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 December 31, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
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. [ ]
The aggregate market value of the voting shares of the registrant
held by non-affiliates at March 5, 1999 was $8,321,765.
The number of shares of beneficial interest of the registrant
outstanding at March 5, 1999 was 3,880,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Part I.
Item I. 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
("REIT") 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 6 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 does not acquire
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.
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 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
mortgage indebtedness and net assets of the Trust as of December
31, 1998 were $10,897,933 and $26,792,268, 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.
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 a strong occupancy of Trust properties
during the last three years. Overall leased occupancy for the
entire portfolio was 96% at December 31, 1998, compared to 87% at
December 31, 1997 and 88% at December 31, 1996.
Item 2. Properties
Real Estate Investments
The Trust has direct ownership of six commercial real estate
properties. These real estate investments are diversified
geographically with 69% of the portfolio located in the
Southeast, 25% in the Southwest and 6% 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, 1998, five commercial properties were being leased on a
managed basis and one property was leased on a net lease basis.
The five managed commercial properties consisted of four shopping
centers and one business park. Managed commercial properties
comprised 94% of the Trust's investment portfolio in 1998,
compared to 95% in 1997 and 1996. Managed commercial properties
provided 91% of USP's annual revenue in 1998, compared to 89% in
1997 and 88% in 1996. All managed properties have at least one
tenant representing 22% or more of the revenue from that
property. The Kroger Company at Mendenhall Commons in Memphis,
Tennessee and Safeway at North Park Plaza in Phoenix, Arizona
each represent approximately 12% of the total revenue of the
Trust under leases expiring in 2012 and 2018, respectively.
The net leased property is an office/warehouse which represented
approximately 6% of the Trust's investment portfolio in 1998,
compared to 5% in 1997 and 1996, and generated 7% of the Trust's
annual revenue in 1998, 1997, and in 1996. Trust properties and
operations are summarized in the table on the next page.
The Trust's real estate investments are not expected to be
substantially affected by current federal, state or local laws
and regulations establishing ecological or environmental
restrictions on the development and operations of such property.
However, the enactment of new provisions or laws may reduce the
Trust's ability to fulfill its investment objectives.
The Trust's properties and operations are summarized in the table
below.
Real Estate Cost 1998 Revenue
at December 31, 1998
Amount Percent Amount Percent
Managed
Kingsley Square
Orange Park, Florida $ 5,743,758 17% $ 775,274 15%
First Tuesday Mall
Carrollton, Georgia 7,168,583 21 820,553 16
Mendenhall Commons
Memphis, Tennessee 8,795,032 25 976,643 18
North Park Plaza
Phoenix, Arizona 8,680,330 25 1,135,596 21
Presidential Drive
Atlanta, Georgia 1,922,882 6 327,317 6
32,310,585 94 4,035,383 76
Net Leased
Yamaha Warehouse
Cudahy, Wisconsin 2,197,937 6 371,100 7
Properties sold --- --- 802,144 15
Trust operations --- --- 123,328 2
$ 34,508,522 100% $ 5,331,955 100%
<TABLE>
<S> <S> <C> <C> <C> <C>
Largest Tenant
Percent of Percent
Name of Lease Property of Trust
Tenant Expiration Revenue Revenue Revenue
Managed
Kingsley Square
Orange Park, Florida OfficeMax 2012 $246,584 32% 5%
First Tuesday Mall
Carrollton, Georgia Winn Dixie 2004 188,152 23 3
Mendenhall Commons
Memphis, Tennessee Kroger 2012 644,083 66 12
North Park Plaza
Phoenix, Arizona Safeway 2018 625,034 55 12
Presidential Drive
Atlanta, Georgia H. S. Photo 2000 74,849 23 1
1,778,702 33
Net Leased
Yamaha Warehouse
Cudahy, Wisconsin Yamaha Motor Corp. 2000 371,100 100 7
$2,149,802 40%
</TABLE>
Recent Transactions
In December 1998, the Trust sold Geneva Square in Lake Geneva,
Wisconsin for cash of $4,500,000. The Trust paid selling
expenses of $20,165 and retired mortgage indebtedness on the
property of $2,803,790. Gain on the sale was $528,282. Earlier
in the year, the Trust received $248,000 from P.W. Enterprises, a
tenant at Geneva Square, in final settlement of a bankruptcy
claim filed in 1996.
During 1998, the Safeway lease at North Park Plaza in Phoenix,
Arizona was extended to 2018 and modified to include an
additional 18,000 square feet vacated in 1996 by Staples, Inc.
Safeway is in the process of expanding into the former Staples
space and is also remodeling their existing space. Safeway is
responsible for the entire cost of the remodeling project.
At First Tuesday Mall in Carrollton, Georgia, the Trust had a
lease with Belk Rhodes for 49,836 square feet. Belk Rhodes
vacated this space in 1997 but 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 Kingsley Square in Orange Park, Florida, the Trust has a lease
with Publix Super Markets for 34,400 square feet. In 1997 the
Trust received written notice from Publix that they planned to
close their store and move to a new location. It is anticipated
that Publix will vacate their space at the end of March 1999.
The Trust anticipates receiving rent from Publix for the
remainder of the lease term, which expires in February 2000. The
Trust is attempting to secure a new tenant for this space.
The Yamaha Warehouse facility in Cudahy, Wisconsin has a lease
with Yamaha Motor Corporation, its sole tenant. In March 1998,
Yamaha exercised both of their remaining one-year options in
order to renew their lease for two more years. The lease expires
in June 2000. The Trust will be seeking a new lease with Yamaha
or some other prospective tenant.
On February 1, 1999, the Trust prepaid the mortgage loan on
Presidential Drive Business Park. The prepayment amount,
including a 1% prepayment fee of $7,065 to the lender, was
$713,548. On February 5, 1999, the Trust prepaid the mortgage
loan on First Tuesday Mall. The prepayment amount, including a
1% prepayment fee of $4,636 to the lender, was $468,281.
On March 1, 1999, the mortgage loans payable on Mendenhall
Commons and North Park Plaza matured, with remaining principal
balances of $3,930,120 and $3,944,537, respectively. The Trust
refinanced these properties with Monumental Life Insurance
Company, an affiliate of AEGON Realty Advisors. The loan amount
for Mendenhall is $3,925,000 with monthly debt service of
$30,430. The loan amount for North Park is $3,940,000 with
monthly debt service of $30,547. Debt service on both loans
include principal amortization over twenty years and interest at
an initial rate of 7%, which will be adjusted quarterly based on
three month LIBOR plus 2%. The loans mature in one year and may
be prepaid at any time without penalty.
The operating results and financial condition of the Trust
greatly depend upon all tenants continuing to pay rent, and the
Trust's ability to renew expiring tenant leases and obtain new
leases at competitive rental rates.
