SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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: September 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
---------- ----------
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
- --------------------------------------------------------------------------------
(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
--------------
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
--- ---
<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 nine months ended September 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 September 30, 1999 and December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
-------- --------
<S> <C> <C>
Assets
- ------
Investments in real estate:
Properties held for investment $181,902 $225,833
Less accumulated depreciation
and amortization (43,709) (48,915)
-------- --------
138,193 176,918
Properties held for sale (net of depreciation) 31,101 -
-------- --------
Total investments in real estate 169,294 176,918
Cash and cash equivalents 11,571 12,597
Rent and other receivables 3,650 3,656
Other 13 13
-------- --------
Total assets $184,528 $193,184
======== ========
Liabilities and Partners' Capital
- ---------------------------------
Liabilities:
Investment portfolio fee payable
to related parties $ 1,079 $ 1,232
Accounts payable and accrued expenses 640 525
Accrued property taxes 1,309 770
Accrued litigation costs 276 -
Unearned income 222 252
Security deposits 1,016 1,063
-------- --------
Total liabilities 4,542 3,842
-------- --------
Partners' capital (deficiency):
General Partners (264) (171)
Limited Partners 180,250 189,513
-------- --------
Total partners' capital 179,986 189,342
-------- --------
Total liabilities and partners' capital $184,528 $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 Nine Months Ended September 30, 1999 and 1998
(in thousands, except units and per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 7,901 $ 7,661 $ 23,637 $22,454
Interest 91 147 381 411
Other income 157 56 298 305
------- ------- -------- -------
8,149 7,864 24,316 23,170
------- ------- -------- -------
Expenses:
Property operating 2,495 2,683 7,524 7,539
Depreciation and amortization 1,470 1,730 4,769 5,171
Investment portfolio
fee - related parties 1,079 1,220 3,361 3,608
General and administrative 184 181 600 476
Bad debt 13 17 219 273
------- ------- -------- -------
5,241 5,831 16,473 17,067
------- ------- -------- -------
Legal expenses - litigation - - (2,472) -
Gain on sale of property - - 1,211 -
------- ------- -------- -------
Net income $ 2,908 $ 2,033 $ 6,582 $ 6,103
======= ======= ======== =======
Net income allocated:
To the General Partners $ 29 $ 20 $ 66 $ 61
To the Limited Partners 2,879 2,013 6,516 6,042
------- ------- -------- -------
$ 2,908 $ 2,033 $ 6,582 $ 6,103
======= ======= ======== =======
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 $ .22 $ .16 $ .51 $ .48
========== ========== ========== ==========
</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 Nine Months Ended September 30, 1999 and 1998
(in thousands - unaudited)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1, 1999 $(171) $189,513 $189,342
Distributions (159) (15,779) (15,938)
Net income 66 6,516 6,582
----- -------- --------
Balance at September 30, 1999 $(264) $180,250 $179,986
===== ======== ========
Balance at January 1, 1998 $ (67) $199,776 $199,709
Distributions (69) (6,872) (6,941)
Net income 61 6,042 6,103
----- -------- --------
Balance at September 30, 1998 $ (75) $198,946 $198,871
===== ======== ========
</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 Nine Months Ended September 30, 1999 and 1998
(in thousands - unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,582 $ 6,103
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,769 5,171
Gain on sale of property (1,211) -
Bad debt expense 219 273
Accrued rental income 86 (12)
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Rent and other receivables (299) (223)
Investment portfolio fee payable to related parties (153) 52
Accounts payable and accrued expenses 115 (26)
Accrued property taxes 539 549
Accrued litigation costs 276 -
Unearned income (30) (117)
Security deposits (47) 54
-------- --------
Net cash provided by operating activities 10,846 11,824
-------- --------
Cash flows from investing activities:
Proceeds from sale of property 6,712 -
Investments in real estate (2,646) (2,711)
-------- --------
Net cash provided by (used in) investing
activities 4,066 (2,711)
-------- --------
Cash flows from financing activities:
Cash distributions (15,938) (6,941)
-------- --------
Net cash used in financing activities (15,938) (6,941)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,026) 2,172
Cash and cash equivalents at beginning of period 12,597 10,883
-------- --------
Cash and cash equivalents at end of period $ 11,571 $ 13,055
======== ========
</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. During the
third quarter, the General Partners approved the sale of three properties.
In accordance with Partnership policy and FAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, these properties have been classified as "Properties held for sale" as
of September 30, 1999 in the accompanying balance sheet. See Note 6.
