SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO 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
AETNA REAL ESTATE ASSOCIATES, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 11-2827907
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
242 Trumbull Street, Hartford, Connecticut 06103
- ------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (860) 275-2178
--------------
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Depositary Units
------------------------------------
(Title of class)
<PAGE>
1
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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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 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]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: $230,517,776 (1)
- ----------------
(1) This statement relates to Units which represent limited partnership
interests in the Registrant. The amount above is calculated based on the
Net Asset Value of Units of $18.12 at December 31, 1998.
<PAGE>
2
PART 1
Item 1. Business.
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Aetna Real Estate Associates, L.P. (the "Registrant") is a limited partnership
organized under the laws of the State of Delaware on September 11, 1986. The
general partners of the Registrant (the "General Partners") are Aetna/AREA
Corporation ("Aetna/AREA"), a Connecticut corporation that is an affiliate of
Aetna Life Insurance Company ("Aetna"), and AREA GP Corporation ("AREA GP"), a
Delaware corporation that is an affiliate of Lehman Brothers Inc. ("Lehman").
From March 1986 through December 31, 1990, the Registrant offered up to
$300,000,000 of units which represent the economic rights attributable to
limited partnership interests in the Registrant ("Units") through an ongoing
public offering (the "Primary Offering") and an additional $30,000,000 of Units
pursuant to the Registrant's Distribution Reinvestment Plan (the "DRIP"). In
addition, in conjunction with the Primary Offering, certain holders of Units
(the "Selling Unitholders") offered up to $30,000,000 of Units (the "Remarketing
Opportunity"). Since January 1, 1991, the Registrant has not offered Units for
sale in the Primary Offering, the Remarketing Opportunity, or the DRIP. The
Registrant received an aggregate of $265,521,423 of capital contributions from
the sale of 12,724,547 Units. The Registrant does not anticipate raising
additional capital through the sale of Units.
The Registrant is engaged in the business of investing in income-producing
apartment complexes, office buildings, shopping centers and other commercial
real estate offered by non-affiliated sellers ("Properties"). All investments in
Properties that the Registrant has made are referred to herein collectively as
"Investments in Properties". The Registrant acquired its interests in
Investments in Properties either directly or through joint ventures or other
partnerships that own Properties, and has acquired all of its interests in
Properties entirely with cash. The Registrant conducts its operations in one
segment, rental real estate.
As of December 31, 1998, the Registrant held 13 Investments in Properties at a
total cost of approximately $225.8 million. (See Item 2 in this report for a
further description of the Investments in Properties.) Such Investments in
Properties have been funded from the proceeds of the sale of Units and from cash
retained by the Registrant from operations and from sales of Investments in
Properties.
The Registrant's principal objectives are to invest in Properties with the goals
of obtaining:
(1) cash distributions from rental and interest income;
(2) capital appreciation; and
(3) preservation and protection of capital.
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. As of December 31, 1998 the General
Partners had retained a broker for Gateway Square and intend to retain one or
more third-party real estate brokers to market other such properties. See Note
14 to the Consolidated
<PAGE>
3
Financial Statements with respect to the sale of Gateway Square on March 17,
1999. There can be no assurances that other 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. As discussed in Item 3, the General Partners
will institute a marketing plan to review the potential sale of other properties
owned by the Registrant. In addition, the Partnership from time to time receives
unsolicited expressions of interest in purchasing some or all of the properties.
Any change in the length of a property's ownership period from that currently
anticipated, could affect the real estate and leasing strategy to be followed at
such property, which could alter the level of capital expenditures to be
invested in the properties. These changes could affect the level of cash flow
received by the Partnership, which might affect the level of quarterly cash
distributions to limited partners.
During 1998, the Registrant made distributions of cash generated from operations
of $.18 per Unit per quarter. (See Item 5 below for additional information
regarding recent quarterly distributions.) The General Partners currently
anticipate that quarterly cash distributions will continue throughout 1999. The
level and timing of future distributions will be reviewed on a quarterly basis
by the General Partners.
Net Asset Value per Unit increased to $18.12 at December 31, 1998 from $16.71 at
December 31, 1997. The increase in Net Asset Value per Unit is attributable to
the increases in the appraised values of certain of the Registrant's properties,
primarily Village Square, Town Center Business Park and Summit Village. The
increase in appraised value of Summit Village is a result of an increase in
market rents. The increase in appraised value of Village Square and Town Center
Business Park is primarily due to improved occupancy and market rent
assumptions. Village Square's appraised value is now based on the assumption
that the property is converted to office use. Leasing at Village Square has
improved with the conversion from retail to office use. These value increases
were partially offset by a decrease in the appraised value of Cross Pointe
Centre and Oakland Pointe Shopping Center. The decrease in appraised value at
Cross Pointe Centre is due to an assumed longer lease-up period and reduced rent
on the space of a former anchor tenant. The appraised value of Oakland Pointe
decreased primarily as the result of a change in the interpretation of a lease
clause and an increase in forecasted capital expenditures.
Competition
- -----------
The Registrant competes with other real estate owners and developers for tenants
and potential buyers in the rental and sale of its Investments in Properties.
Each of the Investments in Properties faces competition from similar properties
within the same vicinity. Increases in the availability of properties
competitive with the Registrant's Investments in Properties may have an adverse
effect on the occupancy levels, revenues and marketability of the Registrant's
Investments in Properties. Should the Registrant be in the market to acquire new
or sell existing Investments in Properties, it would face competition in
connection with such acquisitions or sales from businesses, individuals,
fiduciary accounts and plans and other entities engaged in real estate
investment, which may include certain affiliates of the General Partners. The
number of entities interested and the amount of funds available for investment
in properties of a type suitable for investment by the Registrant may change.
<PAGE>
4
Employees
- ---------
The Registrant has no employees. The officers, directors and employees of the
General Partners and their affiliates and agents perform services for the
benefit of the Registrant. These services are provided in consideration of the
fees paid to the General Partners as described under Item 13 below and the
expense of providing these services is not separately charged to the Registrant.
Aetna/AREA has retained Allegis Realty Investors LLC to provide investment
management services to the Registrant.
<PAGE>
5
Item 2. Properties.
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As of December 31, 1998, the Registrant held 13 Investments in Properties.
<TABLE>
<CAPTION>
(in thousands)
Historical
Property Cost (1)
- -------- ------------
<S> <C>
Cross Pointe Centre $ 14,583
Lincoln Square Apartments 13,721
Gateway Square 7,754
Summit Village 37,747
Village Square 7,157
Marina Bay Industrial Park 11,306
Town Center Business Park 45,187
Oakland Pointe Shopping Center 10,228
115 & 117 Flanders Road 12,854
Three Riverside Drive 10,747
Windmont Apartments 8,162
Powell Street Plaza 32,231
Westgate Distribution Center 14,156
--------
Total $225,833
========
</TABLE>
(1) Historical cost is before accumulated depreciation and may not equal cash
invested because of certain adjustments based on the application of
generally accepted accounting principles. For historical cost purposes,
properties are recorded at the lower of cost, net of impairment
write-downs, or estimated fair value. (See Note 3 to the Consolidated
Financial Statements.)
The Registrant determines the current value of each of its Investments in
Properties quarterly based on independent appraisals of the underlying real
estate using generally accepted valuation techniques. These appraisals are used
to determine Net Asset Value per Unit on a quarterly basis and to prepare the
Registrant's current value financial statements.
Each appraisal is based on numerous assumptions, limiting conditions and
valuation techniques utilized by the independent appraisers retained by the
Registrant. Two of the many assumptions utilized by the appraisers are the
terminal capitalization rate and the discount rate. The terminal capitalization
rate is used to estimate the reversionary proceeds to be received from the
assumed sale of an investment at the end of a typical holding period. The
discount rate is used to determine the net present value of the estimated annual
cash flows of an investment, including the residual proceeds, over the holding
period. Terminal capitalization rates utilized in the appraisals of the
Investments in Properties at December 31, 1998 ranged from 8.5% to 11.00%.
Discount rates utilized in the appraisals of the Investments in Properties at
December 31, 1998 ranged from 10.75% to 13.00%.
<PAGE>
6
Current Properties
A brief description of all Investments in Properties is set forth below. Neither
the Registrant, if it owns a Property directly, nor any joint venture or
partnership in which the Registrant has invested, have incurred any debt to
acquire or maintain any of the Properties.
Cross Pointe Centre
- -------------------
The Registrant owns Cross Pointe Centre, a community shopping center with
approximately 211,345 square feet of net rentable space, located on a 25.8-acre
site in Centerville, Ohio. As of December 31, 1998, the shopping center was 83%
leased and 79% occupied.
Lincoln Square Apartments
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The Registrant owns Lincoln Square Apartments, a 240-unit apartment project on a
12.7-acre site located in Arlington Heights, Illinois. As of December 31, 1998,
the project was 99% leased and occupied.
Gateway Square
- --------------
At December 31, 1998 the Registrant owned Gateway Square, a specialty retail
center located in Hinsdale, Illinois. The center contains approximately 40,366
square feet of rentable space on a 3.7-acre site. As of December 31, 1998, the
retail center was 96% leased and occupied. See Note 14 to the Consolidated
Financial Statements regarding the subsequent sale of Gateway Square.
<PAGE>
7
Summit Village
- --------------
The Registrant owns Summit Village, a 366-unit apartment complex built in two
phases on a 6.2-acre site in the Rosslyn area of Arlington County, Virginia.