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. While a number of possibilities are being
considered, there is no assurance any transaction will be
consummated.
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 Stockholders 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.
Identification of Market and Price Range
At March 5, 1999, the Trust had 3,880,000 shares of beneficial
interest issued and outstanding to 1,918 shareholders of record.
The Trust's shares of beneficial interest are traded over-the-
counter on the Nasdaq SmallCap Market under the symbol USPTS. At
March 5, 1999, the Trust's per share high and low sales prices
were $3.9375 and $3.875, respectively, as obtained from
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.
Market Price Range
Over-the-Counter Sales Prices
Quarter Ended High Low Close
1998
March 31 4 3/4 4 1/8 4 1/2
June 30 5 4 5/16 4 5/8
September 30 7 1/2 3 7/8 5 5/8
December 31 6 1/4 3 3/4 3 7/8
1997
March 31 4 11/16 4 1/8 4 1/2
June 30 4 7/8 3 7/8 4 3/4
September 30 5 4 1/4 4 5/8
December 31 5 3/8 4 4 1/8
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.
Dividend Character
1998 1997 1996
Ordinary Income 76.21% 50.75% 86.10%
Capital Gains 23.79% --- ---
Return of Capital --- 49.25% 13.90%
Total 100.00% 100.00% 100.00%
Distributions paid, per share $.32 $.32 $.32
Advisor
AEGON USA Realty Advisors, Inc.
Cedar Rapids, Iowa
Stock Transfer and Dividend Reinvestment Agent
USP Real Estate Investment Trust
c/o Boston EquiServe, L.P.
P.O. Box 8200
Boston, MA 02266-8200
Telephone: 1-800-426-5523
10-K Information
The 1998 Form 10-K filed with the Securities and Exchange
Commission (exclusive of certain exhibits) is available without
charge upon written request to Roger L. Schulz, Controller, USP
Real Estate Investment Trust, 4333 Edgewood Road N.E., Cedar
Rapids, Iowa 52499-5441.
Item 6. Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31 1998 1997 1996 1995 1994
Revenue $ 5,331,955 5,012,087 5,217,313 5,618,014 6,179,495
Earnings from Operations $ 943,975 637,129 946,230 1,100,149 934,605
Net Gain on Sale or Disposition of Property $ 528,282 259,157 --- --- 788,588
Net Earnings $ 1,472,257 896,286 946,230 1,100,149 1,723,193
Distributions to Shareholders $ 1,241,600 1,241,600 1,241,600 1,202,800 1,008,800
Per Share*
Earnings from Operations $ .24 .16 .24 .28 .24
Basic and Diluted Net Earnings $ .38 .23 .24 .28 .44
Distributions to Shareholders $ .32 .32 .32 .31 .26
Real Estate and Mortgage
Loans Receivable $ 23,816,859 28,571,464 29,627,786 30,434,137 31,237,604
Total Assets $ 27,932,493 31,104,418 32,207,728 32,853,270 34,333,593
Mortgage Loans Payable $ 10,897,933 14,140,584 14,819,479 15,271,385 16,853,303
Total Liabilities $ 11,831,888 15,234,470 15,992,466 16,342,638 17,720,310
Shareholders' Equity $ 16,100,605 15,869,948 16,215,262 16,510,632 16,613,283
*Per share amounts for Earnings from Operations and Basic and
Diluted 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.
</TABLE>
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."
Results of Operations
The Trust owns shopping centers, an office park and an office
warehouse facility in six U.S. cities. The Trust's properties
continue to compete with centers and office buildings of similar
size, tenant mix and location. As of December 31, 1998, the
combined leased occupancy of the Trust's six properties was 96%.
Operating results in the forthcoming year will be influenced by
the ability of current tenants to continue paying rent, and the
Trust's ability to renew expiring tenant leases and obtain new
leases at competitive rental rates.
The Trust sold Geneva Square in Lake Geneva, Wisconsin on
December 22, 1998 for $4,500,000, recognizing a gain on the sale
of $528,282. One of the anchor tenants at Geneva Square filed
for bankruptcy and closed its 63,146 square foot store in 1996,
representing 44% of the square feet at Geneva Square. Due to the
size of this vacant space in relation to the demographics of the
Lake Geneva real estate market, the Trust was unable to locate a
suitable replacement tenant. This vacant space had a negative
impact on the Trust's cash flow, and along with the prospect of a
competing center to be built nearby, led the Trust to market the
property for sale. The Trust was successful in selling the
property in a short period of time.
1998 compared to 1997
The Trust's net earnings for the year ended December 31, 1998
were $1,472,257 ($.38 per share) compared to $896,286 ($.23 per
share) for the year ended December 31, 1997. The net earnings
for 1998 include a net gain on sale of $528,282 ($.14 per share)
from the sale of Geneva Square Shopping Center in December 1998.
The net earnings for 1997 include a net gain of $259,157 ($.07
per share) realized from a previously deferred installment sale.
(All per share amounts are on a basic and diluted basis.) The
increase in net earnings is primarily due to the gain from the
sale of Geneva Square and rent settlements collected in 1998 from
two previous tenants at Geneva Square.
Rental income was $5,218,707 in 1998 compared to $4,802,974 in
1997. This increase of $415,733 was primarily due to the receipt
of settlements in the amount of $333,000 from two previous
tenants at Geneva Square. Rental income increased by $175,415 at
Kingsley Square in Orange Park, Florida due to OfficeMax, which
began paying rent in May 1997. Rents at North Park Plaza
Shopping Center in Phoenix, Arizona increased by $86,519 but was
offset by a $78,228 decrease at First Tuesday Mall in Carrollton,
Georgia.
Interest income was $113,248 in 1998 compared to $209,113 in
1997, a decrease of 46% due a lower balance of funds available
for investment.
Property expenses before depreciation were $1,634,237 in 1998
compared to $1,705,298 in 1997, representing 31% of rental income
for 1998 and 36% of rental income for 1997. Real estate taxes
decreased by 8% as all properties experienced a reduction in
property taxes. Repairs and maintenance expenses decreased by
$102,978 or 19% due to tenant improvements made in 1997. Other
property expenses increased by $66,132 or 43% primarily due to an
increase in lease commissions, particularly at First Tuesday
where unamortized lease commissions pertaining to Luria's, a
former tenant, were written off in 1998.
Interest expense declined by $68,306 from 1997 to 1998 due to the
normal amortization of mortgage loans payable and due to the
underlying mortgage loan on College Square, which was assigned in
December 1997. Other administrative expenses increased by
$128,517 in 1998 primarily due to legal fees 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.
