UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended October 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission File No. 1-6309
HRE PROPERTIES
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2458042
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
321 RAILROAD AVENUE
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (203) 863-8200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares, without par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. x
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of January 6, 1997: Common Shares, without par
value - $67,606,000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable
date: 5,346,081 Common Shares, without par value, as of January 6, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders to be held on March 12,
1997 (certain parts as indicated herein) (PartIII).
TABLE OF CONTENTS
Form 10-K
Item No. Report Page
PART I
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . .3
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . .. . . . .8
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . .. . . . 10
4. Submission of Matters to a Vote of Security Holders . . . .. . . . 10
PART II
5. Market for the Registrant's Common Equity and Related Shareholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 10
6. Selected Financial Data . . . . . . . . . . . . . . . . . .. . . . 12
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . .. . . . 13
8. Financial Statements and Supplementary Data . . . . . . . .. . . . 18
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . .. . . . 18
PART III
10. Directors and Executive Officers of the Registrant. . . . .. . . . 18
11. Executive Compensation. . . . . . . . . . . . . . . . . . .. . . . 19
12. Security Ownership of Certain Beneficial Owners and Management.. . 19
13. Certain Relationships and Related Transactions. . . . . . .. . . . 19
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K . 20
Item I. Business.
HRE Properties (the "Trust") was organized on July 7, 1969 as an
unincorporated business trust under the laws of the Commonwealth of
Massachusetts pursuant to a Declaration of Trust dated July 7, 1969, as
amended.
The Trust has qualified and has elected to be taxed as a real estate
investment trust under Sections 856-860 of the Internal Revenue Code of 1986,
as amended (the "Code"). Pursuant to such provisions of the Code, a trust
which distributes at least 95% of its real estate investment trust taxable
income to its shareholders each year and which meets certain other
conditions will not be taxed on that portion of its taxable income which is
distributed to its shareholders. The Trust intends to continue to qualify
as a real estate investment trust for federal income tax purposes.
Description of Business
The Trust's sole business is the ownership of real estate investments
which consist principally of equity investments in income-producing
properties, with primary emphasis on properties in the northeastern part of
the United States. The Trust's core properties consist of
community shopping centers in the northeastern part of the United
States. The remaining properties include office and retail buildings and
industrial properties. The Trust also seeks to identify desirable properties
for acquisitions which it acquires in the normal course of business.
In addition, the Trust regularly reviews its portfolio and from time to time
considers and effects the sale of certain properties.
At October 31, 1996, the Trust owned or had an equity interest in e
ighteen properties comprised of shopping centers, single tenant
retail stores, office buildings and service and distribution facilities
located in twelve states throughout the United States, containing
a total of 2,798,000 square feet of gross leasable area. For a
description of the Trust's individual investments, see Item 2.
The Trust intends to continue to invest substantially all of its assets
in income producing real estate, with a primary emphasis on shopping centers,
although the Trust will retain the flexibility to invest in other types of
real property. While the Trust is not limited to any geographical location,
the Trust's current strategy is to invest primarily in properties
located in the Northeastern United States.
Investment and Operating Strategy
The Trust's investment objective is to increase cash flow, current
income and consequently the value of its existing portfolio of properties,
and to seek continued growth through (i) the strategic re-tenanting,
renovation and expansion of its existing properties, and (ii) the
selective acquisitions of income-producing real estate properties,
primarily neighborhood and community shopping centers, in the geographic
region, where the Trust presently operates.
These neighborhood and community shopping center properties are
designed to attract local area customers and would typically be anchored by a
supermarket, discount department store or drugstore tenant offering
day-to-day necessities rather than high-priced luxury items.
Core Properties
The Trust considers those properties which are directly managed by the
Trust, located close to the Trust's headquarters and concentrated in the
community shopping center sector to be core properties. Of the eighteen
properties in the Trust's portfolio, ten properties are considered core
properties consisting of seven community shopping centers,
one mixed-use (retail/office) property and two office buildings (including
the Trust's executive headquarters). The properties contain in the aggregate
1,225,000 square feet of gross leasable area. The Trust's core retail
properties collectively had 158 tenants providing a wide range of retail
products and services. Tenants include national supermarkets, discount
department stores, a regional electronic store and local retailers.
At October 31, 1996, the core properties were 91% leased.
A substantial portion of the Trust's operating lease income from retail
tenants consists of rent received under short- and intermediate-term leases.
Most of the leases provide for the payment of fixed base rentals monthly in
advance and for the payment by tenants of a pro-rata share of the real
estate taxes, insurance, utilities and common area
maintenance expenses incurred in operating the shopping centers.
Non-Core Properties
In fiscal 1995, the Board of Trustees expanded and refined the strategic
objectives of the Trust to refocus the real estate portfolio into one of
self-managed retail properties located in the Northeast and authorized a
plan to sell the non-core properties of the Trust in the normal course of
business over the next several years. The Trust believes
that economic conditions in the real estate markets where the Trust's
non-core properties are located have improved and that opportunities to
sell those properties over the next several years have also improved.
At October 31, 1996, the non-core properties total eight properties,
having an aggregate net book value of $32,986,000 ($46,212,000 at October
31, 1995) and comprise the Trust's office (with the exception of the Trust's
headquarters), distribution and service facilities, and certain retail
properties located outside of the northeast region of the United States.
As a result of this change in investment strategy, the Trust
recorded a non-cash charge of $7,000,000 in fiscal 1995, to writedown the
carrying value of two of the non-core properties to their respective
estimated net realizable values. The Trust expects that the ultimate sales of
the non-core properties over the next several years will result in net gains
to the Trust.
At October 31, 1996, the Trust's non-core properties consisted of one
office building, containing 212,000 square feet of gross leasable area (GLA),
three retail properties totaling 440,000 square feet and four industrial
properties with a total of 921,000 square feet of GLA. The non-core
properties were 98% leased at October 31, 1996.
The office property has four tenants which offer a range of services,
including insurance, engineering and management.
The four service and distribution facilities are 100% occupied and
consist of two automobile and truck parts distribution warehouses,
one truck sales and service center and one automobile tire distribution
facility. The service and distribution facilities are net leased under
long-term lease arrangements whereby the tenants pay all taxes,insurance,
maintenance and other operating costs of the property during the term of
the lease.
The three retail properties consist of a 231,000 square foot shopping
center located in Clearwater, Florida containing 44 tenants and two single
tenant properties located in Tempe and Mesa, Arizona totaling 209,000 square
feet of GLA.
On November 22, 1996, the Trust formed a limited partnership with
certain shareholders of the Trust to own, manage and redevelop the Trust's
shopping center in Clearwater, Florida. The Trust, as the general partner,
contributed the shopping center at its net carrying amount
(which amount approximates its fair value of $13 million), and the limited
partners, including Kimco Realty Corp. which will manage the property,
contributed 600,000 common shares of the Trust to the limited partnership.
At October 31, 1996, the Trust also owned a portfolio of mortgage notes
receivable consisting of fixed rate mortgages aggregating $3,706,000.
The fixed rate mortgages are secured by retail properties sold by the Trust
in prior years.
During the five year period ended October 31, 1996, the Trust acquired
eight properties totalling 834,000 square feet of gross leasable space at an
aggregate cost of $71.7 million. The properties were acquired with cash and
$36 million of non-recourse first mortgage loans. In the same period,
the Trust spent nearly $9.1 million to expand, renovate, improve and lease
its existing properties. Such activities were funded from available cash.
During the five year period ended October 31, 1996, the Trust has sold or
disposed of twelve properties totalling 1,566,000 square feet
of gross leasable area which the Trust determined no longer fit into its
strategic plans.
Recent Developments
In November 1996, the Trust negotiated a settlement proposal with one
of its tenants to recover, among other things, unpaid additional percentage
rents including interest totalling $3.25 million. In accordance with the
terms of its lease, the tenant was required to aggregate the sales of all
its stores in a specified radius when computing percentage rent due the
Trust. The settlement proposal, including certain other modifications to
the lease, is expected to be completed and recorded as income in the Trust's
first quarter of fiscal 1997.
During fiscal 1996, the Trust acquired one property comprising 30,700
square feet of gross leasable area at a purchase price of $880,000 and sold
three non-core properties totalling 324,000 square feet of gross leasable
space for net proceeds of $18 million. In addition, the Trust spent $5.6
million for leasing costs and capital improvements to properties it
already owns. Substantially all such capital improvements were incurred in
connection with the Trust's retail leasing activities. The Trust also leased
or renewed 75,000 square feet of gross leasable area in fiscal 1996,
compared to 153,000 square feet of GLA in the prior year. The square footage
leased or renewed in fiscal 1996 comprised 7% of the total gross
leasable area of the Trust's core properties.
Matters Relating to the Real Estate Business
The Trust is subject to certain business risks arising in connection
with owning real estate which include, among others, (1) the bankruptcy or
insolvency of, or a downturn in the business of, any of its major tenants,
(2) the possibility that such tenants will not renew their leases as they
expire, (3) vacated anchor space affecting the entire shopping
center because of the loss of the departed anchor tenant 's customer drawing
power, (4) risks relating to leverage, including uncertainty
that the Trust will be able to refinance its indebtedness, and the risk of
higher interest rates, (5) potential liability for unknown or future
environmental matters, and (6) the risk of uninsured losses. Unfavorable
economic conditions could also result in the inability of tenants in certain
retail sectors to meet their lease obligations and otherwise could adversely
affect the Trust's ability to attract and retain desirable
tenants. The Trust believes that its shopping centers are relatively well
positioned to withstand adverse economic conditions since they typically
are anchored by grocery stores, drug stores and discount department stores
that offer day-to-day necessities rather than luxury goods.
Compliance with Governmental Regulations
The Trust, like others in the commercial real estate industry, is
subject to numerous environmental laws and regulations. Although potential
liability could exist for unknown or future environmental matters, the Trust
believes that its tenants are operating in accordance with current laws and
regulations and has established procedures to monitor these operations.
Competition
The real estate investment business is highly competitive. The Trust
competes for real estate investments with investors of all types, including
domestic and foreign corporations, financial institutions, other real estate
investment trusts and individuals. In addition, the Trust's properties are
subject to local competitors from the surrounding areas. The Trust does not
consider its real estate business to be seasonal in nature.
The Trust's shopping centers compete for tenants with other regional,
community or neighborhood shopping centers in the respective areas where Trust
retail properties are located. The Trust's office buildings compete for tenants
principally with office buildings throughout the respective areas in which
they are located. In most areas where the Trust's office buildings are
located, competition for tenants is intense. Leasing space to prospective
tenants is generally determined on the basis of, among other things, rental
rates, location, physical quality of the property and availability of space.
Since the Trust's industrial properties are all net leased under
long-term lease arrangements which are not due to expire in the near future,
the Trust does not currently face any competitive pressures with respect to
such properties.
Property Management
The Trust actively manages and supervises the operations and leasing at
all of its core properties. Six of the Trust's non-core properties
are net leased to single tenants under long-term lease arrangements, in
which case, management is provided by the tenants. The Trust's two
remaining non-core properties are managed by independent property
management firms retained by the Trust. The Trust closely supervises the
property management firms it engages to manage its properties.
