons 4,128,159 3,134,692 5,597,340 --
Memphis, TN
North Park Plaza 4,135,911 4,635,147 4,018,353 (1,765)
Phoenix, AZ
Presidential Drive 816,551 344,582 1,424,300 117,427
Atlanta, GA
14,949,858 9,636,587 23,664,350 4,152,692
Net Leased
Yamaha Warehouse 1,461,967 26,195 755,756 1,415,986
Cudahy, WI
1,461,967 26,195 755,756 1,415,986
16,411,825* 9,662,782 24,420,106 5,568,678
Gross Amount at
Which Carried
December 31, 1994
Property Description Land Buildings & Total Accumu-lated
Improvements Depreciation
Managed
Kingsley Square 450,000 4,520,114 4,970,114 2,162,277
Orange Park, FL
First Tuesday Mall 600,392 6,399,073 6,999,465 3,028,862
Carrollton, GA
Geneva Square 477,166 5,736,808 6,213,974 1,553,853
Lake Geneva, WI
Mendenhall Commons 3,134,692 5,597,340 8,732,032 803,884
Memphis, TN
North Park Plaza 4,633,382 4,018,353 8,651,735 568,403
Phoenix, AZ
Presidential Drive 344,582 1,541,727 1,886,309 427,008
Atlanta, GA
9,640,214 27,813,415 37,453,629 8,544,287
Net Leased
Yamaha Warehouse 26,195 2,171,742 2,197,937 1,182,480
Cudahy, WI
26,195 2,171,742 2,197,937 1,182,480
9,666,409 29,985,157 39,651,566 9,726,767
Property Description Date Built Date Acquired Life on Which
Depreciation is
computed (in years)
Managed
Kingsley Square 1975-76 7/79 10-40
Orange Park, FL
First Tuesday Mall 1975-78 7/79 10-40
Carrollton, GA
Geneva Square 1981-82 2/84 10-40
Lake Geneva, WI
Mendenhall Commons 1987 2/89 10-40
Memphis, TN
North Park Plaza 1963 2/89 10-40
Phoenix, AZ
Presidential Drive 1980 12/84 10-35
Atlanta, GA
Net Leased
Yamaha Warehouse 1971 2/72 15-40
Cudahy, WI
<FN>
* Excludes encumbrance of $441,478 on wraparound mortgages
receivable.
<FN>
</TABLE>
<TABLE>
The activity in real estate and related depreciation for the
three years ended December 31, 1994 is summarized below.
Real Estate Years Ended December 31,
<S> <C> <C> <C>
1994 1993 1992
Cost
Beginning of year 44,115,186 44,057,866 43,732,096
Additions during year
Improvements 175,804 57,320 415,012
Deductions during year
Property sales or (4,639,424) _ (89,242)
dispositions
End of year 39,651,566* 44,115,186 44,057,866
Accumulated Depreciation
Beginning of year 9,668,323 8,781,946 7,985,697
Additions during year
Depreciation expense 960,227 1,027,956 1,014,188
Deductions during year
Accumulated depreciation
on property sold (786,592) _ (55,904)
Asset replacements charged
to accumulated depreciation (115,191) (141,579) (162,035)
End of year 9,726,767 9,668,323 8,781,946
<FN>
*The aggregate cost for federal income tax purposes is
$39,785,276.
<FN>
</TABLE>
Wholly-owned managed properties with an aggregate cost of
$37,453,629 are leased to tenants pursuant to lease agreements
under which the Trust incurs normal real estate operating
expenses associated with ownership. A wholly-owned property
with an aggregate cost of $2,197,937 ($2,021,621 for 1993) is
leased under a net lease agreement which requires the lessee
to pay cash rental, property taxes and other expenses incurred
in connection with the operation of the property.
On September 16, 1994, the Trust sold Midway Business Park, a
181,320 square foot office park located in Tucson, Arizona.
The sale price was $4,800,000 from which the Trust paid
selling expenses of $158,580 and retired mortgage indebtedness
on the property of $3,141,973. Gain on the sale was $788,588.
In October 1992, the Trust sold Les Petite Day Care Center in
San Antonio, Texas, for $209,329 net of closing costs and
recognized a gain of $175,991.
3. Mortgage Loans Receivable
Mortgage loans receivable consist of notes received from
financing property sales and are secured by the properties
sold, subject to any underlying mortgage loans payable.
Mortgage loans are stated net of unamortized discounts and
deferred gains. The Trust received mortgage loans receivable
of $1,650,000 as part of the consideration for the sales of
Hickory Hills and College Square in 1990. Information
regarding each mortgage is presented in the Schedule of
Mortgage Loans Receivable on the next page.