1997 compared to 1996
The Trust's net earnings for the year ended December 31, 1997
were $896,286 ($.23 per share) compared to $946,230 ($.24 per
share) for the year ended December 31, 1996. The net earnings
for 1997 include a realized gain on sale of $259,157 ($.07 per
share), previously deferred from the installment sale of College
Square Shopping Center in 1990. (All per share amounts are on a
basic and diluted basis.) The decrease in net earnings from 1996
to 1997 was primarily due to lower revenue and an increase in
repairs and maintenance expenses.
Rental income was $4,802,974 in 1997 compared to $4,965,259 in
1996. This decline of $162,285 was primarily due to several
tenants who experienced financial difficulties and vacated their
space. Rental income declined by $171,000 at Geneva Square in
Lake Geneva, Wisconsin and by $103,000 at Kingsley Square in
Orange Park, Florida. Rents at Geneva Square decreased primarily
due to P.W. Enterprises filing a Chapter 11 reorganization plan
and vacating their space in January 1996 and MMM Foods
discontinuing their land lease rental payment in October 1996.
Rents decreased at Kingsley Square primarily due to Luria's
discontinuing their rent payments at the end of August 1996. The
Trust has leased the space formerly occupied by Luria's to
OfficeMax, which began paying rent in May 1997. The reduction in
rental income from the above properties was partially offset by
an increase in rents at Mendenhall Commons Shopping Center in
Memphis, Tennessee and Presidential Drive Business Park in
Atlanta, Georgia due to an increase in expense recoveries
(additional rents) and fewer rent write-offs.
Interest income was $209,113 in 1997 compared to $252,054 in
1996, a decrease of 17%, due to a lower balance of funds
available for investment.
Property expenses before depreciation were $1,705,298 in 1997
compared to $1,609,749 in 1996, representing 36% of rental income
for 1997 and 32% of rental income for 1996. Repairs and
maintenance increased by $171,000 or 45% due to tenant remodeling
expenses along with parking lot, sidewalk, and roof repairs. The
increase in repairs and maintenance was partially offset by a
decrease in other property expenses which declined from $236,000
in 1996 to $153,000 in 1997. The decline in other property
expenses in 1997 is primarily due to substantial legal fees
incurred in 1996 related to the bankruptcy of P.W. Enterprises,
litigation with former tenants, property appraisals and various
consulting expenses.
Interest expense declined by $48,000 from 1996 to 1997 due to the
normal amortization of mortgage loans payable. Other
administrative expenses increased by $58,000 due to the
engagement of Raymond James and Associates as financial advisor
to assist the Trust with its ongoing efforts to maximize
shareholder value, and legal expenses in relation to these
efforts.
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 matured on
December 20, 1997 and had yielded 9.5% to the Trust. Upon
collection of the remaining principal balance of these loans in
December 1997, the Trust assigned the underlying mortgage loan
payable on College Square (which matures in December 1999) to the
mortgagee. As a result of the assignment, the payoff on the
College Square mortgage loan receivable was reduced by the
outstanding mortgage balance on the underlying College Square
mortgage loan payable.
Cash Flow and Funds from Operations
The Trust has for several years used "funds from operations" as a
measurement of operating performance. Funds from operations is
defined by the Trust as earnings from operations plus
depreciation expense. Funds from operations does not represent
operating income or cash flows from operations as defined by
generally accepted accounting principles, and should not be
construed as an alternative to operating income as an indicator
of operating performance or to cash flows as a measure of
liquidity. Management generally considers funds from operations
to be a useful financial performance measure which, together with
earnings, cash flows and other information, may be used by
investors to evaluate the Trust. Funds from operations as
presented by the Trust may not be comparable to similarly titled
measures reported by other companies. The Trust's funds from
operations for the three years ended December 31, 1998 and other
property information are presented on the next page.
<TABLE>
<S> <C> <C> <C>
Sq. Ft.
Size Lease Expiring
Name and Location (Sq. Ft.) Expiration In 1999
Managed
Kingsley Square, Orange Park, Florida 115,025 1999-2012 5,225
First Tuesday Mall, Carrollton, Georgia 180,371 1999-2008 12,025
Mendenhall Commons, Memphis, Tennessee 80,184 1999-2012 2,900
North Park Plaza, Phoenix, Arizona 100,748 1999-2018 6,297
Presidential Drive Business Park, Atlanta, Georgia 62,445 1999-2003 14,545
538,773 40,992
Net Leased
Yamaha Warehouse, Cudahy, Wisconsin 140,040 2000 ---
Total 678,813 40,992
</TABLE>
<TABLE>
<S> <C> <C> <C>
Funds from operations*
Name and Location 1998 1997 1996
Managed
Kingsley Square, Orange Park, Florida $ 456,334 211,012 395,361
First Tuesday Mall, Carrollton, Georgia 443,774 594,006 553,802
Mendenhall Commons, Memphis, Tennessee 256,895 320,796 320,673
North Park Plaza, Phoenix, Arizona 337,055 273,077 224,402
Presidential Drive Business Park, Atlanta, Georgia 153,081 124,227 125,145
1,647,139 1,523,118 1,619,383
Net Leased
Yamaha Warehouse, Cudahy, Wisconsin 217,383 208,134 206,014
Total 1,864,522 1,731,252 1,825,397
Properties sold 334,837 (58,464) 75,381
Non-property Trust operations, net (424,052) (229,326) (143,650)
Funds from operations $ 1,775,307 1,443,462 1,757,128
*Earnings from operations plus depreciation
</TABLE>
Liquidity and Capital Resources
The Trust's capital resources consist of its current equity in
real estate investments. The Trust maintains its properties in
good condition and provides adequate insurance coverage.
Liquidity is represented by cash and cash equivalents ($3,423,296
at December 31, 1998) and the continued operation of the Trust's
real estate portfolio. This liquidity is considered sufficient
to meet current obligations, which include capital expenditures.
During 1998, the Trust received net proceeds of $1,618,678 from
the sale of Geneva Square.
Net cash provided by operating activities, as shown in the
Statements of Cash Flows, was $1,820,940 for the year ended
December 31, 1998. Major applications of cash in 1998 included
$1,241,600 for distributions to shareholders and $3,242,651 in
principal payments and repayments on mortgage loans payable. The
Trust's debt service commitments for mortgage loans payable are
described in Note 7 to the Financial Statements.
On February 1, 1999, the Trust prepaid the mortgage loan on
Presidential Drive Business Park. The prepayment amount,
including a 1% prepayment fee of $7,065 to the lender, was
$713,548. On February 5, 1999, the Trust prepaid the mortgage
loan on First Tuesday Mall. The prepayment amount, including a
1% prepayment fee of $4,636 to the lender, was $468,281.
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.
