SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ Quarterly Report Under Section 13 or 15(d) of
--- the Securities Exchange Act of 1934
For the quarter ended: June 30, 1999
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OR
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/ / Transition Report Under Section 13 or 15(d) of
--- the Securities Exchange Act of 1934
For the transition period from: to
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Commission file number: 0-14986
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AETNA REAL ESTATE ASSOCIATES, L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2827907
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
242 Trumbull Street, Hartford, Connecticut 06103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 275-2178
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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<PAGE>
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The summarized financial information contained herein is unaudited;
however, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
financial information have been included. The results of operations for the
three and six months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
<PAGE>
3
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
--------- -----------
<S> <C> <C>
Assets
- ------
Investments in real estate:
Properties $219,984 $225,833
Less accumulated depreciation
and amortization (49,885) (48,915)
-------- --------
Total investments in real estate 170,099 176,918
Cash and cash equivalents 9,472 12,597
Rent and other receivables 3,851 3,656
Other 13 13
-------- --------
Total assets $183,435 $193,184
======== ========
Liabilities and Partners' Capital
Liabilities:
Investment portfolio fee payable
to related parties $ 1,045 $ 1,232
Accounts payable and accrued expenses 658 525
Accrued property taxes 877 770
Accrued litigation costs 204 -
Unearned income 247 252
Security deposits 1,012 1,063
-------- --------
Total liabilities 4,043 3,842
-------- --------
Partners' capital (deficiency):
General Partners (270) (171)
Limited Partners 179,662 189,513
-------- --------
Total partners' capital 179,392 189,342
-------- --------
Total liabilities and partners' capital $183,435 $193,184
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
4
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1999 and 1998
(in thousands, except units and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 7,926 $ 7,374 $15,736 $14,793
Interest 145 136 290 264
Other income 71 171 141 249
------- ------- ------- -------
8,142 7,681 16,167 15,306
------- ------- ------- -------
Expenses:
Property operating 2,570 2,429 5,029 4,856
Depreciation and amortization 1,670 1,728 3,299 3,441
Investment portfolio
fee - related parties 1,045 1,203 2,282 2,388
General and administrative 225 159 416 295
Bad debt 123 217 206 256
------- ------- ------- -------
5,633 5,736 11,232 11,236
------- ------- ------- -------
Legal expenses - litigation - - (2,472) -
Gain on sale of property - - 1,211 -
------- ------- ------- -------
Net income $ 2,509 $ 1,945 $ 3,674 $ 4,070
======= ======= ======= =======
Net income allocated:
To the General Partners $ 25 $ 20 $ 37 $ 41
To the Limited Partners 2,484 1,925 3,637 4,029
------- ------- ------- -------
$ 2,509 $ 1,945 $ 3,674 $ 4,070
======= ======= ======= =======
Weighted average number of limited
partnership units outstanding 12,724,547 12,724,547 12,724,547 12,724,547
========== ========== ========== ==========
Earnings per limited partnership unit $ .20 $ .15 $ .29 $ .32
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
5
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Partners' Capital (Deficiency)
For the Six Months Ended June 30, 1999 and 1998
(in thousands - unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $(171) $189,513 $189,342
Distributions (136) (13,488) (13,624)
Net income 37 3,637 3,674
----- -------- --------
Balance at June 30, 1999 $(270) $179,662 $179,392
===== ======== ========
Balance at January 1, 1998 $ (67) $199,776 $199,709
Distributions (46) (4,581) (4,627)
Net income 41 4,029 4,070
----- -------- --------
Balance at June 30, 1998 $ (72) $199,224 $199,152
===== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
6
AETNA REAL ESTATE ASSOCIATES, L.P.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
(in thousands - unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,674 $ 4,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,299 3,441
Gain on sale of property (1,211) -
Bad debt expense 206 256
Accrued rental income 66 16
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Rent and other receivables (467) (246)
Investment portfolio fee payable to
related parties (187) 35
Accounts payable and accrued expenses 133 (1)
Accrued property taxes 107 138
Accrued litigation costs 204 -
Unearned income (5) (5)
Security deposits (51) 76
-------- --------
Net cash provided by operating activities 5,768 7,780
-------- --------
Cash flows from investing activities:
Proceeds from sale of property 6,712 -
Investments in real estate (1,981) (1,392)
-------- --------
Net cash provided by (used in)
investing activities 4,731 (1,392)
-------- --------
Cash flows from financing activities:
Cash distributions (13,624) (4,627)
-------- --------
Net cash used in financing activities (13,624) (4,627)
-------- --------
Net (decrease) increase in cash and cash equivalents (3,125) 1,761
Cash and cash equivalents at beginning of period 12,597 10,883
-------- --------
Cash and cash equivalents at end of period $ 9,472 $ 12,644
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
7
AETNA REAL ESTATE ASSOCIATES, L.P.