Historical leasing and occupancy information with respect to Summit Village for
the five most recent years is as follows:
<TABLE>
<CAPTION>
Leased Occupied
------ --------
<S> <C> <C>
12/31/94 99% 98%
12/31/95 99% 99%
12/31/96 98% 98%
12/31/97 99% 99%
12/31/98 99% 99%
</TABLE>
The current leases generally have terms of seven or twelve months at monthly
rental rates ranging from $1,082 to $1,442 per unit.
The Arlington County market includes approximately 13 Class A apartment
communities with almost 5,000 units. Two new competitive high-rise apartment
buildings have recently been added. Meridian at Ballston Apartments with 435
units has just completed lease-up and Courthouse Hill Apartments with 564 units
has just begun lease-up, with minimal impact on Summit Village rents and
occupancy.
Marina Bay Industrial Park
- --------------------------
The Registrant owns a controlling general partnership interest in a limited
partnership that owns the Marina Bay Industrial Park, a 165,780 square foot
industrial park located in Richmond, California on an 8.6-acre site. The Marina
Bay Industrial Park is a four-building complex that includes a rehabilitated
industrial distribution building (approximately 103,680 square feet) and three
newer research/development/light industrial buildings (approximately 62,100
square feet). As of December 31, 1998, the complex was 100% leased and occupied.
Village Square
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The Registrant owns Village Square in Hazelwood, Missouri, a community shopping
center that was converted to primarily back office use during 1998. It contains
approximately 207,304 square feet of net rentable area on approximately 20 acres
of land. As of December 31, 1998, the property was 89% leased and 58% occupied.
A strategy for converting Village Square to non-traditional retail and back
office space was implemented to capitalize on market demand and to generate
better lease-up.
<PAGE>
8
Town Center Business Park
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The Registrant owns a controlling interest in a general partnership which owns
and operates Town Center Business Park, totaling approximately 457,500 square
feet of net rentable area on approximately 28 acres in Santa Fe Springs,
California. Town Center Business Park was developed in two phases. Phase I
consists of a three-story office building and six industrial buildings totaling
approximately 323,100 rentable square feet. Phase II consists of a two-story
office/service building and two industrial buildings containing approximately
134,400 square feet.
During 1999, sixteen leases covering 20% of the space in Town Center Business
Park are scheduled to expire. Three tenants totaling 35,925 square feet have
already renewed. One tenant occupying 4,733 square feet is vacating at the end
of its lease term and lease negotiations are underway with a potential tenant.
Renewal negotiations have begun with six tenants totaling 30,161 square feet.
The remaining six tenants, comprising 4% of the space, expire in the latter part
of the year, and these tenants will be contacted in the first and second
quarters to commence renewal discussions. Also, the Registrant completed an
office and an industrial lease for two new tenants in early 1999 for 1.4% of
space in Town Center Business Park.
Town Center Business Park has no single tenant which occupies 10% or more of the
rentable square footage. During 2000 and 2001, nineteen and eight leases,
respectively, are scheduled to expire covering 23% and 16%, respectively, of the
space in Town Center Business Park.
Historical leasing and occupancy information with respect to Town Center
Business Park for the five most recent years is as follows:
<TABLE>
<CAPTION>
Leased Occupied
------ --------
<S> <C> <C>
12/31/94 76% 74%
12/31/95 84% 72%
12/31/96 85% 83%
12/31/97 93% 92%
12/31/98 93% 89%
</TABLE>
Average annualized rental rates for December 1998 were $11.16 per square foot as
compared to $11.12 and $10.49 per square foot for December 1997 and 1996,
respectively.
Oakland Pointe Shopping Center
- ------------------------------
The Registrant owns a portion of the Oakland Pointe Shopping Center, a shopping
center containing approximately 434,150 square feet located on 49.8 acres in
Pontiac, Michigan. The portion owned by the Registrant (the "Oakland Project")
contains approximately 213,350 square feet of rentable area on approximately
32.1 acres. As of December 31, 1998, the Oakland Project was approximately 89%
leased and occupied.
<PAGE>
9
115 and 117 Flanders Road
- -------------------------
The Registrant owns 115 and 117 Flanders Road, two buildings containing
approximately 115,175 square feet of net rentable area and located on
approximately 26.6 acres in Westborough, Massachusetts. Each building has a
two-story office/research and development section and a one-story
office/warehouse section. As of December 31, 1998, the buildings were 100%
leased and occupied.
Three Riverside Drive
- ---------------------
The Registrant owns Three Riverside Drive, an office/research and development
building containing approximately 91,350 square feet of rentable area located on
approximately 8.8 acres in Andover, Massachusetts. As of December 31, 1998, the
building was 73% leased and occupied.
Windmont Apartments
- -------------------
The Registrant owns Windmont Apartments, a 178-unit apartment complex which is
located on 6.8 acres in DeKalb County, Georgia. As of December 31, 1998, the
complex was approximately 92% leased and 90% occupied.
Powell Street Plaza
- -------------------
The Registrant owns Powell Street Plaza, a shopping center with approximately
169,551 square feet of rentable space, located on approximately 12.9 acres in
Emeryville, California.
Certain governmental agencies in California, led by the Alameda County Health
Care Services Agency (the "Agency"), delivered a letter (the "Request Letter")
to the Registrant on June 4, 1993 requiring that it remediate certain soil and
ground water contamination by petroleum hydrocarbons existing on the Powell
Street property. The contamination is the result of a use of the property prior
to its acquisition by the Registrant in 1990. Pursuant to the agreement under
which the Registrant acquired Powell Street Plaza, the Registrant has made a
demand on the former owner from which it acquired the property (the "Former
Owner") to remediate the contamination. The Former Owner has agreed to respond
to the governmental agencies. The Former Owner prepared a site characterization
and submitted a remediation plan to the Alameda County Healthcare Services
Agency, which have been approved. On October 15, 1997 the Agency determined the
site was low risk and agreed to close the case pending an approved Long-term
Site Management Plan. The Registrant is monitoring the process and anticipates
that all costs of complying with the Request Letter will be borne by the Former
Owner. The Registrant has hired its own consultant to analyze the extent of the
pollution.
<PAGE>
10
Powell Street Plaza (continued)
- -------------------------------
During 1999, one lease expires covering 5% of the space, and during 2000 there
are two leases scheduled to expire totaling 2% of the space. One lease expires
in 2001 covering 4% of the space in Powell Street Plaza. Powell Street Plaza has
two tenants with leases covering 10% or more of the rentable square footage of
the property. The first lease, for 27,275 square feet, expires in 2009 and
provided annual base rent of $382,017 (14% of total rent) in 1998. The lease
contains two consecutive five-year options to renew. The second lease, for
25,025 square feet, expires in 2003 and provided annual base rent of $298,555
(11% of total rent) in 1998. The lease contains four consecutive five-year
options to renew.
Historical leasing and occupancy information with respect to Powell Street Plaza
for the five most recent years is as follows:
<TABLE>
<CAPTION>
Leased Occupied
------ --------
<S> <C> <C>
12/31/94 100% 100%
12/31/95 100% 100%
12/31/96 91% 91%
12/31/97 98% 95%
12/31/98 100% 100%
</TABLE>
Average annualized base rental rates for December 1998 were $17.27 per square
foot as compared to $17.26 and $16.54 per square foot for December 1997 and
1996, respectively.
During 1996, a 450,000 square foot power center opened about one mile from
Powell Street. Tenants at the new center include Home Depot, Sportmart and
Toys-R-Us. The only direct competition is with Powell Street Plaza's Copeland
Sports.
Westgate Distribution Center
- ----------------------------
The Registrant owns Westgate Distribution Center, which consists of three
warehouse/distribution buildings totaling approximately 324,200 rentable square
feet on 15.6 acres in Corona, California. As of December 31, 1998, the buildings
were 100% leased and occupied.
<PAGE>
11
Item 3. Legal Proceedings.
-----------------
Neither the Registrant nor any of the Registrant's Investments in Properties are
subject to any material pending legal proceedings, except for the following
lawsuits.
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. Pursuant to the
terms of the Settlement Agreement, the following actions will take place:
(1) 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% from that set forth in Section 6.6 of the Partnership Agreement
(the "First Reduction"). The First Reduction will be effective on the
Final Date and will be applied retroactively to 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.
(2) 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.
(3) The General Partners will institute a marketing plan, market the
Partnership's assets on a property-by-property basis and, subject to
their fiduciary duties, determine whether or not the sale of any
particular property should take place. The determination of whether to
engage in the sale of one or more properties will reside solely within
the discretion and business judgment of the General Partners, in
accordance with their fiduciary duties.
(4) The Partnership shall make a special distribution no later than April 15,
1999 of at least $2,500,000 (or approximately $0.20 per Unit) of
Partnership cash to limited partners holding Partnership Units as of the
date of such distribution.
<PAGE>
12
(5) The representative plaintiffs and the class will agree to release any
and all claims, to the extent such claims relate to or arise out of
the class action lawsuits, against the defendants to the fullest
extent permitted by law. If the Settlement Agreement is approved by
the Delaware Chancery Court and judgment is entered, the actions will
be dismissed with prejudice.
(6) The representative plaintiffs or their counsel may submit an
application to the Delaware Chancery Court 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.
The Settlement Agreement is subject to approval by the Delaware Chancery
Court, although 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.
This summary description of the Settlement Agreement does not purport to
be complete and is qualified in its entirety by reference to the Settlement
Agreement which is filed with the Delaware Chancery Court.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
During the fourth quarter of the fiscal year ended December 31, 1998, no matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise.
