UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarter ended September 30, 1998 Commission file number 0-7589
USP REAL ESTATE INVESTMENT TRUST
(Exact name of registrant as specified in its charter)
Iowa 42-6149662
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
4333 Edgewood Road N.E., Cedar Rapids, IA 52499
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 398-8975
N/A
(Former name, address and 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
The number of shares of beneficial interest of the registrant
outstanding at November 13, 1998 was 3,880,000.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
USP REAL ESTATE INVESTMENT TRUST
Balance Sheets
(unaudited)
<S> <C> <C> <C>
September 30, December 31,
1998 1997 1997
ASSETS
Real estate
Land, buildings and improvements at cost $ 40,722,496 40,695,104 40,694,216
Less accumulated depreciation (12,747,098) (11,922,726) (12,122,752)
27,975,398 28,772,378 28,571,464
Mortgage loans receiveable, net of deferred gain - 1,238,796 -
Real estate and mortgage loans receivable 27,975,398 30,011,174 28,571,464
Cash and cash equivalents 1,809,854 502,324 1,606,427
Rents and other receivables 354,272 371,494 421,637
Prepaid and deferred expenses 278,337 340,302 351,874
Taxes held in escrow 159,467 97,160 153,016
$ 30,577,328 31,322,454 31,104,418
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable $ 13,813,825 14,454,257 14,140,584
Accounts payable and accrued expenses 619,498 698,118 560,917
Due to affiliates 48,442 43,954 97,473
Distribution declared 310,400 310,400 310,400
Tenant deposits 80,095 71,235 80,818
Other 32,924 64,801 44,278
14,905,184 15,642,765 15,234,470
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 3,880,000
Additional paid-in capital 11,792,144 11,799,689 11,989,948
15,672,144 15,679,689 15,869,948
$ 30,577,328 31,322,454 31,104,418
</TABLE>
<TABLE>
USP REAL ESTATE INVESTMENT TRUST
Statements of Earnings
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
REVENUE
Rents $ 1,201,595 1,200,960 4,034,705 3,604,226
Interest 29,021 49,495 85,400 159,969
1,230,616 1,250,455 4,120,105 3,764,195
EXPENSES
Property expenses:
Real estate taxes 152,955 170,150 458,865 520,286
Repairs and maintenance 132,259 191,353 317,128 380,283
Utilities 33,309 25,963 82,611 94,968
Management fee 55,442 55,980 187,316 167,217
Insurance 10,757 12,039 33,554 35,021
Other 37,107 35,277 151,102 108,187
Property expenses, excluding depreciation 421,829 490,762 1,230,576 1,305,962
Depreciation 206,985 200,045 624,346 606,307
Total property expenses 628,814 690,807 1,854,922 1,912,269
Interest 343,753 359,525 1,039,252 1,087,234
Administrative fee 63,909 64,536 191,727 192,330
Other administrative 81,265 69,482 300,808 176,735
1,117,741 1,184,350 3,386,709 3,368,568
Net earnings $ 112,875 66,105 733,396 395,627
Basic and diluted net earnings per share $ .03 .02 .19 .10
Distributions to shareholders $ 310,400 310,400 931,200 931,200
Distributions to shareholders per share $ .08 .08 .24 .24
</TABLE>
<TABLE>
USP REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(unaudited)
<S> <C> <C>
Nine Months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Rents collected $ 4,090,636 3,675,732
Interest received 85,400 167,506
Payments for operating expenses (1,662,072) (1,677,658)
Interest paid (1,036,728) (1,084,710)
Net cash provided by operating activities 1,477,236 1,080,870
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collections on mortgage loans receivable - 22,130
Capital expenditures (28,280) (1,011,825)
Other, net 12,430 (26,069)
Net cash used by investing activities (15,850) (1,015,764)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal portion of scheduled
mortgage loan payments (326,759) (365,222)
Distributions paid to shareholders (931,200) (931,200)
Net cash used by financing activities (1,257,959) (1,296,422)
Net increase (decrease) in cash and cash equivalents 203,427 (1,231,316)
Cash and cash equivalents at beginning of period 1,606,427 1,733,640
Cash and cash equivalents at end of period $ 1,809,854 502,324
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 733,396 395,627
Add (deduct) reconciling adjustments:
Depreciation 624,346 606,307
Amortization 2,524 2,524
Decrease in rent and other receivables 67,285 76,965
Decrease (increase) in prepaid and deferred expenses 57,940 (63,823)
Decrease (increase) in taxes held in escrow (6,451) 49,711
Increase in accounts payable
and accrued expenses 58,581 13,973
Decrease in due to affiliates (49,031) (2,492)
Increase (decrease) in advance rents (11,354) 2,078
Net cash provided by operating activities $ 1,477,236 1,080,870
</TABLE>
NOTES TO FINANCIAL
STATEMENTS
Note 1: The unaudited interim financial statements are prepared in
accordance with generally accepted accounting principles and include all
adjustments of a normal recurring nature necessary for a fair presentation of
the financial position and quarterly results. Interim reports should be read
in conjunction with the audited financial statements and related notes included
in the 1997 Annual Report.
