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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter Ended March 31, 1996 Commission File Number 1-6249
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First Union Real Estate Equity and Mortgage Investments
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-6513657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1900, 55 Public Square
Cleveland, Ohio 44113-1937
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 781-4030
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
17,461,871 Shares of Beneficial Interest outstanding as of March 31, 1996
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Total number of pages contained in this report: 11
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements.
- ------------------------------
The combined financial statements included herein have been prepared by
the registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the registrant believes that the disclosures
contained herein are adequate to make the information presented not misleading.
It is suggested that these combined financial statements be read in conjunction
with the combined financial statements and the notes thereto included in the
registrant's latest annual report on Form 10-K.
The unaudited "Combined Balance Sheets" as of March 31, 1996 and
December 31, 1995 and "Combined Statements of Income and Combined Statements of
Changes in Cash" for the periods ended March 31, 1996 and 1995, of the
registrant, and "Notes to Combined Financial Statements," are included herein.
These financial statements reflect, in the opinion of the registrant, all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the combined financial position and results of operations for the
respective periods in conformity with generally accepted accounting principles
consistently applied.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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Financial Condition
- -------------------
In February 1996, the registrant sold two office buildings and a
parking garage in Cleveland, OH for $1.8 million in cash and a $7 million, 8%
note secured by the properties. This sale resulted in a capital loss of $5.6
million which was provided for by the registrant as part of a $14 million
noncash unrealized loss on the carrying value of certain assets which was
recorded in December 1995.
Additionally, the registrant obtained a $12.5 million mortgage loan in
January 1996. The mortgage loan is secured by an apartment complex in Durham,
NC and is at an interest rate of 6.875%.
Except as noted above, there has been no material change in the
registrant's financial condition from December 31, 1995.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operations of $5.1 million for the first quarter
of 1996 was $1.9 million less than the same period in 1995. This decline in the
first quarter of 1996 is primarily attributed to the decrease in accrued
liabilities when comparing the first quarter of 1996 to 1995. Dividends paid in
1996 of $2.0 million represented 40% of net cash from operating activities.
As noted previously, the registrant, in 1996, received proceeds of
$1.8 million from the sale of two office buildings and a parking garage in
Cleveland, OH. Additionally, the registrant reinvested $8.7 million in its
existing portfolio in building and tenant improvements. The expenditures were
primarily made to complete the renovations of two retail properties and a
retail anchor tenant building which were begun in 1995 and to begin the
construction of a major office building tenant alteration.
In January 1996, the registrant, as previously noted, obtained a $12.5
million mortgage loan. The proceeds were used to repay short-term bank loans.
In December 1995, the registrant signed an agreement to purchase
950,000 of its shares of beneficial interest at the average 1995 trading price
through December 8, 1995 of $7.50 per share from a minority shareholder. This
was part of a settlement which was reached to dismiss pending litigation. The
transaction occurred on January 10, 1996, but the effect of purchasing the
950,000 shares was reflected in the financial statements at December 31, 1995
as an accrued liability. The $7.1 million required for the purchase was funded
in 1996 through the registrant's bank credit facilities.
In March 1996, the registrant sold for $1 million an interest rate
protection agreement which had a net book value of approximately $.9 million.
The rate agreement had been used to protect the registrant from rising interest
rates on a floating rate mortgage loan which was repaid in 1995.
Subsequent to March 31, 1996, the registrant obtained two mortgage
loans secured by apartment complexes in Indianapolis, IN and Cincinnati, OH.
The proceeds of the mortgage loans totaled $24 million and were used to repay
short-term bank loans.
During the remaining nine months of 1996, the registrant has
approximately $2.5 million of mortgage principal payments, a $5 million
medium-term note repayment and
2
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approximately $15 million of tenant and building improvements to fund. These
requirements will be funded through available bank credit facilities of
approximately $34 million (including the effect of the April 1996 mortgage
financings).
Results from Operations
- -----------------------
For the first quarter, income before capital gains and cumulative
effect of accounting change was a loss of $.9 million in 1996 compared to
income of $.6 million in 1995. The amount in 1996 included two non-recurring,
noncash charges totaling $1.3 million for the write-off of a tenant allowance
and the termination of an employment contract, as discussed below. The amount
in 1995 included $950,000 of proxy and litigation expenses. Net income for the
first quarter of 1996 was a loss of $.9 million compared to $26.1 million in
1995, which included a capital gain of $29.9 million and a $4.3 million noncash
charge for the cumulative effect of a change in accounting method.