<PAGE>
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
----------------------------------------------------------------------
The Units represent the economic rights attributable to limited partnership
interests in the Registrant. There is no established public trading market for
the Units. The Registrant's Units are listed on certain matching services (the
"Matching Programs") currently maintained by various broker-dealers. These
Matching Programs are computerized listing systems that put individuals who wish
to sell listed securities in contact with persons who wish to buy such
securities. Neither the broker-dealers nor the General Partners are required to
list the Registrant's Units on the Matching Program. There can be no assurance
that any Units listed on the Matching Program will be sold.
As of March 1, 1999, the number of Unitholders was approximately 18,000.
The Revised Limited Partnership Agreement dated December 1, 1988 by and among
Aetna/AREA Corporation, AREA GP Corporation and AREA Depositary Corporation (the
"Partnership Agreement") provides for distributions of net cash from operations,
if any, to be paid quarterly to Unitholders. Net cash from operations, as
defined in the Partnership Agreement, is equal to net income, before
depreciation, less any amounts set aside to increase or create reserves. In the
last three years, quarterly cash distributions of $.18 per Unit have been paid
to Unitholders.
<PAGE>
14
Item 6. Selected Financial Data.
-----------------------
The following selected financial data of the Registrant have been selected by
the General Partners and derived from the consolidated financial statements for
the indicated periods, which have been audited by PricewaterhouseCoopers LLP,
independent certified public accountants, whose report for the years 1998, 1997
and 1996 is included elsewhere herein. The information set forth below should be
read in conjunction with the Registrant's consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" also included elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in thousands, except per Unit data)
- -------------------------------------------
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ......................$ 30,689 $ 29,597 $ 29,030 $ 28,438 $ 26,454
Operating Income before
Impairment of Investment
in Real Estate ............... 7,894 6,793 5,711 5,002 4,144
Impairment of Investment
in Real Estate (a) ........ 9,007 - - 4,408 -
Operating Income (Loss) ...... (1,113) 6,793 5,711 594 4,144
Gain (Loss) on Sale of
Property ..................... - - - (23) 355
Cash and Cash
Equivalents ................ 12,597 10,883 9,133 8,971 9,373
Total Assets (Historical
Cost Basis) ................ 193,184 203,416 205,750 209,334 217,854
Total Assets (Current
Value Basis) ............... 236,917 218,719 204,222 199,709 195,916
Rental Income ................ 29,716 28,604 28,242 27,455 25,831
Interest Income .............. 538 404 336 367 301
Earnings (Loss) per
Weighted Average Unit ...... (.09) .53 .44 .04 .35
Cash Distributions per
Unit ......................... .72 .72 .72 .72 .91
Net Asset Value per
Unit ......................... 18.12 16.71 15.59 15.24 14.96
<FN>
(a) See Note 3 to the Consolidated Financial Statements with respect to
accounting policy for permanent impairment of properties.
</FN>
</TABLE>
<PAGE>
15
Item 7. 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 $7.6 million, including approximately $5.7 million retained from cash
generated from operations in 1998. During the year ended December 31, 1998, the
Partnership expended approximately $4.3 million for capital improvements. At
December 31, 1998, the Registrant had approximately $2.6 million of outstanding
commitments for capital improvements and approximately $3.0 million of projected
capital improvements (collectively "Capital Costs") related to existing
Investments in Properties. The projected capital improvements 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 expects to fund Capital Costs throughout
1999 from existing Reserves and the retention of a portion of cash generated
from operations. The General Partners will continue to review the Reserves
quarterly to determine whether cash distributions should be adjusted.
If sufficient capital is not available at the time of a funding of Capital
Costs, 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.
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
<PAGE>
16
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
- ---------------------
1998 versus 1997
- ----------------
Net income for the year ended December 31, 1998 decreased approximately
$7,906,000 from 1997 resulting primarily from an impairment loss of
approximately $9,007,000 reflected in the 1998 Consolidated Statement of Income
(Loss). Revenue increased approximately $1,092,000 from 1997, resulting from an
increase in rental revenue at the majority of the residential and
office/industrial properties. The most significant increases in rental revenue
occurred at Village Square and Town Center Business Park, as a result of
increased occupancy, and at 115 Flanders Road and Summit Village, as a result of
an increase in rental rates. These increases were partially offset by certain
decreases in rental revenue, as a result of decreases in occupancy, at Three
Riverside Drive and Oakland Pointe Shopping Center. Other income for the year
ended December 31, 1998 decreased approximately $154,000 from 1997 primarily
because lease termination fees and settlement proceeds related to faulty roof
construction were received during the year ended December 31, 1997.
Property operating expenses for the year ended December 31, 1998 decreased
approximately $51,000 in comparison to 1997. The most significant decreases in
operating expenses occurred at Village Square, relating primarily to decreased
parking lot maintenance, and at Three Riverside Drive from lower utility
expenses caused by two tenants assuming direct responsibility for their meters,
and lower repair and maintenance expenses due to significant HVAC repairs during
1997. The investment portfolio fee increased approximately $137,000 due to an
increase in the current value of net assets as discussed below, partially offset
by a decrease in the fee percentage for properties held more than ten years. Bad
debt expense for the year ended December 31, 1998 was approximately $320,000 due
primarily to the write-off of certain tenant receivables and an increase in the
allowance for doubtful accounts at Town Center Business Park.
Net Asset Value per Unit increased to $18.12 at December 31, 1998 from $16.71 at
December 31, 1997. The increase in Net Asset Value per Unit is attributable to
the increases in the appraised values of certain of the Registrant's properties,
primarily Village Square, Town Center Business Park and Summit Village. The
increase in appraised value of Summit Village is a result of an increase in
market rents. The increase in appraised value of Village Square and Town Center
Business Park is primarily due to improved occupancy and market rent
assumptions. Village Square's appraised value is now based on the assumption
that the property is converted to office use. Leasing at Village Square has
improved with the conversion from retail to office use. These value increases
were partially offset by a decrease in the appraised value of Cross Pointe
Centre and Oakland Pointe Shopping Center. The decrease in appraised value at
Cross Pointe Centre is due to an assumed longer lease-up period and reduced rent
on the space of a former anchor tenant. The appraised value of
<PAGE>
17
Oakland Pointe decreased primarily as the result of a change in the
interpretation of a lease clause and an increase in forecasted capital
expenditures.
1997 versus 1996
- ----------------
Operating income for the year ended December 31, 1997 increased approximately
$1,082,000 from 1996. Revenue increased approximately $567,000 from 1996,
resulting primarily from an increase in rental revenue at the majority of the
residential and office/industrial properties, partially offset by decreases in
rental revenue at the majority of the retail properties. The most significant
increases in rental revenue occurred at 115 and 117 Flanders Road and Town
Center Business Park, as a result of increased occupancy, and at Summit Village,
as a result of an increase in rental rates. The most significant decrease in
rental revenue occurred at Village Square, the result of a reduction of leased
space. The increase in other income of approximately $137,000 for the year ended
December 31,1997 is attributable to the receipt of lease termination fees at 115
and 117 Flanders Road and the receipt of settlement proceeds at Westgate
Distribution Center related to faulty roof construction.
Property operating expenses for the year ended December 31, 1997 increased
approximately $375,000 in comparison to 1996. The most significant increases in
operating expenses occurred at Village Square, relating primarily to increased
parking lot maintenance, and at Town Center Business Park primarily as a result
of increased HVAC electric and repair and maintenance expenses. The decrease in
depreciation and amortization expense of approximately $448,000 is primarily a
result of the write-off of the unamortized cost of the tenant improvements and
leasing commissions associated with a tenant that vacated Powell Street Plaza
during 1996. The investment portfolio fee decreased approximately $184,000 due
to a decrease in the fee percentage for properties held more than ten years,
partially offset by an increase in net assets at current value as discussed
below. Bad debt expense declined approximately $167,000 in comparison to 1996.
Bad debt expense of approximately $448,000 for the year ended December 31, 1997
includes approximately $180,000 related to a tenant in bankruptcy at Powell
Street Plaza and approximately $72,000 related to a tenant that had vacated at
Town Center Business Park.
Net Asset Value per Unit increased to $16.71 at December 31, 1997 from $15.59 at
December 31, 1996. The increase in Net Asset Value per Unit is attributable to
the increases in the appraised values of certain of the Registrant's properties,
primarily, Summit Village, Town Center Business Park, and 115 and 117 Flanders
Road. The increase in appraised value of Summit Village is a result of an
increase in projected market rents. The increase in appraised value of Town
Center Business Park and 115 and 117 Flanders Road is primarily due to improved
occupancy and market rent assumptions. These value increases were partially
offset by a decrease in the appraised value of Oakland Pointe Shopping Center
due to a decrease in anticipated occupancy from the expected departure of three
major tenants, and a reduction in the market rent of some space.
The Registrant made cash distributions, which were entirely from cash generated
from operations, of $.72 per Unit to Unitholders for each of the years ended
December 31, 1998 and 1997.
<PAGE>
18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
Not applicable.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See List of Financial Statements and Financial Statement Schedule on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
<PAGE>
19
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
The Registrant has no officers or directors. Aetna/AREA Corporation and AREA GP
Corporation, the General Partners of the Registrant, jointly manage and control
the affairs of the Registrant and have general responsibility and authority in
all matters affecting its business.
Certain officers and directors of AREA GP are now serving (or in the past have
served) as officers or directors of entities which act as general partners of a
number of real estate limited partnerships, unrelated to the Registrant, which
have sought protection under the provisions of the Federal Bankruptcy Code. The
partnerships which have filed bankruptcy petitions own real estate which has
been adversely affected by the economic conditions in the markets in which the
real estate is located and, consequently, the partnerships sought protection of
the bankruptcy laws to protect the partnerships' assets from loss through
foreclosure. As compared to the Registrant, many of these partnerships had
different investment objectives, including the use of leverage.