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. As of December 31, 1998, substantially all of
the Advisor's mission critical systems were year 2000 compliant.
The Advisor will continue conducting revalidation testing of its
systems throughout 1999, including the development, review, and
revision of business resumption and continuity 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 8. Financial Statements and Supplementary Data
<TABLE>
Balance Sheets
<S> <C> <C>
December 31,
1998 1997
Assets
Real estate
Land $ 9,189,243 9,666,409
Buildings and improvements 25,319,279 31,027,807
34,508,522 40,694,216
Less accumulated depreciation (10,691,663) (12,122,752)
23,816,859 28,571,464
Cash and cash equivalents 3,423,296 1,606,427
Rents and other receivables 397,822 421,637
Prepaid and deferred expenses 275,653 351,874
Taxes held in escrow 18,863 153,016
$ 27,932,493 31,104,418
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 10,897,933 14,140,584
Accounts payable and accrued expenses 418,204 560,917
Due to affiliates 115,722 97,473
Distribution declared 310,400 310,400
Tenant deposits 78,701 80,818
Other 10,928 44,278
11,831,888 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
Additional paid-in capital, net of cumulative
distributions in excess of earnings
of $16,411,501 in 1998 and 1997 11,989,948 11,989,948
Undistributed net earnings 230,657 ---
16,100,605 15,869,948
$ 27,932,493 31,104,418
See the accompanying notes to financial statements.
</TABLE>
<TABLE>
Statements of Earnings
<S> <C> <C> <C>
Years Ended December 31,
1998 1997 1996
Revenue
Rents $ 5,218,707 4,802,974 4,965,259
Interest 113,248 209,113 252,054
5,331,955 5,012,087 5,217,313
Expenses
Property expenses:
Real estate taxes 561,818 610,322 595,318
Repairs and maintenance 446,787 549,765 378,432
Utilities 113,939 122,754 123,585
Management fee 241,877 221,935 230,045
Insurance 50,299 47,137 46,411
Other 219,517 153,385 235,958
Property expenses, excluding depreciation 1,634,237 1,705,298 1,609,749
Depreciation 831,332 806,333 810,898
Total property expenses 2,465,569 2,511,631 2,420,647
Interest 1,375,031 1,443,337 1,491,534
Administrative fee 204,587 205,714 202,378
Other administrative 342,793 214,276 156,524
4,387,980 4,374,958 4,271,083
Earnings from operations 943,975 637,129 946,230
Net gain on sale of property 528,282 259,157 ---
Net earnings $ 1,472,257 896,286 946,230
Basic and diluted net earnings per share $ .38 .23 .24
Distributions to shareholders $ 1,241,600 1,241,600 1,241,600
Distributions to shareholders per share $ .32 .32 .32
See the accompanying notes to financial statements.
</TABLE>
<TABLE>
Statements of Cash Flows
<S> <C> <C> <C>
Years Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Rents collected $ 5,219,180 4,825,238 5,167,812
Interest received 113,248 216,650 250,878
Payments for operating expenses (2,139,822) (2,283,645) (1,889,840)
Interest paid (1,371,666) (1,439,972) (1,484,924)
Net cash provided by operating activities 1,820,940 1,318,271 2,043,926
Cash flows from investing activities:
Proceeds from property sales, net of closing costs 4,479,835 --- ---
Capital expenditures (28,280) (1,010,937) (31,713)
Principal collections on mortgage loans receivable --- 28,094 27,166
Principal repayment on mortgage loans receivable --- 1,298,008 ---
Other, net 28,625 (34,135) 17,144
Net cash provided by investing activities 4,480,180 281,030 12,597
Cash flows from financing activities:
Principal portion of scheduled mortgage loan payments (438,861) (484,914) (451,906)
Principal prepayment on mortgage loans payable (2,803,790) --- ---
Distributions paid to shareholders (1,241,600) (1,241,600) (1,241,600)
Net cash used by financing activities (4,484,251) (1,726,514) (1,693,506)
Net increase (decrease) in cash and cash equivalents 1,816,869 (127,213) 363,017
Cash and cash equivalents at beginning of year 1,606,427 1,733,640 1,370,623
Cash and cash equivalents at end of year $ 3,423,296 1,606,427 1,733,640
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 1,472,257 896,286 946,230
Gain on sale of property (528,282) (259,157) ---
Earnings from operations 943,975 637,129 946,230
Add (deduct) reconciling adjustments:
Depreciation 831,332 806,333 810,898
Amortization 3,365 3,365 6,610
Decrease in rents and other receivables 33,823 26,608 171,497
Decrease (increase) in prepaid and deferred expenses 32,106 (80,011) 17,046
Decrease (increase) in taxes held in escrow 134,153 (6,145) (4,093)
Increase (decrease) in accounts payable and accrued expenses (142,713) (123,228) 57,690
Increase in due to affiliates 18,249 51,027 8,168
Increase (decrease) in advance rents (33,350) 3,193 29,880
Net cash provided by operating activities $ 1,820,940 1,318,271 2,043,926
See the accompanying notes to financial statements.
</TABLE>
<TABLE>
Statements of Shareholders' Equity
<S> <C> <C> <C> <C>
Years Ended December 31, 1998, 1997 and 1996
Shares of Additional Undistributed Total
Beneficial Paid-In Net Shareholders'
Interest Capital Earnings Equity
Balance at January 1, 1996 $ 3,880,000 12,018,890 611,742 16,510,632
Net earnings --- --- 946,230 946,230
Distributions to shareholders --- --- (1,241,600) (1,241,600)
Balance at December 31, 1996 $ 3,880,000 12,018,890 316,372 16,215,262
Net earnings --- --- 896,286 896,286
Distributions to shareholders --- (28,942) (1,212,658) (1,241,600)
Balance at December 31, 1997 $ 3,880,000 11,989,948 --- 15,869,948
Net earnings --- --- 1,472,257 1,472,257
Distribution to Shareholders --- --- (1,241,600) (1,241,600)
Balance at December 31, 1998 $ 3,880,000 11,989,948 230,657 16,100,605
See the accompanying notes to financial statements.
</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.
The Trust records impairment losses when indicators of impairment
are present and the undiscounted cash flows estimated to be
generated by the real estate are less than their carrying amount.
If real estate is considered to be impaired, it's carrying amount
is written down to fair value and recognized as a net loss on
property in the statement of earnings.
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 $224,938 in
1998 and $321,764 in 1997. 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 Statement of Financial
Accounting Standard No. 66, Accounting for Sales of Real Estate.
Deferred gains are recognized as income using the installment
method.
Since the Trust has no potentially dilutive securities
outstanding, basic and diluted net earnings per share in
accordance with Statement of Financial Accounting Standard No.
