SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ Quarterly Report Under Section 13 or 15 (d) of
--- the Securities Exchange Act of 1934
For the quarter ended: March 31, 1999
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OR
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/ / Transition Report Under Section 13 or 15 (d) of
--- the Securities Exchange Act of 1934
For the transition period from: to
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Commission file number: 0-14986
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AETNA REAL ESTATE ASSOCIATES, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 11-2827907
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
242 Trumbull Street, Hartford, Connecticut 06103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 275-2178
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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
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<PAGE>
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
three months ended March 31, 1999 are not necessarily indicative of the results
to be expected for the full year.
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<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Balance Sheets
As of March 31, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
--------- -----------
Assets
- ------
<S> <C> <C>
Investments in real estate:
Properties $219,231 $225,833
Less accumulated depreciation
and amortization (48,275) (48,915)
-------- --------
Total investments in real estate 170,956 176,918
Cash and cash equivalents 20,094 12,597
Rent and other receivables 3,537 3,656
Other 13 13
-------- --------
Total assets $194,600 $193,184
======== ========
Liabilities and Partners' Capital
- ---------------------------------
Liabilities:
Investment portfolio fee payable
to related parties $ 1,237 $ 1,232
Distributions payable 2,571 -
Accrued litigation costs 2,400 -
Accounts payable and accrued expenses 557 525
Accrued property taxes 935 770
Security deposits 985 1,063
Unearned income 293 252
-------- --------
Total liabilities 8,978 3,842
-------- --------
Partners' capital (deficiency):
General Partners (208) (171)
Limited Partners 185,830 189,513
-------- --------
Total partners' capital 185,622 189,342
-------- --------
Total liabilities and partners' capital $194,600 $193,184
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Income
For the Three Months Ended March 31, 1999 and 1998
(in thousands, except units and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Revenue:
Rental $ 7,810 $ 7,419
Interest 145 128
Other income 70 78
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8,025 7,625
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Expenses:
Property operating 2,459 2,427
Depreciation and amortization 1,629 1,713
Investment portfolio fee - related parties 1,237 1,185
General and administrative 191 136
Bad debt 83 39
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5,599 5,500
------- -------
Legal expenses - litigation (2,472) -
Gain on sale of property 1,211 -
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Net income $ 1,165 $ 2,125
======= =======
Net income allocated:
To the General Partners $ 12 $ 21
To the Limited Partners 1,153 2,104
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$ 1,165 $ 2,125
======= =======
Weighted average number of limited
partnership units outstanding 12,724,547 12,724,547
=========== ===========
Earnings per limited partnership unit $ .09 $ .17
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
For the Three Months Ended March 31, 1999 and 1998
(in thousands - unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1, 1999 $(171) $189,513 $189,342
Distributions (49) (4,836) (4,885)
Net income 12 1,153 1,165
----- -------- --------
Balance at March 31, 1999 $(208) $185,830 $185,622
===== ======== ========
Balance at January 1, 1998 $ (67) $199,776 $199,709
Distributions (23) (2,291) (2,314)
Net income 21 2,104 2,125
----- -------- --------
Balance at March 31, 1998 $ (69) $199,589 $199,520
===== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(in thousands - unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,165 $ 2,125
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,629 1,713
Gain on sale of property (1,211) -
Bad debt expense 83 39
Accrued rental income 94 (29)
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Rent and other receivables (58) (113)
Investment portfolio fee payable to
related parties 5 17
Accounts payable and accrued expenses 32 (52)
Accrued litigation costs 2,400 -
Accrued property taxes 165 243
Security deposits (78) 36
Unearned income 41 (34)
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Net cash provided by operating activities 4,267 3,945
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Cash flows from investing activities:
Net proceeds from sale of property 6,712 -
Investments in real estate (1,168) (679)
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Net cash provided by (used in)
investing activities 5,544 (679)
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Cash flows from financing activities:
Cash distributions (2,314) (2,314)
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Net cash used in financing activities (2,314) (2,314)
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Net increase in cash and cash equivalents 7,497 952
Cash and cash equivalents at beginning of period 12,597 10,883
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Cash and cash equivalents at end of period $20,094 $11,835
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-6-
<PAGE>
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 for the year ended
December 31, 1998. The financial data included herein as of December 31,
1998 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. See Note 5 with respect to potential future reduction of fees.
For the three months ended March 31, 1999, Aetna/AREA and AREA GP earned
fees of $577,533 and $659,399, respectively. For the similar period of the
prior year, Aetna/AREA and AREA GP earned fees of $553,674 and $631,002,
respectively.