Item 11. Executive Compensation.
----------------------
No compensation was paid by the Registrant to the officers or directors of
either of the General Partners. See Item 13 below for a description of the
compensation and fees paid to the General Partners and their affiliates by the
Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
As of March 1, 1999, no person was known by the Registrant to be the beneficial
owner of more than five percent of the Units of the Registrant. The Registrant
has no directors or officers, and as of March 15, 1999, neither of the General
Partners of the Registrant owns any Units, though together they own a 1% general
partnership interest in the Registrant. As of March 1, 1999, no directors or
officers of AREA GP beneficially owned any Units. As of March 1, 1999, no
directors of Aetna/AREA owned any Units, and as of such date, officers of
Aetna/AREA as a group beneficially owned approximately 232 Units, which
constituted less than 1% of the outstanding Units.
Aetna Life Insurance Company entered into an Option Purchase Agreement dated
June 7, 1996, with the managing member of Allegis Realty Investors LLC by which
such managing member is granted the right to purchase the stock of Aetna/AREA
for nominal consideration during the twelve-year period following the date of
the option. During the period of the option, such managing member is also
granted the right to designate the directors of Aetna/AREA regardless of whether
the option is exercised. This option has not been exercised to date.
<PAGE>
20
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The General Partners and their affiliates have received or will receive certain
types of compensation, fees, or other distributions in connection with the
operations of the Registrant. The arrangements for payment of compensation and
fees were not determined in arms-length negotiations with the Registrant. The
General Partners are entitled to receive an investment portfolio fee based on
the net asset value of the Registrant's investments. The fee is payable
quarterly from available cash flow and may not exceed 2.5% per annum of net
asset value. For the year ended December 31, 1998, Aetna/AREA and AREA GP were
entitled to fees of $2,265,203 and $2,574,862, respectively, totaling
$4,840,065.
During the year ended December 31, 1998, $347,439 was paid to Aetna Life
Insurance Company, an affiliate of Aetna/AREA, primarily as reimbursement for
insurance expense paid on behalf of the Registrant by Aetna Life Insurance
Company to persons not affiliated with the Registrant.
Cash distributions paid to the General Partners during the year ended December
31, 1998 aggregated $92,542, which related to operations for the quarters ended
December 31, 1997, March 31, 1998, June 30, 1998 and September 30, 1998.
<PAGE>
21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
The following documents are filed as part of this report:
(a) 1. Financial Statements:
See List of Financial Statements and Financial Statement
Schedule on page F-1.
2. Financial Statement Schedules:
See List of Financial Statements and Financial Statement Schedule
on page F-1.
3. Exhibits:
3.1 Form of Subscription Agreement (incorporated by reference
to Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264).
3.2 Revised Limited Partnership Agreement of the Registrant
(incorporated by reference to Post-Effective Amendment No.
15 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264).
3.3 Form of Certificate of Limited Partnership Interest
(incorporated by reference to Post-Effective Amendment No.
14 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264).
3.4 Form of Distribution Reinvestment Plan Election Card
(incorporated by reference to Post-Effective Amendment No.
15 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264).
4.1 Revised Depositary Agreement of the Registrant
(incorporated by reference to Post-Effective Amendment No.
14 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264).
4.2 See Exhibits 3.1, 3.2, 3.3, and 3.4.
4.3 Distribution Reinvestment Plan of the Registrant
(incorporated by reference to Post-Effective Amendment No.
2 to the Registrant's Registration Statement on Form S-11,
File No. 33-2264).
4.4 Revised Form of Depositary Receipt of the Registrant
(incorporated by reference to Post-Effective Amendment No.
17 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264).
<PAGE>
22
4.5 Form of Distribution Reinvestment Plan Administration
Agreement (incorporated by reference to Post-Effective
Amendment No. 8 to the Registrant's Registration Statement
on Form S-11, File No. 33-2264).
10.1 Revised Escrow Agreement (incorporated by reference to
Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264).
10.2 See Exhibits 4.1 and 4.5.
10.3 Custody Agreement (incorporated by reference to
Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264).
10.4 Processing Agreement (incorporated by reference to
Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264).
10.5 Amendment to Revised Escrow Agreement, dated March 4, 1991
(incorporated by reference to Form 10-K for the year ended
December 31, 1990).
10.6 Amendment to Custody Agreement, dated March 4, 1991
(incorporated by reference to Form 10-K for the year ended
December 31, 1990).
10.7 Amendment to Processing Agreement, dated March 4, 1991
(incorporated by reference to Form 10-K for the year ended
December 31, 1990).
21 Subsidiaries of the Registrant (incorporated by reference
to Post-Effective Amendment No. 11 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264).
(b) There were no reports on Form 8-K filed in the fourth quarter of
fiscal year 1998.
(c) See Exhibit Index contained herein.
(d) See List of Financial Statements and Financial Statement Schedule
included on page F-1.
<PAGE>
23
INDEX TO EXHIBITS
Exhibit Page
- ------- ----
3.1 Form of Subscription Agreement (incorporated by reference to
Post-Effective Amendment No. 15 to the Registrant's Registration
Statement on Form S-11, File No. 33-2264) ..............................*
3.2 Revised Limited Partnership Agreement of the Registrant (incorporated by
reference to Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264) .................*
3.3 Form of Certificate of Limited Partnership Interest (incorporated by
reference to Post-Effective Amendment No. 14 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264) .................*
3.4 Form of Distribution Reinvestment Plan Election Card (incorporated by
reference to Post-Effective Amendment No. 15 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264) .................*
4.1 Revised Depositary Agreement of the Registrant (incorporated by
reference to Post-Effective Amendment No. 14 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264) .................*
4.2 See Exhibits 3.1, 3.2, 3.3, and 3.4 ....................................*
4.3 Distribution Reinvestment Plan of the Registrant (incorporated by
reference to Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264) .................*
4.4 Revised Form of Depositary Receipt of the Registrant (incorporated by
reference to Post-Effective Amendment No. 17 to the Registrant's
Registration Statement on Form S-11, File No. 33-2264) .................*
4.5 Form of Distribution Reinvestment Plan Administration Agreement
(incorporated by reference to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form S-11, File No. 33-2264) ....*
10.1 Revised Escrow Agreement (incorporated by reference to Post-Effective
Amendment No. 15 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264) ................................................*
10.2 See Exhibits 4.1 and 4.5 ...............................................*
* Incorporated by reference
<PAGE>
24
10.3 Custody Agreement (incorporated by reference to Post-Effective
Amendment No. 15 to the Registrant's Registration Statement on
Form S-11, File No. 33-2264) ...........................................*
10.4 Processing Agreement (incorporated by reference to Post-Effective
Amendment No. 15 to the Registrant's Registration Statement on Form
S-11, File No. 33-2264) ................................................*
10.5 Amendment to Revised Escrow Agreement, dated March 4, 1991
(incorporated by reference to Form 10-K for the year ended December 31,
1990) ..................................................................*
10.6 Amendment to Custody Agreement, dated March 4, 1991 (incorporated
by reference to Form 10-K for the year ended December 31, 1990) ........*
10.7 Amendment to Processing Agreement, dated March 4, 1991 (incorporated
by reference to Form 10-K for the year ended December 31, 1990) ........*
21 Subsidiaries of the Registrant (incorporated by reference to
Post-Effective Amendment No. 11 to the Registrant's Registration
Statement on Form S-11, File No. 33-2264) ..............................*
* Incorporated by reference
<PAGE>
25
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 this 31st day of March
1999.
Aetna Real Estate Associates, L.P.
By: Aetna/AREA Corporation,
General Partner
By:/s/ Daniel R. Leary
-------------------------
Daniel R. Leary
President
By: AREA GP Corporation,
General Partner
By:/s/ Mark J. Marcucci
--------------------------
Mark J. Marcucci
President
<PAGE>
26
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 31, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Daniel R. Leary
- ---------------------- President (Principal Executive Officer)
Daniel R. Leary and Director of Aetna/AREA Corporation
/s/ Carol M. Kuta
- ---------------------- Treasurer (Principal Financial Officer)
Carol M. Kuta and Comptroller of Aetna/AREA Corporation
/s/ James W. O'Keefe
- ---------------------- Chairman and Vice President of
James W. O'Keefe Aetna/AREA Corporation
/s/ Dean A. Lindquist
- ---------------------- Assistant Treasurer and Assistant Comptroller of
Dean A. Lindquist
Aetna/AREA Corporation
/s/ Mark J. Marcucci
- ---------------------- Director and President of
Mark J. Marcucci AREA GP Corporation
<PAGE>
F-1
AETNA REAL ESTATE ASSOCIATES, L.P.
----------------------------------
(a Delaware limited partnership)
List of Financial Statements and Financial Statement Schedule Page
- ------------------------------------------------------------- ----
Report of Independent Accountants F-2
Report of Realty Services International, Inc. F-3 - F-4
Consolidated Balance Sheets (Historical Cost and Current Value)
December 31, 1998 and 1997 F-5
Consolidated Statements of Income (Loss) (Historical Cost)
for the years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Partners' Capital (Deficiency) (Historical
Cost) for the years ended December 31, 1998, 1997 and 1996 F-7
Consolidated Statements of Partners' Capital (Deficiency) (Current
Value) for the years ended December 31, 1998, 1997 and 1996 F-8
Consolidated Statements of Cash Flows (Historical Cost)
for the years ended December 31, 1998, 1997 and 1996 F-9
Consolidated Current Value Basis Statements of Changes in Excess
(Deficiency) of Current Value over Historical Cost for the years
ended December 31, 1998, 1997 and 1996 F-10
Notes to Consolidated Financial Statements F-11 - F-21
Report of Independent Accountants-
Supplementary Information F-22
The following financial statement schedule of Aetna
Real Estate Associates, L.P. required by Item 14 (d)
is included in this Item 8:
Schedule III -- Real Estate and Accumulated Depreciation F-23 - F-29
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission have been omitted since:
(1) the information required is disclosed in the financial statements and notes
thereto; (2) the schedules are not required under the related instructions; or
(3) the schedules are inapplicable.