<TABLE>
Schedule of Mortgage Loans Receivable
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Description Date of Stated Final Annual Balloon Face Amount Carrying
Name and Location of Mortgage Interest Maturity Principal Payment at of Mortgage Amount of
Property Rate Date and Maturity Receivable Mortgage
Interest at December 31,
Acquisition 1994
Hickory Hills Shopping
Center Hillsville, 12-21-90 9.5% 12-20-97 55,043 474,726 525,000 500,595
Virginia
College Square
Shopping Center
Jefferson City, 12-21-90 9.5% 12-20-97 117,949 1,017,270 1,125,000 1,071,367
Tennessee
172,992 1,491,996 1,650,000 1,571,962
Deferred Gain _ _ _ (259,157)
172,992 1,491,996 1,650,000 1,312,805
</TABLE>
The estimated fair value of mortgage notes receivable at
December 31, 1994 was $1,543,872 compared to the carrying
value of $1,571,962. The estimated fair value is less than the
carrying value as a result of the current interest rate
applied to discount the cash flows being higher than the
stated rate of the notes. The activity on mortgage loans
receivable for the three years ended December 31, 1994 is
summarized as follows:
<TABLE>
Mortgage Loans Receivable
<S> <C> <C> <C>
Years Ended
December 31,
1994 1993 1992
Principal
Beginning of year 1,594,444 1,614,896 1,841,300
Deductions during year
Principal collections (22,482) (20,452) (226,404)
Balance at end of year 1,571,962* 1,594,444 1,614,896
Deferred gain (259,157) (259,157) (259,157)
Balance, net of deferred gain 1,312,805 1,335,287 1,355,739
<FN>
*Represents the aggregate cost for federal income tax
purposes.
<FN>
</TABLE>
4. Cash and Cash Equivalents
At December 31, 1994, the Trust had cash of $3,593 and an
investment in a money market fund of $2,082,918. Information
regarding the money market investment is presented in the
following schedule:
Type of Issue and Maturity Principal Cost at
Name of Issuer Date Amount December 31,
1994*
Money Market
Fidelity Investments, demand 2,082,918 2,082,918
approximate average,
5.55%
* Represents the amount at which carried on the balance sheet
at December 31, 1994, which also approximates the market value
at that date.
5. Transactions With Affiliates
The Trust has contracted with AEGON USA Realty Advisors, Inc.
("AEGON Realty Advisors") to provide administrative services
for a base fee of 5/8% of the average gross real estate
investment plus 1/4% of the monthly balance of mortgage loans
receivable and an incentive fee of 20% of annual adjusted cash
flow from operations in excess of $.72 per share. If the
annual adjusted cash flow from operations is less than $.72
per share, then the payment of so much of the base fee is to
be deferred so that revised cash flow from operations will be
equal to $.72 per share; provided, however, in no event shall
the amount deferred exceed 20% of the previously determined
base fee. Any deferred fees may be paid in subsequent years
(subject to certain limits). Annual adjusted cash flow from
operations, as defined for purposes of the incentive fee,
includes the net realized gain (or loss) from the disposition
of property, adjusted to exclude accumulated depreciation
(otherwise stated as gain in excess of cost without reduction
for allowable depreciation). The administrative fee is
limited to 1 1/2% of average quarterly net invested assets.
The administrative agreement is for a one-year term,
automatically renewed annually and cancellable by either party
upon 90 days written notice. Amounts paid to AEGON Realty
Advisors for administrative services were: $219,982 for 1994,
$227,352 for 1993, and $227,162 for 1992. No incentive fees
were paid in 1994, 1993 or 1992. Administrative fees of
$54,995 in 1994, $56,838 in 1993, and $56,791 in 1992 were
deferred, but may become payable in subsequent years.
Cumulative deferred administrative fees were $407,906 as of
December 31, 1994.
AEGON Realty Advisors also provides real estate acquisition
and disposition services for the Trust. A negotiated fee of
2% to 4% of the cost is charged for properties acquired. No
separate fee is charged for property dispositions. There were
no acquisition fees paid in 1994, 1993 or 1992.
AEGON USA Realty Management, Inc. ("AEGON Realty Management"),
a wholly-owned subsidiary of AEGON Realty Advisors, provides
property management services to the Trust for a fee of 5% of
the gross income of each managed property. The property
management agreement is for a one-year term, automatically
renewed annually and cancellable upon a 30-day written notice
from either party. Amounts paid to AEGON Realty Management
for property management services were $277,945 for 1994,
$287,608 for 1993, and $268,259 for 1992. Pursuant to the
property management agreement, on-site property management
wages and salaries incurred by AEGON Realty Management were
reimbursed by the Trust as follows: $19,354 for 1994, $31,618
for 1993, and $63,414 for 1992.
AEGON Realty Advisors provides dividend disbursement, stock
certificate preparation, recordkeeping and other shareholder
services to the Company for a quarterly fee of $1.25 per
shareholder account, $.75 per shareholder account for
distributions processed, $.50 per shareholder account for
proxy tabulation, and such other compensation for services
performed as from time to time agreed to by the parties. The
Trust paid AEGON Realty Advisors $23,000, $23,871, and
$22,457 in shareholder service fees for 1994, 1993, and 1992,
respectively. AEGON Realty Advisors has subcontracted with
Boston Financial Data Services, a subsidiary of State Street
Bank and Trust Company, for delivery of these services.
On December 31, 1991, the Trust had a mortgage loan payable to
Life Investors Insurance Company of America, an affiliate of
AEGON Realty Advisors, in the amount of $131,579, which was
repaid in 1992. Interest on the mortgage was $1,773 in 1992.
