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, 1999 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
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 15, 1999 was 3,880,000.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
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USP REAL ESTATE INVESTMENT TRUST
Balance Sheets
(unaudited)
<S> <C> <C> <C>
September 30, December 31,
1999 1998 1998
Assets
Real estate
Land, buildings and improvements at cost $ 34,617,710 40,722,496 34,508,522
Less accumulated depreciation (11,185,980) (12,747,098) (10,691,663)
23,431,730 27,975,398 23,816,859
Cash and cash equivalents 2,616,567 1,809,854 3,423,296
Rents and other receivables 334,568 354,272 397,822
Prepaid and deferred expenses 214,665 278,337 275,653
Taxes held in escrow - 159,467 18,863
$ 26,597,530 30,577,328 27,932,493
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 9,449,202 13,813,825 10,897,933
Accounts payable and accrued expenses 630,955 619,498 418,204
Due to affiliates 41,542 48,442 115,722
Distribution declared 310,400 310,400 310,400
Tenant deposits 82,717 80,095 78,701
Other 9,192 32,924 10,928
10,524,008 14,905,184 11,831,888
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 11,989,948 11,792,144 11,989,948
Undistributed net earnings 203,574 - 230,657
16,073,522 15,672,144 16,100,605
$ 26,597,530 30,577,328 27,932,493
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<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,
1999 1998 1999 1998
Revenue
Rents $ 1,053,922 1,201,595 3,368,670 4,034,705
Interest 35,562 29,021 101,559 85,400
1,089,484 1,230,616 3,470,229 4,120,105
Expenses
Property expenses:
Real estate taxes 118,366 152,955 353,531 458,865
Repairs and maintenance 118,682 132,259 368,273 317,128
Utilities 29,789 33,309 87,441 82,611
Management fee 37,356 55,442 154,517 187,316
Insurance 8,881 10,757 24,789 33,554
Other 39,194 37,107 94,600 151,102
Property expenses, excluding depreciation 352,268 421,829 1,083,151 1,230,576
Depreciation 162,645 206,985 494,317 624,346
Total property expenses 514,913 628,814 1,577,468 1,854,922
Interest 186,731 343,753 640,126 1,039,252
Administrative fee 54,243 63,909 162,729 191,727
Other administrative 74,915 81,265 185,789 300,808
830,802 1,117,741 2,566,112 3,386,709
Net earnings $ 258,682 112,875 904,117 733,396
Basic and diluted net earnings per share $ .07 .03 .23 .19
Distributions to shareholders $ 310,400 310,400 931,200 931,200
Distributions to shareholders per share $ .08 .08 .24 .24
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USP REAL ESTATE INVESTMENT TRUST
Statements of Cash Flows
(unaudited)
<S> <C> <C>
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Rents collected $ 3,421,113 4,090,636
Interest received 101,559 85,400
Payments for operating expenses (1,226,618) (1,662,072)
Interest paid (637,602) (1,036,728)
Net cash provided by operating activities 1,658,452 1,477,236
Cash flows from investing activities:
Capital expenditures (109,188) (28,280)
Other, net 23,938 12,430
Net cash used by investing activities (85,250) (15,850)
Cash flows from financing activities:
Principal portion of scheduled
mortgage loan payments (278,604) (326,759)
Principal repayment of mortgage loans (1,170,127) -
Distributions paid to shareholders (931,200) (931,200)
Net cash used by financing activities (2,379,931) (1,257,959)
Net increase (decrease) in cash and cash equivalents (806,729) 203,427
Cash and cash equivalents at beginning of period 3,423,296 1,606,427
Cash and cash equivalents at end of period $ 2,616,567 1,809,854
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 904,117 733,396
Add (deduct) reconciling adjustments:
Depreciation 494,317 624,346
Amortization 2,524 2,524
Decrease in rent and other receivables 54,179 67,285
Decrease in prepaid and deferred expenses 47,617 57,940
Decrease (increase) in taxes held in escrow 18,863 (6,451)
Increase in accounts payable
and accrued expenses 212,751 58,581
Decrease in due to affiliates (74,180) (49,031)
Decrease in advance rents (1,736) (11,354)
Net cash provided by operating activities $ 1,658,452 1,477,236
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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 1998 Annual Report.
Note 2: Shareholders' equity, December 31, 1998 $ 16,100,605
Net earnings 904,117
Distributions to shareholders (931,200)
Shareholders' equity, September 30, 1999 $ 16,073,522
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, 1999 were $258,682
($.07 per share) and $904,117 ($.23 per share),
respectively, compared to $112,875 ($.03 per share) and
$733,396 ($.19 per share) for the same periods in 1998.