128, Earnings per Share, are the same.
During 1997, the Financial Accounting Standards Board issued
Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information. Statement No. 131 establishes standards
for reporting information about operating segments, products and
markets. Generally, Statement No. 131 requires financial
information to be reported on the basis on which it is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement, which was
required to be adopted by the Trust during 1998, had no impact on
the financial statements as the Trust has only one operating
segment, which involves the direct ownership of commercial real
estate properties substantially on a managed basis.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. The actual
results of the Trust could differ as a result of those estimates.
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standard No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of
fair value information about financial instruments.
The following methods and assumptions were used by the Trust in
estimating its fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts of cash and cash
equivalents approximates their fair values.
Mortgage loans payable: The fair values of mortgage loans payable
are estimated utilizing discounted cash flow analysis, using
interest rates reflective of current market conditions and the
risk characteristics of the loans.
The following sets forth a comparison of the fair values and
carrying values of the Trust's financial instruments subject to
the provisions of Statement of Financial Accounting Standard No.
107:
1998 1997
Carrying Carrying
Value Fair Value Value Fair Value
Assets
Cash and cash equivalents 3,423,296 3,423,296 1,606,427 1,606,427
Liabilities
Mortgage loan payable 10,897,933 11,265,751 14,140,584 14,885,253
3. 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
Subsequent
Amount of Buildings & Cost
Property Description Encumbrance Land Improvements Capitalized
Managed
Kingsley Square $ 429,527 450,000 3,311,660 1,982,098
Orange Park, FL
First Tuesday Mall 469,618 595,000 4,347,697 2,225,886
Carrollton, GA
Mendenhall Commons 3,935,041 3,134,692 5,597,340 63,000
Memphis, TN
North Park Plaza 3,949,314 4,635,147 4,018,353 26,830
Phoenix, AZ
Presidential Drive 709,391 344,582 1,424,300 154,000
Atlanta, GA
9,492,891 9,159,421 18,699,350 4,451,814
Net Leased
Yamaha Warehouse 1,405,042 26,195 755,756 1,415,986
Cudahy, WI
Total $ 10,897,933 9,185,616 19,455,106 5,867,800
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Amount at Which Carried
December 31, 1998
Life on
Which
Depreciation
Buildings & Accumulated Date Date is computed
Property Description Land Improvements Total Depreciation Built Acquired (in years)
Managed
Kingsley Square $ 450,000 5,293,758 5,743,758 2,607,761 1975-76 7/79 10-40
Orange Park, FL
First Tuesday Mall 600,392 6,568,191 7,168,583 3,677,400 1975-78 7/79 10-40
Carrollton, GA
Mendenhall Commons 3,134,692 5,660,340 8,795,032 1,385,212 1987 2/89 10-40
Memphis, TN
North Park Plaza 4,633,382 4,046,948 8,680,330 986,189 1963 2/89 10-40
Phoenix, AZ
Presidential Drive 344,582 1,578,300 1,922,882 631,136 1980 12/84 10-35
Atlanta, GA
9,163,048 23,147,537 32,310,585 9,287,698
Net Leased
Yamaha Warehouse 26,195 2,171,742 2,197,937 1,403,965 1971 2/72 15-40
Cudahy, WI
Total $ 9,189,243 25,319,279 34,508,522 10,691,663
</TABLE>
The activity in real estate and related depreciation for the
three years ended December 31, 1998 is summarized in the table
below.
<TABLE>
<S> <C> <C> <C>
Real Estate Years Ended December 31,
1998 1997 1996
Cost
Beginning of year $ 40,694,216 39,683,279 39,651,566
Additions during year
Improvements 28,280 1,010,937 31,713
Deductions during year
Property sales (6,213,974) --- ---
End of year $ 34,508,522* 40,694,216 39,683,279
Accumulated Depreciation
Beginning of year $ 12,122,752 11,316,419 10,505,521
Additions during year
Depreciation expense 831,332 806,333 810,898
Deductions during year
Property sales (2,262,421) --- ---
End of year $ 10,691,663 12,122,752 11,316,419
*The aggregate cost for federal income tax purposes is $34,642,232.
</TABLE>
Wholly owned managed properties with an aggregate cost of
$32,310,585 are leased to tenants pursuant to lease agreements
under which the Trust incurs normal real estate operating
expenses associated with ownership. Yamaha Warehouse, a wholly-
owned property with an aggregate cost of $2,197,937 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.
In 1998, the Trust incurred capital expenditures of $28,280 for
parking lot improvements at First Tuesday Mall. In 1997, the
Trust incurred capital expenditures of $1,010,937. The
improvements consisted of $833,526 for tenant build-outs
(including $770,526 for OfficeMax at Kingsley Square) and
$177,411 for parking lot and sidewalk improvements at First
Tuesday Mall and at Presidential Drive Business Park.
On December 22, 1998, the Trust sold Geneva Square, a 143,676
square foot shopping center located in Lake Geneva, Wisconsin.
The sale price was $4,500,000 from which the Trust paid selling
expenses of $20,165 and retired mortgage indebtedness on the
property of $2,803,790. Gain on the sale was $528,282.
4. 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. 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 and retained a mortgage payable on the property.
Accordingly, the gain on this sale was deferred. The mortgage
loans receivable matured on December 20, 1997 and had yielded
9.5% to the Trust. Upon maturity of these mortgage loans
receivable, the Trust assigned the underlying mortgage loan
payable on College Square to the mortgagee. As a result of the
assignment, the proceeds from the College Square mortgage loan
receivable were reduced by the outstanding mortgage loan payable
of $193,981.
The activity in mortgage loans receivable for the two years ended
December 31, 1997 (there was no activity in 1998) is summarized
in the table below.
Mortgage Loans Receivable
Years Ended December 31,
1997 1996
Principal
Beginning of year $ 1,520,083 1,547,249
Deductions during year
Principal collections (28,094) (27,166)
Principal repayment (1,491,989) ---
Balance at end of year --- 1,520,083
Deferred gain --- (259,157)
Balance, net of deferred gain $ --- 1,260,926
5. Cash and Cash Equivalents
At December 31, 1998, cash and cash equivalents consisted of cash
of $548 and a money market fund of $3,422,748. At December 31,
1997, cash and cash equivalents consisted of cash of $927 and a
money market fund of $1,605,500.
6. 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 cancelable by either
party upon 90 days written notice. Amounts paid to AEGON Realty
Advisors for administrative services were: $204,587 for 1998,
$205,714 for 1997, and $202,378 for 1996. No incentive fees were
paid in 1998, 1997 or 1996.
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 1998, 1997 or 1996.
AEGON USA Realty Management, Inc. ("AEGON Realty Management"), a
wholly-owned subsidiary of AEGON Realty Advisors, provided
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 cancelable upon a 30-day written notice from either party.