Employees
The Trust's executive offices are located at 321 Railroad Avenue,
Greenwich, Connecticut. It occupies approximately 5,000 square feet in a two
story office building owned by the Trust.
The Trust has 15 employees, eight of whom oversee the management of the
Trust's real estate portfolio, or analyze potential acquisition properties
and determine which properties, if any, to sell. The Trust's remaining
employees serve in various professional, executive and administrative
capacities.
Item II. Properties.
Core Properties
<TABLE>
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The following table sets forth information concerning each core property at October
31, 1996. All core properties are 100% owned by the Trust.
Gross Leasable
Year Year Square Number
Location Completed Acquired Feet Acres of Tenants Leased Principal Tenant
Meriden, Connecticut 1989 1993 300,000 29.2 20 94% ShopRite Supermarket
Springfield, Massachusetts 1970 1970 293,000 26.0 18 88% Great Atlantic &Pacific Tea Co.
Danbury, Connecticut 1989 1995 193,000 19.3 24 100% Barnes & Noble
Carmel, New York 1983 1995 126,000 19.0 11 58% ShopRite Supermarket
Newington, New Hampshire 1975 1979 102,000 14.3 10 100% Sears Roebuck
Wayne, New Jersey 1959 1992 102,000 9.0 44 98% Great Atlantic &Pacific Tea Co.
Farmingdale, New York 1981 1993 70,000 5.6 12 95% King Kullen Supermarket
Somers, New York 1989 1992 19,000 4.9 12 100% Putnam County Savings Bank
Greenwich, Connecticut 1983 1993 10,000 .2 3 100% HRE Properties
Greenwich, Connecticut 1983 1994 9,700 .2 4 100% Rogers &Goffigon
</TABLE>
Non-Core Properties
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The following table sets forth information concerning each non-core property in which
the Trust owned an equity interest at October 31, 1996. Except as otherwise noted, non-
core properties are 100% owned by the Trust.
Rentable
Year Year Square Number
Location Completed Acquired Feet Acres of Tenants Leased Principal Tenant
Southfield, Michigan(1) 1973 1983 212,000 7.8 4 100% Giffels Associates
Clearwater, Florida(2) 1983 1985 231,000 21.5 44 89% Albertson's Supermarket
Mesa, Arizona 1971 1971 92,000 7.6 1 100% Mervyn's
Tempe, Arizona 1970 1970 117,000 8.6 2 100% Mervyn's
Albany, Georgia 1972 1972 476,000 51.3 1 100% Firestone
Dallas, Texas 1970 1970 253,000 14.5 1 100% Chrysler Corporation
St. Louis, Missouri 1970 1970 163,000 16.0 1 100% Chrysler Corporation
Syracuse, New York 1973 1973 29,000 10.0 1 100% Navistar International
(1) The Trust owns an 85% partnership interest in this property.
(2) The Trust has a general partner interest in this property, effective
November 22,1996.
</TABLE>
Item III. Legal Proceedings.
No legal proceedings are required to be reported under this Item.
Item IV. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during
the fourth quarter of the fiscal year ended October 31,1996.
Item Pursuant to Instruction 3 of Item 401 (b) of
Regulation S-K: Executive Officers of the Trust.
For information regarding Executive Officers of the Trust--See Item X.
PART II
Item V. Market for the Registrant's Common Equity and Related
Shareholder Matters.
(a) Price Range of Common Shares
The Common Shares of the Trust are traded on the New York
Stock Exchange under the symbol "HRE". The following table sets
forth the high and low closing sales prices for the Trust's
Common Shares during the fiscal years ended October 31, 1996 and
October 31, 1995 as reported on the New York Stock Exchange:
Fiscal Year Fiscal Year
Ended Ended
October 31, 1996 October 31, 1995
High Low High Low
Fourth Quarter $16 - $14-1/4 $14-3/8 - $13-3/8
Third Quarter 16 - 14 14-3/8 - 13-3/8
Second Quarter 15-5/8 - 13-1/2 13-7/8 - 13
First Quarter 14-1/8 - 13-1/8 14-1/4 - 13-1/4
(b) Approximate Number of Equity Security Holders
At December 31, 1996 (latest date available), there were
2,568 shareholders of record of the Trust's Common Shares.
(c) Dividends Declared on Common Shares and Tax Status
The following table sets forth the dividends declared per
Common Share and tax status for Federal income tax purposes of
the dividends paid during the fiscal years ended October 31, 1996 and 1995:
Portion of Dividend Designated as:
Fiscal Year Ended Gross Dividend Income Capital Gain
October 31, 1996: Paid Per Share Distribution Distribution
Fourth Quarter $ .31 $ .26 $ .05
Third Quarter $ .31 $ .26 $ .05
Second Quarter $ .31 $ .26 $ .05
First Quarter $ .29 $ .24 $ .05
$1.22 $1.02 $ .20
Portion of Dividend Designated as:
Fiscal Year Ended Gross Dividend Income
October 31, 1995: Paid Per Share Distribution
Fourth Quarter $ .29 $ .29
Third Quarter $ .29 $ .29
Second Quarter $ .28 $ .28
First Quarter $ .28 $ .28
$1.14 $1.14
The Trust made distributions to shareholders aggregating
$1.22 per Common Share during the fiscal year ended October 31,
1996. The Trust has paid quarterly dividends on its Common Shares
since it commenced operations as a real estate investment trust in 1969.
Although the Trust intends to continue to declare quarterly
dividends on its Common Shares, no assurances can be made as to
the amounts of any future dividends. The declaration of any
future dividends by the Trust is within the discretion of the
Board of Trustees, and will be dependent upon, among other
things, the earnings, financial condition and capital
requirements of the Trust, as well as any other factors deemed
relevant by the Board of Trustees. Two principal factors in
determining the amounts of dividends are (i) the requirement of
the Code that a real estate investment trust distribute to
shareholders at least 95% of its real estate investment trust
taxable income, and (ii) the amount of the Trust's funds from operations.
The Trust has a Dividend Reinvestment and Share Purchase
Plan which allows shareholders to acquire additional shares by
automatically reinvesting dividends. Shares are acquired
pursuant to the Plan at a price equal to the higher of 95% of the
market price of such shares on the dividend payment date or 100%
of the average of the daily high and low sales prices for the
five trading days ending on the day of purchase without payment
of any brokerage commission or service charge. Approximately 14%
of the Trust's eligible shareholders currently participate in the Plan.
Item VI. Selected Financial Data.
(In thousands, except per share data)
Year Ended October 31, 1996 1995 1994 1993 1992
Total Assets $132,160 $149,099 $142,559 $119,330 $137,855
Mortgage Notes Payable $ 39,798 $ 57,212 $ 46,386 $ 24,227 $ 31,226
Revenues $ 24,432 $ 22,853 $ 18,969 $ 16,162 $ 16,942
Operating Income (Loss) $ 3,930 $( 3,703) $ 1,262 $( 7,293) $ 1,588
Gains on Sales of
Properties $ 6,341 $ 7,567 $ 82 $ 2,330 $ --
Net Income (Loss) $ 10,271 $ 3,864 $ 1,344 $ (4,963) $ 1,588
Funds from Operations* $ 9,525 $ 8,510 $ 7,653 $ 6,748 $ 6,631
Per Share Data:
Net Income (Loss) $1.91 $ .72 $ .26 $ (.94) $.30
Cash Dividends $1.22 $ 1.14 $ 1.10 $ 1.08 $ 1.16
*Defined as net income (computed in accordance with
generally accepted accounting principles), excluding gains
(or losses) from debt restructuring and sales of properties,
plus depreciation, amortization, and the elimination of
significant non-recurring charges and credits. In 1996, the
Trust adopted the revised definition of Funds from
Operations suggested by the National Association of Real
Estate Investment Trusts (NAREIT). 1995 and prior year
amounts have been restated to conform to the new NAREIT definition.
ITEM VII. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Trust's liquidity and capital resources include its cash
and cash equivalents, funds available from bank borrowings
and long-term mortgage debt and sales of real estate
investments. The Trust meets its liquidity requirements
primarily by generating cash from the operations of its
properties and collection of principal and interest on its
mortgage notes receivable. Payments of expenses related to
real estate operations, capital improvement programs, debt
service, management and professional fees, and dividend
requirements place demands on the Trust's liquidity.
The Trust believes that the financial resources currently
available to it are sufficient to meet all of its known
obligations and commitments and to make additional real
estate investments when appropriate opportunities arise. At
October 31, 1996, the Trust had cash and cash equivalents of
$1.8 million compared to $7.1 million in 1995 and $8.7
million in 1994. The Trust also expects to receive a cash
settlement of $3.25 million in the first quarter of fiscal
1997 for unpaid percentage rent from one of its tenants.
The Trust also has available $15 million in unsecured lines
of credit with two major commercial banks. The credit lines
are available to finance the acquisition, management or
development of commercial real estate and for working
capital purposes. The credit lines expire at various
periods in 1997 and outstanding borrowings, if any, may be
repaid from proceeds of debt financings or sales of
properties. At October 31, 1996, there were no outstanding
borrowings under existing lines of credit. It is the
Trust's intent to renew these credit lines as they expire in
1997. Long-term debt consists of mortgage notes payable
totalling $39.8 million, of which $3.1 million in principal
payments are due in fiscal 1997 (including a mortgage note
of $2.4 million, which matures in February, 1997). The
mortgage loans bear interest at fixed rates that range from
7.5% to 9.75%. The Trust has received a commitment for $2
million to refinance the $2.4 million mortgage note and
expects to use available cash for the difference between the
current mortgage and the commitment amount.
Since 1992, the Trust has selectively sold or disposed of
properties which were determined to no longer fit into its
strategic plan and employed the proceeds of sales, available
cash and long-term mortgage debt to acquire nearly $75
million of properties during this same period. In fiscal
1995, the Board of Trustees expanded and refined the
strategic objectives of the Trust to refocus the real estate
portfolio into one of self-managed retail properties located
in the Northeast and authorized a plan to sell the non-core
properties of the Trust in the normal course of business
over the next several years. The non-core properties
comprise all of the Trust's offices (except its
headquarters), distribution and service facilities, and
certain retail properties located outside of the Northeast
region of the United States. As a result of this change in
investment strategy, the Trust recorded a charge of
$7,000,000 in fiscal 1995, to writedown the carrying value
of two of the non-core properties to their estimated net
realizable values. The Trust believes that economic
conditions in the real estate markets where the Trust's non-core
properties are located have improved and that
opportunities to sell those properties over the next several
years have also improved. The Trust expects the ultimate
sales of the non-core properties over the next several years
to result in net gains to the Trust. During fiscal 1996,
the Trust sold three non-core properties for aggregate sales
proceeds of $20 million and realized net gains on the sales
of the properties of $6,341,000. The proceeds from these
sales were used principally to reduce outstanding mortgage
indebtedness by approximately $19 million. At October 31,
1996, the non-core properties total eight properties having
an aggregate net book value of $32,986,000.