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 will decrease another .25% per annum as of June 19,
2001 pursuant to the Settlement Agreement discussed in Note 5. For the
nine months ended September 30, 1999, Aetna/AREA and AREA GP earned fees
of $1,575,142 and $1,785,420, respectively. For the similar period of the
prior year, Aetna/AREA and AREA GP earned fees of $1,688,300 and
$1,919,888, 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 nine
months ended September 30, 1999 is approximately $1,211,000.
<PAGE>
8
4. CASH DISTRIBUTIONS
Cash distributions paid to Unitholders during the period January 1, 1999
to September 30, 1999 by the Partnership aggregated $15,778,438 ($1.24 per
Unit). Cash distributions paid to the General Partners during the same
period aggregated $159,378. Of the amount paid to Unitholders (1)
$6,871,255 ($.54 per Unit) relates to operations for the quarters ended
December 31, 1998, March 31, 1999 and June 30, 1999; (2) a special cash
distribution paid April 14, 1999 aggregating $2,544,909 ($.20 per Unit)
from Partnership cash reserves pursuant to the Settlement Agreement, see
Note 5; and (3) $6,362,274 ($.50 per Unit) paid May 17, 1999 representing
proceeds from the sale of Gateway Square.
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 had been paid to the General
Partners were 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, 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 June 19, 1999 (the "Final Date") 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 nine months ended September 30, 1999.
<PAGE>
9
5. LITIGATION (continued)
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 nine months
ended September 30, 1999. In addition, legal expenses on behalf of the
Partnership and the General Partners amounting to $275,893 were accrued at
September 30, 1999. The total legal expense of the litigation for the nine
months ended September 30, 1999 aggregated $2,471,650.
6. SUBSEQUENT EVENTS
Distributions
-------------
In October 1999, the Partnership declared additional distributions of
$2,313,554 pertaining to operations for the period from July 1, 1999 to
September 30, 1999.
Sales of Investments in Real Estate
-----------------------------------
On October 18, 1999, Andover Research Park was sold to an unaffiliated
party. The gross sales price of $8,025,000 was approximately $825,000
greater than the property's appraised value. After closing costs and
adjustments aggregating approximately $206,000 and $177,000, respectively,
net cash proceeds to the Partnership were approximately $7,642,000. Gain
on the sale to be recognized in the consolidated financial statements
during the quarter ended December 31, 1999 is approximately $320,000.
On October 18, 1999, 115 & 117 Flanders Road was sold to an unaffiliated
party. The gross sales price of $9,975,000 was approximately $275,000
greater than the property's appraised value. After closing costs and
adjustments aggregating approximately $254,000 and $179,000, respectively,
net cash proceeds to the Partnership were approximately $9,542,000. Gain
on the sale to be recognized in the consolidated financial statements
during the quarter ended December 31, 1999 is approximately $635,000.
On October 26, 1999, Cross Pointe Centre was sold to an unaffiliated
party. The gross sales price of $17,250,000 was approximately $1,350,000
greater than the property's appraised value. After closing costs and
adjustments aggregating approximately $315,000 and $168,000, respectively,
net cash proceeds to the Partnership were approximately $16,767,000. Gain
on the sale to be recognized in the consolidated financial statements
during the quarter ended December 31, 1999 is approximately $2,397,000.
<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 nine months ended September 30, 1999,
the Registrant expended approximately $2,646,000 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 $6,678,000. At September 30,
1999, the Registrant had approximately $1,697,000 of outstanding commitments for
capital improvements and approximately $2,608,000 of projected capital
improvements (collectively the "Capital Costs") related to existing Investments
in Properties. For the three months ended December 31, 1999 the Registrant will
fund, if needed, approximately $1,552,000 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. The Registrant has completed a comprehensive risk-based plan designed
to make such systems Year 2000 ready. The plan covered five stages, including:
(i) inventory, (ii) assessment, (iii) contingency planning and, where
appropriate, (iv) remediation and (v) testing. Costs to specifically remediate
the Registrant's property systems were not material. The Registrant does not
believe that the Year 2000 issue will pose significant problems with respect to
its systems, however, there can be no assurance that all potential problems were
identified by the plan.
<PAGE>
11
Communications have been completed 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 were 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 nine months ended September 30, 1999 increased approximately
$479,000 in comparison to the corresponding period in 1998. The increase
resulted primarily from the gain on the sale of Gateway Square, an increase in
rental revenue and a reduction in investment portfolio fees and depreciation and
amortization, which was partially offset by legal expenses incurred related to
the Settlement Agreement. The increase in rental revenue of approximately
$1,183,000 resulted primarily from increased occupancy at Village Square.