<PAGE>
F-2
PRICEWATERHOUSECOOPERS
Report of Independent Accountants
To the Unitholders of
Aetna Real Estate Associates, L.P.
We have audited the accompanying consolidated historical cost balance sheets of
Aetna Real Estate Associates, L.P. ("the Partnership") as of December 31, 1998
and 1997, and the related consolidated historical cost statements of income,
partners' capital and cash flows for each of the three years in the period ended
December 31, 1998. We have also audited the supplemental consolidated current
value basis balance sheets of Aetna Real Estate Associates, L.P. as of December
31, 1998 and 1997, and the supplemental consolidated current value basis
statements of partners' capital and changes in the excess of current value over
historical cost for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Partnership'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 of 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 historical cost financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Aetna Real Estate Associates, L.P. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
As described in Note 2, the supplemental consolidated current value financial
statements have been prepared by management to present relevant financial
information that is not provided by the consolidated historical cost financial
statements and are not intended to be a presentation in conformity with
generally accepted accounting principles. In addition, the supplemental
consolidated current value financial statements do not purport to present the
net realizable, liquidation, or market value of the Partnership as a whole.
Furthermore, amounts ultimately realized by the Partnership from the disposal of
properties may vary significantly from the current values presented.
In our opinion, the supplemental consolidated current value financial statements
referred to above present fairly, in all material respects, the information set
forth in them on the basis of accounting described in Note 2.
PRICEWATERHOUSECOOPERS LLP
March 8, 1999, except for Note 15,
as to which the date is March 18, 1999
<PAGE>
F-3
REALTY SERVICES INTERNATIONAL, INC.
March 8, 1999
PricewaterhouseCoopers
and the Unitholders of Aetna
Real Estate Associates, L.P.
Re: Cross Pointe Center, Centerville, OH
Windmont Apartments, DeKalb Co., GA
Powell Street Plaza, Emeryville, CA
Lincoln Marina Bay, Richmond, CA
Village Square Shopping Center, Hazelwood, MO
Andover Research Park, Andover, MA
Metrowest Business Park I, Westborough, MA
Metrowest Business Park II, Westborough, MA
Gateway Square, Hinsdale, IL
Oakland Pointe, Shopping Center, Pontiac, MI
Summit Village, Rosslyn, VA
Westgate Distribution Center, Corona, CA
Town Center Business Park, Santa Fee Springs, CA
Lincoln Square, Arlington Heights, IL
We have estimated the market value of certain real property (the "Properties")
owned by Aetna Real Estate Associates, L.P. (the "Partnership") as of
December 31, 1998. The Properties consist of the 14 properties identified above.
Full annual valuation reports and quarterly update reports were performed for
each of the Properties during 1998. In accordance with an on-going schedule, the
dates for the full annual valuation varied from property to property during the
course of the year. The quarterly valuations, which were more limited in scope,
were based on, and subject to, the most recent full valuation. Each property was
inspected at least once during the course of the assignment. The reports were
prepared in accordance with the Code of Professional Ethics and Standards of
Professional Practice of the Appraisal Institute.
The aggregate market value estimate reported below is subject to the detailed
assumptions and limiting conditions with respect to each property considered, or
incorporated by reference, in the Appraisal with respect to such Property. The
aggregate market value estimate is the sum of the individual property market
values and does not reflect any premium or discount for the properties as a
whole.
<PAGE>
F-4
In our opinion, the aggregate market value of the Properties, as of December 31,
1998 was:
TWO HUNDRED TWENTY-FIVE MILLION FIVE HUNDRED THOUSAND DOLLARS
($225,500,000)
Realty Services International, Inc. was not employed to provide legal
analysis and assumes no responsibility for any matters of a legal nature.
Realty Services International, Inc. was also not employed to perform
engineering inspections and assumes no responsibility for structural and
mechanical, electrical, or any other construction matters, or the ability of
the underlying properties to withstand climatic or seismic disruptions.
Neither Realty Services International, Inc., its officers, nor any staff
employed on the valuations have any known present or contemplated future
interest in the Properties. We have no personal interest or bias with respect to
the subject matter or the parties involved. To the best of our knowledge and
belief, the facts upon which the analyses and conclusions are based are true and
correct. Realty Services International, Inc.'s fee for the assignments was in no
way contingent upon the values reported.
Sincerely,
REALTY SERVICES INTERNATIONAL, INC.
William C. Hersler, MAI
Manager, Appraisal Operations
<PAGE>
F-5
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Balance Sheets
(Historical Cost and Current Value)
As of December 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Current Current
Value Historical Value Historical
(Note 2) Cost (Note 2) Cost
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Assets
- ------
Investments in real estate:
Properties $223,343 $225,833 $206,777 $243,062
Less accumulated depreciation
and amortization - (48,915) - (54,496)
-------- -------- -------- --------
Total investments in real estate 223,343 176,918 206,777 188,566
Cash and cash equivalents 12,597 12,597 10,883 10,883
Rent and other receivables 964 3,656 1,046 3,954
Other 13 13 13 13
-------- -------- -------- --------
Total assets $236,917 $193,184 $218,719 $203,416
======== ======== ======== ========
Liabilities and Partners' Capital
- ---------------------------------
Liabilities:
Investment portfolio fee payable
to related parties $ 1,232 $ 1,232 $ 1,168 $ 1,168
Accounts payable and accrued expenses 525 525 463 463
Accrued property taxes 770 770 782 782
Security deposits 1,063 1,063 979 979
Unearned income 252 252 315 315
-------- -------- -------- --------
Total liabilities 3,842 3,842 3,707 3,707
-------- -------- -------- --------
Commitments (Note 13)
Partners' capital (deficiency):
General Partners 266 (171) 86 (67)
Limited Partners 232,809 189,513 214,926 199,776
-------- -------- -------- --------
Total partners' capital 233,075 189,342 215,012 199,709
-------- -------- -------- --------
Total liabilities and partners'
capital $236,917 $193,184 $218,719 $203,416
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
F-6
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Income (Loss) (Historical Cost)
For the Years Ended December 31, 1998, 1997 and 1996 (in thousands,
except units and per unit amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Rental $ 29,716 $ 28,604 $ 28,242
Interest 538 404 336
Other income 435 589 452
-------- -------- --------
30,689 29,597 29,030
-------- -------- --------
Expenses:
Property operating 10,005 10,056 9,681
Depreciation and amortization 6,932 6,921 7,369
Investment portfolio
fee - related parties 4,840 4,703 4,887
General and administrative 698 676 767
Bad debt 320 448 615
-------- -------- --------
22,795 22,804 23,319
-------- -------- --------
Impairment of investment in real estate (9,007) - -
-------- -------- --------
Net income (loss) $ (1,113) $ 6,793 $ 5,711
======== ======== ========
Net income (loss) allocated:
To the General Partners $ (11) $ 68 $ 57
To the Limited Partners (1,102) 6,725 5,654
-------- -------- --------
$ (1,113) $ 6,793 $ 5,711
======== ======== ========
Weighted average number of
limited partnership units
outstanding 12,724,547 12,724,547 12,724,547
========== ========== ==========
Earnings (Loss) per limited
partnership unit $ (.09) $ .53 $ .44
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
F-7
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Partners' Capital (Deficiency) (Historical Cost)
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1, 1996 $ 85 $205,721 $205,806
Net income 57 5,654 5,711
Cash distributions (185) (9,162) (9,347)
-------- -------- --------
Balance at December 31, 1996 (43) 202,213 202,170
Net income 68 6,725 6,793
Cash distributions (92) (9,162) (9,254)
-------- -------- --------
Balance at December 31, 1997 (67) 199,776 199,709
Net loss (11) (1,102) (1,113)
Cash distributions (93) (9,161) (9,254)
-------- -------- --------
Balance at December 31, 1998 $ (171) $189,513 $189,342
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
F-7
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Partners' Capital (Deficiency) (Current Value)
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1, 1996 $ (11) $196,192 $196,181
Net income 57 5,654 5,711
Decrease in deficiency of current value over
historical cost 81 8,016 8,097
Cash distributions (185) (9,162) (9,347)
-------- -------- --------
Balance at December 31, 1996 (58) 200,700 200,642
Net income 68 6,725 6,793
Increase in excess of current value over
historical cost 168 16,663 16,831
Cash distributions (92) (9,162) (9,254)
-------- -------- --------
Balance at December 31, 1997 86 214,926 215,012
Net loss (11) (1,102) (1,113)
Increase in excess of current value over
historical cost 284 28,146 28,430
Cash distributions (93) (9,161) (9,254)
-------- -------- --------
Balance at December 31, 1998 $ 266 $232,809 $233,075
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
F-9
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Cash Flows (Historical Cost)
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,113) $ 6,793 $ 5,711
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,932 6,921 7,369
Impairment of investment in real estate 9,007 - -
Bad debt expense 320 448 615
Deferred (accrued) rental income 216 68 (118)
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Rent and other receivables (238) 17 (816)
Investment portfolio fee payable
to related parties 64 (27) (17)
Accounts payable and accrued expenses 62 1 10
Accrued property taxes (12) 16 (49)
Security deposits 84 45 110
Unearned income (63) 126 (36)
-------- -------- --------
Net cash provided by operating activities 15,259 14,408 12,779
-------- -------- --------
Cash flows from investing activities:
Investments in real estate (4,291) (3,404) (3,270)
-------- -------- --------
Net cash used in investing activities (4,291) (3,404) (3,270)
-------- -------- --------
Cash flows from financing activities:
Cash distributions (9,254) (9,254) (9,347)
-------- -------- --------
Net cash used in financing activities (9,254) (9,254) (9,347)
-------- -------- --------
Net increase in cash and cash equivalents 1,714 1,750 162
Cash and cash equivalents at beginning of year 10,883 9,133 8,971
-------- -------- --------
Cash and cash equivalents at end of year $ 12,597 $ 10,883 $ 9,133
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
F-10
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Current Value Basis Statements of Changes in
Excess (Deficiency) of Current Value Over Historical Cost
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Deficiency of current value over historical cost at January 1, 1996 (9,625)
Current value increase in properties 8,215
Increase in accrued rent (118)
--------
8,097
--------
Deficiency of current value over historical cost at December 31, 1996 (1,528)
Current value increase in properties 16,763
Decrease in accrued rent 68
--------
16,831
--------
Excess of current value over historical cost at December 31, 1997 15,303
--------
Current value increase in properties 19,207
Write-down of properties for permanent impairment 9,007
Decrease in accrued rent 216
--------
28,430
--------
Excess of current value over historical cost at December 31, 1998 $ 43,733
========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
F-11
AETNA REAL ESTATE ASSOCIATES, L.P.