On December 31, 1993, the mortgage loan on the Trust's
Presidential Drive property was acquired from the lender by
AUSA Life Insurance Company, Inc., an affiliate of AEGON
Realty Advisors, as part of a large transaction involving the
transfer of loans and securities. Interest paid on the
mortgage was $85,646 in 1994. See Note 6 on the next page for
information on the refinancing in February 1994 of the
mortgage on Geneva Square with PFL Life Insurance Company
("PFL"), an affiliate of AEGON Realty Advisors. Interest paid
on the mortgage was $208,444 in 1994. AEGON Realty Advisors is
an indirect wholly-owned subsidiary of AEGON USA, Inc. which,
through other wholly-owned subsidiaries, beneficially owns
approximately 31% of the outstanding shares of the Trust at
December 31, 1994.
6. Mortgage Loans Payable
Mortgage loan obligations, secured by the real estate owned,
carry annual interest rates ranging from 8% to 10.5%. In
1992, the Trust prepaid three underlying mortgage loans on the
Northeast Hills Apartments (see Note 3) totaling $268,833.
The mortgage loan on Geneva Square matured in February 1994
and was refinanced with a mortgage from PFL. The $3,000,000
loan may be prepaid at any time without penalty and matures in
February 1996, with an option to extend for an additional
eight years at the then current market terms offered for
comparable loans by PFL. The annual debt service is $301,128,
including interest at 8%. A 1% origination fee ($30,000) was
paid to PFL in connection with the loan. Information
regarding each mortgage is presented in the Schedule of
Mortgage Loans on Real Estate on the next page. The activity
in mortgage loans payable for the three years ended December
31, 1994 is summarized in the table below:
Mortgage Loans Payable
Years Ended
December 31,
1994 1993 1992
Principal
Beginning of year 20,422,351 20,917,912 21,644,041
Additions during year
New mortgage loan on
refinancing 3,000,000 __ __
Deductions during year
Principal payments (585,071) (495,561) (457,296)
Prepayments and (2,835,063) __ (268,833)
maturities
Balance of mortgage loan
on (3,141,973) __ __
property sold
Balance at end of year 16,860,244 20,422,351 20,917,912
Discount
Beginning of year (34,706) (62,470) (86,396)
Deductions during year
Amortization of 27,765 27,764 23,926
discount
Balance at end of year (6,941) (34,706) (62,470)
Balance, net of discount 16,853,303 20,387,645 20,855,442
On January 31, 1995, the Trust prepaid one of the mortgage
loans on First Tuesday Mall. The prepayment amount, including
a 1% fee to the lender, was $1,147,526. The annual debt
service on this mortgage was $229,068, including interest at
10%.
The estimated fair value of mortgage notes payable at December
31, 1994 was $16,979,623 compared to the carrying value of
$16,853,303. The estimated fair value exceeds the carrying
value as a result of the current interest rate applied to
discount the cash flows being lower than the stated rate for a
majority of the mortgage notes.
Scheduled monthly payments will substantially amortize the
principal balances of the mortgage loans over their respective
terms with the exception of balloon payments at maturity.
Amortized payments on the outstanding balances due in the next
five years, including balloon repayments at maturity, are
summarized as follows:
<TABLE>
<C> <C> <C>
Maturity Amortized Payments
Date Payments at Maturity
1995 452,695 1,136,164*
1996 430,581 2,873,831
1997 468,570 _
1998 516,998 _
1999 429,106 7,874,657
<FN>
* Please see discussion above concerning the prepayment of one
of the First Tuesday Mall mortgage loans.
<FN>
</TABLE>
<TABLE>
Schedule of Mortgage Loans on Real Estate
<S> <C> <C> <C> <C>
Property Date of Note Stated Interest Final Maturity Annual Principal and
Description Rate Date Interest
Managed
Kingsley Square 2/77 10% 2/02 76,370
Orange Park, FL
(two loans)
8/75 10% 8/00 163,650
First Tuesday 4/79 9.25% 4/04 115,128
Carrollton, GA
(two loans) 1/77 10.0% 2/02 229,068
Geneva Square 2/94 8.0% 3/96 301,128
Lake Geneva, WI
Mendenhall 2/89 10.25% 3/99 462,396
Commons Memphis,
TN
North Park Plaza 2/89 10.5% 3/99 472,008
Phoenix, AZ
Presidential 2/80 10.25% 2/10 107,604
Drive Atlanta, GA
1,927,352
Net Leased
Yamaha Warehouse 12/90 10.125% 1/01 159,627
Cudahy, WI
159,627
Sold****
College Square 12/75 9.375% 12/99 115,500
Jefferson City,
TN
115,500
2,202,479
Property Balloon Payment Prepayment Face Amount of Carrying Amount of
Description at Maturity Penalty Mortgage at Mortgage at December
Provisions* Acquisition 31, 1994
Managed
Kingsley Square _ 7.0% in 1995, 700,000 384,360
Orange Park, FL declining .5%
(two loans) per year to 4%
thereafter
_ 5.0% 1,500,000 692,667
First Tuesday _ 1.0% 1,120,000 708,542
Carrollton, GA
(two loans) _ 1.0% 1,800,000 1,136,164**
Geneva Square 2,873,831 no penalty 3,000,000 2,947,504
Lake Geneva, WI
Mendenhall 3,930,120 4% in 1995, 4,300,000 4,128,159
Commons Memphis, declining 1% per
TN year thereafter
North Park Plaza 3,944,537 4% in 1995 4,300,000 4,135,911
Phoenix, AZ declining 1% per
year thereafter
Presidential _ 2.5% in 1995, 968,935 816,551***
Drive Atlanta, GA declining .5%
per year to 1%
thereafter
10,748,488 17,688,935 14,949,858
Net Leased
Yamaha Warehouse 1,366,721 no prepayment 1,500,000 1,461,967
Cudahy, WI first 5 years;
excess of loan
rate over U.S.