The $29.9 million capital gain in 1995 resulted from the sale of the
registrant's 50% interests in two malls in Wilkes-Barre, PA and Fairmount, WV
for $29.5 million in cash, a $6 million mortgage at an interest rate of 9%
secured by one of the malls and also secured by partnership units of Crown
American Properties L.P., and the assumption by the purchaser of $4.7 million
of mortgage debt. The proceeds from this sale were invested in short-term
securities until properties were acquired in 1995 in a tax-free exchange.
Additionally, in 1995, the registrant recorded a noncash charge of
$4.3 million for the cumulative effect of the change in accounting method for
leasing costs. Previously, the registrant deferred internal leasing costs and
amortized these costs over the lives of the consummated leases. This change in
the method of accounting was made retroactive to January 1995 and,
consequently, 1995 amounts have been restated to reflect this change.
Property net operating income, which is calculated as revenue
generated from rents collected and mortgage investments, less property
operating expenses and real estate taxes, was $10.6 million in both the first
quarters of 1996 and 1995. Mortgage investment income increased in 1996 as
compared to 1995 due to the addition of two mortgages in January 1995 and
February 1996, respectively. Both mortgages were the result of property sales
as previously noted.
Additionally, in 1995 the registrant had an average of $19 million in
short-term investments from the proceeds of the sale of its 50% interest in two
malls for the last two months of the first quarter of 1995. These funds were
used in the last nine months of 1995 to purchase a retail property and apartment
complex.
Mortgage interest expense declined when comparing 1996 to 1995. The
decrease was caused by the registrant refinancing four mortgage loans totaling
approximately $49 million at an average interest rate of 9.28% for one mortgage
loan at an interest rate of 7.49%. The approximate quarterly interest savings of
$200,000 was partially offset by the new $12.5 million mortgage loan obtained in
January 1996 on the Durham, NC apartment complex.
Bank loans increased when comparing 1996 to 1995 due to increased
borrowings on the bank credit facilities during the last half of 1995 and first
three months of 1996. The borrowings were used to fund the registrant's capital
improvement program and to purchase 950,000 shares of beneficial interest. In
1996, the registrant had an average of $66 million of bank lines of credit
outstanding as compared to an average of $39 million in 1995.
Depreciation and amortization expense increased over 1995 by
approximately $1 million. This increase was caused by a non-recurring $680,000
noncash write-off of a tenant allowance due to the registrant replacing an
anchor tenant at one of its malls and the registrant's capital improvement
program during the last half of 1995 and first quarter of 1996.
General and administrative expenses in the first three months of 1996
included a non-recurring noncash charge of $650,000 for the termination of an
employment contract of a former executive. Additionally, proxy and litigation
expenses of $950,000 were included in general and administrative expenses in the
first quarter of 1995.
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
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None.
Item 2. Changes in Securities.
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None.
Item 3. Defaults Upon Senior Securities.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
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The following matters were considered at the Annual Meeting of
Shareholders held on April 9, 1996:
1. Election of Trustees
--------------------
<TABLE>
<CAPTION>
Name Total Votes For Against Abstentions
---- ----------- --- ------- -----------
<S> <C> <C> <C> <C>
Daniel G. DeVos 14,588,541 14,020,342 --- 568,199
Allen H. Ford 14,588,541 14,012,317 --- 576,224
Spencer H. Heine 14,588,541 13,989,525 --- 599,016
</TABLE>
<TABLE>
<CAPTION>
Continuing Term Trustees
------------------------
<S> <C>
Kenneth K. Chalmers 1997
William E. Conway 1997
Russell R. Gifford 1997
Stephen R. Hardis 1998
E. Bradley Jones 1998
James C. Mastandrea 1998
</TABLE>
2. Other Matters
-------------
A Shareholder proposal to disallow proxy ballots which are unmarked as
an affirmative vote for the issue under consideration.
<TABLE>
<CAPTION>
Total Votes For Against Abstentions
----------- --- ------- -----------
<S> <C> <C> <C>
9,220,548 2,215,752 6,528,301 476,495
</TABLE>
Item 5. Other Information.
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None.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits:
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Exhibit (11) - Statements Re: Computation of Per Share Earnings.