(a Delaware limited partnership)
Notes to Consolidated Financial Statements
1. ORGANIZATION
Aetna Real Estate Associates, L.P. ("the Partnership") was organized on
September 11, 1986 as a limited partnership under the laws of the State
of Delaware pursuant to a Certificate and Agreement of Limited
Partnership (the "Partnership Agreement"), as amended and restated. The
Partnership was formed for the purpose of making acquisitions in and
operating certain types of residential and commercial real estate,
either directly or through joint venture arrangements and, subject to
certain limitations, making participating investments, construction
loans and conventional mortgage loans. The Partnership's primary source
of revenue is from rental real estate operations. The General Partners
of the Partnership are Aetna/AREA Corporation ("Aetna/AREA"), an
affiliate of Aetna Life Insurance Company, and AREA GP Corporation
("AREA GP"), an affiliate of Lehman Brothers Inc. The Partnership will
continue until December 31, 2015 unless sooner terminated by law or in
accordance with the terms of the Partnership Agreement.
2. CURRENT VALUE BASIS FINANCIAL STATEMENTS
Current Value Reporting
-----------------------
The consolidated current value basis financial statements are presented to
provide supplementary information about the Partnership's financial
position and changes in partners' capital which is not provided by the
historical cost basis financial statements. The Partnership's investments
in real estate are subject to changes in value and, therefore, their
current values differ from their historical cost basis net book values
determined in conformity with generally accepted accounting principles.
Management believes that reporting the financial position on a current
value basis is a more realistic basis for reporting the Partnership's
activities because of the changing economic conditions affecting the real
estate market.
As more fully explained below, estimates of the current values of the
Partnership's assets and liabilities are determined by management. The
estimates of current values of the Partnership's investments in real estate
are based upon independent appraisals of the underlying real estate using
generally accepted valuation techniques. Such estimates of current value
represent the value of real estate assets held as investments for purposes
of obtaining the benefit of appreciation and operating cash flows.
The estimates do not necessarily represent the realizable sales values of
these assets at the date of valuation. Additionally, partners' capital on a
current value basis is not intended to represent the liquidation value of
the Partnership or the market value of its net assets taken as a whole.
<PAGE>
F-11
2. CURRENT VALUE BASIS FINANCIAL STATEMENTS (Continued)
Bases of Valuation
------------------
The following describes the bases of management's estimates of current
values:
o The current values of the Partnership's operating properties are
determined by independent appraisers. Independent appraisals of each
property are performed at the date of purchase and on a quarterly
basis thereafter. The value of future cash payments from joint venture
partners and additional capital costs, if any, are determined by
management to the extent they have not been considered in the
independent appraisals.
o All other assets and liabilities are carried in the current value
basis balance sheets at the lower of cost or net realizable value.
Accrued rent related to scheduled rent increases and tenant
concessions, included in rent and other receivables on the historical
cost basis balance sheets, is deemed to have a net realizable value of
zero on a current value basis.
o The aggregate difference between the current value basis and
historical cost basis of the Partnership's assets and liabilities is
reflected in the partners' capital accounts in the current value basis
balance sheets. The components of this difference at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Properties $ 46,425 $ 18,211
Accrued rent (2,692) (2,908)
-------- --------
Excess of current value over historical cost $ 43,733 $ 15,303
======== ========
</TABLE>
3. SIGNIFICANT ACCOUNTING POLICIES
Financial Statements
--------------------
The Partnership has a controlling interest in each of its joint venture
investments and, therefore, has consolidated the accounts of such joint
ventures in the financial statements. The consolidated financial statements
for 1998, 1997 and 1996 include the accounts of the Partnership and its
joint ventures Lincoln Marina Bay and Town Center Associates. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
<PAGE>
F-12
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Properties
----------
The Partnership regularly evaluates the carrying value of its properties.
During the fourth quarter of 1998, permanent impairments totaling
approximately $9,007,000 were recorded to write-down the carrying value of
two investment properties to their estimated fair value. This amount is
reflected in the 1998 Consolidated Statement of Income (Loss). At December
31, 1998 each property's estimated undiscounted cash flows over the
expected holding period was less than the asset's carrying value. The
estimated fair value represents the property's current value, as discussed
in Note 2. There were no such write-downs required in 1997 or 1996.
Investments in properties, which the Partnership has the intent to hold for
the production of income, are carried at depreciated cost, which includes
the initial purchase price of the property, plus closing costs, legal fees,
and other miscellaneous acquisition costs, net of impairment write-downs.
Properties will be considered held for sale at the time management accepts
a purchase offer or otherwise commits to the sale of a property. Properties
to be disposed of are carried at the lower of depreciated cost or fair
value less estimated selling costs. Leases are accounted for under the
operating method where rental income is recognized on a straight-line
basis. Lease termination fees are included in income in the period in which
the fee is received. Expenses including advertising, maintenance and
repairs are charged to operations as incurred. Significant betterments and
improvements are capitalized and depreciated over their estimated useful
lives. Depreciation is computed using the straight-line method based upon
the estimated useful lives of the respective depreciable properties and
improvements, ranging from 5 to 40 years for land improvements; 10 to 50
years for building and improvements; and 3 to 10 years for personal
property, furniture, fixtures and equipment. Leasing commissions and tenant
improvements are amortized over the life of the respective leases or the
lives of the improvements, whichever is shorter. Properties to be disposed
of are not depreciated.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expense
during the reporting period. Actual results could differ from those
estimates.
<PAGE>
F-14
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
----------------
For purposes of the consolidated statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. Included in cash and cash
equivalents are restricted security deposits of $87,519 and $77,041 at
December 31, 1998 and 1997, respectively. Also, included in cash and cash
equivalents at December 31, 1998 and 1997 was $6,689,916 and $8,742,070,
respectively, held in a mutual fund utilizing investments such as
commercial paper, certificates of deposit and government obligations, which
are carried at market value. The cost of cash equivalents approximates fair
value at December 31, 1998 and 1997.
At December 31, 1998 and 1997, approximately $1,023,000 and $852,000,
respectively, of the bank balances of the Partnership's checking and money
market accounts were insured by the Federal Deposit Insurance Corporation
("FDIC") while approximately $5,834,000 and $1,612,000, respectively, were
uninsured. Included in the uninsured bank balances was approximately
$4,522,000 and $832,000 held at one major financial institution at December
31, 1998 and 1997, respectively. The remainder of the uninsured balances
were held in multiple banks, minimizing the risk of an isolated bank
failure.
Income Taxes
------------
No provision for federal or state income taxes has been made in the
financial statements since income, losses and tax credits are generally
passed through to the individual partners.
Earnings Per Limited Partnership Unit
-------------------------------------
Earnings per unit is based upon net income allocated to the Limited
Partners and their weighted average number of units outstanding during the
year.
<PAGE>
F-15
4. RENT AND OTHER RECEIVABLES
Rent and other receivables at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Current Historical Current Historical
Value Cost Value Cost
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rent and reimbursements receivable $1,626,087 $1,626,087 $1,507,848 $1,507,848
Prepaid and other receivables 235,475 235,475 269,960 269,960
Accrued rent - 2,691,723 - 2,907,877
---------- ---------- ---------- ----------
1,861,562 4,553,285 1,777,808 4,685,685
Less: allowance for doubtful accounts (897,084) (897,084) (731,856) (731,856)
---------- ---------- ---------- ----------
Total rent and other receivables $ 964,478 $3,656,201 $1,045,952 $3,953,829
========== ========== ========== ==========
</TABLE>
5. PARTNERSHIP ALLOCATIONS
Generally, net income and losses for any fiscal year and gains and losses
from sales are allocated 99% to the Limited Partners and 1% to the General
Partners.
The Partnership Agreement provides that net cash from operations, as
defined therein, and distributable proceeds from sale of investments (other
than from the sale of investments pursuant to the liquidation of the
Partnership) generally will be distributed, on a quarterly basis, 99% to
the Limited Partners and 1% to the General Partners. Distributable proceeds
from the sale of investments in liquidation of the Partnership will be
distributed in accordance with the partners' capital accounts after all
allocations of income and loss. The Partnership Agreement also provides for
potentially substantial compensation to be paid to the General Partners in
the event the Limited Partners elect to remove the General Partners.