Treasury Bill
rate thereafter
1,366,721 1,500,000 1,461,967
Sold****
College Square _ 2.5% in 1995, 1,100,000 441,478
Jefferson City, declining .5%
TN per year
thereafter
_ 1,100,000 441,478
12,115,209 20,288,935 16,853,303
<FN>
* Percentages are of the principal amount at time of
prepayment.
** The loan was prepaid on January 31, 1995.
*** Carrying amount at December 31, 1994 is stated net of
unamortized loan costs of $6,941.
**** A wraparound mortgage loan receivable was received as
part of the consideration from sale; the Trust continues
to service the underlying mortgage payable.
<FN>
</TABLE>
7. Leased Assets
The Trust is lessor of various properties as described in Note
2. Certain properties are leased to tenants under long-term,
non-cancellable operating lease agreements. Future minimum
lease rentals to be received under the terms of these lease
agreements are as follows:
<TABLE>
<C> <C>
Year Amount
1995 3,898,061
1996 3,563,723
1997 2,898,134
1998 2,329,068
1999 2,129,864
2000 - 2012 14,215,998
</TABLE>
Contingent rentals included in income received in connection
with operating leases were $82,754, $98,228, and $105,100 for
the years ended December 31, 1994, 1993 and 1992,
respectively. Such rentals are based principally on tenant
sales in excess of stipulated minimums. In 1994 and in 1992,
the Trust derived 10% or more of its revenue from one major
tenant. The revenue from this tenant was $647,180 in 1994 and
$611,378 in 1992. The Trust did not receive 10% or more of
its revenue from any one tenant in 1993.
In August 1994, Publix Supermarkets exercised an option to
extend their lease for 34,400 square feet in Kingsley Square.
The lease extension, effective February 11, 1995, has a term
of five years and requires the Trust to contribute up to
$250,000 toward remodeling costs at the Publix store. The
Trust expects to incur this cost in 1995.
8. Federal Income Taxes
The Trust conducts its operations so as to qualify as a real
estate investment trust under the Internal Revenue Code which
requires, among other things, that at least 95% of the Trust's
taxable income be distributed to shareholders. The Trust has
historically distributed all of its taxable income.
Distributions made in 1994 plus a portion of the Trust's first
distribution in 1995 were used to meet the Internal Revenue
Code distribution requirements for 1994. Accordingly, no
provision has been made for federal income taxes since the
Trust did not have taxable income after the deductions allowed
for distributions to shareholders.
Certain property acquisitions have resulted in the basis of
those properties being determined differently for financial
accounting purposes than for income tax purposes. The
differing methods of determination of basis in these
transactions has resulted in the tax basis of certain
properties being higher or lower than the financial basis. At
December 31, 1994 the tax basis of real estate was $133,710 in
excess of the financial basis.
9. Legal Proceedings
The Trust is not a party to any pending legal proceedings
which, in the opinion of management, are material to the
Trust's financial position.
10. Subsequent Event
On February 1, 1995, the Trust announced that it had begun
exploring strategic alternatives to maximize shareholder
value. Such alternatives may include a business combination
or sale of the Trust's assets. The decision reflects the
opinion of the Trust's board of trustees that recent market
prices for the Trust's shares have not adequately reflected
the value of the Trust.
<TABLE>
11. Selected Quarterly Financial Data (Unadudited)
<S> <C> <C> <C> <C> <C>
Quarter Ended Year Ended
Year 3/31 6/30 9/30 12/31 12/31
1994
Revenue 1,651,674 1,582,681 1,581,086 1,364,054 6,179,495
Earnings from operations 247,328 196,185 212,863 278,229 934,605
Net gain on disposition
of _ _ 788,588 _ 788,588
property
Net earnings 247,328 196,185 1,001,451 278,229 1,723,193
Net earnings per share .06 .05 .26 .07 .44
1993
Revenue 1,500,105 1,580,646 1,520,981 1,670,731 6,272,463
Earnings from operations 148,098 148,667 138,010 280,971 715,746
Net earnings 148,098 148,667 138,010 280,971 715,746
Net earnings per share .04 .04 .04 .07 .18
1992
Revenue 1,513,957 1,429,676 1,465,796 1,519,644 5,929,073
Earnings (loss) from
operations 89,243 (9,665) 100,656 102,167 282,401
Net gain on disposition
of _ _ _ 175,991 175,991
property
Net earnings (loss) 89,243 (9,665) 100,656 278,158 458,392
Net earnings per share .02 .00 .03 .07 .12
</TABLE>
Report of Independent Auditors
The Board of Trustees and Shareholders
USP Real Estate Investment Trust
We have audited the accompanying balance sheets of USP Real
Estate Investment Trust as of December 31, 1994 and 1993, and
the related statements of earnings, shareholders' equity, and
cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the
responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based
on our audits.