Amounts paid to AEGON Realty Management for property management
services were $241,877 for 1998, $221,935 for 1997, and $230,045
for 1996. On December 31, 1998, AEGON Realty Management was
merged with and into AEGON Realty Advisors and the property
management agreement was assumed by AEGON Realty Advisors.
AEGON Realty Advisors previously provided 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 $21,376, $21,658, and $21,904 in shareholder
service fees for 1998, 1997, and 1996, respectively. AEGON
Realty Advisors had subcontracted with Boston EquiServe, L.P., a
subsidiary of State Street Bank and Trust Company, for delivery
of these services. Effective January 1, 1999, the Trust
contracted directly with Boston EquiServe, L.P. and terminated
the agreement with AEGON Realty Advisors.
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
$74,575 in 1998, $77,779 in 1997, and $80,674 in 1996. In
addition, the mortgage on Geneva Square was with PFL Life
Insurance Company ("PFL"), an affiliate of AEGON Realty Advisors.
Interest paid on the mortgage was $228,562 in 1998, $235,842 in
1997, and $236,477 in 1996. Geneva Square was sold in December
1998.
On March 1, 1999, the mortgage loans on Mendenhall Commons and
North Park Plaza matured. The Trust obtained financing from
Monumental Life Insurance Company ("Monumental"), an affiliate of
AEGON Realty Advisors, for these properties. (See Note 7.)
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, 1998.
7. Mortgage Loans Payable
Mortgage loan obligations, secured by the real estate owned,
carry annual interest rates ranging from 9.25% to 10.5%.
On February 1, 1999, the Trust prepaid the mortgage loan on
Presidential Drive Business Park. The prepayment amount,
including a 1% prepayment fee to the lender, was $713,548. The
annual debt service on this mortgage was $107,604, including
interest at 10.25%. On February 5, 1999, the Trust prepaid the
mortgage loan on First Tuesday Mall. The prepayment amount,
including a 1% prepayment fee to the lender, was $468,281. The
annual debt service on this mortgage was $115,128, including
interest at 9.25%. These prepayment fees will be recorded in
1999's results of operations.
On March 1, 1999, the mortgage loans on Mendenhall Commons and
North Park Plaza matured, requiring principal repayments of
$3,930,120 and $3,944,537, respectively. On March 15, 1999, the
Trust refinanced these mortgage loans with Monumental. The loan
amount for Mendenhall is $3,925,000 with monthly debt service of
$30,430. The loan amount for North Park is $3,940,000 with
monthly debt service of $30,547. Debt service on both loans
include principal amortization over twenty years and interest at
an initial rate of 7%, which will be adjusted quarterly based on
three month LIBOR plus 2%. The loans mature in one year and may
be prepaid at any time without penalty. Information regarding
each mortgage is presented in the Schedule of Mortgage Loans on
Real Estate below.
<TABLE>
Schedule of Mortgage Loans on Real Estate
<S> <C> <C> <C> <C> <C> <C>
Periodic Payment Terms
Annual
Stated Final Principal Balloon
Property Description Date of Interest Maturity and Payment at Prepayment Penalty
Note Rate Date Interest Maturity Provisions*
Managed
Kingsley Square 2/77 10% 2/02 $ 76,370 $ --- Feb. 98 to Feb. 99 penalty
Orange Park, FL is 5.5%, declining .5% per year
(two loans) to 4% thereafter
8/75 10% 8/00 163,650 --- 5.0%
First Tuesday 4/79 9.25% 4/04 115,128 --- 1.0%
Carrollton, GA
Mendenhall Commons 2/89 10.25% 3/99 462,396 3,930,120 1.0%
Memphis, TN
North Park Plaza 2/89 10.5% 3/99 472,008 3,944,537 1.0%
Phoenix, AZ
Presidential Drive 2/80 10.25% 2/10 107,604 --- 1.0%
Atlanta, GA
1,397,156 7,874,657
Net Leased
Yamaha Warehouse 12/90 10.125% 1/01 159,627 1,366,721 Excess of loan rate over
Cudahy, WI U.S. Treasury Bill rate
$1,556,783 $9,241,378
*Percentages are of the principal amount at time of prepayment.
</TABLE>
Carrying
Face Amount Amount of
Property Description of Mortgage Mortgage at
at Acquisition Dec. 31, 1998
Managed
Kingsley Square $ 700,000 $ 198,728
Orange Park, FL
(two loans)
1,500,000 230,799
First Tuesday 1,120,000 469,618 ***
Carrollton, GA
Mendenhall Commons 4,300,000 3,935,041 ****
Memphis, TN
North Park Plaza 4,300,000 3,949,314 ****
Phoenix, AZ
Presidential Drive 968,935 709,391 **
Atlanta, GA
12,888,935 9,492,891
Net Leased
Yamaha Warehouse 1,500,000 1,405,042
Cudahy, WI
$14,388,935 $10,897,933
** The loan was prepaid on February 1, 1999.
*** The loan was prepaid on February 5, 1999.
**** The loan was refinanced on March 15, 1999.
The activity in mortgage loans payable for the three years ended
December 31, 1998 is summarized in the table below.
Mortgage Loans Payable
Years Ended December 31,
1998 1997 1996
Principal
Beginning of year $14,140,584 14,819,479 15,271,385
Deductions during year
Principal payments (438,861) (484,914) (451,906)
Prepayments and maturities (2,803,790) (193,981) ---
Balance at end of year $10,897,933 14,140,584 14,819,479
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, prior to
the 1999 transactions discussed above, are summarized as follows:
Amortized Payments
Year Payments at Maturity
1999 $345,637 $7,874,657
2000 291,617 ---
2001 207,007 1,366,721
2002 150,324 ---
2003 163,148 ---
8. Leased Assets
The Trust is lessor of various properties as described in Note 3.
Certain properties are leased to tenants under long-term, non-
cancelable operating lease agreements. Future minimum lease
rentals to be received under the terms of these lease agreements
are as follows:
Year Amount
1999 $ 3,570,408
2000 3,027,040
2001 2,509,523
2002 2,137,304
2003 1,998,654
2004-2018 13,990,315
Contingent rentals included in income received in connection with
operating leases were $136,446, $134,343, and $101,446 for the
years ended December 31, 1998, 1997 and 1996, respectively. Such
rentals are based principally on tenant sales in excess of
stipulated minimums. In 1998 and 1997 the Trust derived 10% or
more of its revenue from the Kroger Company at Mendenhall Commons
and from Safeway at North Park Plaza. The revenue from these
tenants was $644,083 and $625,034 in 1998, and $587,097 and
$581,028 in 1997, respectively. In 1996 the Trust derived 10% or
more of its revenue from the Kroger Company. The revenue from
this tenant for 1996 was $646,844.
