SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
___
/ X / Quarterly Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarter ended: September 30, 1998
OR
___
/___/ Transition Report Under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from: _____ to _______
Commission file number: 0-14986
AETNA REAL ESTATE ASSOCIATES, L.P.
(Exact name of registrant as specified in its charter)
Delaware 11-2827907
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
242 Trumbull Street, Hartford, Connecticut 06103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 275-2178
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 __
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The summarized financial information contained herein is
unaudited; however, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation of such financial information have been
included. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results
to be expected for the full year.
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Balance Sheets
As of September 30, 1998 and December 31, 1997
(in thousands)
September 30, December 31,
1998 1997
(unaudited)
Assets
Investments in real estate:
Properties $ 245,773 $ 243,062
Less accumulated depreciation
and amortization (59,667) (54,496)
Total investments in
real estate 186,106 188,566
Cash and cash equivalents 13,055 10,883
Rent and other receivables 3,916 3,954
Other 13 13
Total assets $ 203,090 $ 203,416
Liabilities and Partners' Capital
Liabilities:
Investment portfolio fee payable
to related parties $ 1,220 $ 1,168
Accounts payable and accrued expenses 437 463
Accrued property taxes 1,331 782
Security deposits 1,033 979
Unearned income 198 315
Total liabilities 4,219 3,707
Partners' capital (deficiency):
General Partners (75) (67)
Limited Partners 198,946 199,776
Total partners' capital 198,871 199,709
Total liabilities and
partners' capital $ 203,090 $ 203,416
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 1998 and 1997
(in thousands, except units and per unit amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenue:
Rental $ 7,661 $ 7,045 $ 22,454 $ 21,294
Interest 147 99 411 280
Other income 56 161 305 390
7,864 7,305 23,170 21,964
Expenses:
Property operating 2,683 2,590 7,539 7,455
Depreciation and amortization 1,730 1,710 5,171 5,119
Investment portfolio fee -
related parties 1,220 1,182 3,608 3,535
General and administrative 181 159 476 488
Bad debt 17 98 273 407
5,831 5,739 17,067 17,004
Net income $ 2,033 $ 1,566 $ 6,103 $ 4,960
Net income allocated:
To the General Partners $ 20 $ 16 $ 61 $ 50
To the Limited Partners 2,013 1,550 6,042 4,910
$ 2,033 $ 1,566 $ 6,103 $ 4,960
Weighted average number of
limited partnership units
outstanding 12,724,547 12,724,547 12,724,547 12,724,547
Earnings per limited
partnership unit $.16 $.12 $.48 $.39
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
For the Nine Months Ended September 30, 1998 and 1997
(in thousands - unaudited)
General Limited
Partners Partners Total
Balance at January 1, 1998 $ (67) $ 199,776 $ 199,709
Distributions (69) (6,872) (6,941)
Net income 61 6,042 6,103
Balance at September 30, 1998 $ (75) $ 198,946 $ 198,871
Balance at January 1, 1997 $ (43) $ 202,213 $ 202,170
Distributions (69) (6,872) (6,941)
Net income 50 4,910 4,960
Balance at September 30, 1997 $ (62) $ 200,251 $ 200,189
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
(in thousands - unaudited)
Nine Months Ended September 30,
1998 1997
Cash flows from operating activities:
Net income $ 6,103 $ 4,960
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,171 5,119
Bad debt expense 273 407
Accrued rental income (12) (29)
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Rent and other receivables (223) (71)
Investment portfolio fee payable to
related parties 52 (13)
Accounts payable and accrued expenses (26) (80)
Accrued property taxes 549 369
Security deposits 54 30
Unearned income (117) (14)
Net cash provided by operating activities 11,824 10,678
Cash flows from investing activities:
Investments in real estate (2,711) (2,561)
Net cash used in investing activities (2,711) (2,561)
Cash flows from financing activities:
Cash distributions (6,941) (6,941)
Net cash used in financing activities (6,941) (6,941)
Net increase in cash and cash equivalents 2,172 1,176
Cash and cash equivalents at beginning of period 10,883 9,133
Cash and cash equivalents at end of period $ 13,055 $ 10,309
AETNA REAL ESTATE ASSOCIATES, L.P.
(a Delaware limited partnership)
Notes to Consolidated Financial Statements
(unaudited)
1. GENERAL
The accompanying financial statements and related notes
should be read in conjunction with the Partnership's
annual report on Form 10-K for the year ended December 31,
1997. The financial data included herein as of December
31, 1997 has been drawn from the consolidated financial
statements of the Partnership, which were audited by
PricewaterhouseCoopers LLP.