3. SALE OF INVESTMENT IN REAL ESTATE
On March 17, 1999, Gateway Square was sold to an unaffiliated party. The
gross sales price of $6,940,000 was approximately $640,000 greater than
the property's appraised value. After closing costs and adjustments
aggregating approximately $211,000 and $235,000, respectively, net cash
proceeds to the Partnership were approximately $6,494,000. Gain on the
sale included in these consolidated financial statements is approximately
$1,211,000 for the three months ended March 31, 1999.
4. CASH DISTRIBUTIONS
On or about February 26, 1999, cash distributions paid by the Partnership
aggregated $2,313,554 which related to operations for the three months
ended December 31, 1998.
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<PAGE>
5. LITIGATION
In November 1996, the Partnership and its general partners, Aetna/AREA
Corporation and AREA GP Corporation (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 (collectively, the "Complaints"). The Complaints alleged,
among other things, that management fees that have been paid and are paid
to the General Partners are excessive and that a standstill agreement with
a then tender offeror which had the effect of limiting the number of
Partnership Units that would be the subject of any tender offer is
unlawful.
On March 15, 1999, the parties entered into a Stipulation and Agreement of
Compromise, Settlement and Release (the "Settlement Agreement"), which was
filed with and is subject to approval by the Delaware Chancery Court.
There can be no assurance that the Court will approve the Settlement
Agreement. A hearing to consider the Settlement Agreement is scheduled for
May 19, 1999.
Upon the "Final Date" (the date that the judgment is no longer subject to
appeal) the Applicable Percentage, as defined in Section 6.6 of the
Partnership Agreement, used to calculate the Investment Portfolio Fee per
quarter which is paid to the General Partners, will be reduced by 0.0625%
(the "First Reduction"). The First Reduction will be effective on the
Final Date and will be applied retroactively to March 15, 1999, the date
of the execution of the Settlement Agreement. The First Reduction will
result in a 0.25% reduction of the annual Investment Portfolio Fee
otherwise provided in the Partnership Agreement. Effective on the second
anniversary of the Final Date, the Applicable Percentage will be reduced
by an additional 0.0625% per quarter (the "Second Reduction"). The First
and Second Reductions will apply cumulatively so that the annual
Investment Portfolio Fee from the second anniversary of the Final Date
through the termination of the Partnership will be a total of 0.50% below
the annual Investment Portfolio Fee otherwise provided in the Partnership
Agreement. If the settlement becomes final, the Investment Portfolio Fee
reduction for the period from March 15, 1999 through March 31, 1999 would
be approximately $30,000 and will be recognized for financial statement
purposes in the period of the Final Date.
As discussed in Note 6, pursuant to the terms of the Settlement Agreement,
the Partnership made a special cash distribution out of Partnership cash
reserves on April 14, 1999 of $2,544,909 ($0.20 per Unit) to Limited
Partners and $25,706 to the General Partners.
The representative plaintiffs or their counsel may submit an application
to the Delaware Chancery Court, per the terms of the Settlement Agreement,
for reimbursement by the Partnership of attorneys' fees in an amount not
to exceed $2,000,000 and out-of-pocket expenses in an amount not to exceed
$200,000. In addition the Partnership accrued $200,000 for legal expenses
on behalf of the Partnership and the General Partners. As a result, the
reserve established as of March 31, 1999 was $2,400,000.
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<PAGE>
6. SUBSEQUENT EVENTS
On April 14, 1999, the Partnership paid a special cash distribution out of
Partnership cash reserves aggregating $2,570,615 pursuant to the
Settlement Agreement.
In May 1999, the Partnership declared additional distributions of
$2,313,554 pertaining to operations for the period from January 1, 1999 to
March 31, 1999 and $6,426,539 from the sale proceeds of Gateway Square. On
or about May 17, 1999, $8,652,692 ($.68 per Unit) is to be distributed to
the Limited Partners and $87,401 to the General Partners.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Registrant had working capital reserves ("Reserves")
of approximately $7,551,000. During the quarter ended March 31, 1999, the
Registrant expended approximately $1,168,000 for capital improvements. After
declared cash distributions from the sale proceeds of Gateway Square and a
special distribution from Reserves, see Note 6 to Consolidated Financial
Statements, the Registrant has current Reserves of approximately $3,645,000. At
March 31, 1999, the Registrant had approximately $1,678,000 of outstanding
commitments for capital improvements and approximately $4,767,000 of projected
capital improvements (collectively the "Capital Costs") related to existing
Investments in Properties. For the nine months ended December 31, 1999 the
Registrant will fund, if needed, approximately $5,356,000 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 Registrant anticipates funding these Capital Costs from
existing Reserves and through additions from operating cash flow to its
Reserves. To ensure that the Registrant 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 Costs 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
- ---------
The Year 2000 issue, 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 Registrant owns real estate
assets, and in connection with the operation of such assets, utilizes certain
software products and equipment such as accounting, heating, ventilating and
cooling systems and security systems, which may or may not be Year 2000
compliant. A comprehensive risk-based plan designed to make such systems Year
2000 ready is currently being executed. The plan covers five stages, including:
(i) inventory, (ii) assessment, (iii) remediation, (iv) testing and
certification, and (v) contingency planning, where appropriate. The inventory
and assessment stages for the Registrant's real estate assets are currently
underway. These phases are targeted for completion by mid-1999. Remediation,
testing and certification of the systems, if necessary, and contingency planning
are targeted for completion thereafter. Although it is not possible at present
to give an estimate of the cost to the Registrant to remediate systems for Year
2000 issues, such costs are not expected to have a material adverse impact on
the Registrant's long-term results of operations.