The Trust expects to make additional real estate investments
periodically. The funds for such investments may come from
existing liquid assets, line of credit arrangements,
proceeds from property sales, financing of acquired or
existing properties or the sale of mortgage notes
receivable. In 1996, the Trust acquired Southern Plaza, a
30,700 square foot shopping center in Tempe, Arizona for a
purchase price of $880,000. The Trust also invests in its
existing properties and, during fiscal 1996, spent
approximately $5.6 million on its properties for capital
improvement and leasing costs.
In fiscal 1996, the Trust's Board of Trustees authorized a
program to purchase up to one million of the Trust's common
shares over the next two to three years. The Trust expects
to finance the purchase of such common shares from available
cash or proceeds from the sales of its non-core assets. The
repurchase program is subject to postponement or termination
at any time in light of prevailing market conditions and
other factors. In fiscal 1996, the Trust repurchased 40,700
shares at an aggregate cost of $631,000.
Funds from Operations
Funds from Operations is defined as net income (computed in
accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and
sales of properties, plus depreciation and amortization, and
the elimination of significant non-recurring charges and
credits. In fiscal 1996, the Trust adopted the revised
definition of Funds from Operations suggested by the
National Association of Real Estate Investment Trusts
(NAREIT), which eliminated the adjustment for amortization
of non-real estate assets. The Trust believes the level of
Funds from Operations to be an appropriate supplemental
financial measure of its operating performance. Funds from
Operations does not represent cash flows from operations as
defined by generally accepted accounting principles, is not
indicative that cash flows are adequate to fund all cash
needs and is not considered to be an alternative to net
income. The Trust considers recoveries of investment in
properties which are subject to financing leases to be
analogous to amortization for purposes of calculating Funds
from Operations. In fiscal 1996, Funds from Operations
increased 12% to $9,525,000 from $8,510,000 in 1995, and
$7,653,000 in 1994. The improvement in fiscal 1996 is
primarily the result of the positive effect of the Trust's
recent property acquisitions and new leasing at certain of
the Trust's core retail properties.
Results of Operations
Fiscal 1996 vs. Fiscal 1995
Revenues
Total revenues increased 6.9% to $24,432,000 in fiscal 1996
compared to $22,853,000 in fiscal 1995. Operating lease
revenues, which comprise more than 90% of the Trust's total
revenues, increased by $2,767,000 or 14% resulting from the
additional rents of two retail properties acquired in fiscal
1995 and new leasing at certain of the Trust's core
properties. The Trust also sold two office properties and
one retail property during fiscal 1996. In fiscal 1996, the
Trust leased or renewed 75,000 square feet of retail space.
Overall, the Trust's portfolio was 94% leased at year end.
When adjusted to exclude properties acquired and sold in
1995 and 1996, rental income increased by 9% in fiscal 1996
from additional leasing of vacant space. At the end of
fiscal 1996, more than 85% of the Trust's real estate
portfolio consisted of retail properties.
Other income in fiscal 1995 included $600,000 of non-
recurring contract extension and other fees earned in
connection with the sale of a property.
Finance lease income decreased in fiscal 1996 as a result of
the sale of four distribution properties in fiscal 1995
which were accounted for as direct finance leases.
During 1996, the outlook for the retail industry improved.
However, certain retailers continued to report sluggish
sales, intense competition for consumer dollars and lower
profit margins. Recently, there have been a number of
retailer bankruptcies and others are anticipated. As of
October 31, 1996, two discount retailers occupying space at
two of the Trust's retail properties are in various stages
of bankruptcy. In one instance, the lease has been
reassigned to a credit worthy tenant who continues on the
lease and has met all of its obligations under the lease.
In the second instance, the tenant has historically reported
good store sales and currently pays a modest rent. A third
tenant closed its store and rejected its lease in
bankruptcy. The Trust has obtained control of the lease and
is actively seeking to re-tenant the space. While the Trust
cannot predict the ultimate outcomes, it is optimistic and
will monitor events in fiscal 1997.
The gains on sales of properties in 1996 resulted from the
sales of two office properties in Denver, Colorado and
Houston, Texas and one retail property in Manassas,Virginia.
Expenses
Total expenses were $20,502,000 in fiscal 1996 compared to
$26,556,000 in fiscal 1995. Included in fiscal 1995
expenses were write-downs in the carrying value of
investments of $7,000,000 to the carrying values of two of
the Trust's non-core properties to their estimated net
realizable values. (See discussion under Liquidity and
Capital Resources). Property expenses totalled $8,780,000
in fiscal 1996, compared to $7,691,000 in fiscal 1995. For
properties owned during both 1996 and 1995, expenses in
fiscal 1996 increased by 12% principally from higher snow
removal costs, real estate taxes, and repairs.
The increase in property expenses related to properties
acquired or sold during fiscal 1996 and 1995 amounted to
$370,000 in fiscal 1996.
Interest expense in fiscal 1996 decreased from the repayment
of outstanding borrowings under the Trust's credit lines and
approximately $16.6 million in mortgage notes payable. The
credit lines and mortgage notes payable were repaid from
proceeds of sales of properties.
Depreciation and amortization increased to $5,132,000 in
fiscal 1996 from $4,804,000 in fiscal 1995 from the addition
of two properties acquired in fiscal 1995 and capital
expenditures for tenant improvements and deferred charges.
General and administrative expenses decreased in fiscal 1996
principally from the absence of rental expense incurred
under a lease agreement which expired in December 1995 for
the Trust's former executive office space. The Trust
currently occupies space in one of its office properties.
Fiscal 1995 vs. Fiscal 1994
Revenues
Total revenues increased 20.5% to $22,853,000 in fiscal 1995
compared to $18,969,000 in fiscal 1994. Rental income,
including the income portion of rentals received in respect
of direct finance leases, comprised 93% of total revenues
(94% in fiscal 1994). Rental income from retail properties
increased 25.9% to $14.5 million from $11.5 million in
fiscal 1994. Most of the increase was attributable to two
retail properties acquired during fiscal 1995 which
increased rental income by $2.1 million. During the year,
the Trust leased or renewed 153,400 square feet of retail
space (9% of the Trust's gross retail leasable space).
Gross rents from office properties increased nearly 10% to
$5.4 million compared to $4.9 million in fiscal 1994 from
higher occupancy and rent levels.
Other income in fiscal 1995 included $600,000 of non-
recurring contract extension and other fees earned in
connection with the sale of a department store property.
Expenses
Total expenses were $26,556,000 in fiscal 1995, compared to
$17,707,000 in fiscal 1994. Included in expenses in fiscal
1995 and 1994 were write-downs in the carrying values of
investments of $7,000,000(see discussion under Liquidity and
Capital Resources) and $1,086,000, respectively. The $1,086,000
write-down reflects a charge to record a $4,836,000 mortgage note
receivable held by the Trust and collateralized by an office
building at its net realizable value. The Trust had
previously determined that the long term economic prospects
for the building had declined and decided to offer the
mortgage note for sale. The mortgage note was subsequently
sold at its net realizable value.
Property expenses increased 7% to $7,691,000 in fiscal 1995,
from $7,185,000 in fiscal 1994. The increase in property
expenses was primarily the result of the addition of new
properties. The level of property expenses in 1995 for
properties owned during both 1995 and 1994 decreased by 2%.
Interest expense rose by $1,506,000 from the addition of
$30.7 million of new mortgage notes payable in fiscal 1995
and late 1994. Also, interest expense on credit line
borrowings rose from increases in the prime rate and LIBOR
during the period.
General and administrative expenses increased in fiscal 1995
principally from professional fees incurred in connection
with the Trust's proxy and other filings during the year,
and costs and expenses related to the relocation of the
Trust to its new headquarters.
Depreciation and amortization increased to $4,804,000 in
fiscal 1995 from $4,075,000 in fiscal 1994 from the addition
of three properties acquired at an aggregate cost of $52.6
million in fiscal 1995 and 1994 and capital expenditures for
tenant improvements and deferred charges.
Item VIII. Financial Statements and Supplementary Data.
The consolidated financial statements required by this Item,
together with the report of the Trust's independent public
accountants thereon and the supplementary financial information
required by this Item are included under Item XIV of this Annual
Report.
Item IX. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
No information is required to be reported under this Item.
PART III
Item X.Directors and Executive Officers of the Registrant.
The Trust has filed with the Securities and Exchange
Commission its definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on March 12, 1997. The additional
information required by this Item is included under the caption
"ELECTION OF TRUSTEES" of such Proxy Statement and is
incorporated herein by reference.
Executive Officers of the Registrant.
The following sets forth certain information regarding the
executive officers of the Trust:
Name Age Offices Held
Charles J. Urstadt 68 Chairman and Chief Executive
Officer (since September 1989)
Willing L. Biddle 35 President and Chief Operating
Officer (since December,
1996); Executive Vice
President and Chief Operating
Officer (since March, 1996);
Senior Vice President -
Management (since June,
1995); Vice President - Retail
(June, 1994 to June, 1995);
Vice President - Asset
Management (April 1993 to
1994); Vice President, Levites
Realty Management Corp (1989
to 1993); prior to 1989,
Second Vice President, Chase
Manhattan Bank
James R. Moore 48 Executive Vice President and
Chief Financial Officer (since
March, 1996); Senior Vice
President and Chief Financial
Officer (since September
1989); Secretary (since April
1987) and Treasurer (since
December 1987); Vice
President-Finance and
Administration (April 1987 to
September 1989); prior to
April 1987, Senior Manager,
Ernst & Young
Raymond P. Argila 48 Senior Vice President and
Chief Legal Officer (since
June 1990); formerly Senior
Counsel, Cushman & Wakefield,
Inc., (September 1987 to May
1990) and associated with
Finley, Kumble, Wagner, Heine,
Underberg, Manley, Myerson &
Casey (from March to June
1987); Vice President and
Chief Legal Officer, Pearce,
Urstadt, Mayer & Greer Realty
Corp. from (January 1984 to
March 1987.)
Officers of the Trust are elected annually by the Trustees.
Mr. Urstadt has been the Chairman of the Trustees since
1986, and a Trustee since 1975. Mr. Urstadt also serves as the
President of Urstadt Property Company, Inc. (formerly Pearce,
Urstadt, Mayer & Greer Inc.) and has served in such capacity for
more than five years.
Item XI. Executive Compensation.
The Trust has filed with the Securities and Exchange
Commission its definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on March 12, 1997. The information
required by this Item is included under the caption "ELECTION OF
TRUSTEES - Compensation and Transactions with Management and
Others of such Proxy Statement and is incorporated herein by reference.
Item XII. Security Ownership of Certain
Beneficial Owners and Management.
The Trust has filed with the Securities and Exchange
Commission its definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on March 12, 1997. The information
required by this Item is included under the caption ELECTION OF
TRUSTEES - Security Ownership of Certain Beneficial Owners and
Management of such Proxy Statement and is incorporated herein by reference.
Item XIII. Certain Relationships and Related Transactions.
The Trust has filed with the Securities and Exchange
Commission its definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on March 12, 1997. The information
required by this Item is included under the caption ELECTION OF
TRUSTEES - Compensation and Transactions with Management and
Others of such Proxy Statement and is incorporated herein by reference.
PART IV
Item XIV. Exhibits, Financial Statements,Schedules and Reports on Form 8-K.