2. TRANSACTIONS WITH AFFILIATES
Investment Portfolio Fee
The General Partners are entitled to receive an
investment portfolio fee based on the net asset value of
the Partnership's investments. The fee is payable
quarterly, in arrears, from available cash flow and may
not exceed 2.5% per annum of net asset value. The
applicable percentage, for the purpose of calculating
this fee, declines to 2% per annum for Investments in
Properties held by the Partnership more than 10 years but
less than 15 years, and to 1.75% per annum for
Investments in Properties held more than 15 years. For
the nine months ended September 30, 1998, Aetna/AREA and
AREA GP earned fees of $1,688,300 and $1,919,888,
respectively. For the similar period of the prior year,
Aetna/AREA and AREA GP earned fees of $1,527,496 and
$2,007,515, respectively.
3. CASH DISTRIBUTIONS
Cash distributions paid to Unitholders during the period
January 1, 1998 to September 30, 1998 by the Partnership
aggregated $6,871,255 which related to operations for the
quarters ended December 31, 1997, March 31, 1998 and
June 30, 1998. Cash distributions paid to the General
Partners during the same period aggregated $69,407 which
related to operations for the quarters ended December 31, 1997,
March 31, 1998, and June 30, 1998.
4. SUBSEQUENT EVENTS
In October 1998, the Partnership declared cash
distributions aggregating $2,313,554 pertaining to the
period from July 1, 1998 to September 30, 1998. On or
about November 18, 1998, $2,290,418 ($.18 per Unit) is to
be distributed to the Limited Partners and $23,136 to the
General Partners.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At December 31, 1997, the Partnership had working capital
reserves ("Reserves") of approximately $6,201,000. During the
nine months ended September 30, 1998, the Partnership expended
approximately $2,711,000 for capital improvements. The
Partnership has current Reserves of approximately $8,353,000,
including approximately $4,863,000 retained from operations for
the nine months ended September 30, 1998. At September 30,
1998, the Partnership had approximately $3,200,000 of
outstanding commitments for capital improvements and
approximately $3,241,000 of projected capital improvements
(collectively the "Capital Costs") related to existing
Investments in Properties. For the three months ended December
31, 1998 the Partnership will fund if needed approximately
$3,666,000 from Reserves for these Capital Costs. These
Capital Costs consist primarily of estimated tenant
improvements and leasing commissions for speculative leasing
activity at certain properties, which, based on activity in the
marketplace, may or may not materialize. The Partnership
anticipates funding these Capital Costs from existing Reserves
and through additions from operating cash flow to its Reserves.
To ensure that the Partnership has adequate Reserves to fund
its Capital Costs, the General Partners will continue to review
the Reserves quarterly.
If sufficient capital is not available at the time of a funding
of a Capital Cost, the General Partners will review such
Capital Cost and take such steps as they consider appropriate,
including decreasing future cash distributions from operations,
negotiating a delay or other restructuring of the capital
funding requirements related to an Investment in Properties or
borrowing money, as provided in the Partnership Agreement, on a
short-term basis to pay Capital Costs.
Year 2000 Issues
Management is continuing to evaluate the potential impact of
the situation commonly referred to as the "Year 2000" problem.
The Year 2000 problem, which is common to most businesses,
concerns the inability of computer systems and devices to
properly recognize and process date-sensitive information when
the year changes to 2000. The Partnership owns real estate
assets, and in connection with the operation of such assets,
utilizes certain software products and equipment such as
accounting, heating, ventilation and air conditioning and
security systems, which may or may not be Year 2000 compliant.
Management has formed teams and hired independent third party
consultants to identify Year 2000 issues, assess Year 2000
readiness, identify risks if the Partnership is unable to
mitigate Year 2000 problems and formulate remediation or
contingency plans where appropriate. Their findings are
expected to be summarized by December 31, 1998. It is
anticipated that the cost of vendor (particularly property
management and related services) compliance with Year 2000
problems will be borne primarily by vendors. Although it is
not possible at present to give an estimate of the cost of this
work to the Partnership, the General Partners do not expect
such costs to have a material adverse impact on the
Partnership's long term results of operations.