(a Delaware limited partnership)
Notes to Consolidated Financial Statements
(unaudited)
1. GENERAL
The accompanying financial statements and related notes should be read in
conjunction with the Partnership's annual report for the year ended
December 31, 1998. The financial data included herein as of December 31,
1998 has been drawn from the consolidated financial statements of the
Partnership which were audited by PricewaterhouseCoopers LLP.
2. TRANSACTIONS WITH AFFILIATES
Investment Portfolio Fee
------------------------
The General Partners are entitled to receive an investment portfolio fee
based on the net asset value of the Partnership's investments. The fee is
payable quarterly, in arrears, from available cash flow and may not exceed
2.5% per annum of net asset value. The applicable percentage, for the
purpose of calculating this fee, declines to 2% per annum for Investments
in Properties held by the Partnership more than 10 years but less than 15
years, and to 1.75% per annum for Investments in Properties held more than
15 years. Effective March 15, 1999 each of the above rates was reduced by
.25% per annum, and decrease another .25% per annum as of March 15, 2001
pursuant to the Settlement Agreement discussed in Note 5. For the six
months ended June 30, 1999, Aetna/AREA and AREA GP earned fees of
$1,044,725 and $1,236,932, respectively. For the similar period of the
prior year, Aetna/AREA and AREA GP earned fees of $1,116,876 and
$1,271,115, respectively.
3. SALE OF INVESTMENT IN REAL ESTATE
On March 17, 1999, Gateway Square was sold to an unaffiliated party. The
gross sales price of $6,940,000 was approximately $640,000 greater than
the property's appraised value. After closing costs and adjustments
aggregating approximately $211,000 and $235,000, respectively, net cash
proceeds to the Partnership were approximately $6,494,000. Gain on the
sale included in these consolidated financial statements for the six
months ended June 30, 1999 is approximately $1,211,000.
4. CASH DISTRIBUTIONS
On April 14, 1999, the Partnership paid a special cash distribution
aggregating $2,570,615 from Partnership cash reserves pursuant to the
Settlement Agreement, see Note 5. On or about May 17, 1999, cash
distributions paid by the Partnership aggregated $8,740,093, of which
$2,313,554 related to operations for the three months ended March 31, 1999
and $6,426,539 represented proceeds from the sale of Gateway Square. Of
the distributions for the quarter ended June 30, 1999, $11,197,601 ($.88
per Unit) was distributed to the Limited Partners and $113,107 to the
General Partners.
<PAGE>
8
5. LITIGATION
In November 1996, the Partnership and its general partners, Aetna/AREA
Corporation and AREA GP Corporation (the "General Partners"), were named
as defendants in two purported class action lawsuits filed in the Chancery
Court of Delaware in New Castle County, entitled Bobbitt v. Aetna Real
Estate Associates, L.P., et al and Estes v. Aetna Real Estate Associates,
L.P., et al (collectively, the "Complaints"). The Complaints alleged,
among other things, that management fees that have been paid and are paid
to the General Partners are excessive and that a standstill agreement with
a then tender offeror which had the effect of limiting the number of
Partnership Units that would be the subject of any tender offer was
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 subject to approval by the Delaware Chancery Court. The
Court approved the Settlement Agreement on May 19, 1999 (the "Final
Date"), and no appeal was filed within the applicable period.
Upon the approval by the court of the Settlement Agreement 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, was reduced by 0.0625% (the "First Reduction"). The
First Reduction was effective on May 19, 1999 and was applied
retroactively to March 15, 1999, the date of the execution of the
Settlement Agreement. The First Reduction will result in a 0.25% reduction
of the annual Investment Portfolio Fee otherwise provided in the
Partnership Agreement. Effective on the second anniversary of the Final
Date, the Applicable Percentage will be reduced by an additional 0.0625%
per quarter (the "Second Reduction"). The First and Second Reductions will
apply cumulatively so that the annual Investment Portfolio Fee from the
second anniversary of the Final Date through the termination of the
Partnership will be a total of 0.50% below the annual Investment Portfolio
Fee otherwise provided in the Partnership Agreement. The Investment
Portfolio Fee reduction for the period from March 15, 1999 through March
31, 1999 of $27,144 was recognized in these consolidated financial
statements during the quarter ended June 30, 1999.