A. Financial Statements and Financial Statement Schedules
1. Financial Statements --
The consolidated financial statements listed in the
accompanying index to financial statements on Page 23 are
filed as part of this Annual Report.
2. Financial Statement Schedules --
The financial statement schedules required by this Item
are filed with this report and are listed in the
accompanying index to financial statements on Page 23.
All other financial statement schedules are inapplicable.
B. Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during
the last quarter of the fiscal year ended October 31, 1996.
C. Exhibits.
Listed below are all Exhibits filed as part of this report.
Certain Exhibits are incorporated by reference from
documents previously filed by the Trust with the Securities
and Exchange Commission pursuant to Rule 12b-32 under the
Securities Exchange Act of 1934, as amended.
Exhibit
(3) Articles of Incorporation and By-laws.
3.1 Fourth Amended and Restated Declaration of Trust of the
Trust, as amended, (incorporated by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended April 30, 1995).
3.2 By-laws of the Trust, as amended (incorporated by
reference to Exhibit 4.2 of the Registrant's Registration
Statement on Form S-8 (No. 33-41408)).
(4) Instruments Defining the Rights of
Security Holders, Including Indentures.
4.1 Common Shares: See Exhibit 3.1 hereto.
4.2 Preferred Shares: See Exhibit 3.1 hereto.
4.3 Preferred Share Purchase Rights: See Exhibits 3.1, 10.3
and 10.3.1 hereto.
(10) Material Contracts.
10.1 Form of Indemnification Agreement entered into
between the Registrant and each of its Trustees and
for future use with Trustees and officers of the
Trust (incorporated herein by reference to Exhibit
10.1 of the Registrant's Annual Report on Form 10-K
for the year ended October 31, 1989).*
10.2 Amended and Restated Change of Control Agreement
between the Registrant and James R. Moore dated
November 15, 1990 (incorporated herein by reference
to Exhibit 10.3 of the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1990).*
10.3 Rights Agreement between the Trust and The First
National Bank of Boston, as Rights Agent, dated as
of October 28, 1988 (incorporated herein by
reference to Exhibit 1 of the Registrant's Current
Report on Form 8-K dated October 28, 1988).
10.3.1 Amendment No. 1 dated May 14, 1996 to the Rights
Agreement, dated as of October 28, 1988
(incorporated herein by reference to Exhibit 4 of
the Registrant's Current Report on Form 8-K dated
May 2, 1996).
10.4 Change of Control Agreement dated as of June 12,
1990 between the Registrant and Raymond P. Argila
(incorporated herein by reference to Exhibit 10.7
of the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1990).*
10.4.1 Agreement dated December 19, 1991 between the
Registrant and Raymond P. Argila amending the
Change of Control Agreement dated as of June 12,
1990 between the Registrant and Raymond P. Argila
(incorporated herein by reference to Exhibit 10.6.1
of the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1991).*
10.5 Change of Control Agreement dated as of December
20, 1990 between the Registrant and Charles J.
Urstadt (incorporated herein by reference to
Exhibit 10.8 of the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1990).*
10.6 Amended and Restated HRE Properties Stock Option
Plan (incorporated herein by reference to Exhibit
10.8 of the Registrant's Annual Report on Form 10-K
for the year ended October 31, 1991).*
10.6.1 Amendments to HRE Properties Stock Option Plan
dated June 9, 1993 (incorporated by reference to
Exhibit 10.6.1 of the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1995).*
10.7 Amended and Restated Change of Control Agreement
dated as of November 6, 1996 between the Registrant
and Willing L. Biddle*.
10.8 Countryside Square Limited Partnership Agreement of
Limited Partnership dated as of November 22, 1996
between HRE Properties, as General Partner and the
persons whose names are set forth on Exhibit A of
the Agreement, as Limited Partners (incorporated by
reference to Exhibit I of the Registrant's Current
Report on Form 8-K dated November 22, 1996).
(21) Subsidiaries.
21.1 List of Trust's subsidiaries (incorporated by
reference to Exhibit 22.1 of the
Registrant's Annual Report on Form 10-K for the
year ended October 31, 1988).
(23) Consents of Experts and Counsel.
23.1 The consent of Arthur Andersen LLP to the
incorporation by reference of their reports
included or incorporated by reference herein in the
Registrant's Registration Statements on Form S-3
(No.33-57119), Form S-8 (No.2-93146) and Form S-8
(No. 33-41408) is filed herewith as part of this report.
(27) Financial Data Schedule.
27.1 Financial Data Schedule
*Management contract, compensatory plan or arrangement required
to be filed as an exhibit to this Annual Report on Form 10-K
pursuant to Item 14(c).
HRE PROPERTIES
Item XIVa. INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
Consolidated Balance Sheets at October 31, 1996 and 1995 24
Consolidated Statements of Income for each of the
three years ended October 31, 1996 25
Consolidated Statements of Cash Flows for each of the
three years ended October 31, 1996 26
Consolidated Statements of Shareholders' Equity
for each of the three years ended October 31, 1996 27
Notes to Consolidated Financial Statements 28-35
Report of Independent Public Accountants 36
Schedule.
The following consolidated financial statement schedules of HRE
Properties are included in Item XIV(d):
III Real Estate and Accumulated Depreciation - October 31,1996 37
IV Mortgage Loans on Real Estate - October 31, 1996 41
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
October 31,
ASSETS 1996 1995
Real Estate Investments:
Properties owned - at cost, net of accumulated
depreciation $ 88,280 $ 85,966
Properties available for sale - at cost, net of
accumulated depreciation and recoveries 32,986 46,212
Mortgage notes receivable 3,706 3,937
124,972 136,115
Cash and cash equivalents 1,819 7,097
Interest and rent receivable 2,795 2,691
Deferred charges, net of accumulated amortization 1,592 1,913
Other assets 982 1,283
$132,160 $149,099
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank loan $ - $ 2,500
Mortgage notes payable 39,798 57,212
Accounts payable and accrued expenses 774 1,014
Deferred trustees' fees 470 436
Other liabilities 1,152 1,355
42,194 62,517
Shareholders' Equity:
Preferred shares, without par value; 2,000,000 shares
authorized; none issued
Common shares, without par value; unlimited shares
authorized; 5,565,129 and 5,545,574 issued in 1996
and 1995, respectively 124,126 123,844
Less 219,048 and 178,348 common shares held in
treasury, at cost, respectively (3,492) (2,861)
Distributions in excess of accumulated net income (30,668) (34,401)
89,966 86,582
$132,160 $149,099
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended October 31,
1996 1995 1994
Revenues:
Operating leases $ 22,770 $20,003 $16,498
Financing leases 612 1,165 1,392
Interest and other 1,050 1,685 1,079
24,432 22,853 18,969
Operating Expenses:
Property expenses 8,780 7,691 7,185
Interest 4,867 5,281 3,775
Depreciation and amortization 5,132 4,804 4,075
General and administrative expenses 1,545 1,610 1,423
Trustees' fees and expenses 178 170 163
Write-downs in carrying value of
investments - 7,000 1,086
20,502 26,556 17,707
Operating Income (Loss) 3,930 (3,703) 1,262
Gains on Sales of Properties 6,341 7,567 82
Net Income $10,271 $ 3,864 $ 1,344
Net Income Per Common Share $ 1.91 $ .72 $ .26
Weighted Average Number of Common
Shares Outstanding 5,365 5,349 5,330
The accompanying notes to consolidated financial statements
are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended October 31,
1996 1995 1994
Operating Activities:
Net income $10,271 $ 3,864 $ 1,344
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,132 4,924 4,151
Recovery of investment in properties owned
subject to financing leases 954 1,355 1,471
Minority interests in results of consolidated
jointventure -- -- (20)
Gains on sales of properties (6,341) (7,567) (82)
Write-downs in carrying value of investments -- 7,000 1,086
(Increase) in interest and rent receivable (104) (348) (1,039)
Increase (decrease) in accounts payable and
accrued expenses (206) (95) 97
(Increase) decrease in other assets and other
liabilities, net 95 (98) (619)
Net Cash Provided by Operating Activities 9,801 9,035 6,389
Investing Activities:
Acquisitions of properties (880) (26,809) (25,816)
Improvements to existing properties owned and
deferred charges (5,617) (2,959) (1,764)
Proceeds from sale of mortgage note receivable -- 3,750 --
Net proceeds from sale of investment in
unconsolidated joint venture -- -- 250
Net proceeds from sales of properties 17,988 12,822 454
Contract deposit received -- -- 500
Payments received on mortgage notes receivable 231 76 68
Miscellaneous -- (119) (4)
Net Cash Provided by (Used in)
Investing Activities 11,722 (13,239) (26,312)
Financing Activities:
Proceeds from bank loans 5,250 -- 5,000
Proceeds from mortgage notes 6,000 11,250 22,500
Dividends paid (6,538) (6,100) (5,861)
Proceeds from sales of common shares 282 337 302
Purchases of common shares for treasury (631) -- --
Payments on mortgage notes payable and bank loan (31,164) (2,924) (341)
Net Cash Provided by (Used in)
Financing Activities (26,801) 2,563 21,600
Net Increase (Decrease) In Cash and
Cash Equivalents (5,278) (1,641) 1,677
Cash and Cash Equivalents at Beginning of Year 7,097 8,738 7,061
Cash and Cash Equivalents at End of Year $ 1,819 $ 7,097 $ 8,738
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<TABLE>
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except shares and per share data)
Common Shares (Distributions
Treasury In Excess of
Outstanding Issued Shares, Accumulated
Number Amount at Cost Net Income) Total
Balances - October 31, 1993 5,320,106 $123,205 $(2,861) $(27,648) $92,696
Net income -- -- -- 1,344 1,344
Cash dividends paid ($1.10 per share) -- -- -- (5,861) (5,861)
Sale of additional common shares under
dividend reinvestment plan 18,048 261 -- -- 261
Common shares issued upon exercise of
stock options 3,542 41 -- -- 41
Balances - October 31, 1994 5,341,696 123,507 (2,861) (32,165) 88,481
Net income -- -- -- 3,864 3,864
Cash dividends paid ($1.14 per share) -- -- -- (6,100) (6,100)
Sale of additional common shares under
dividend reinvestment plan 18,862 260 -- -- 260
Common shares issued upon exercise of
stock options 6,668 77 -- -- 77
Balances - October 31, 1995 5,367,226 123,844 (2,861) (34,401) 86,582
Net income -- -- -- 10,271 10,271
Cash dividends paid ($1.22 per share) -- -- -- (6,538) (6,538)
Sale of additional common shares under
dividend reinvestment plan 19,555 282 -- -- 282
Purchases of common shares held in
treasury (40,700) -- (631) -- (631)
Balances - October 31, 1996 5,346,081 $124,126 (3,492) $(30,668) $89,966
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
HRE Properties, a real estate investment trust, is engaged
in the acquisition, ownership and management of commercial
real estate, primarily neighborhood and community shopping
centers in the northeastern part of the United States.
Other assets include office and retail buildings and
industrial properties. The Trust's major tenants include
supermarket chains and other retailers who sell basic
necessities and multi-national industrial corporations.