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<PAGE>
Communications are underway with the Registrant's critical external
relationships to determine the extent to which the Registrant may be vulnerable
to such parties' failure to resolve their own Year 2000 issues. Where
practicable, contingency plans will be developed in an attempt to mitigate risks
with respect to the failure of these entities to be Year 2000 ready. 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. The effect, if any, on the Registrant's results of operations from the
failure of such parties to be Year 2000 ready is not reasonably estimable.
Results of Operations
- ---------------------
Net income for the three months ended March 31, 1999 decreased approximately
$960,000 in comparison to the corresponding period in 1998, resulting primarily
from the legal expenses accrued as a result of the Settlement Agreement. These
expenses were partially offset by the gain on the sale of Gateway Square, and an
increase in rental revenue of approximately $391,000. The increase in rental
revenue resulted primarily from increased occupancy at Village Square. Property
operating expenses for the three months ended March 31, 1999 as compared to the
corresponding period in 1998 were generally stable with an overall increase of
$32,000. Bad debt expense increased approximately $43,000. At Oakland Pointe
Shopping Center bad debt expense was approximately $76,000 for the three months
ended March 31, 1999, an increase of approximately $73,000 from the
corresponding period in 1998. This increase was primarily the result of an
anchor tenant defaulting on its lease. This increase was partially offset by a
decrease in bad debt expense of $43,000 at Town Center Business Park.
The Partnership paid cash distributions of $.18 per Unit to Unitholders for the
three months ended March 31, 1999 and 1998.
The Net Asset Value of each of the Partnership's Units, based upon quarterly
independent appraisals, increased to $18.14 at March 31, 1999 from $17.39 at
March 31, 1998. The increase in Net Asset Value per Unit is primarily the result
of significant increases in the appraised values of certain of the Registrant's
properties, including Summit Village Apartments, Town Center Business Park,
Village Square and Powell Street Plaza. The increase in appraised value of
Summit Village is a result of an increase in projected market rents. The
increase in the appraised value of Town Center Business Park and Village Square
is primarily due to improved occupancy and increases in market rent assumptions.
Leasing at Village Square has improved with the conversion from retail to
primarily office use. Powell Street Plaza's increase in appraised value was
primarily due to the commencement of several new leases and an increase in
projected market rents. These value increases were partially offset by a
decrease in the appraised value of Oakland Pointe Shopping Center due to a
decrease in occupancy from the departure of two major tenants, and a change in
lease payments from two tenants resulting from Marshall's vacating the premises
in late 1997.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
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<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
The General Partners are continuing to actively review the potential sale of
other properties owned by the Registrant. During the quarter ended March 31,
1999 the General Partners had discussions with potential candidates to broker
Village Square for sale. There can be no assurances that the property will be
sold in the near future, or that if sold, the sales price will approximate the
estimated net asset value of the property. In addition, the Registrant from time
to time receives unsolicited expressions of interest in purchasing some or all
of the properties.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibit No. 27 - Financial Data Schedule
(b) On March 18, 1999 a report 8-K was filed relating to a Stipulation and
Agreement of Compromise, Settlement and Release ("the Settlement Agreement")
entered into as of March 15, 1999 and filed with and subject to the approval by
the Delaware Chancery Court. See Note 5 to the Consolidated Financial
Statements for a description of the litigation proceedings.
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<PAGE>
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: May 17, 1999 BY: /s/ Mark J. Marcucci
--------------------
President & Director
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 20,094,000
<SECURITIES> 000
<RECEIVABLES> 4,212,000
<ALLOWANCES> 675,000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 219,231,000
<DEPRECIATION> 48,275,000
<TOTAL-ASSETS> 194,600,000
<CURRENT-LIABILITIES> 8,978,000
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 185,622,000
<TOTAL-LIABILITY-AND-EQUITY> 194,600,000
<SALES> 7,810,000
<TOTAL-REVENUES> 8,025,000
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 8,071,000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 1,165,000
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 000
</TABLE>