Note 2: Shareholders' equity, December 31, 1997 $ 15,869,948
Net earnings 733,396
Distributions to shareholders (931,200)
Shareholders' equity, September 30, 1998 $ 15,672,144
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
USP Real Estate Investment Trust's net earnings for the three
and nine months ended September 30, 1998 were $112,875 ($.03
per share) and $733,396 ($.19 per share), respectively,
compared to $66,105 ($.02 per share) and $395,627 ($.10 per
share) for the same periods in 1997. (All per share amounts
are on a basic and diluted basis.) The increase in year-to-
date net earnings from 1997 to 1998 continues to be primarily
the result of higher revenues.
The Trust's rental income for the first nine months of 1998
increased by $430,000, or 12%, from the first nine months of
1997. Rents at Geneva Square in Lake Geneva, Wisconsin
increased significantly due to the receipt of settlements
totaling $333,000, previously reserved as uncollectible, from
P.W. Enterprises and MMM Foods, both former tenants. Rents at
Kingsley Square in Orange Park, Florida increased by $180,000
due to the Trust's ability to secure OfficeMax as an anchor
tenant in 1997. Rents at First Tuesday in Carrollton, Georgia
decreased by $88,000 in 1998 primarily due to the lack of base
rent and percentage rents (additional rents based on tenant
sales) received from Belk Rhodes in 1997. Belk Rhodes vacated
49,836 square feet of space in July 1997, though continued to
pay base rent. On July 30, 1998, this space was occupied by
Martin's Family Clothing, pursuant to a ten year lease. At
September 30, 1998, overall leased occupancy of the Trust's
portfolio was 88%. Interest income for the first nine months
of 1998 was $75,000 less than 1997 due to a lower balance of
funds available for investment and a lower average interest
rate earned on the available funds.
Total property expenses excluding depreciation, as a
percentage of rental income, decreased from 36% in 1997 to 30%
in 1998. Real estate taxes decreased by $61,000 from 1997
primarily due to the Trust's success in appealing the tax
assessments and reducing the assessed values at Geneva Square
and several of the other properties. Repairs and maintenance
decreased by $63,000 during the first nine months of 1998
primarily due to tenant remodeling expenses along with parking
lot and roof repairs incurred in 1997. Utilities decreased by
$12,000, or 13%, during the first nine months of 1998
primarily due to the mild winter experienced at Geneva Square.
Management fees increased by 12% from 1997 due to the increase
in rents as mentioned above. Other property expenses
increased by $43,000 primarily due to unamortized lease
commissions at First Tuesday (pertaining to Luria's, a former
tenant) being written off in 1998 and due to various insurance
claims totaling $12,000 being paid in the first quarter of
1998 at Geneva Square.
Other administrative expenses increased by $124,000 during the
first nine months of 1998 compared to the same period last
year. The increase is primarily due to legal expenses
incurred during 1998 in connection with the Trust's efforts to
maximize shareholder value. As previously reported, the Board
of Trustees has been exploring various strategic alternatives
with the intent to maximize shareholder value. Raymond James
& Associates, Inc. has been engaged as financial advisor to
assist the Trust with these ongoing efforts.
In March 1998, Yamaha Motor Corporation, the sole tenant at
Yamaha Warehouse in Cudahy, Wisconsin, exercised both of their
remaining one year options in order to renew their lease for
two more years. The lease now expires in June 2000. As
reported last quarter, strong winds damaged a portion of the
building. The building has been repaired and all repairs were
covered by the tenant's insurance proceeds.