Principles of Consolidation
The consolidated financial statements include the accounts
of HRE Properties (the Trust), its wholly-owned subsidiary,
and a joint venture in which the Trust has the ability to
control the affairs of the venture. All significant
intercompany transactions and balances have been eliminated
in consolidation.
Accounting for Leases
The Trust accounts for its leases of real property in
accordance with the provisions of Financial Accounting
Standards Statement No. 13, "Accounting for Leases," as
amended. This Statement sets forth specific criteria for
determining whether a lease should be accounted for as an
operating lease or a direct financing lease. In general, the
financing lease method applies where property is under
long-term lease to a creditworthy tenant and the present
value of the minimum required lease payments at the
inception of a lease is at least 90% of the market value of
the property leased. Other leases are accounted for as operating leases.
Federal Income Taxes
The Trust believes it qualifies and intends to continue to
qualify as a real estate investment trust under Sections
856-860 of the Internal Revenue Code. Under those sections,
a trust, among other things, that distributes at least 95%
of its real estate trust taxable income will not be taxed on
that portion of its taxable income which is distributed. The
Trust has distributed all of its taxable income for the
fiscal years through 1996. Accordingly, no provision has
been made for Federal income taxes in the accompanying
consolidated financial statements.
Taxable income of the Trust prior to the dividends paid
deduction for the years ended October 31, 1996, 1995 and
1994 was approximately $5,200,000, $3,600,000, and
$2,200,000, respectively. Taxable income in fiscal 1996 and
1995 was reduced through the utilization of available
capital loss carry-overs of $2,600,000 and $2,900,000,
respectively. The difference between net income for
financial reporting purposes and taxable income results
from, among other things, differences in adjusted bases for
capital gains and losses and different methods of accounting
for leases and depreciable lives related to the properties owned.
Depreciation and Amortization
The Trust uses the straight-line method for depreciation and
amortization. Properties owned and properties available for
sale are depreciated over the estimated useful lives of the
properties, which range from 30 to 45 years. Furniture and
equipment are depreciated over their estimated useful lives,
which range from 3 to 20 years. Tenant improvements,
deferred leasing costs and leasehold improvements are
amortized over the life of the related leases. All other
deferred charges are amortized over the terms of the
agreements to which they relate.
Properties Available for Sale
A property is classified as available for sale upon
determination by the Trustees that the property is to be
marketed for sale in the normal course of business over the
next several years.
In March 1995, the Financial Accounting Standards Board
issued Statement No. 121 (the "Statement") on accounting for
the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to assets to be held and
used. The Statement also establishes accounting standards
for long-lived assets and certain identifiable intangibles
to be disposed of. The Trust is required and plans to adopt
the Statement on November 1, 1996. The Statement requires,
among other things, that assets to be disposed of be carried
at the lower of cost or fair value less costs to dispose.
Management does not expect the impact on the consolidated
financial statements resulting from the adoption of the
provisions of this Statement to be material.
Capitalization
The Trust capitalizes all direct costs relating to the
acquisition of real estate investments and costs relating to
improvements to properties. The Trust also capitalizes all
direct costs relating to its successful leasing activities.
Income Recognition
Revenues from operating and finance leases include revenues
from properties owned and properties available for sale.
Rental income is generally recognized based on the terms of
leases entered into with tenants. Rental income from leases
with scheduled rent increases is recognized on a straight-
line basis over the lease term. Additional rents which are
provided for in leases, are recognized as income when earned
and their amounts can be reasonably estimated. Interest
income is recognized as it is earned. Gains and losses on
sales of properties are recorded when the criteria for
recognizing such gains or losses under generally accepted
accounting principles have been met.
Statements of Cash Flows
The Trust considers short-term investments with original
maturities of 90 days or less to be cash equivalents.
Use of Estimates
The preparation of financial statements requires management
to make use of estimates and assumptions that affect amounts
reported in the financial statements as well as certain
disclosures. Actual results could differ from those estimates.
Allowance For Possible Investment Losses
The Trust's real estate investments are recorded at the
lower of depreciated historical cost or estimated net
realizable values. The Trust periodically reviews each of
its investments for declines in net realizable values, to
amounts below recorded balances, based on its present
investment strategies. Future changes in such investment
strategies and other circumstances may affect estimates of
net realizable values and therefore the carrying amount of investments.
Net Income Per Common Share
Computations of net income per common share are based on the
weighted average number of common shares outstanding during
the respective periods. The additional shares issuable upon
exercise of stock options (see Note 8) have not been
included in the computations since their effect is immaterial.
(2) REAL ESTATE INVESTMENTS
The Trust's investments in real estate were composed of the
following at October 31, 1996 and 1995
(in thousands):
Properties Mortgage
Properties Available Notes 1996 1995
Owned for Sale Receivable Totals Totals
Retail $ 86,469 $ 16,553 $ 3,706 $ 106,728 $ 105,330
Office 1,507 7,864 -- 9,371 20,945
Distribution and Service -- 7,769 -- 7,769 8,736
Undeveloped Land 304 800 -- 1,104 1,104
$ 88,280 $ 32,986 $ 3,706 $ 124,972 $136,115
The Trust's investments at October 31, 1996, consisted of equity
interests in 18 properties which are located in various regions
throughout the United States and mortgage notes. The following is a
summary of the geographic locations of the Trust's investments at
October 31, 1996 and 1995 (in thousands):
1996 1995
Northeast $90,649 $89,211
Southeast 14,137 15,153
Midwest 10,418 10,910
Rocky Mountain 800 8,916
Southwest 7,015 9,909
Pacific Coast and Northwest 1,953 2,016
$124,972 $136,115
(3) PROPERTIES OWNED
The components of properties owned were as follows (in thousands):
1996 1995
Land $ 17,068 $ 17,068
Buildings and improvements 84,034 79,165
101,102 96,233
Accumulated depreciation (12,822) (10,267)
$ 88,280 $ 85,966
Space at properties owned by the Trust is generally leased to
various individual tenants under short and intermediate term leases
which are accounted for as operating leases.
Minimum rental payments on noncancellable operating leases become
due as follows: 1997 - $15,373,000; 1998 - $14,436,000; 1999 -
$13,007,000; 2000 - $11,664,000; 2001 - $8,685,000; and thereafter
- - $62,415,000.
In addition to minimum rental payments, certain tenants are
required to pay additional rental amounts based on increases in
property operating expenses and/or their share of the costs of
maintaining common areas. Certain of the Trust's leases provide for
the payment of additional rent based on a percentage of the
tenant's revenues. Such additional rents are included in rental
income and aggregated approximately $281,000, $483,000, and
$515,000 in 1996, 1995 and 1994, respectively.
(4) PROPERTIES AVAILABLE FOR SALE
In fiscal 1995, the Board of Trustees authorized a plan to sell all
of the non-core properties of the Trust over the next several
years. The non-core properties consist of all of the Trust's
distribution and service properties, the Trust's office properties
(with the exception of its headquarters), and certain retail
properties located outside of the Northeast region of the United
States. These properties, having a net carrying amount of
$32,986,000 at October 31, 1996, have been classified as Properties
Available for Sale in the accompanying consolidated financial
statements. As a result of this change in investment strategy, the
Trust recorded a charge of $7,000,000 in the 1995 consolidated
statement of income to write-down the carrying value of the
properties available for sale to their respective estimated net
realizable values.
At October 31, 1996 and 1995, properties available for sale
consisted of the following (in thousands):
1996 1995
Properties available for sale subject to:
Operating leases $ 25,832 $38,104
Direct financing leases 7,154 8,108
$ 32,986 $46,212
Operating Leases
The components of properties available for sale subject to
operating leases were as follows (in thousands):
1996 1995
Land $ 6,675 $ 8,898
Buildings and improvements 32,871 48,874
39,546 57,772
Accumulated depreciation (13,714) (19,668)
$ 25,832 $38,104
Direct Financing Leases
The components of properties available for sale subject to direct
financing leases were as follows (in thousands):
1996 1995
Total minimum lease payments to be received $ 5,900 $ 7,431
Assumed residual values of leased property 2,404 2,412
Unearned income (1,150) (1,735)
Investment in property subject to direct financing leases $ 7,154 $ 8,108
Original cost of property subject to direct financing leases $16,276 $16,276
Assumed residual values are based upon a depreciated cost concept
using estimated useful lives and thus do not contain an element of
appreciation which may result by reason of inflation or other factors.
Minimum lease payments receivable on direct financing leases become
due at a rate of $1,468,000 in 1997, $1,468,000 in 1998, $1,468,000
in 1999, $1,299,000 in 2000 and $197,000 in 2001.
In fiscal 1996, the Trust acquired one retail property at a
purchase price of $880,000. The property is located adjacent to
property already owned by the Trust.
Sales of Properties
In fiscal 1996, the Trust sold three properties for a net gain on
sales of properties of $6,341,000.
In fiscal 1995 the Trust sold four industrial properties for gains
on sales of properties of $7,567,000.
In fiscal 1994, the Trust sold an industrial property for a gain on
sale of property of $82,000.
(5) WRITE-DOWNS IN CARRYING VALUE OF INVESTMENTS
In connection with the Trust's change in investment strategy and
plan to sell its non-core properties, the Trust recorded a charge
of $7,000,000 in fiscal 1995 to write-down the carrying value of
the properties available for sale to their respective estimated net
realizable values. (See Note 4)
The Trust held a participating mortgage in the principal amount of
$4,836,000. The participating mortgage note was collateralized by
an office property and entitled the Trust to a fixed rate of
interest plus a participation in increases in the property's income
and market value. In fiscal 1994,the Trust determined that the
long-term outlook for the property had declined due to, among other
things, significant tenant turnover. As a result of these
circumstances, the Trust changed its investment strategy with
respect to this asset and offered the mortgage loan for sale and,
in December 1994, the mortgage loan was sold for net proceeds of
$3,750,000. As a result, the Trust recorded a charge of $1,086,000
in fiscal 1994, to write down the carrying value of the mortgage
loan to its selling price, which charge is reflected in "Write-
downs in carrying value of investments" in the 1994 consolidated
statement of income.
(6) MORTGAGE NOTES RECEIVABLE
The Trust's mortgage notes receivable consist of fixed rate
mortgages. The components of the mortgage notes receivable at
October 31, 1996 and 1995 were as follows (in thousands):
1996 1995
Remaining principal balance $ 4,690 $ 4,977
Unamortized discounts to reflect market interest
rates at time of acceptance of notes ( 984) (1,040)
$ 3,706 $ 3,937
At October 31, 1996, principal payments on mortgage notes
receivable become due as follows:
1997 - $158,000; 1998 - $172,000; 1999 - $189,000; 2000 - $206,000;
2001 - $160,000; thereafter - $ 3,805,000.
At October 31, 1996, the remaining principal balance was due from
two borrowers. The amount due from the largest individual borrower
at October 31, 1996 was $2,346,000. The contractual interest rates
on mortgage notes receivable range from 12% to 14%.
(7) MORTGAGE NOTES PAYABLE AND LINES OF CREDIT
At October 31, 1996 the Trust had seven nonrecourse mortgage notes
payable totalling $39,798,000 ($51,606,000 at October 31, 1995)
which are due in installments over various terms extending to the
year 2002 and which bear interest at rates ranging from 7.5% to
9.75%. The mortgage notes payable are collateralized by real
estate investments having a net carrying value of $68.4 million as
of October 31, 1996.