Depreciation and amortization expense decreased approximately $402,000,
resulting primarily from properties held for sale for which depreciation ceased
to be accumulated during the third quarter of 1999 and from the sale of Gateway
Square. Investment portfolio fees decreased approximately $247,000 primarily the
result of lower rates as provided under the Settlement Agreement as discussed in
Note 5 to the Consolidated Financial Statements. General and administrative
expenses increased approximately $124,000 due to increased expenses for
professional services provided to the Registrant.
The Partnership paid cash distributions of $1.24 and $.54 per Unit to
Unitholders for the nine months ended September 30, 1999 and 1998, respectively.
The Net Asset Value of each of the Partnership's Units, based upon quarterly
independent appraisals, increased to $18.21 at September 30, 1999 from $17.95 at
September 30, 1998. The increase in Net Asset Value per Unit is primarily the
result of significant increases in the appraised values of certain of the
Registrant's properties, including Summit Village Apartments, Cross Pointe
Centre, Village Square and Powell Street Plaza. The increase in appraised value
of Summit Village is a result of an increase in projected market rents. The
increase in the appraised value of Cross Pointe Centre and Village Square is
primarily due to improved occupancy and increases in market rent assumptions.
Leasing at Village Square has improved with the conversion from retail to
primarily office use. Powell Street Plaza's increase in appraised value was
primarily due to an increase in projected market rents and the replacement of a
below market leased space. These value increases were partially offset by the
distributions of cash related to the sale of Gateway Square ($.50 per Unit) and
from cash reserves per the Settlement Agreement ($.20 per Unit).
<PAGE>
12
Net income for the three months ended September 30, 1999 increased approximately
$875,000 as compared to the corresponding period in 1998. Rental revenue
increased approximately $240,000. 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.
Depreciation and amortization expense decreased approximately $260,000,
resulting primarily from properties being held for sale for which depreciation
ceased to be accumulated during the third quarter of 1999 and from the sale of
Gateway Square. Property operating expenses decreased approximately $188,000
primarily due to the sale of Gateway Square and reduced expenses at Town Center
Business Park. Investment portfolio fees decreased approximately $141,000
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
Sale of Investments in Real Estate
- ----------------------------------
The General Partners are continuing to actively review the potential sale of
other properties owned by the Registrant. There can be no assurances that any
properties will be sold in the near future, or that if sold, the sales prices
will approximate the estimated net asset values of the properties. In addition,
the Registrant from time to time receives unsolicited expressions of interest in
purchasing some or all of the properties.
Acquisition of Allegis Realty Investors LLC
- -------------------------------------------
Allegis Realty Investors LLC provides investment advisory, asset management and
support services to Aetna/AREA regarding the acquisition, management,
development, improvement, leasing and sale of properties, investments and other
assets now or hereafter owned by or allocable to the Partnership. In addition,
Allegis has the right to acquire the stock of Aetna/AREA for nominal
consideration until 2008 (the "option") and to designate the directors of
Aetna/AREA regardless of whether the option is exercised. On September 15, 1999
an agreement was signed for the direct and indirect equity interests of Allegis,
and the Option and related rights, to be acquired by the UBS Brinson division of
UBS AG. UBS Brinson is a leading investment management firm with global
operations. The acquisition is subject to Federal Reserve Board approval and
other consents. The transaction is expected to close by December 1999. This
transaction would not alter Aetna/AREA's status as a general partner of the
Partnership or its obligations and fiduciary duties to the Partnership and
Unitholders resulting from its status as general partner.
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: November 15, 1999 BY: /s/Mark J. Marcucci
---------------------------
Mark J. Marcucci
President & Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,571,000
<SECURITIES> 000
<RECEIVABLES> 3,981,000
<ALLOWANCES> 331,000
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 220,649,000
<DEPRECIATION> 51,355,000
<TOTAL-ASSETS> 184,528,000
<CURRENT-LIABILITIES> 4,542,000
<BONDS> 000
<COMMON> 000
000
000
<OTHER-SE> 179,986,000
<TOTAL-LIABILITY-AND-EQUITY> 184,528,000
<SALES> 23,637,000
<TOTAL-REVENUES> 24,316,000
<CGS> 000
<TOTAL-COSTS> 000
<OTHER-EXPENSES> 16,473,000
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 000
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 6,582,000
<EPS-BASIC> 0.51
<EPS-DILUTED> 000
</TABLE>