Capital resources of the Trust consist of equity in real
estate investments. Properties are maintained in good
condition and adequate insurance coverage is provided.
Liquidity is represented by cash and cash equivalents
($1,809,854 at September 30, 1998) as well as cash flow from
the continued operation of the Trust's real estate portfolio,
which is considered sufficient to meet current obligations.
The Trust is continuing its initiative to refinance the real
estate properties. The North Park Plaza and Mendenhall
Commons mortgages mature on March 1, 1999 and need to be
refinanced. Since the current interest rate environment is
favorable and prepayment penalties associated with most of the
other mortgage loans are relatively low, the Trustees believe
it is in the best interest of the shareholders to attempt a
refinancing of the entire portfolio. The mortgage on Yamaha
would be excluded due to its high prepayment penalty.
The Board of Trustees declared a third quarter distribution of
$.08 per share, payable November 16, 1998 to shareholders of
record November 3, 1998. Distributions to shareholders
continue to be dependent upon earnings, cash flow, financial
condition and other factors reviewed by the Board of Trustees.
YEAR 2000 ISSUE
Management of the Trust is well aware of the issues and
concerns surrounding the potential problems associated with
computer systems that may not be able to distinguish the year
2000 from the year 1900, typically referred to as "the year
2000 issue." The Trust does not own or use any information
technology directly, because all services necessary to conduct
the day-to-day operations of the Trust are performed by AEGON
USA Realty Advisors, Inc. and its affiliates (the Advisor).
Nevertheless, the Trust could be adversely affected if
computer systems, as well as certain embedded technology, used
by the Advisor, tenants, vendors, financial institutions and
other third parties do not properly process and calculate date-
related information and data from and after January 1, 2000.
The most significant risks associated with year 2000 issues
that could negatively impact the Trust include failure of
tenants to pay rent, failure by the Trust to pay its own
obligations, failure of various building systems at the
Trust's real estate properties, failure of any and all third
parties to provide services and failure of any and all
information, accounting and recordkeeping systems or
processes. The reasons for such failures could range from a
simple inability to process electronic information in a timely
manner to a total business failure somehow related to, or the
result of, the year 2000 issue.
The Advisor has developed plans to modify, upgrade and/or
replace portions of its information technology to ensure that
its computer systems will function properly in the year 2000
and thereafter, and is in process of obtaining reasonable
assurances that comparable steps are being taken by the
Trust's' other major service providers. The Advisor is
targeted to be year 2000 compliant by December 31, 1998 and to
conduct revalidation testing of its systems throughout 1999,
including the development of business continuity and
contingency plans.
The Trust is not expected to incur any direct costs associated
with year 2000 issues. Based on these efforts to date,
management of the Trust is not aware of any consequence of the
year 2000 issue that it believes would have a material effect
on the Trust's business, results of operations or financial
condition. There can be no assurance, however, that these
efforts will be sufficient to avoid any adverse impact to the
Trust.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1998.
SIGNATURE
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.
USP REAL ESTATE INVESTMENT TRUST
/s/ Alan F. Fletcher
Alan F. Fletcher
Vice President and Treasurer
(principal financial officer)
/s/ Roger L. Schulz
Roger L. Schulz
Controller
(principal accounting officer)
Dated: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000102438
<NAME> USP REAL ESTATE INVESTMENT TRUST
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,809,854
<SECURITIES> 0
<RECEIVABLES> 581,203
<ALLOWANCES> 226,931
<INVENTORY> 0
<CURRENT-ASSETS> 2,442,463
<PP&E> 40,722,496
<DEPRECIATION> 12,747,098
<TOTAL-ASSETS> 30,577,328
<CURRENT-LIABILITIES> 1,091,359
<BONDS> 13,813,825
0
0
<COMMON> 3,880,000
<OTHER-SE> 11,792,144
<TOTAL-LIABILITY-AND-EQUITY> 30,577,328
<SALES> 0
<TOTAL-REVENUES> 4,120,105
<CGS> 0
<TOTAL-COSTS> 1,854,922
<OTHER-EXPENSES> 492,535
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,039,252
<INCOME-PRETAX> 733,396
<INCOME-TAX> 0
<INCOME-CONTINUING> 733,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 733,396
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