We 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 financial
position of USP Real Estate Investment Trust at December 31,
1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December
31, 1994, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Des Moines, Iowa
February 24, 1995
Part III
Item 10. Directors and Executive Officers of the Registrant
Information About Directors (referred to herein as "Trustees")
Certain information about the Trustees appears below. (See
"Item 13 Certain Relationships and Related Transactions" for a
description of the Trust's relationship with AEGON USA Realty
Advisors, Inc. and other subsidiaries of AEGON USA, Inc.)
GARY A. DOWNING, age 36, has served as a Trustee of the Trust
since 1989. He is Managing Director of Raymond James &
Associates, Inc. (investment banking), St. Petersburg,
Florida, where he has been employed since 1984. Mr. Downing
is a member of the Audit Committee.
PATRICK E. FALCONIO, age 53, has served as Chairman of the
Board and a Trustee of the Trust since 1988. He is Executive
Vice President and Chief Investment Officer of AEGON USA, Inc.
(insurance and financial services), Cedar Rapids, Iowa, where
he has been employed since 1987. Mr. Falconio is Chairman of
the Board of AEGON USA Realty Advisors, Inc. and a Director of
various other subsidiaries of AEGON USA, Inc. He is also
Chairman of the Board of Directors of Cedar Income Fund, Ltd.
(real estate investment company) and a Director of Firstar
Bank Cedar Rapids, N.A. (commercial bank).
EDWIN L. INGRAHAM, age 68, has served as a Trustee of the
Trust since 1984, and as Vice Chairman of the Board of
Trustees since 1990. He retired in 1988 as Executive Vice
President, Treasurer and Chief Investment Officer of AEGON
USA, Inc., where he had been employed since 1982. He is a
Director of Cedar Income Fund, Ltd. (real estate investment
company). Mr. Ingraham is a member of the Audit Committee.
SAMUEL L. KAPLAN, age 58, has served as a Trustee of the Trust
since 1983. He has been engaged in the practice of law in
Minneapolis, Minnesota for over five (5) years as a member of
the firm of Kaplan, Strangis and Kaplan, P.A. Mr. Kaplan is a
member of the Audit Committee.
Information About Executive Officers
Certain information about the executive officers of the
Trust appears below. (See "Item 13 Certain Relationships and
Related Transactions" for a description of the Trust's
relationship with AEGON USA Realty Advisors, Inc. and other
subsidiaries of AEGON USA, Inc.)
DAVID L. BLANKENSHIP, age 44, has served as President of the
Trust since 1985. He has been employed by AEGON USA, Inc.
since 1977 in various administrative and management positions
related to real estate investment activities and is President
of AEGON USA Realty Advisors, Inc.
MAUREEN DEWALD, age 44, has served as Vice President of the
Trust since 1986 and Secretary since 1985. She has been
employed by AEGON USA, Inc. since 1983 as an attorney for real
estate investment activities and is Senior Vice President,
Secretary and General Counsel of AEGON USA Realty Advisors,
Inc.
JEFFRY DIXON, age 41, has served as Director of Investor
Relations and Assistant Secretary of the Trust since January,
1994. He has been employed by AEGON USA, Inc. since 1984 in
real estate acquisition and mortgage lending positions and is
a Senior Mortgage Loan Officer of AEGON USA Realty Advisors,
Inc.
ALAN F. FLETCHER, age 45, has served as Treasurer of the Trust
since 1986, as Vice President since 1985, as Assistant
Secretary since 1982 and as principal financial officer since
1981. He has been employed by AEGON USA, Inc. since 1981 in
various financial and administrative positions related to
investment activities and is Senior Vice President and Chief
Financial Officer of AEGON USA Realty Advisors, Inc.
EDWARD J. KITTLESON, age 37, has served as Controller and
Assistant Secretary of the Trust since January, 1993. He has
been employed by AEGON USA, Inc. since 1991, first as a real
estate investment officer, and since November, 1992, as
Manager - Financial Reporting. He is Treasurer of AEGON USA
Realty Advisors, Inc. From 1981 to 1991, Mr. Kittleson was
employed as Controller for Bjornsen Investment Corporation, a
real estate development company in Cedar Rapids, Iowa.
Item 11. Executive Compensation
During 1994, each Trustee, with the exception of Mr.
Falconio, received an annual fee of $6,000 plus $750 for each
regular or special meeting attended, as well as $400 per day
for inspecting properties owned by the Trust and properties
proposed to be acquired by the Trust and $400 for attendance
at each committee meeting as a member, unless held in
conjunction with a meeting of the Board of Trustees. Mr.
Falconio has waived all fees for his services as a Trustee so
long as he continues to be affiliated as an officer or
director of AEGON USA Realty Advisors, Inc. (see "Item 10
Directors and Executive Officers of the Registrant"). Total
fees paid to all Trustees as a group were $27,750 for 1994.
The executive officers of the Trust receive no cash or
deferred compensation in their capacities as such.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the number of Shares of the
Trust beneficially owned as of March 1, 1995 by each Trustee
and officer and by all Trustees, and officers as a group
(9 persons). Except as otherwise indicated by footnote, the
individuals have direct ownership of, and sole voting and
investment power with respect to, any Shares beneficially
owned by them.