Scheduled principal payments during the next five years are as
follows: 1997 - $ 3,089,000; 1998 - $24,267,000; 1999 - $257,000;
2000 - $2,236,000; 2001 - $4,309,000; and thereafter - $5,640,000.
The Trust also has available $15 million in unsecured lines of
credit. Extensions of credit under one of the lines of credit in
the amount of $10 million is subject to the bank's satisfaction of
certain conditions, including the intended use of proceeds. The
lines of credit expire in fiscal 1997 and bear interest at rates
tied to the prime rate or LIBOR. A condition for one of the credit
lines in the amount of $5 million requires the Trust to maintain a
compensating balance of $525,000. The Trust had no outstanding
borrowings under either line of credit at October 31, 1996
($2,500,000 at October 31, 1995).
Interest paid for the years ended October 31, 1996, 1995 and 1994
was $4,945,000, $5,304,000, and $3,668,000 respectively.
(8) STOCK OPTIONS AND SHAREHOLDER RIGHTS PLAN
At October 31, 1996, 453,665 shares of the Trust's authorized but
unissued stock were reserved for issuance to key employees of the
Trust and certain non-employee trustees under the Trust's stock
option plan. Options are granted at fair market value on the date
of the grant and are generally exercisable in installments over a
maximum period of four years from the date of grant. A summary of
stock options at October 31, 1996 and 1995 is as follows:
Number Option Price
of Shares Per Share
Outstanding at October 31,
1996 440,082 $11.38-$25.50
1995 376,248 $11.38-$25.50
Exercisable at October 31, 1996 285,330 $11.38-$25.50
No accounting recognition is given to stock options until they are
exercised, at which time the proceeds
are credited to shareholders' equity. During the year ended October
31, 1995, options to purchase 6,668 common shares were exercised.
There were no options exercised in fiscal 1996.
Stock appreciation rights may be issued in tandem with the stock
options, in which case, either the option or the right can be
exercised. Such rights entitle the grantee to payment in cash or a
combination of common shares and cash equal to the increase in the
value of the shares covered by the option to which the stock
appreciation right is related. The plan limits the value of the
stock appreciation rights to 150% of the option price for the
related shares. The excess of the market price of the shares over
the exercise price of vested options is charged to expense. For the
years ended October 31, 1996, 1995 and 1994, there were no amounts
charged to expense.
The Board of Trustees adopted a Preferred Share Purchase Rights
Plan in 1988 and declared a dividend distribution of one preferred
share purchase right for each outstanding common share. The Plan
was amended in 1996 to increase the beneficial ownership threshold
which triggers the exercisability of the rights. The rights, which
expire on November 13, 1998, are not currently exercisable. When
they are exercisable, the holder will be entitled to purchase from
the Trust one one-hundredth of a share of a newly-established
Series A Participating Preferred Stock at a price of $65 per one
one-hundredth of a preferred share, subject to certain adjustments.
The rights will become exercisable 10 days after a person or group
either acquires 25% ("acquiring person") or more of the Trust's
shares, or announces an offer the consummation of which would
result in such person or group owning 30% or more of the shares.
Following any such 25% acquisition, shareholders other than the
acquiring person will be entitled to use the rights to purchase
common shares of the Trust at 50% of market value.
If the Trust is involved in a merger or other business combination
at any time after the rights become exercisable, the rights will be
modified to entitle a holder other than the acquiring person to
purchase a number of shares of common stock of the acquiring
company having a market value of twice the exercise price of each right.
(9) OTHER MATTERS
In a prior year, as a part of a real property transfer and mortgage
transaction, the Trust negotiated an option to purchase a 117,500
square foot retail property upon the occurrence of certain events,
for one dollar. The property is triple net leased to a single
tenant under a long-term lease arrangement. In fiscal 1996, the
Trust exercised its option. However, the property's owner of
record has contested the option and has commenced an action against
the Trust to declare the option unenforceable. The Trust has
counterclaimed, and intends to vigorously pursue the litigation.
There is a $2 million mortgage lien recorded against the property,
the priority of which is being evaluated.
In March 1996, the Trust's Board of Trustees authorized a program
to purchase up to one million of the Trust's common shares
periodically. The Trust purchased 40,700 common shares in fiscal
1996 which are held in treasury.
(10) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined
by management using available market information and appropriate
valuation methodologies. Considerable judgement is necessary to
interpret market data and develop estimated fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Trust could realize on disposition of
the financial instruments. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and cash equivalents, rents receivable, interest receivable,
accounts payable and accrued expenses and other liabilities are
carried at amounts which reasonably approximate their fair values.
The estimated fair value of mortgage notes receivable
collateralized by real property is based on discounting the future
cash flows at a year-end risk adjusted lending rate that the Trust
would utilize for loans of similar risk and duration. At October
31, 1996, the estimated aggregate fair value of the mortgage notes
receivable is $3,900,000.
Mortgage notes payable with an aggregate carrying value of
$39,798,000 have an estimated aggregate fair value of $40,000,000
at October 31, 1996. Estimated fair value is based on discounting
the future cash flows at a year-end risk adjusted lending rate
currently available to the Trust for issuance of debt with similar
terms and remaining maturities.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these
financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.
(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended
October 31, 1996 and 1995 are as follows
(in thousands, except per share data):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended October 31, 1996 Year Ended October 31, 1995
Quarter Ended Quarter Ended
Jan 31 Apr 30 July 31 Oct 31 Jan 31 Apr 30 July 31 Oct 31
Revenues $ 6,154 $ 6,076 $ 5,955 $ 6,247 $ 5,169 $ 5,606 $ 5,815 $6,263
Income (loss) before gains
on sales of properties (1) $ 778 $ 914 $1,053 $ 1,185 $ 575 $ 668 $ (6,252) $1,306
Gains (losses) on sales of
properties 6,252 -- 389 (300) -- 5,502 -- 2,065
Net Income (loss) $ 7,030 $ 914 $1,442 $ 885 $ 575 $ 6,170 $ (6,252) $3,371
Per share:
Net Income (loss) $ 1.31 $ .17 $ .26 $ .17 $ .11 $ 1.15 $ (1.17) $ .63
</TABLE>
(1) Quarter ended October 31, 1995 results include other income of $600,000
earned in connection with the contract for sale of one of the Trust's
properties.
Quarter ended July 31, 1995 results include a charge of $7,000,000 to
reflect the carrying values of two properties available for sale at
their net realizable values.
(12) SUBSEQUENT EVENTS
In December 1996, subject to shareholder approval, the Board of
Trustees approved a plan of reorganization of the Trust from a
Massachusetts business trust to a corporation organized in Maryland
to, among other things, provide for enhanced flexibility in the
conduct of its business in carrying out the strategic objectives of
the Trust. The plan of reorganization will be effected by means of
a merger of the Trust into a Maryland corporation wholly owned by
the Trust under which each outstanding common share of the Trust
will be converted into one share of common stock of the
corporation. The plan of reorganization is subject to, among other
things, approval of the shareholders of the Trust at its annual
meeting in March, 1997.
In December 1996, the Trust obtained a commitment from a bank for a
$2 million non recourse first mortgage loan secured by a retail
property having a book value of approximately $3.1 million.
In December 1996, the Trust purchased approximately 85 acres of
land in Carmel, New York at a cost of $275,000.
In November 1996, the Trust negotiated a settlement proposal with
one of its tenants to recover, among other things, unpaid
additional percentage rents including interest totalling $3.25
million. In accordance with the terms of its lease, the tenant
will be required to aggregate the sales of all its stores in a
specified radius when computing percentage rent due the Trust. The
settlement proposal, including certain other modifications to the
lease is expected to be completed and recorded as income in the Trust's
first quarter of fiscal 1997.
On November 22, 1996, the Trust formed a limited partnership with
certain shareholders of the Trust. The purpose of the partnership
is to own, manage and redevelop the Trust's Countryside Square
shopping center in Clearwater, Florida, a property available for
sale in the accompanying Consolidated Balance Sheet at October 31,
1996. The Trust, as the general partner, contributed the shopping
center at its net carrying amount (which amount approximates its
fair value of $13 million), and the limited partners, including
Kimco Realty Corp. who will manage the property, contributed
600,000 common shares of the Trust to the limited partnership. The
partnership agreement provides for the limited partners to receive
an annual cash preference from available cash of the partnership,
as defined. Upon liquidation, proceeds from the sale of the
partnership assets are to be distributed to the partners as
follows: first, $12 million to the limited partners, next, $25
million to the Trust and the balance to the partners in proportion
to the respective partnership interests. The property may be sold
at any time after the third year of operation and the Trust has a
right of first refusal on the sale of the property.
The partners are not obligated to make any additional capital
contributions, however, to the extent that there is a shortfall in
cash available for distributions, the general partner may elect to
sell the common shares of the Trust held by the partnership in an
amount equal to the shortfall amount, or contribute such shortfall
amount to the partnership.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of HRE Properties:
We have audited the accompanying consolidated balance sheets of HRE
Properties (the Trust), a Massachusetts voluntary association,
and subsidiary as of October 31, 1996 and 1995, and the
related consolidated statements of income, cash flows and shareholders'
equity for each of the three years in the period ended October 31, 1996.