Results of Operations
Net income for the nine months ended September 30, 1998
increased approximately $1,143,000 in comparison to the
corresponding period in 1997, due primarily to an increase in
rental revenue. An increase in revenue of approximately
$1,206,000 from the corresponding period in 1997 resulted
primarily from increases in rental revenue at Town Center
Business Park, Powell Street Plaza, Summit Village, and 115
Flanders Road. Rental revenue at Town Center Business Park
increased as a result of improved occupancy and rental rates,
as well as approximately $72,000 charged to a tenant under the
default clause of their lease, which was offset by that
tenant's bad debt expense as discussed below. Rental revenue
at Powell Street Plaza, Summit Village, and 115 Flanders Road
increased due to increased rental rates. These increases were
partially offset by decreases in rental revenue at Oakland
Pointe Shopping Center and Three Riverside Drive as a result
of lower occupancy. Expenses for the nine months ended
September 30, 1998 increased approximately $63,000 in
comparison to the corresponding period in 1997 due to normal
business operations.
Bad debt expense, which resulted from the write-off of certain
tenant receivables and increases to the allowance for doubtful
accounts at certain properties for the nine months ended
September 30, 1998, includes approximately $213,000 related
primarily to a tenant experiencing financial difficulties at
Town Center Business Park.
The Partnership made cash distributions of $.54 per Unit to
Unitholders during the nine months ended September 30, 1998
and 1997.
The Net Asset Value of each of the Partnership's Units, based
upon quarterly independent appraisals, increased to $17.95 at
September 30, 1998 from $16.38 at September 30, 1997. The
increase in Net Asset Value per Unit is primarily the result
of increases in the appraised values of certain of the
Registrant's properties, including significant increases in
Village Square and Town Center Business Park. The increase in
appraised value for these properties is primarily a result of
improved occupancy and market rent assumptions and reduced
discount and exit capitalization rate parameters. Village
Square's appraised value is now based on the assumption that
the property will be converted to office use. Leasing at
Village Square has improved with the conversion from retail to
office use.
Net income for the three months ended September 30, 1998
increased approximately $467,000 as compared to the
corresponding period in 1997. An increase in rental revenue
of approximately $616,000 was partially offset by a decrease
in other income of approximately $105,000. The most
significant increases in rental revenue occurred at Town
Center Business Park, 115 Flanders Road and Powell Street.
Other income for the period ended September 30, 1997 included
the receipt of a prior year tax refund at Powell Street Plaza.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(a) On August 11, 1998, Oak Investors LLC and Cedar
Partners L.P. (collectively, "Oak"), filed suit against
the Partnership in the Court of Chancery of the State
of Delaware in and for New Castle County (the
"Complaint"). The Complaint alleges that the
Partnership failed to deliver a list of the Unitholders
upon Oak's demand and that such failure constitutes a
breach of the Delaware Revised Uniform Limited
Partnership Act and a breach of the Partnership's
agreement of limited partnership. The Partnership and
the plaintiff settled such litigation without cost to
the Partnership.
(b) In November 1996, the Registrant and the General
Partners were named as defendants in two purported
class action lawsuits filed in the Chancery Court of
Delaware in New Castle County, entitled Bobbitt v.
Aetna Real Estate Associates, L.P., et al. and Estes v.
Aetna Real Estate Associates, L.P., et al. The
complaints in those actions allege, among other things,
that management fees that have been and are paid to the
General Partners are excessive and that a standstill
agreement with a tender offeror which has had the
effect of limiting the number of Units that would be
the subject of any tender offer is unlawful. The
defendants have moved to dismiss one of the complaints
and have not yet been served with the other. The
General Partners believe that the allegations in these
complaints are without merit and intend to defend the
lawsuits vigorously. The tender offer referenced in
the lawsuit expired in December 1997 with less than 5%
of the Units being tendered. The parties have
exchanged correspondence and are engaged in discussions
concerning settlement.
Item 5. Other Information
The General Partners have determined that it is in the
best interests of the Partnership and the Unitholders
to begin to market for sale the following six
properties owned by the Partnership: (i) Gateway
Square, (ii) Oakland Pointe Shopping Center, (iii)
Cross Pointe Centre, (iv) Three Riverside Drive, (v)
115 Flanders Road, and (vi) 117 Flanders Road.
The General Partners intend to retain one or more
third-party real estate brokers to market such properties.
There can be no assurances that such properties will be
sold in the near future, or that if sold, the sales
prices will approximate the estimated net asset value
of such properties. The General Partners are continuing
to actively review the potential sale of other properties
owned by the Partnership. In addition, the Partnership
from time to time receives unsolicited expressions of
interest in purchasing some or all of the properties.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 27 - Financial Data Schedule
(b) None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AETNA REAL ESTATE ASSOCIATES, L.P.
BY: Area GP Corporation
General Partner
Date: November 16, 1998 BY: /s/ Mark J. Marcucci
President & Director
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