Exhibit (20) - Financial Statements (Unaudited)
Combined Balance Sheets as of March 31, 1996 and
December 31, 1995
Combined Statements of Income, for the Three
Months ended March 31, 1996 and 1995
Combined Statements of Changes in Cash, for
the Three Months ended March 31, 1996 and 1995
Notes to Combined Financial Statements
Exhibit (27) - Financial Data Schedule
(b) Reports on Form 8-K:
--------------------
None.
4
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Union Real Estate Equity and
Mortgage Investments
----------------------------------
(Registrant)
Date: May 14, 1996 By: /s/ James C. Mastandrea
----------------------------------
James C. Mastandrea, Chairman
President, Chief Executive Officer
and Chief Financial Officer
Date: May 14, 1996 By: /s/ John J. Dee
-----------------------------------
John J. Dee, Senior Vice
President, Chief Accounting
Officer
5
<PAGE> 6
Index to Exhibits
Page
Number
Exhibit (11) - Statements Re: Computation of Per Share
Earnings.......................................... 7
Exhibit (20) - Financial Statements (unaudited)
Combined Balance Sheets as of March 31, 1996
and December 31, 1995............................. 8
Combined Statements of Income, for the Three
Months ended March 31, 1996 and 1995.............. 9
Combined Statements of Changes in Cash, for the
Three Months ended March 31, 1996 and 1995........ 10
Notes to Combined Financial Statements............ 10
Exhibit (27) - Financial Data Schedule............................... 11
6
<PAGE> 1
Exhibit 11
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
Statements Re: Computation of Per Share Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1996 1995
------ ------
<S> <C> <C>
Shares Outstanding
For computation of primary net
income per share -
Weighted average 17,262 18,145
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For computation of fully diluted
net income per share -
Weighted average, without regard to exercise
of shares under share option, restricted
stock or employee incentive plans 17,194 18,100
Weighted average of outstanding
shares issued under restricted
stock plan 64 42
Weighted average of shares issued
under employee incentive plan 4 3
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Adjusted shares outstanding 17,262 18,145
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Net Income (loss):
Net income (loss) applicable to shares of
beneficial interest (used for computing primary
and fully diluted net income per share): $ (877) $26,112(1)
======= =======
Net Income (loss) per share of beneficial interest --
primary and fully diluted:
Income (loss) before cumulative effect of
accounting change $(.05) $1.67
Cumulative effect of change in accounting for
internal leasing costs -- (.24)
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Net Income (loss) $ (.05) $ 1.43
======= =======
<FN>
(1) 1995 Net Income has been restated to reflect the change in accounting
method for internal leasing costs which was adopted retroactively to the
first quarter of 1995.
</TABLE>
<PAGE> 1
Exhibit 20
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
- -------------------------------------------------------
Combined Balance Sheets
Unaudited (In thousands, except shares)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Investments in real estate
Land $ 51,740 $ 54,403
Buildings and improvements 390,732 395,157
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442,472 449,560
Less - Accumulated depreciation (104,063) (107,701)
--------- ---------
Total investments in real estate 338,409 341,859
Mortgage loans receivable 49,096 42,042
Other assets
Cash and cash equivalents 4,906 3,402
Accounts receivable and prepayments 4,556 4,536
Deferred charges and other, net 5,320 4,873
Unamortized debt issue costs 3,901 4,287
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$ 406,188 $ 400,999
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans $ 95,634 $ 83,854
Senior notes 105,000 105,000
Bank loans 69,700 69,600
Accounts payable and accrued liabilities 17,703 21,779
Deferred obligations 10,710 10,670
Deferred capital gains and other deferred income 7,741 7,741
Shareholders' equity, including shares of beneficial interest,
$1 par, unlimited authorization, outstanding 1996--17,461,871;
1995--17,485,057 99,700 102,355
--------- ---------
$ 406,188 $ 400,999
========= =========
</TABLE>
<PAGE> 2
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
- -------------------------------------------------------
Combined Statements of Income
Unaudited (In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Revenues
Rents $18,685 $17,989
Interest - Mortgage loans 1,205 1,072
- Short-term investments 7 286
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19,897 19,347
------- -------
Expenses
Property operating 7,166 6,299
Real estate taxes 2,020 1,998
Depreciation and amortization 3,753 2,775
Interest - Mortgage loans 1,825 1,989
- Senior notes 2,326 2,326
- Bank loans and other 1,568 1,129