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 HRE
Properties and subsidiary as of October 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the
three years in the period ended October 31, 1996 in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the accompanying
index to financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
New York, New York
December 18, 1996
HRE PROPERTIES
OCTOBER 31, 1996
SCHEDULE III- REAL ESTATE AND ACCUMULATED DEPRECIATION
- -----------------------------------------------------
(In thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E COL. F COL. G/H
Costs Capitalized Sub. Amount at which Carried
Initial Cost to Trust to Acquisition at Close of Period Accumulated Date
Description Building & Carrying Building & Building & Depreciation Constructed
and Location Encumbrances Land Improvements Costs Improvements Land Improvements Total Note(b) or Acquired
- ------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE SUBJECT TO OPERATING
LEASES (Note (a) ):
- -----------------------------------
OFFICE BUILDINGS:
Greenwich, Connecticut $575 $199 $795 $0 $45 $199 $840 $1,039 $76 1993 31.5
Greenwich, Connecticut 0 111 444 0 21 111 465 576 33 1994 31.5
Southfield, Michigan 0 1,000 10,280 0 833 1,000 11,113 12,113 4,249 1983 35
575 1,310 11,519 0 899 1,310 12,418 13,728 4,358
SHOPPING CENTERS:
Clearwater, Florida 0 3,689 17,273 0 2,881 3,689 15,354 19,043 6,439 1985 40
Springfield, Massachusetts 0 1,372 3,656 0 12,147 1,372 15,803 17,175 5,397 1970 40
Farmingdale, New York 2,575 1,029 4,174 0 106 1,029 4,280 5,309 437 1993 31.5
Somers, New York 2,458 821 2,600 0 30 821 2,630 3,451 325 1992 31
Wayne, New Jersey 9,100 2,492 9,966 0 273 2,492 10,239 12,731 1,056 1992 31
Meriden, Connecticut 14,722 5,000 20,309 0 467 5,000 20,776 25,776 1,910 1993 31.5
Danbury, Connecticut 5,940 3,850 15,811 0 597 3,850 16,408 20,258 782 1994 31.5
Tempe, Arizona 0 114 766 0 0 114 766 880 14 1996 40
Carmel, New York 0 1,470 5,973 0 26 1,470 5,999 7,469 163 1995 31.5
34,795 19,837 80,528 0 16,527 19,837 92,255 112,092 16,523
DEPARTMENT STORES:
Tempe, Arizona 0 378 1,518 0 970 378 2,488 2,866 1,387 1970 40
Mesa, Arizona 0 440 1,631 0 989 440 2,620 3,060 1,457 1971 40
0 818 3,149 0 1,959 818 5,108 5,926 2,844
INDUSTRIAL SERVICE CENTER:
Syracuse, New York 0 253 530 0 0 253 530 783 168 1973 40
0 253 530 0 0 253 530 783 168
MIXED USE FACILITY: RETAIL/OFFICE:
Newington, New Hampshire 4,428 421 1,997 0 4,597 421 6,594 7,015 2,643 1979 40
LAND:
Newington, New Hampshire 0 305 0 0 0 305 0 305 0 1981 -
Denver, Colorado 0 799 0 0 0 799 0 799 0 1988 -
TOTAL REAL ESTATE
SUBJECT TO OPERATING
LEASES... $39,798 $23,743 $97,723 $0 $23,982 $23,743 $116,905 $140,648 $26,536
</TABLE>
HRE PROPERTIES
OCTOBER 31, 1996
SCHEDULE III- REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
- ------------------------------------------------------------------
(In thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E COL. F
Net Investment
Remaining in Properties
Description Building & Carrying Building & Minimum Lease Residual Unearned Subject to
and Location Encumbrances Land Improvements Costs Improvements Payments Value Income Financin
REAL ESTATE SUBJECT TO FINANCING
LEASES (Notes (c) and (e) ):
- -----------------------------------
INDUSTRIAL DISTRIBUTION CENTERS:
(Leased to Chrysler Corporation)
St. Louis, Missouri 0 523 2,253 0 2,363 1,585 1,167 (333) 2,419 1970
Dallas, Texas 0 193 2,266 0 4,195 2,547 841 (482) 2,906 1970
Deferred Lease
Renewal Rights 0 0 0 0 296 0 296 0 296 1981
0 716 4,519 0 6,854 4,132 2,304 (815) 5,621
INDUSTRIAL DISTRIBUTION CENTER:
(Leased to Firestone Tire and
Rubber Company):
Albany, Georgia 0 835 3,343 0 0 1,768 100 (335) 1,533 1972
TOTAL REAL ESTATE
SUBJECT TO FINANCING
LEASES... $0 $ 1,551 $ 7,862 $ 0 $ 6,854 $5,900 $2,404 ($1,150) $7,154
</TABLE>
HRE PROPERTIES
OCTOBER 31, 1996
SCHEDULE III- REAL ESTATE AND ACCUMULATED DEPRECIATION -CONTINUED
- -----------------------------------------------------------------
(In thousands)
<TABLE>
<S> <C> <C> <C>
NOTES: 1996 1995 1994
(a) RECONCILIATION OF PROPERTIES OWNED SUBJECT TO OPERATING
LEASES
Balance at beginning of year $154,005 $132,085 $105,926
Property improvements during the year 5,263 1,816 907
Property acquired during the year 880 27,104 25,816
Writedown in carrying value of properties -- (7,000) --
Property sold or disposed of during the year (19,500) -- (564)
Balance at end of year $140,648 $154,005 $132,085
(b) RECONCILIATION OF ACCUMULATED DEPRECIATION
Balance at beginning of year $29,935 $26,173 $22,837
Provision during the year charged to income 4,454 4,099 3,531
Property sold during the year (7,853) (337) (195)
Balance at end of year $26,536 $29,935 $26,173
(c) RECONCILIATION OF PROPERTIES OWNED SUBJECT TO
FINANCING LEASES-
Balance at beginning of year $ 8,108 $14,719 $16,190
Recovery of investment in property owned subject to
financing leases ( 954) (1,355) (1,471)
Property sold during the year -- (5,256) --
Balance at end of year $7,154 $ 8,108 $14,719
</TABLE>
(d)Tenant improvement costs are depreciated over the life of
the related leases, which range from 3 to 25 years.
(e)The difference between the initial costs tothe Trust
and costs capitalized subsequent to acquisition and the amount
at which carried at close of period represents accumulated
depreciation for the period prior to classification of these
the period thereafter.
(f)The aggregate cost basis of real estate for Federal income tax
purposes at October 31,1996 is $173,040,000.
HRE PROPERTIES
OCTOBER 31, 1996
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
- -------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
COL. A COL.B COL. C COL. D COL. E COL. F
Face Amount Carrying Amount
of Mortgages of Mortgages
Interest Rate Final Maturity Periodic (Note (b) ) (Note (a) )
Description Coupon Effective Date Payment Terms (In Thousands) (In Thousands)
I. FIRST MORTGAGE LOANS ON BUSINESS PROPERTIES (NOTES (c) and (d):
Retail Store:
Fall River, Massachusetts 9% 14% 04-01-2013 Payable in monthly $1,225 $918
Installments of $11,920.
Retail Store:
Erie, Pennsylvania 9% 14% 07-01-2013 Payable in monthly 1,119 835
Installments of $10,787.
Retail Store:
Riverside, California 9% 12% 01-15-2013 Payable in quarterly 2,050 1,673
Installments of $54,313.
Total First Mortgage Loans 4,394 3,426
II. SECOND MORTGAGE LOAN ON BUSINESS PROPERTY (Notes (c) and (e) ):
Retail Store:
Riverside, California 9% 12% 01-15-2001 Payable in quarterly
Installments of $21,135. 296 280
TOTAL MORTGAGE LOANS ON REAL ESTATE $4,690 $3,706
</TABLE>
SCHEDULE IV- MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
NOTES TO SCHEDULE IV
<TABLE>
<S> <C> <C> <C>
Year Ended October 31,
Reconciliation of Mortgage Loans on Real Estate
- -------------------------------------------------
1996 1995 1994
------------ ---------- ------
(a) Balance at beginning of period: $3,937 $7,763 $8,917
Deductions during current period:
Prepayment of Mortgage Loan (143) ---- ----
Sale of Mortgage ---- (3,750) ----
Collections of principal and
amortization of discounts (88) (76) (68)
Writedown in carrying value of Mortgage Loan ----- ----- (1,086)
Balance at close of period: $3,706 $3,937 $ 7,763
(b) The aggregate cost basis for Federal income tax purposes is equal to the
face amount of the mortgages.
(c) At October 31, 1996 no mortgage loans were delinquent in payment of
currently due principal or interest.
(d) There are no prior liens for any of the First Mortgage Loans on Real
Estate.
(e) The First Mortgage Loan on this property is held by the Trust.
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.
HRE PROPERTIES
By: /S/ CHARLES J. URSTADT
Charles J. Urstadt
Chairman and Chief Executive Officer
Dated: January 22, 1997
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 on the date indicated.
/s/ CHARLES J. URSTADT January 22, 1997
Charles J. Urstadt
Chairman and Trustee
(Principal Executive Officer)
/s/ JAMES R. MOORE January 22, 1997
James R. Moore
Executive Vice President - Chief
Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
/s/ E. VIRGIL CONWAY January 22, 1997
E. Virgil Conway
Trustee
/s/ ROBERT R. DOUGLASS January 22, 1997
Robert R. Douglass
Trustee
/s/ PETER HERRICK January 22, 1997
Peter Herrick
Trustee
/s/ GEORGE H. C. LAWRENCE January 22, 1997
George H. C. Lawrence
Trustee
/s/ PAUL D. PAGANUCCI January 22, 1997
Paul D. Paganucci
Trustee
/s/ JAMES O. YORK January 22, 1997
James O. York
Trustee
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Annual Report on Form 10-K for the year
ended October 31,1996 of HRE Properties, into its previously filed Registration
Statement on Form S-3 (No.33-57119) and its previously filed Registration
Statements on Form S-8 (No.2-93146 and No. 33-41408), and to the reference to
our Firm under the caption"Experts" in said Registration Statements.
ARTHUR ANDERSEN LLP
New York, New York
January 22, 1997
</TABLE>
CHANGE OF CONTROL AGREEMENT
This Agreement dated as of November 6, 1996 between HRE Properties (the
"Trust") and Willing L. Biddle ("Employee") .
The Employee is currently employed by the Trust and the Employee's
services are valued by the Trust.
The Trust recognizes that the possibility of a change of control of the
Trustmay result in the departure or distraction of the Employee, to the
detriment of the Trust and its shareholders.
The Trust wishes to assure the Employee of fair severance should his
employment terminate in certain specified circumstances following a change of
control.
In consideration of the Employee's continued employment by the Trust, and
for other good and valuable consideration, the parties hereto hereby agree as
follows:
1. Termination Benefits. If the employment of the Employee is terminated
by the Employee for Good Reason or by the Trust for any reason other
than for Cause, within 18 months following a Change of Control,
(a) the Trust shall pay Employee an amount equal to 12 months of
Employee's rate of base salary (exclusive of any bonus or other
benefit) in effect at the date of the Change of Control. Such amount
shall be payable in cash in a lump sum within 45 days after such
termination; and
(b) the Trust shall continue in force and effect for 12 months after
termination (the "Continuation of Benefits Period") and at the same
level and for the benefit of the Employee's family, where applicable,
all life insurance, disability, medical and other benefit programs or
arrangements in which the Employee is participating or to which the
Employee is entitled at the date of the Change of Control, provided that
the Employee's continued participation is possible under such programs
and arrangements. In the event that such continued participation is not
possible, the Trust shall arrange to provide the Employee with benefits
similar to those which Employee would be entitled to receive under such
programs and arrangements. Without limiting the foregoing, the benefits
continuation shall include a lump sum cash payment to the Employee
within 45 days of such termination in lieu of Trust contributions on
behalf of the Employee under the HRE Properties Profit Sharing and
Savings Plan. The amount of such payment shall be the product of (i)
the number of months in the Continuation of Benefits Period and (ii)
1/12 of 5% (or such other percentage reflected in the Trust's most
recent annual contribution determined prior to the Change of Control)
times the Employee's annual salary rate in effect immediately prior to
the termination date or, if greater, the Employee's annual salary rate
in effect immediately prior to the Change of Control.
Payments under this Section 1 shall be reduced to the extent, but only
to the extent, necessary to provide that no "payment in the nature of
compensation" to (or for the benefit of) the Employee which is
"contingent"on the Change of Control would fail to be deductible for
federal income tax purposes by reason of section 28OG of the Internal
Revenue Code of 1986, as amended (the "Code"). As used in this Section
the words "payment in the nature of compensation" and "contingent" shall
be construed and applied in a manner consistent with the meaning of
those words under section 28OG of the Code and regulations thereunder.