<TABLE>
<S> <C> <C> <C>
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
Gary A. Downing(1) 438 *
Patrick E. Falconio(2) 1,199,260 30.91%
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(3) 10,000 *
David L. Blankenship(4) 1,818 *
Maureen DeWald(5) 7,811 *
Jeffry Dixon 0 *
Alan F. Fletcher(6) 2,200 *
Edward J. Kittleson 0 *
Trustees, nominees and
officers as a 1,223,027 31.52%
group
</TABLE>
(1) Mr. Downing is the beneficial owner of 438 Shares held in
an individual retirement account through the custodian of
which he has sole voting and investment powers with
respect to such Shares.
(2) Mr. Falconio may be deemed to be the beneficial
owner of 1,197,260 Shares beneficially owned by AEGON
USA, Inc. with respect to which he shares voting and
investment powers (see "Item 10 Directors and Executive
Officers of the Registrant" and "Item 13 Certain
Relationships and Related Transactions"), but he
disclaims beneficial ownership of such Shares. He may
also be deemed to be the beneficial owner of 2,000 Shares
owned by his wife.
(3) Mr. Kaplan may be deemed to be the beneficial owner
of 1,500 Shares held in a profit sharing trust for his
account. Such Shares are included in the 10,000 Shares
above.
(4) Mr. Blankenship may be deemed to be the beneficial
owner of 1,818 Shares held in custodial accounts for his
children for which he has sole voting and investment
powers.
(5) Ms. DeWald is the direct owner of 6,586 Shares for
which she has sole voting and investment powers and may
be deemed to be the beneficial owner of 1,225 Shares held
in a custodial account for her daughter for which she has
sole voting and investment powers.
(6) Mr. Fletcher is the direct owner of 600 Shares for
which he has sole voting and investment powers and is the
beneficial owner of 1,600 Shares held in an individual
retirement account for which he has sole voting and
investment powers through the custodian.
*Such holdings represent less than one percent of the
outstanding Shares.
Item 13. Certain Relationships and Related Transactions
The Trust has no employees and has contracted with various
subsidiaries of AEGON USA, Inc. to provide administrative,
advisory, acquisition, divestiture, property management and
shareholder services to the Trust. A description of the
relationships between AEGON USA, Inc. and its various
subsidiaries and of such subsidiaries' agreements with the
Trust follows. The description of the agreements which
follows is qualified in its entirety by reference to the terms
and provisions of such agreements. AEGON USA, Inc. is the
beneficial owner of 1,197,260 shares of the Trust as of March
1, 1995 which represents 30.86% of the outstanding shares of
the Trust. AEGON USA, Inc. is an indirect, wholly-owned
subsidiary of AEGON N.V., a holding company organized under
the laws of the Netherlands which is controlled by Vereninging
AEGON, an association organized under the laws of The
Netherlands. AEGON USA, Inc. has sole voting and investment
powers with respect to the above shares.
Administrative, Advisory and Acquisition Services
AEGON USA Realty Advisors, Inc. ("AEGON Realty Advisors"),
is a wholly-owned subsidiary of AEGON USA, Inc. AEGON Realty
Advisors provides administrative, advisory, acquisition and
divestiture services to the Trust pursuant to an
Administrative Agreement. The term of the Administrative
Agreement is for one (1) year and is automatically renewable
each year for an additional year subject to the right of
either party to cancel the Agreement upon 90 days written
notice. The performance of AEGON Realty Advisors' duties and
obligations under the Administrative Agreement has been
guaranteed by AEGON USA, Inc.
Under the Administrative Agreement, AEGON Realty Advisors
(a) provides clerical, administrative and data processing
services, office space, equipment and other general office
services necessary for the Trust's day-to-day operations, (b)
provides legal, tax and accounting services to maintain all
necessary books and records of the Trust and to ensure Trust
compliance with all applicable federal, state and local laws,
regulatory reporting requirements and tax codes, (c) arranges
financing for the Trust, including but not limited to mortgage
financing for property acquisition, (d) obtains property
management services for the Trust's properties and supervises
the activities of persons performing such services, (e)
provides monthly reports summarizing the results of operations
and financial conditions of the Trust, (f) prepares and files
all reports to shareholders and regulatory authorities on
behalf of the Trust, (h) prepares and files all tax returns of
the Trust and (i) provides the Trust with property acquisition
and divestiture services.
AEGON Realty Advisors receives fees for its administrative
and advisory services as follows: (a) a base fee, payable
monthly, equal to 5/8% per annum of the average monthly gross
real estate investments of the Trust plus 1/4% per annum of
the monthly outstanding principal balance of mortgage loans
receivable; and (b) an incentive fee, payable annually, equal
to 20% of the annual adjusted cash flow from operations in
excess of $.72 per share. If the annual adjusted cash flow
from operations is less than $.72 per share, then the payment
of so much of the base fee is to be deferred so that revised
cash flow from operations will be equal to $.72 per share;
provided, however, in no event shall the amount deferred
exceed 20% of the previously determined base fee. Any
deferred fees may be paid in a subsequent year, up to a
maximum of 30% of that year's revised cash flow from
operations in excess of $.72 per share. Annual adjusted cash
flow from operations, as defined for purposes of the incentive
fee, includes the net realized gain (or loss) from the
disposition of property, adjusted to exclude accumulated
depreciation (otherwise stated as gain in excess of cost
without reduction for allowable depreciation).