(All per share amounts are on a basic and diluted basis.)
While net earnings and funds from operations increased from
1998 to 1999, both revenues and expenses were lower in 1999
primarily due to the December, 1998 sale of Geneva Square
Shopping Center in Lake Geneva, Wisconsin.
The Trust's rental income this year is $666,035 lower than
the first nine months of 1998, entirely attributable to the
sale of Geneva Square. Rental income for properties owned
in both years actually increased by $56,074 due to a lease
termination fee and an increase in expense recoveries
(additional rents). At September 30, 1999, overall leased
occupancy of the portfolio was 95%. Total property
expenses, excluding depreciation, decreased by $147,425 from
1998 to 1999. As a percentage of rental income, such
expenses increased from 30% in 1998 to 32% in 1999,
primarily because rents declined more than expenses.
Real estate taxes decreased by $105,334 from 1998 primarily
due to the sale of Geneva Square. Repairs and maintenance
increased by $51,145 from 1998 primarily due to an increase
in tenant remodeling expenses and parking lot repairs in
1999. Utilities increased by $4,830 from 1998 primarily due
to an increase in water usage at Presidential Drive Business
Park in Atlanta, Georgia. These charges are paid by the
Trust and billed back to tenants as additional rent.
Management fees decreased by $32,799 from 1998 due to lower
revenue in 1999 as a result of the sale of Geneva Square.
Other property expenses were $56,502 lower than 1998, due to
reduced lease commissions, insurance claims, and advertising
and promotional expenses.
In 1999, depreciation expense and the administrative fee
each decreased from 1998 due to the sale of Geneva Square.
Interest expense decreased by $399,126 due to the sale of
Geneva Square and due to the Trust prepaying the mortgage
loans in February 1999 on Presidential Drive Business Park
in Atlanta, Georgia and First Tuesday Mall in Carrollton,
Georgia. Other administrative expenses decreased by
$115,019 during the first nine months of 1999 compared to
the same period last year. This decrease is due to lower
legal expenses, incurred primarily in connection with the
Trust's efforts to maximize shareholder value.
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
($2,616,567 at September 30, 1999) as well as cash flow from
the continued operation of the Trust's real estate
portfolio, which is considered sufficient to meet current
obligations.
As reported in a news release dated August 16, 1999, the
Trust announced that it had executed a letter of intent to
sell all of its assets to AEGON USA Realty Advisors, the
Trust's advisor. The sale of assets is subject to
negotiation of a definitive agreement and shareholder
approval, and is expected to result in a liquidating
distribution to USP shareholders in excess of $6.00 per
share after all transaction costs have been paid.
Shareholders will receive a proxy statement containing
additional information regarding the transaction. While no
assurance can be given that the sale will be consummated,
completion of the transaction is planned for early 2000.
The Board of Trustees declared a third quarter distribution
of $.08 per share, payable November 29, 1999 to shareholders
of record November 16, 1999. Future distributions to
shareholders will continue to be dependent upon earnings,
cash flow, financial condition, and the status of the
proposed sale and liquidation.
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.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K.
The Company reported on a Form 8-K, dated August 16,
1999, that it had executed a letter of intent to sell
all of its assets to AEGON USA Realty Advisors, the
Trust's advisor.
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 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000102438
<NAME> USP REAL ESTATE INVESTMENT TRUST
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 2,616,567
<SECURITIES> 0
<RECEIVABLES> 537,027
<ALLOWANCES> 202,459
<INVENTORY> 0
<CURRENT-ASSETS> 3,165,800
<PP&E> 34,617,710
<DEPRECIATION> 11,185,980
<TOTAL-ASSETS> 26,597,530
<CURRENT-LIABILITIES> 1,074,806
<BONDS> 9,449,202
0
0
<COMMON> 3,880,000
<OTHER-SE> 12,193,522
<TOTAL-LIABILITY-AND-EQUITY> 26,597,530
<SALES> 0
<TOTAL-REVENUES> 3,470,229
<CGS> 0
<TOTAL-COSTS> 1,577,468
<OTHER-EXPENSES> 348,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 640,126
<INCOME-PRETAX> 904,117
<INCOME-TAX> 0
<INCOME-CONTINUING> 904,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904,117
<EPS-BASIC> .23
<EPS-DILUTED> .23
</TABLE>