General and administrative 2,116 2,264
------- -------
20,774 18,780
------- -------
Income (loss) before capital gains and cumulative effect of accounting change (877) 567
Capital gains -- 29,870
------- -------
Income (loss) before cumulative effect of accounting change
for internal leasing costs (877) 30,437
Cumulative effect of change in accounting for internal leasing costs -- (4,325)
------- -------
Net income (loss) $ (877) $26,112
======= =======
Dividends declared $ 1,921 $ 1,827
======= =======
Per share
Income (loss) before cumulative effect of accounting change $ (.05) $ 1.67
Cumulative effect of change in accounting
for internal leasing costs (.24)
------- -------
Net income (loss) $ (.05) $ 1.43
======= =======
Dividends declared $ .11 $ .10
======= =======
Adjusted shares of beneficial interest 17,262 18,145
======= =======
</TABLE>
<PAGE> 3
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
- -------------------------------------------------------
Combined Statements of Changes in Cash
Unaudited (In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
1996 1995
------- --------
<S> <C> <C>
Cash provided by (used for) operations
Net income $ (877) $ 26,112
Adjustments to reconcile net income to net
cash provided by operations --
Depreciation and amortization 3,753 2,775
Cumulative effect of change in accounting
for internal leasing costs 4,325
Capital gains (29,870)
Increase in deferred charges, net (329) (669)
Increase in deferred interest on
mortgage investments, net (96) (90)
Increase in deferred obligations 40 35
Net changes in other assets and liabilities 2,586 4,349
------- --------
Net cash provided by operations 5,077 6,967
------- --------
Cash provided by (used for) investing
Principal received from mortgage investments 42 38
Proceeds from sale of properties 1,825 27,500
Investments in capital and tenant improvements (8,662) (2,898)
------- --------
Net cash provided by (used for) investing (6,795) 24,640
------- --------
Cash provided by (used for) financing
Increase in mortgage loans 12,500
Increase in short-term loans 100 1,152
Repayment of mortgage loans (720) (955)
Sale of First Union shares 79 75
Dividends paid (2,028) (1,826)
Debt issue costs paid (611)
Sale of interest rate protection agreement 1,025
Purchase of First Union shares (7,125)
Other 2 (17)
------- --------
Net cash provided by (used for) financing 3,222 (1,571)
------- --------
Increase in cash and cash equivalents 1,504 30,036
Cash and cash equivalents at beginning of period 3,402 2,975
------- --------
Cash and cash equivalents at end of period $ 4,906 $ 33,011
======= ========
</TABLE>
Notes to Combined Statements of Income
1. Income per share of beneficial interest has been computed on weighted
average shares and share equivalents outstanding for the applicable
periods.
2. In 1995, the Trust changed its accounting method to directly expense
internal leasing costs and recorded a $4.3 million charge for the
cumulative effect of the accounting change retroactive to January 1, 1995.
Previously, the Trust deferred and amortized these costs over the lives of
consummated lease transactions. Depreciation and amortization, general and
administrative expenses, income before capital gains and cumulative effect
of accounting change, net income and earnings per share on the 1995
Combined Statements of Income and investment in properties on the 1995
Combined Statements of Changes in Cash have been restated to reflect the
change in accounting.
3. In February 1996, the Trust sold two office buildings in Cleveland, Ohio
for $1.8 million in cash and a $7 million mortgage note resulting in a loss
of $5.6 million. This loss had been previously recognized during the fourth
quarter of 1995. In January 1995, the Trust sold its 50% interests in two
malls in Wilkes-Barre, Pennsylvania and Fairmount, West Virginia for a $2
million cash payment which was received in 1994, a tax-free exchange of
these properties for $27.5 million of cash that was deposited into a tax
intermediary escrow account, a $6 million mortgage note receivable and the
assumption by the purchaser of $4.7 million in mortgage debt, resulting in
a capital gain for financial reporting purposes of approximately $29.9
million.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000037008
<NAME> FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,906,000
<SECURITIES> 0
<RECEIVABLES> 4,566,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,462,000
<PP&E> 0
<DEPRECIATION> (104,063,000)
<TOTAL-ASSETS> 406,188,000
<CURRENT-LIABILITIES> 17,703,000
<BONDS> 270,334,000
<COMMON> 99,700,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 406,188,000
<SALES> 0
<TOTAL-REVENUES> 19,897,000
<CGS> 0
<TOTAL-COSTS> 9,186,000
<OTHER-EXPENSES> 5,869,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,719,000
<INCOME-PRETAX> (877,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (877,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (877,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