6. JOINT VENTURES
The Partnership was a general partner in two consolidated joint ventures as
of December 31, 1998, 1997 and 1996. The joint venture agreements in
existence as of December 31, 1998 provide the Partnership with priority
cash payments from operations of the joint ventures ranging from 9% to 13%
per annum on all funds contributed by the Partnership to the extent
sufficient cash flows are generated by the underlying properties. Any cash
flows in excess of these payments to the Partnership will be distributed to
the Partnership and its joint venture partners in accordance with their
joint venture interests. The Partnership's interests in its joint ventures
range from 50% to 80%.
7. CAPITAL CONTRIBUTIONS/DISTRIBUTIONS
The Partnership initially offered up to $300,000,000 of depositary
partnership units representing units of limited partnership interests and
an additional $30,000,000 of units pursuant to the Partnership's
Distribution Reinvestment Plan ("DRIP"). Pursuant to such Plan, Unitholders
were entitled to elect to have their Partnership distributions reinvested
in new units.
<PAGE>
F-16
7. CAPITAL CONTRIBUTIONS/DISTRIBUTIONS (continued)
Effective January 1, 1991, the Partnership suspended its initial offering
of $300,000,000 of units. In March 1992, the Partnership terminated the
offering and suspended sales of units pursuant to the DRIP. During 1993,
the Partnership received a favorable response to a no-action request
submitted to the Securities and Exchange Commission regarding its ability
to continue to sell units pursuant to the DRIP without registration of such
units under the Securities Act of 1933, as amended. As of December 31,
1998, the Partnership had not reopened sales of units pursuant to the DRIP.
No additional units were issued since 1991. Information related to
Unitholders' distributions for the years ended December 31, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
Cash Distributions
------------------
Paid Per Unit
---- --------
<S> <C> <C>
1998 $9,161,674 $ .72
1997 9,161,674 .72
1996 9,161,674 .72
</TABLE>
Cash distributions paid to the General Partners during the year ended
December 31, 1998 aggregated $92,542 which related to operations for the
quarters ended December 31, 1997, March 31, 1998, June 30, 1998 and
September 30, 1998. Cash distributions paid to the General Partners during
the year ended December 31, 1997 aggregated $92,542, which related to
operations for the quarters ended December 31, 1996, March 31, 1997, June
30, 1997 and September 30, 1997.
8. 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. As specified
in the Partnership Agreement, the fee is determined by applying various
percentages to the portion of net asset value attributable to committed and
uncommitted funds available for investment. The fee is payable quarterly
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 15
with respect to future reductions of fees. For the years ended December 31,
1998, 1997 and 1996, Aetna/AREA and AREA GP were entitled to fees as
follows:
<TABLE>
<CAPTION>
Aetna/AREA AREA GP
---------- --------
<S> <C> <C>
1998 $2,265,203 $2,574,862
1997 2,059,243 2,643,952
1996 1,972,562 2,914,167
</TABLE>
<PAGE>
F-17
8. TRANSACTIONS WITH AFFILIATES (Continued)
Other
-----
The General Partners are entitled to reimbursement of expenses paid on
behalf of the Partnership incurred in connection with the investments and
operation of the Partnership. Reimbursable expenses of $347,439, $399,840
and $411,675, which consist primarily of insurance expense paid to a third
party, were reimbursed during 1998, 1997 and 1996 respectively, to an
affiliate of Aetna/AREA.
9. LEASE AGREEMENTS
At December 31, 1998, the Partnership's principal assets subject to lease
agreements consisted of shopping centers, apartment complexes, business
parks and industrial parks. Apartment leases generally have terms of 6 to
12 months and provide for a fixed minimum rent. Leases with shopping
center, industrial park and business park tenants generally range in term
from 1 to 10 years and provide for fixed minimum rent and reimbursement of
their proportionate share of operating expenses. Included in rental revenue
are $3,630,246, $3,803,939 and $3,956,228 primarily consisting of expense
reimbursements for the years ended December 31, 1998, 1997 and 1996,
respectively. In addition, various leases with shopping center tenants
provide for additional rent based upon percentages of tenants' sales
volume. Percentage rent included in rental revenue is $438,369, $329,730
and $458,715 for the years ended December 31, 1998, 1997 and 1996,
respectively. The following table is a schedule of minimum future rents to
be received under noncancelable operating leases:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1999 $17,200,091
2000 15,358,781
2001 13,033,060
2002 11,043,547
2003 8,678,897
Thereafter 18,442,476
-----------
Total $83,756,852
===========
</TABLE>
10. NET ASSET VALUE PER UNIT
Prior to the termination of the Offering and the Remarketing Opportunity
and the suspension of the DRIP in 1992, units offered to new Unitholders or
issued pursuant to the DRIP were purchased at Net Asset Value per unit as
defined in the Partnership Agreement. As discussed in Note 7, the
Partnership had not reopened sales of units pursuant to the DRIP as of
December 31, 1998. The Net Asset Value per unit calculated in accordance
with the Partnership Agreement, is summarized as of December 31, 1998 and
1997 as follows:
<PAGE>
F-18
10. NET ASSET VALUE PER UNIT (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Limited Partners' capital - current value basis $232,808,194 $214,925,972
Cash to be distributed to Limited Partners (2,290,418) (2,290,418)
------------ ------------
$230,517,776 $212,635,554
============ ============
Units outstanding 12,724,547 12,724,547
============ ============
Net Asset Value per unit $ 18.12 $ 16.71
============ ============
</TABLE>
11. SUPPLEMENTARY INFORMATION
Maintenance and repairs, real estate taxes and advertising costs included
in property operating expenses for the years ended December 31, 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs $ 1,094,871 $ 1,261,142 $ 1,085,405
Real estate taxes 3,021,543 3,010,819 2,898,371
Advertising costs 375,714 374,395 296,932
</TABLE>
12. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION
The following is a reconciliation of net income for financial statement
purposes to net income (loss) for federal income tax purposes for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) per financial statements $(1,112,562) $ 6,792,869 $ 5,710,699
Joint venture net income for tax purposes
in excess of (less than) joint venture net
income per financial statements 491,758 374,786 (38,240)
Depreciation deducted for tax purposes
less than depreciation expense per
financial statements 143,694 681,231 673,968
Permanent impairment not deductible
for tax purposes 9,006,619 - -
Rental income related to accrued rent
on wholly owned properties 16,460 109,467 130,895
Bad debt expense deducted per financial
statements in excess of (less than) bad
debt expense deducted for tax purposes (79,323) 131,291 (415,238)
Other (35,137) 20,597 (22,829)
----------- ----------- -----------
Taxable net income $ 8,431,509 $ 8,110,241 $ 6,039,255
=========== =========== ===========
</TABLE>
<PAGE>
F-19
12. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION (Continued)
The following is a reconciliation of partners' capital (historical cost)
for financial statement purposes to partners' capital for federal income
tax purposes as of December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Partners' capital per financial statements $189,342,090 $199,708,868 $202,170,215
Adjustment for cumulative difference
between tax basis net income and net
income (loss) per financial statements 22,036,660 12,492,589 11,175,217
------------ ------------ ------------
Partners' capital per tax return $211,378,750 $212,201,457 $213,345,432
============ ============ ============
</TABLE>
13. COMMITMENTS
As of December 31, 1999, the Partnership had outstanding commitments of
approximately $2.6 million relating to previously acquired investments. Of
this amount, $1.8 million relates to the Partnership's commitment to fund
additional tenant improvements, leasing commissions, and other capital
projects at Village Square, and $.5 million relates to the Partnership's
commitment to fund additional leasing commissions, tenant and building
improvements at certain retail properties.
14. SUBSEQUENT EVENTS
Capital Contributions/Distributions
-----------------------------------
In February 1999, the Partnership declared cash distributions
aggregating $2,313,554 ($.18 per Unit) pertaining to the period from
October 1, 1998 to December 31, 1998, which was distributed on or about
February 19, 1999.
Gateway Square Sale
-------------------
On March 17, 1999 Gateway Square was sold to an unaffiliated party for
a gross sales price of $6,940,000. After closing costs and adjustments,
net cash proceeds to the Partnership were approximately $6,490,000.
Gain on sale of approximately $1,210,000 will be recognized in the
financial statements of the first quarter of 1999. The General Partners
expect to distribute a portion of the net proceeds in the form of a
special distribution during the first or second quarter of 1999.
<PAGE>
F-20
15. 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. Pursuant to the terms of the Settlement Agreement, the
following actions will take place:
(1) 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%
from that set forth in Section 6.6 of the Partnership Agreement (the "First
Reduction"). The First Reduction will be effective on the Final Date and
will be applied retroactively to 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.
(2) 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.
(3) The General Partners will institute a marketing plan, market the
Partnership's assets on a property-by-property basis and, subject to their
fiduciary duties, determine whether or not the sale of any particular
property should take place. The determination of whether to engage in the
sale of one or more properties will reside solely within the discretion and
business judgment of the General Partners, in accordance with their
fiduciary duties.
(4) The Partnership shall make a special distribution no later than April
15, 1999 of at least $2,500,000 (or approximately $0.20 per Unit) of
Partnership cash to limited partners holding Partnership Units as of the
date of such distribution.