As discussed in Note 4, pursuant to the terms of the Settlement Agreement,
the Partnership made a special cash distribution out of Partnership cash
reserves on April 14, 1999 of $2,544,909 ($0.20 per Unit) to Limited
Partners and $25,706 to the General Partners.
As part of the Settlement Agreement the plaintiff's attorneys were paid
fees and out-of-pocket expenses totaling $2,195,757 during the quarter
ended June 30, 1999. In addition, legal expenses on behalf of the
Partnership and the General Partners amounting to $71,650 were paid during
the six months ended June 30, 1999. The total legal expense of the
litigation for the six months ended June 30, 1999 aggregated $2,471,650,
of which $204,243 is included in accrued litigation costs in these
consolidated financial statements as of June 30, 1999.
<PAGE>
9
6. SUBSEQUENT EVENTS
In July 1999, the Partnership declared additional distributions of
$2,313,554 pertaining to operations for the period from April 1, 1999 to
June 30, 1999.
In August 1999, the General Partners entered into an agreement with a
third party for the sale of Cross Pointe Center. The potential buyer will
perform due diligence and may terminate the agreement for any reason on or
before September 2, 1999. Therefore, it cannot be assumed that the
property will be sold.
<PAGE>
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
- -------------------------------
At December 31, 1998, the Registrant had working capital reserves ("Reserves")
of approximately $7,551,000. During the six months ended June 30, 1999, the
Registrant expended approximately $1,981,000 for capital improvements. After
cash distributions from the sale proceeds of Gateway Square and a special
distribution from Reserves, see Note 4 to Consolidated Financial Statements, the
Registrant has current Reserves of approximately $4,353,000. At June 30, 1999,
the Registrant had approximately $1,660,000 of outstanding commitments for
capital improvements and approximately $3,276,000 of projected capital
improvements (collectively the "Capital Costs") related to existing Investments
in Properties. For the six months ended December 31, 1999 the Registrant will
fund, if needed, approximately $3,892,000 from Reserves for these Capital Costs.
These Capital Costs consist primarily of estimated tenant improvements and
leasing commissions for speculative leasing activity at certain properties,
which, based on activity in the marketplace, may or may not materialize. The
Registrant anticipates funding these Capital Costs from existing Reserves and
through additions from operating cash flow to its Reserves. To ensure that the
Registrant has adequate Reserves to fund its Capital Costs, the General Partners
will continue to review the Reserves quarterly.
If sufficient capital is not available at the time of a funding of a Capital
Cost, the General Partners will review such Capital Costs and take such steps as
they consider appropriate, including decreasing future cash distributions from
operations, negotiating a delay or other restructuring of the capital funding
requirements related to an Investment in Properties or borrowing money, as
provided in the Partnership Agreement, on a short-term basis to pay Capital
Costs.
Year 2000
- ---------
The Year 2000 issue, which is common to most businesses, concerns the inability
of computer systems and devices to properly recognize and process date-sensitive
information when the year changes to 2000. The Registrant owns real estate
assets, and in connection with the operation of such assets, utilizes certain
software products and equipment such as accounting, heating, ventilating and
cooling systems and security systems, which may or may not be Year 2000
compliant. A comprehensive risk-based plan designed to make such systems Year
2000 ready is currently being executed. The plan covers five stages, including:
(i) inventory, (ii) assessment, (iii) remediation, (iv) testing and
certification, and (v) contingency planning, where appropriate. The inventory
and assessment stages for the Registrant's real estate assets have been
completed. Remediation, testing and certification of the systems, if necessary,
and contingency planning are currently underway. 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.
<PAGE>
11
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 are being developed in an attempt to mitigate
risks with respect to the failure of these entities to be Year 2000 ready. It is
anticipated that the cost of vendor (particularly property management and
related services) compliance with Year 2000 problems will be borne primarily by
vendors. The effect, if any, on the Registrant's results of operations from the
failure of such parties to be Year 2000 ready is not reasonably estimable.