The determination as to whether and to what extent a reduction in
payments under this Section 1 is necessary to
avoid the nondeductibility of any payment under section 28OG of the
Code shall be made at the Trust's expense by Arthur Andersen & Co.
or by such other certified public accounting firm as the
Compensation Committee of the Trustees may designate prior to a Change of
Control. In the event of any underpayment or overpayment under this
Section 1, as determined by Arthur Andersen & Co. (or such other firm
as may have been designated in accordance with the preceding sentence),
the amount shall forthwith be paid to the Employee or refunded to the
Trust, as the case may be, with interest at the applicable federal rate
provided for in section 7872(f)(2) of the Code.
2. Definitions.
The definitions in Appendix A are hereby incorporated in this Agreement.
3. No Duty to Mitigate Damages. The Employee's benefits under this
Agreement shall be considered severance pay in consideration of his past
service and his continued service from the date of this Agreement, and
his entitlement thereto shall neither be governed by any duty to
mitigate his damages by seeking further employment nor offset by any
compensation which he may receive from future employment.
4. Withholding. Anything herein to the contrary notwithstanding, all
payments required to be made by the Trust hereunder to the Employee
shall be subject to the withholding of such amounts, if any, relating to
tax and other payroll deductions as the Trust may reasonably determine
it should withhold pursuant to any applicable law or regulation.
5. Legal Fees and Expenses; Interest. The Trust shall pay all reasonable
legal fees and expenses incurred by the Employee in successfully
obtaining any right or benefit to which the Employee is entitled under
this Agreement. Any amount payable under this Agreement that is not
paid when due shall accrue interest at the base rate as from time to
time in effect at The Bank of New York, until paid in full.
6. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in New
York City in accordance with the rules of the American Arbitration
Association then in effect. The parties shall attempt to select a
mutually agreeable arbitrator who shall promptly convene a hearing to
resolve submitted disputes. If the parties are unable to agree upon
such an arbitrator within 20 days from initial contact, the American
Arbitration Association shall be requested by either party to submit a
list of at least seven arbitrators from which the parties shall attempt
to select one by agreement. In the event they do not so agree, they
shall alternately strike names from this list beginning with the
Employee, until a single name remains. The remaining person shall be
appointed to hear and decide the parties' disputes, drawing his
authority and the bases for decision from this Agreement. The
arbitrator will resolve all submitted matters in a written decision with
expedition. Judgment may be entered on the arbitrator's award in any
court having jurisdiction.
7. Notices. All notices shall be in writing and shall be deemed given five
days after mailing in the continental United States by registered or
certified mail, or upon personal receipt after delivery, telex, telecopy
or telegram, to the party entitled thereto at the address stated below
or to such changed address as the addressee may have given by a similar
notice:
To the Trust: HRE Properties
321 Railroad Avenue
Greenwich, Connecticut 06830
To the Employee: At his home address,
as last shown on the
records of the Trust
8. Severability. In the event that any provision of this Agreement shall
be determined to be invalid or unenforceable, such provision shall be
enforceable in any other jurisdiction in which valid and enforceable and
in any event the remaining provisions hereof shall remain in full force
and effect to the fullest extent permitted by law.
9. Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the parties and be enforceable by the Employee's personal
or legal representatives or successors. If the Employee dies while any
amounts would still be payable to him hereunder, such amounts shall be
paid to the Employee's estate. This Agreement shall not otherwise be
assignable by the Employee.
10. Successors. This Agreement shall inure to and be binding upon the
Trust's successors. The Trust will require any successor to all or
substantially all of the businesses and/or assets of the Trust by sale,
merger (where the Trust is not the surviving entity), lease or
otherwise, to assume expressly this Agreement. If the Trust shall not
obtain such agreement prior to the effectiveness of any such succession,
the Employee shall have all rights resulting from termination of the
Employee's employment under this Agreement. This Agreement shall not
otherwise be assignable by the Trust.
11. Amendment or Modification; Waiver. This Agreement may not be amended
unless agreed to in writing by the Employee and the Trust. No waiver by
either party of any breach of this Agreement shall be deemed a waiver of
a subsequent breach.
12. Continued Employment. This Agreement shall not confer upon the Employee
any right of continued or future employment by the Trust or any right to
compensation or benefits from the Trust except the right specifically
stated herein to certain severance benefits, and shall not limit the
right of the Trust to terminate the Employee's employment at any time,
except as may be otherwise provided in a written employment agreement
between the Trust and the Employee.
13. Governing Law. The validity, interpretation, performance and
enforcement of this Agreement shall be governed by the laws of The
Commonwealth of Massachusetts.
14. Liability of Shareholders. This Agreement is executed by or on behalf
of the Trustees of the Trust solely in their capacity as such Trustees,
and shall not constitute their personal obligation either jointly or
severally in their individual capacities. The shareholders, Trustees,
officers or agents of the Trust shall not be personally liable for any
obligations of the Trust under this Agreement and all parties hereto
shall look solely to the property of the Trust for the payment of any
claim hereunder.
IN WITNESS WHEREOF the parties have duly executed the Agreement as of
the above date.
Employee
HRE PROPERTIES
By: Title: Chairman
APPENDIX A TO CHANGE OF CONTROL AGREEMENT
"Change of Control" shall mean the occurrence of any one of the
following events:
(a) any Person becomes the owner of 20% or more of the Trust's Common Shares
and thereafter individuals who were not Trustees of the Trust prior to
the date such Person became a 20% owner are elected as Trustees pursuant
to an arrangement or understanding with, or upon the request of or
nomination by, such Person and constitute at least two of the Trustees;
or
(b) there occurs a change of control of the Trust of a nature that would be
required to be reported in response to Items la of Form 8-K pursuant to
Section 13 or 15 under the Securities Exchange Act of 1934 ("Exchange
Act"), or in any other filing by the Trust with the Securities and
Exchange Commission (the "Commission"); or
(c) there occurs any solicitation of proxies by or on behalf of any Person
other than the Trustees of the Trust and thereafter individuals who were
not Trustees prior to the commencement of such solicitation are elected
as Trustees pursuant to an arrangement or understanding with, or upon
the request of or nomination by, such Person and constitute at least two
of the Trustees.
(d) the Trust executes an agreement of acquisition, merger or consolidation
which contemplates that (i) after the effective date provided for in the
agreement, all or substantially all of the business and/or assets of the
Trust shall be owned, leased or otherwise controlled by another
corporation or other entity and (ii) individuals who are trustees of the
Trust when such agreement is executed shall not constitute a majority of
the trustees or board of directors of the survivor or successor entity
immediately after the effective date provided for in such agreement;
provided, however, for purposes of this paragraph (c) that if such
agreement requires as a condition precedent approval by the Trust's
shareholders of the agreement or transaction, a Change of Control shall
not be deemed to have taken place unless and until such approval is
secured.
"Common Shares" shall mean the then outstanding Common Shares of the
Trust plus, for purposes of determining the ownership of any Person,
the number of unissued shares of Common Shares which such Person has the
right to acquire
(whether such right is exercisable immediately or only after the passage of
time) upon the exercise of conversion rights, exchange rights, warrants or
options or otherwise.
"Person" shall have the meaning used in Section 13(d) of the Exchange
Act, as in effect on December 31, 1984. A Person shall be deemed to be
the "owner" of any Common Shares:
(a) of which such Person would be the "beneficial owner", as such term is
defined in Rule 13d-3 promulgated by the Commission under the Exchange
Act, as in effect on December 31, 1984; or
(b) of which such Person would be the "beneficial owner", as such term is
defined under Section 16 of the Exchange Act and the rules of the
Commission promulgated thereunder, as in effect on December 31, 1984; or
(c) which such Person or any of its Affiliates or Associates (as such terms
are defined in Rule 12b-2 promulgated by the Commission under the
Exchange Act, as in effect on December 31, 1984), has the right to
acquire (whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights, warrants or
options or otherwise.
Termination for "Cause" shall mean termination of the Employee's employment
by the Trust because of dishonesty, conviction of a felony, gross neglect
of duties (other than as a result of disability or death), or conflict
of interest(other than any conflict of interest which has been fully
disclosed to the Trustees and has been determined by them not to be
material), which, in the case of gross neglect or conflict, shall continue
for 30 days after the Trust gives written notice to the Employee
requesting the cessation of such gross neglect or conflict, as the case
may be.
Termination for "Good Reason" shall have the following meanings.
Termination for "Good Reason" shall mean the voluntary termination by
the Employee of his employment within 90 days after the occurrence of
any one of the following events without the Employee's express written
consent:
(a) the assignment to him of any duties inconsistent with his positions,
duties, responsibilities, reporting requirements, and status with the
Trust immediately prior to a Change of Control, or a substantive change
in the Employee's titles or offices as in effect immediately prior
to a Change of Control, or any removal of the Employee from or any
failure to reelect him to such positions, except in connection
with the termination of the Employee's employment by the Trust
for Cause or by the Employee other than for Good Reason;
or any other action by the Trust which
results in a diminishment in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent action
which is remedied by the Trust promptly after receipt of notice thereof
given by the Employee; or
(b) if the Employee's base salary for any fiscal year is less than 100
percent of the base salary paid to the Employee in the completed fiscal
year immediately preceding the Change of Control, or if the Employee's
total cash compensation opportunities, including salary and incentives,
for any fiscal year are less than 100 percent of the total cash
compensation opportunities made available to the Employee in the
completed fiscal year immediately preceding the Change of Control; or
(c) the failure of the Trust to continue in effect any benefits or
perquisites, or any pension, life insurance, medical insurance or
disability plan in which the Employee was participating immediately
prior to a Change of Control unless the Trust provides the Employee
with a plan or plans that provide substantially similar benefits, or
the taking of any action by the Trust that would adversely affect the
Employee's participation in or materially reduce the Employee's
benefits under any of such plans or deprive the Employee of
any material fringe benefit enjoyed by the Employee
immediately prior to a Change of Control; or
(d) any relocation of the Employee outside Manhattan in New York City; or
(e) the Trust sells or otherwise disposes of, in one transaction or a
series of related transactions, assets or earning power aggregating
more than 50% of the assets (taken at asset value as stated on the
books of the Trust determined in accordance with generally accepted
accounting principles consistently applied) or earning power of the
Trust to any other Person or Persons; or
(f) any other breach by the Trust of any provision of this Agreement,
provided that the same shall have continued unremedied for a period of
30 days after the Employee gives notice to the Trust requesting that
the Trust remedy the same.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 1819000
<SECURITIES> 0
<RECEIVABLES> 2795000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 147802000<F1>
<DEPRECIATION> 26536000
<TOTAL-ASSETS> 132160000
<CURRENT-LIABILITIES> 774000
<BONDS> 39798000
<COMMON> 124126000
0
0
<OTHER-SE> (34160000)
<TOTAL-LIABILITY-AND-EQUITY> 132160000
<SALES> 0
<TOTAL-REVENUES> 24432000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15635000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4867000
<INCOME-PRETAX> 3930000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3930000
<DISCONTINUED> 0
<EXTRAORDINARY> 6341000<F2>
<CHANGES> 0
<NET-INCOME> 10271000
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
<FN>
<F1>This item consists of Real Estate Investments Owned
<F2>This item consists of Gains on Sales of Properties
</FN>
</TABLE>