In August 1994, Publix Supermarkets exercised an option to extend
their lease for 34,400 square feet at 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. Since Publix has not yet
remodeled their store and because they have given written notice
of their intent to close the store in 1999, it is unlikely this
amount will be paid. Accordingly, this amount has not been
recorded in the financial statements.
9. 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 1998, plus a portion of the Trust's first
distribution in 1999, were used to meet the Internal Revenue Code
distribution requirements for 1998. 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, 1998 the tax basis of real
estate was $133,710 in excess of the financial basis.
10. 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.
11. Selected Quarterly Financial Data (Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Quarter Ended Year Ended
Year 3/31 6/30 9/30 12/31 12/31
1998
Revenue $ 1,622,786(1) 1,266,703 1,230,616 1,211,850 5,331,955
Earnings from operations $ 512,257 108,264 112,875 210,579 943,975
Net gain on sale of property --- --- --- 528,282 528,282
Net earnings $ 512,257(1) 108,264 112,875 738,861 1,472,257
Basic and diluted net
earnings per share $ .13 .03 .03 .19 .38
1997
Revenue $ 1,277,422 1,236,318 1,250,455 1,247,892 5,012,087
Earnings from operations $ 163,220 166,302 66,105 241,502 637,129
Net gain on sale of property --- --- --- 259,157 259,157
Net earnings $ 163,220 166,302 66,105 500,659 896,286
Basic and diluted net
earnings per share $ .04 .04 .02 .13 .23
1996
Revenue $ 1,371,756 1,312,030 1,370,969 1,162,558 5,217,313
Earnings from operations $ 294,639 217,624 206,052 227,915 946,230
Net earnings $ 294,639 217,624 206,052 227,915 946,230
Basic and diluted net
earnings per share $ .08 .06 .05 .06 .24
(1) Revenues and net income for the first quarter of 1998 included a final settlement of $248,000 for a claim
as an unsecured creditor under a Chapter 11 reorganization plan and an $85,000 settlement for the termination
of a lease by a tenant in 1997.
</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, 1998 and 1997, and the
related statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended December
31, 1998. 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, 1998 and
1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Des Moines, Iowa
February 23, 1999
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information About Directors (referred to herein as "Trustees")
Certain information about the nominees for Trustee 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.)
On January 22, 1999, at a meeting of the USP Board of Trustees,
Richard M. Osborne was elected to serve as a Trustee. Gary A.
Downing, a Trustee and member of the Audit Committee, has decided
not to stand for re-election at the Annual Meeting.
PATRICK E. FALCONIO, age 57, has served as a Trustee and Chairman
of the Board since 1988. He retired on February 1, 1999 as an
Executive Vice President of AEGON USA, Inc. (insurance and
financial services), Cedar Rapids, Iowa, where he had been
employed since 1987. He was also a Director of AEGON USA Realty
Advisors, Inc. and various other subsidiaries of AEGON USA, Inc.
until his retirement.
EDWIN L. INGRAHAM, age 72, 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. Mr. Ingraham is a member of the Audit
Committee.
SAMUEL L. KAPLAN, age 62, has served as a Trustee of the Trust
since 1983. He has been engaged in the practice of law in
Minneapolis, Minnesota as a member of the firm of Kaplan,
Strangis and Kaplan, P.A. since 1978. Mr. Kaplan is a member of
the Audit Committee.
RICHARD M. OSBORNE, age 53, has served as a Trustee of the Trust
since January 1999. He is President and Chief Executive Officer
of OsAir, Inc., a company he founded in 1963. OsAir, Inc. is a
manufacturer of industrial gases for pipeline delivery and a real
property developer. Mr. Osborne is the sole Manager of Turkey
Vulture Fund XIII, Ltd. which acquires, holds, sells or otherwise
invests in all types of securities and other instruments. Mr.
Osborne is a Director and Chairman of the Board of Meridian Point
Realty Trust '83, a publicly-held real estate investment trust, a
Director of Central Reserve Life Corporation, a publicly-held
insurance holding company, a Director and Chairman of the Board
of Pacific Gateway Properties, Inc., a publicly-held real estate
company and a Director and Vice Chairman of the Board of GLB
Bancorp, Inc., a bank holding company.
Information About Executive Officers
Certain information about the executive officers of the Trust who
are not also nominees appears below. The term of office of each
executive officer will expire at the Annual Meeting of the Board
of Trustees, which will follow the Annual Meeting of
Shareholders. (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 48, 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 Chairman of the Board
and President of AEGON USA Realty Advisors, Inc.
MAUREEN DEWALD, age 48, 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.
ALAN F. FLETCHER, age 49, 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.
ROGER L. SCHULZ, age 37, has served as Controller and Assistant
Secretary of the Trust since 1995. He has been employed by AEGON
USA, Inc. since 1985 in various accounting and financial
reporting positions related to real estate investment activities
and is Manager - Financial Reporting for AEGON USA Realty
Advisors, Inc.
Item 11. Executive Compensation
During 1998, 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 $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, Inc. (see
"Item 10. Directors and Executive Officers of the Registrant").
Total fees paid to all Trustees as a group were $27,000 for 1998.
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
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to each
person and group (as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) known by the Trust to be the
beneficial owner of more than five percent (5%) of the
outstanding shares of the Trust as of March 5, 1999.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
AEGON USA, Inc. (1) 1,197,260 30.86%
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499
Turkey Vulture Fund XIII, Ltd. (2) 551,081 14.20%
c/o Kohrman Jackson & Krantz P.L.L.
1375 East 9th Street
Cleveland, Ohio 44114
(1) 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.
(2) Turkey Vulture Fund XIII, Ltd. (the "Fund") is an Ohio
limited liability company, of which Richard M. Osborne is the
sole Manager. As sole Manager of the Fund, Mr. Osborne may be
deemed to beneficially own all of the Shares of beneficial
interest of USP owned by the Fund. Mr. Osborne also has sole
power to vote, or to direct the voting of, and the sole power to
dispose or to direct the disposition of, any Shares owned by the
Fund.
Security Ownership of Management
The following table sets forth the number of Shares of the Trust
beneficially owned as of March 5, 1999 by each Trustee, nominee,
and officer and by all Trustees, nominees 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. Under rules adopted by the Securities and Exchange
Commission, transactions in Shares of the Trust are reportable by
Trustees and officers on specified forms, and the Trust is
required to disclose any known delinquent filings. A report on
Form 5 was filed late for Mr. Downing, reporting 36 Shares
acquired through the Trust's distribution reinvestment plan.