Notwithstanding the foregoing, the combined base and incentive
fees cannot exceed the amount permitted by the limitation on
operating expenses as provided in the Trust's Declaration of
Trust, which limitation is essentially 1 1/2% of the Trust's
average quarterly invested assets, net of depreciation. In
addition, AEGON Realty Advisors is to be paid a separately
negotiated fee of not less than 2% nor more than 4% of the
cost of each property acquired by the Trust as compensation
for acquisition services furnished by it to the Trust.
Administrative fees paid to AEGON Realty Advisors for 1994
were $219,982. No acquisition fees were paid in 1994.
Management Services
AEGON USA Realty Management, Inc. ("AEGON Realty
Management"), is a wholly-owned subsidiary of AEGON Realty
Advisors. AEGON Realty Management provides management
services to the Trust pursuant to a Property Management
Agreement. The term of the Agreement is for one (1) year and
is automatically renewable each year for an additional year
subject to the right of either party to cancel the Agreement
upon 30 days written notice. Under the Management Agreement,
AEGON Realty Management is obligated to (a) procure tenants
and execute leases with respect to Trust properties which are
not leased under net lease arrangements (the "Managed
Properties"), (b) maintain and repair (at the Trust's expense)
the Managed Properties, (c) maintain complete and accurate
books and records of the operations of the Managed Properties,
(d) maintain the Managed Properties in accordance with
applicable government rules and regulations, licensing
requirements and building codes, (e) collect all rents and (f)
carry (at the Trust's expense) general liability, accident,
fire and other property damage insurance. For these services,
AEGON Realty Management receives 5% of the gross income
derived from the operation of the Managed Properties.
Management fees paid to AEGON Realty Management for 1994 were
$277,945.
Shareholder Services
AEGON Realty Advisors provides shareholder services to the
Trust pursuant to a Shareholder Services Agreement (the
"Agreement"). Under the Agreement, AEGON Realty Advisors is
obligated to provide dividend disbursement, stock certificate
preparation, recordkeeping and other shareholder services for
which AEGON Realty Advisors receives the following fees: a
quarterly fee of $1.25 per shareholder account based on the
number of shareholder accounts (minimum $1,000 per quarter), a
fee of $.75 per shareholder account for each dividend
processed, a fee of $.50 per shareholder account for proxy
tabulation, and such other compensation as from time to time
agreed upon by the Trust and AEGON Realty Advisors.
Shareholder service fees paid to AEGON Realty Advisors for
1994 were $23,000. AEGON Realty Advisors has subcontracted
for stock transfer and dividend disbursement services with
Boston Financial Data Services, a subsidiary of State Street
Bank and Trust Company.
Other
On December 31, 1993, the mortgage loan on the Trust's
Presidential Drive property was acquired from the lender by
AUSA Life Insurance Company, Inc., a wholly-owned subsidiary
of AEGON USA, Inc., as part of a large transaction involving
the transfer of loans and securities. The terms of the
mortgage loan remained the same. In February 1994, the Trust
refinanced the existing mortgage loan on its Geneva Square
property with a new mortgage loan from PFL Life Insurance
Company ("PFL"), a wholly-owned subsidiary of AEGON USA, Inc.
This $3,000,000 loan was obtained by the Trust on commercially
competitive terms at a fixed interest rate of 8%. The loan
may be prepaid at any time without penalty and matures in
February 1996, with an option to extend for an additional
eight years at the then current market terms offered for
comparable loans by PFL. A 1% origination fee ($30,000) was
paid to PFL in connection with the loan.
The aggregate principal amount of the two mortgage loans
described above as of December 31, 1994 was $3,770,996. The
maximum principal amount of such mortgage indebtedness
outstanding during 1994 was $3,843,704. The Trust paid
$74,454 in principal and $294,090 in interest on such mortgage
indebtedness for 1994.
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
(a) List of Documents
1. Financial Statements.
Balance Sheets, December 31, 1994 and 1993.
Statements of Earnings, Years Ended December 31, 1994, 1993,
and 1992.
Statements of Cash Flows, Years Ended December 31, 1994, 1993,
and 1992.
Statements of Shareholders' Equity, Years Ended December 31,
1994, 1993, and 1992.
Notes to Financial Statements.
Report of Independent Auditors.
2. Financial Statement Schedules.
Financial Statement Schedules. (Included in Notes to
Financial Statements)
(III) Schedule of Real Estate and Accumulated Depreciation.
Note 2
(IV) Schedule of Mortgage Loans on Real Estate. Note 3
All other schedules have been omitted because they are
not required, or because the required information, where
material, is included in the financial statements or
accompanying notes.
Part IV (continued)
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K (continued)
(a) List of Documents (continued)
3. Exhibits.
(3) Second Amended and Restated Declaration of
Trust currently in effect, dated October 5, 1972, as
amended December 18, 1972, March 3, 1975 and
April 23, 1984, incorporated herein by reference to
Item 14(a)3, Exhibit (3) of Form 10-K for the year
ended December 31, 1984.