Results of Operations
- ---------------------
Net income for the six months ended June 30, 1999 decreased approximately
$396,000 in comparison to the corresponding period in 1998, resulting primarily
from the legal expenses incurred related to the Settlement Agreement. These
expenses were partially offset by the gain on the sale of Gateway Square, and an
increase in rental revenue of approximately $943,000. The increase in rental
revenue resulted primarily from increased occupancy at Village Square. Property
operating expenses for the six months ended June 30, 1999, as compared to the
corresponding period in 1998, increased approximately $173,000. The increase in
property operating expenses occurred primarily at Village Square and Town Center
Business Park where both properties incurred higher repairs and maintenance
costs. Investment portfolio fees decreased approximately $106,000 primarily the
result of lower rates per the Settlement Agreement as discussed in Note 5 to the
Consolidated Financial Statements. General and administrative expenses increased
approximately $121,000 primarily the result of increased expenses for audit and
other professional services provided to the Registrant.
The Partnership paid cash distributions of $1.06 and $.36 per Unit to
Unitholders for the six months ended June 30, 1999 and 1998, respectively.
The Net Asset Value of each of the Partnership's Units, based upon quarterly
independent appraisals, increased to $17.79 at June 30, 1999 from $17.69 at June
30, 1998. The increase in Net Asset Value per Unit is primarily the result of
significant increases in the appraised values of certain of the Registrant's
properties, including Summit Village Apartments, Town Center Business Park,
Village Square and Powell Street Plaza. The increase in appraised value of
Summit Village is a result of an increase in projected market rents. The
increase in the appraised value of Town Center Business Park and Village Square
is primarily due to improved occupancy and increases in market rent assumptions.
Leasing at Village Square has improved with the conversion from retail to
primarily office use. Powell Street Plaza's increase in appraised value was
primarily due to an increase in projected market rents and the pending
replacement of a below market leased space. These value increases were partially
offset by a decrease in the appraised value of Oakland Pointe Shopping Center
and distributions of cash related to the sale of Gateway Square ($.50 per Unit)
and from cash reserves per the Settlement Agreement ($.20 per Unit). The
decrease in appraised value of Oakland Pointe Shopping Center was due primarily
to a decrease in occupancy from the departure of two major tenants, and a change
in lease payments from two tenants resulting from Marshall's vacating the
premises in late 1997.
<PAGE>
12
Net income for the three months ended June 30, 1999 increased approximately
$564,000 as compared to the corresponding period in 1998. Rental revenue
increased approximately $552,000. As discussed above, the most significant
increase in rental revenue occurred at Village Square, which was partially
offset by a reduction in rental revenue due to the sale of Gateway Square.
Investment portfolio fees decreased approximately $158,000 primarily the result
of lower rates per the Settlement Agreement as discussed in Note 5 to the
Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
<PAGE>
13
PART II - OTHER INFORMATION
Item 5. Other Information
The General Partners are continuing to actively review the potential sale of
other properties owned by the Registrant. During 1999, the General Partners had
discussions with potential candidates to broker Village Square for sale. There
can be no assurances that the property will be sold in the near future, or that
if sold, the sales price will approximate the estimated net asset value of the
property. In addition, the Registrant from time to time receives unsolicited
expressions of interest in purchasing some or all of the properties.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibit No. 27 - Financial Data Schedule
(b) None
<PAGE>
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AETNA REAL ESTATE ASSOCIATES, L.P.
BY: AREA GP Corporation
General Partner
Date: August 13, 1999 BY: /s/Mark J. Marcucci
----------------------
Mark J. Marcucci
President & Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 9,472,000
<SECURITIES> 000
<RECEIVABLES> 4,597,000
<ALLOWANCES> 746,000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 219,984,000
<DEPRECIATION> 49,885,000
<TOTAL-ASSETS> 183,435,000
<CURRENT-LIABILITIES> 4,043,000
<BONDS> 000
000
000
<COMMON> 000
<OTHER-SE> 179,662,000
<TOTAL-LIABILITY-AND-EQUITY> 183,435,000
<SALES> 15,736,000
<TOTAL-REVENUES> 16,167,000
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 13,704,000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 3,674,000
<EPS-BASIC> 0.29
<EPS-DILUTED> 000
</TABLE>