Name of Amount and Nature Percent
Beneficial Owner of Beneficial Ownership of Class
Gary A. Downing(1) 577 *
Patrick E. Falconio(2) 2,000 *
Edwin L. Ingraham 1,500 *
Samuel L. Kaplan(3) 10,000 *
Richard M. Osborne(4) 551,081 14.20%
David L. Blankenship(5) 1,199,078 30.90%
Maureen DeWald 0 *
Alan F. Fletcher(6) 2,200 *
Roger L. Schulz 100 *
Trustees, nominees and officers as a group 1,766,536 45.53%
(1) Mr. Downing is the beneficial owner of 577 Shares held in an
individual retirement account.
(2) Mr. Falconio may be deemed to be the beneficial owner
of 2,000 Shares owned by his wife.
(3) Mr. Kaplan is the direct owner of 8,500 Shares and may
be deemed to be the beneficial owner of 1,500 Shares held in a
profit sharing trust for his account.
(4) Mr. Osborne may be deemed to be the beneficial owner of
551,081 Shares beneficially owned by Turkey Vulture Fund, XIII,
Ltd., an Ohio limited liability company, of which Mr. Osborne is
the sole Manager.
(5) Mr. Blankenship 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 "Principal Shareholders" and "Information About
Executive Officers"). Mr. Blankenship disclaims beneficial
ownership of such Shares. He may also be deemed to be the
beneficial owner of 1,818 Shares held in custodial accounts
for his children.
(6) Mr. Fletcher is the direct owner of 600 Shares and is
the beneficial owner of 1,600 Shares held in an individual
retirement account.
*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. (see "Principal Shareholders") to
provide administrative, advisory, acquisition, divestiture,
property management and shareholder services. 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. (See "Item 12. Security Ownership
of Certain Beneficial Owners and Management" for a description of
the relationship between AEGON USA, Inc. and AEGON N.V.)
Administrative, Advisory and Acquisition Services
AEGON USA Realty Advisors, Inc. ("AEGON Advisors"), is a wholly-
owned subsidiary of AEGON USA, Inc. AEGON 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 Advisors' duties and
obligations under the Administrative Agreement has been
guaranteed by AEGON USA, Inc.
Under the Administrative Agreement, AEGON 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 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 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 Advisors for 1998 were
$204,587. No acquisition fees were paid in 1998.
Management Services
AEGON Advisors 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 Advisors 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 Advisors receives 5% of the gross
income derived from the operation of the Managed Properties.
Management fees paid to AEGON Advisors for 1998 were $241,877.
These services were previously provided by AEGON USA Realty
Management, Inc., a wholly-owned subsidiary of AEGON Advisors,
which was merged into AEGON Advisors in December 1998.
Shareholder Services
AEGON Advisors provides shareholder services to the Trust
pursuant to a Shareholder Services Agreement (the "Agreement").
Under the Agreement, AEGON Advisors is obligated to provide
dividend disbursement, stock certificate preparation,
recordkeeping and other shareholder services for which AEGON
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 Advisors. Shareholder service fees paid to AEGON Advisors
for 1998 were $21,376. AEGON Advisors has subcontracted for
stock transfer and dividend disbursement services with Boston
EquiServe, L.P., a subsidiary of State Street Bank and Trust
Company. Effective January 1, 1999, the Trust contracted
directly with Boston EquiServe, L.P. and terminated the agreement
with AEGON Advisors.
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. On February 1, 1999, the Trust prepaid the mortgage
loan on Presidential Drive Business Park. The prepayment amount,
including a 1% prepayment fee of $7,065 to the lender, was
$713,548. 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% and a 1% origination fee ($30,000) was paid
to PFL in connection with the loan. The loan matured on March 1,
1996, and the Trust exercised an option to extend the loan for
eight years at 8.30% based on commercially competitive terms
offered for comparable loans by PFL. On December 22, 1998, the
Trust sold Geneva Square and the mortgage balance of $2,803,790
was repaid. On March 1, 1999, the mortgage loans on Mendenhall
Commons and North Park Plaza matured, requiring principal
repayment. On March 15, 1999, the Trust refinanced these
mortgage loans with Monumental Life Insurance Company, a wholly-
owned subsidiary of AEGON USA, Inc. The new loans are for a
period of one year, carry an initial interest rate of 7%, and may
be prepaid at any time without penalty. The maximum principal
amount of the Presidential Drive and Geneva Square mortgage
indebtedness outstanding during 1998 was $3,570,474. The Trust
paid $57,293 in principal and $303,137 in interest on such
mortgage indebtedness for 1998.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) List of Documents
The following financial statements are included in Item 8:
1. Financial Statements.
Balance Sheets, December 31, 1998 and 1997.
Statements of Earnings, Years Ended December 31, 1998, 1997, and 1996.
Statements of Cash Flows, Years Ended December 31, 1998, 1997, and 1996.
Statements of Shareholders' Equity, Years Ended December 31, 1998, 1997,
and 1996.
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 3
(IV) Schedule of Mortgage Loans on Real Estate. Note 7
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.
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 November 19, 1997.
(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.
(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 reports on Form 8-K were filed during the fourth quarter of 1998.
(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 officer) (principal financial officer)
/s/ Roger L. Schulz
Roger L. Schulz
Controller
(principal accounting officer)
March 26, 1999
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/ Samuel L. Kaplan
Gary A. Downing Samuel L. Kaplan
Trustee Trustee
/s/ Patrick E. Falconio /s/ Richard M. Osborne
Patrick E. Falconio Richard M. Osborne
Trustee Trustee
/s/ Edwin L. Ingraham
Edwin L. Ingraham
Trustee
March 26, 1999
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 November 19, 1997.
(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.
(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
Roger L. Schulz, Controller, USP Real Estate Investment Trust,
4333 Edgewood Road N.E., Cedar Rapids, IA 52499.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000102438
<NAME> USP REAL ESTATE INVESTMENT TRUST
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,423,296
<SECURITIES> 0
<RECEIVABLES> 622,760
<ALLOWANCES> 224,938
<INVENTORY> 0
<CURRENT-ASSETS> 4,115,634
<PP&E> 34,508,522
<DEPRECIATION> 10,691,663
<TOTAL-ASSETS> 27,932,493
<CURRENT-LIABILITIES> 933,955
<BONDS> 10,897,933
0
0
<COMMON> 3,880,000
<OTHER-SE> 12,220,605
<TOTAL-LIABILITY-AND-EQUITY> 27,932,493
<SALES> 0
<TOTAL-REVENUES> 5,331,955
<CGS> 0
<TOTAL-COSTS> 2,465,569
<OTHER-EXPENSES> 547,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,375,031
<INCOME-PRETAX> 1,472,257
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,472,257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,472,257
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