(3.1) By-Laws currently in effect, dated January
28, 1992, incorporated herein by reference to Item 14(a)3,
Exhibit (3.1) of Form 10-K for the year ended December 31, 1991.
(4) Articles II and III of the Second Amended and
Restated Declaration of Trust currently in effect,
dated October 5, 1972, as amended December 18, 1972,
March 3, 1975 and April 23, 1984, incorporated
herein by reference to Item 14(a)3, Exhibit (3) of
Form 10-K for the year ended December 31, 1984.
(4.1) Article II of the By-Laws currently in
effect, dated January 28, 1992, incorporated herein
by reference to Item 14(a)3, Exhibit (4.1) of Form
10-K for the year ended December 31, 1991.
(10) Administrative Agreement currently in effect,
dated January 1, 1984, incorporated herein by
reference to Item 5, Exhibit (28) of Form 8-K dated
January 1, 1984.
(10.1) Property Management Agreement currently in
effect, dated July 1, 1981, as amended November 4,
1982, incorporated herein by reference to Item
14(a)3, Exhibit (10) of Form 10-K for the year ended
December 31, 1982.
(10.2) Shareholder Services Agreement, currently in
effect, dated January 1, 1991, as amended January 1,
1992 and assigned January 28, 1992, incorporated
herein by reference to Item 14(a)3, Exhibit (10.2)
of Form 10-K for the year ended December 31, 1991.
(b) No Form 8-Ks were filed during the fourth quarter of
1994.
(c) The required exhibits applicable to this section are
listed in Item 14(a)3.
(d) There are no required financial statement schedules
applicable to this section.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
USP REAL ESTATE INVESTMENT
TRUST
/s/ Patrick E. Falconio /s/ Alan F. Fletcher
Patrick E. Falconio Alan F. Fletcher
Chairman of the Board Vice President and
Treasurer
(principal executive (principal financial
officer)
officer)
/s/ Edward J. Kittleson
Edward J. Kittleson
Controller
(principal accounting
officer)
March 27, 1995
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and
as of the date indicated.
/s/ Gary A. Downing /s/ Edwin L. Ingraham
Gary A. Downing Edwin L. Ingraham
Trustee Trustee
/s/ Patrick E. Falconio /s/ Samuel L. Kaplan
Patrick E. Falconio Samuel L. Kaplan
Trustee Trustee
March 27, 1995
EXHIBIT INDEX
Exhibit
Item Title or Description
(3) Second Amended and Restated
Declaration of Trust currently in
effect, dated October 5, 1972, as
amended December 18, 1972, March 3,
1975 and April 23, 1984, incorporated
herein by reference to Item 14(a)3,
Exhibit (3) of Form 10-K for the year
ended December 31, 1984.
(3.1) By-Laws currently in effect, dated
January 28, 1992, incorporated herein
by reference to Item 14(a)3, Exhibit
(3.1) of Form 10-K for the year ended
December 31, 1991.
(4) Articles II and III of the Second
Amended and Restated Declaration of
Trust currently in effect, dated
October 5, 1972, as amended
December 18, 1972, March 3, 1975 and
April 23, 1984, incorporated herein by
reference to Item 14(a)3, Exhibit (3)
of Form 10-K for the year ended
December 31, 1984.
(4.1) Article II of the By-Laws currently in
effect, dated January 28, 1992,
incorporated herein by reference to
Item 14(a)3, Exhibit (4.1) of Form 10-
K for the year ended December 31,
1991.
(10) Administrative Agreement currently in
effect, dated January 1, 1984,
incorporated herein by reference to
Item 5, Exhibit (28) of Form 8-K dated
January 1, 1984.
(10.1) Property Management Agreement currently
in effect, dated July 1, 1981, as
amended November 4, 1982, incorporated
herein by reference to Item 14(a)3,
Exhibit (10) of Form 10-K for the year
ended December 31, 1982.
(10.2) Shareholder Services Agreement dated
January 1, 1991, as amended January 1,
1992 and assigned January 28, 1992,
incorporated herein by reference to Item
14(a)3, Exhibit (10.2) of Form 10-K for
the year ended December 31, 1991.
All Exhibit Items are omitted from this report, but a copy
will be furnished upon payment of $33.00, representing a
charge of fifty cents ($.50) per page, accompanying a
written request to Edward J. Kittleson, Controller, USP Real
Estate Investment Trust, 4333 Edgewood Road N.E., Cedar
Rapids, IA 52499.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,086,511
<SECURITIES> 0
<RECEIVABLES> 636,536
<ALLOWANCES> (100,744)
<INVENTORY> 0
<CURRENT-ASSETS> 3,095,989
<PP&E> 39,651,566
<DEPRECIATION> 9,726,767
<TOTAL-ASSETS> 34,333,593
<CURRENT-LIABILITIES> 867,007
<BONDS> 16,853,303
<COMMON> 3,880,000
0
0
<OTHER-SE> 12,733,283
<TOTAL-LIABILITY-AND-EQUITY> 34,333,593
<SALES> 0
<TOTAL-REVENUES> 6,179,495
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,291,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,953,117
<INCOME-PRETAX> 1,723,193
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,723,193
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