(5) The representative plaintiffs and the class will agree to release any
and all claims, to the extent such claims relate to or arise out of the
class action lawsuits, against the defendants to the fullest extent
permitted by law. If the Settlement Agreement is approved by the Delaware
Chancery Court and judgment is entered, the actions will be dismissed with
prejudice.
<PAGE>
F-21
(6) The representative plaintiffs or their counsel may submit an
application to the Delaware Chancery Court 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.
The Settlement Agreement is subject to approval by the Delaware Chancery
Court, although 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.
This summary description of the Settlement Agreement does not purport to be
complete and is qualified in its entirety by reference to the Settlement
Agreement which is filed with the Delaware Chancery Court.
The Partnership will record as an expense for the three months ended March
31, 1999 the attorney's fees and out-of-pocket expenses referred to in (6)
above.
<PAGE>
F-22
PRICEWATERHOUSECOOPERS
Report of Independent Accountants - Supplementary Information
To the Unitholders of
Aetna Real Estate Associates, L.P.
In connection with our audits of the consolidated financial statements of Aetna
Real Estate Associates, L.P. as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998, which financial
statements are included herein, we have also audited the related financial
statement schedule listed in the index on page F-1 herein.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
March 8, 1999, except for Note 15,
as to which the date is March 18, 1999
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 1998
<TABLE>
<CAPTION>
Costs Capitalized Gross Amount at Which
Initial Cost Subsequent to Acquisition Carried at End of Year
-------------------------- ------------------------- ----------------------------------------
Encum- Building & Building & Building &
Description brances Land Improvements Land Improvements Land Improvements Total (a)
- ---------------------- ------- ----------- ------------ -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Partnership Owned:
Cross Pointe (b) $ - $ 3,300,000 $ 12,200,000 $ 16,751 $ (933,750) $ 3,316,751 $ 11,266,250 $ 14,583,001
Shopping Center
Centerville, OH
Gateway Square - 1,516,679 5,377,320 799 858,995 1,517,478 6,236,315 7,753,793
Shopping Center
Hinsdale, IL
Lincoln Square - 1,859,283 11,102,944 1,660 757,670 1,860,943 11,860,614 13,721,557
Apartment Complex
Arlington Heights, IL
Oakland Pointe (b) - 3,412,062 16,981,319 12,552 (10,177,933) 3,424,614 6,803,386 10,228,000
Shopping Center
Pontiac, MI
Summit Village - 5,395,408 30,154,302 116,350 2,081,298 5,511,758 32,235,600 37,747,358
Apartment Complex
Rosslyn, VA
</TABLE>
See Notes to Schedule III
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Schedule III - Real Estate and Accumulated Depreciation (Continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Costs Capitalized Gross Amount at Which
Initial Cost Subsequent to Acquisition Carried at End of Year
-------------------------- ------------------------- ----------------------------------------
Encum- Building & Building & Building &
Description brances Land Improvements Land Improvements Land Improvements Total (a)
- ---------------------- ------- ----------- ------------ -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Partnership Owned (Cont'd)
Three Riverside Drive - 1,722,156 7,389,779 (22,892) 1,658,094 1,699,264 9,047,873 10,747,137
Office/R&D Bldg.
Andover, MA
Village Square - 2,710,355 4,103,802 285,346 57,422 2,995,701 4,161,224 7,156,925
Office Building
Hazelwood, MO
Windmont Apartments - 1,429,226 6,093,017 28,430 611,090 1,457,656 6,704,107 8,161,763
Apartment Complex
Atlanta, GA
115 & 117 Flanders Rd - 2,369,342 8,947,868 7,016 1,529,282 2,376,358 10,477,150 12,853,508
R&D Warehouse Bldgs.
Westborough, MA
Powell Street Plaza - 9,196,813 20,167,160 (68,973) 2,935,667 9,127,840 23,102,827 32,230,667
Shopping Center
Emeryville, CA
</TABLE>
See Notes to Schedule III
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Schedule III - Real Estate and Accumulated Depreciation (Continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Costs Capitalized Gross Amount at Which
Initial Cost Subsequent to Acquisition Carried at End of Year
-------------------------- ------------------------- ----------------------------------------
Encum- Building & Building & Building &
Description brances Land Improvements Land Improvements Land Improvements Total (a)
- ---------------------- ------- ----------- ------------ -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Partnership Owned (Cont'd)
Westgate Distribution
Center - 3,916,801 6,047,987 18,474 4,173,107 3,935,275 10,221,094 14,156,369
Industrial Park
Corona, CA
Consolidated Ventures:
Marina Bay - 1,777,110 5,212,740 166,987 4,148,786 1,944,097 9,361,526 11,305,623
Industrial Park
Richmond, CA
Town Center - 10,880,641 19,198,867 94,939 15,012,981 10,975,580 34,211,848 45,187,428
Business Park
Santa Fe Springs, CA
------- ----------- ------------ -------- ------------ ----------- ------------ ------------
$ - $49,485,876 $152,977,105 $657,439 $ 22,712,709 $50,143,315 $175,689,814 $225,833,129
======= =========== ============ ======== ============ =========== ============ ============
</TABLE>
See Notes to Schedule III
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Schedule III - Real Estate and Accumulated Depreciation
(Continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Life on which
Depreciation in
Latest Income
Accumulated Date of Date Statement
Description Depreciation (a) Construction Acquired is Computed
- ----------- ---------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Cross Pointe (b)
Shopping Center
Centerville, OH $ - 1985 10/3/86 40 years
Gateway Square
Shopping Center
Hinsdale, IL 2,269,365 1986 11/21/86 33 years
Lincoln Square
Apartment Complex
Arlington Heights, IL 4,864,145 1986 11/14/86 33 years
Oakland Pointe (b)
Shopping Center
Pontiac, MI - 1987 1/26/88 33 years
Summit Village
Apartment Complex 9,558,547 1987/1989 6/9/87 and 40 years
Rosslyn, VA 8/31/89
Three Riverside Drive
Office/R&D Bldg.
Andover, MA 3,329,733 1986 2/8/88 33 years
</TABLE>
See Notes to Schedule III
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Schedule III - Real Estate and Accumulated Depreciation
(Continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Life on which
Depreciation in
Latest Income
Accumulated Date of Date Statement
Description Depreciation (a) Construction Acquired is Computed
- ----------- ---------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Partnership Owned (Cont'd)
Village Square
Office Building
Hazelwood, MO 683,718 1961/1988 6/24/87 33 years
Windmont Apartments
Apartment Complex
Atlanta, GA 2,244,407 1989 7/18/89 33 years
115 & 117 Flanders Rd.
R&D Warehouse Bldgs. 3,565,621 1986/1988 2/8/88 and 33 years
Westborough, MA 8/31/89
Powell Street Plaza
Shopping Center
Emeryville, CA 6,490,134 1988 2/16/90 33 years
Westgate Distribution
Center
Industrial Park
Corona, CA 2,726,649 1989 2/22/90 50 years
</TABLE>
See Notes to Schedule III
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Schedule III - Real Estate and Accumulated Depreciation
(Continued)
As of December 31, 1998
<TABLE>
<CAPTION>
Life on which
Depreciation in
Latest Income
Accumulated Date of Date Statement
Description Depreciation (a) Construction Acquired is Computed
- ----------- ---------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Consolidated Ventures:
Marina Bay
Industrial Park
Richmond, CA 3,190,249 1962/1987 6/30/87 50 years
Town Center
Business Park
Santa Fe Springs, CA 9,992,133 1982 12/18/87 33 years
-----------
$48,914,701 (c)
===========
</TABLE>
See Notes to Schedule III
<PAGE>
AETNA REAL ESTATE ASSOCIATES, L.P.
Notes to Schedule III
(a) Reconciliation of the carrying amount of real estate investments and
accumulated depreciation for the years ended December 31, 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance of real estate investments
at beginning of year $243,061,496 $239,888,792 $237,333,658
Additions during year:
Improvements and additions 4,290,989 3,369,864 3,304,120
Deductions during year:
Impairment (b) (9,006,619) - -
New basis adjustment (b) (12,404,058) - -
Other (1) (108,679) (197,160) (748,986)
------------ ------------ ------------
Balance of real estate investments
at close of year $225,833,129 $243,061,496 $239,888,792
============ ============ ============
Balance of accumulated depreciation
at beginning of year $ 54,495,592 $ 47,771,997 $ 41,152,009
Depreciation expense 6,931,846 6,920,755 7,368,974
New basis adjustment (b) (12,404,058) - -
Other (1) (108,679) (197,160) (748,986)
------------ ------------ ------------
Balance of accumulated depreciation
at close of year $ 48,914,701 $ 54,495,592 $ 47,771,997
============ ============ ============
</TABLE>
(1) Write-off of tenant improvements and leasing commissions for vacated
tenants.
(b) In 1998, two properties were written-down for permanent impairments
aggregating $9,006,619. Accumulated depreciation and amortization totaling
$12,404,058 at the time of the permanent impairments has been adjusted
against each property's respective cost.
(c) For Federal income tax purposes, the aggregate cost of land, buildings and
improvements is $249,180,581. The amount of accumulated depreciation on
real property for Federal income tax purposes is $59,293,009.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,597,000
<SECURITIES> 000
<RECEIVABLES> 4,553,000
<ALLOWANCES> 897,000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 225,833,000
<DEPRECIATION> 48,915,000
<TOTAL-ASSETS> 193,184,000
<CURRENT-LIABILITIES> 000
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 189,342,000
<TOTAL-LIABILITY-AND-EQUITY> 193,184,000
<SALES> 29,716,000
<TOTAL-REVENUES> 30,689,000
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 22,795,000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> (1,113,000)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> 000
</TABLE>
