<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarter ended: March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number: 0-16785
VANGUARD REAL ESTATE FUND I
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Massachusetts 23-6861048
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Vanguard Financial Center
Malvern, PA 19355
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number (610) 669-1000
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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 _____
11,019,978 shares of beneficial interest outstanding as of April 30, 1996.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Item Page
No. No.
<S> <C>
Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement of Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Income Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statement of Changes in Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
1
<PAGE> 3
STATEMENT OF NET ASSETS
(in Process of Liquidation)
<TABLE>
<CAPTION>
March 31, 1996
($ in 000's)
(unaudited)
-------------
<S> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309
Short-Term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,435
Temporary Cash Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
-------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,975
-------------
LIABILITIES
Due to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
Dividend Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,713
Accounts Payable and Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . 500
-------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,663
-------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,312
=============
Number of Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,019,978
=============
Net Assets Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .12
=============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS (unaudited)
(in Process of Liquidation)
<TABLE>
<CAPTION> (000's)
-------------
<S> <C> <C>
NET ASSETS--going concern basis--March 27, 1996 . . . . . . . . . $1,618
Adoption of liquidation basis of accounting . . . . . . . . . . . (31)
Estimated interest income through expected date of liquidation . 125
Estimated expenses through expected date of liquidation . . . . . (400)
------------
Estimated Fund net expenses through expected date of liquidation (275)
------------
NET ASSETS--liquidation basis--March 31, 1996 . . . . . . . . . $1,312
------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 4
BALANCE SHEETS
<TABLE>
<CAPTION>
March 27, 1996
($ in 000's) December 31, 1995
ASSETS (unaudited) ($ in 000's)
------------- -------------
<S> <C> <C>
Investments in Real Estate:
Direct Ownership Investments:
Land . . . . . . . . . . . . . . . . . . . . . . . . . -- $ 9,485
Buildings and Improvements . . . . . . . . . . . . . . -- 12,066
-------- -------
-- 21,551
Less--Accumulated Depreciation . . . . . . . . . . . . -- 1,492
-------- -------
Net Investment Portfolio . . . . . . . . . . . . . . . . . -- 20,059
Marketable Securities--REMICs . . . . . . . . . . . . . . . . -- 1,832
Short-Term Investments:
Vanguard Money Market Reserves-Prime Portfolio
(1,434,637 and 1,602,632 shares, respectively) . . . . $ 1,435 1,603
Temporary Cash Investments . . . . . . . . . . . . . . . . 35,000 13,981
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . 446 681
-------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 36,881 $38,156
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . -- $ 2,281
Due to Affiliates . . . . . . . . . . . . . . . . . . . . . $ 450 305
Dividend Payable . . . . . . . . . . . . . . . . . . . . . . 34,713 --
Other Liabilities . . . . . . . . . . . . . . . . . . . . . 100 402
-------- -------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . 35,263 2,988
-------- -------
Shares of Beneficial Interest, without par value, unlimited
shares authorized . . . . . . . . . . . . . . . . . . . . . -- 28,884
Undistributed Net Income . . . . . . . . . . . . . . . . . . 1,618 6,284
-------- -------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 1,618 35,168
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . $ 36,881 $38,156
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 5
INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Period Ended Period Ended
March 27, 1996 March 31, 1995
REAL ESTATE INCOME (000) (000)
------------- -------------
<S> <C> <C>
Rental Income . . . . . . . . . . . . . . . . . . . . . . . . $ 631 $ 1,025
Mortgage Interest Income . . . . . . . . . . . . . . . . . . . 3 306
------------- -------------
634 1,331
------------- -------------
REAL ESTATE EXPENSES
Mortgage Interest Expense . . . . . . . . . . . . . . . . . . 33 59
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . 44 102
Property Operating Expenses . . . . . . . . . . . . . . . . . 115 294
Provision for Possible Losses . . . . . . . . . . . . . . . . -- 400
------------- -------------
192 855
------------- -------------
INCOME FROM REAL ESTATE 442 476
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . 225 56
------------- -------------
667 532
------------- -------------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . . 26 47
Administrative Fee . . . . . . . . . . . . . . . . . . . . 24 43
Other Administrative Expenses . . . . . . . . . . . . . . . 84 109
------------- -------------
134 199
------------- -------------
INCOME BEFORE NET GAIN ON SALES
OF INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 533 333
Net Gain on Sales of Investments . . . . . . . . . . . . . . 630 --
------------- -------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $1,163 $ 333
============= =============
Net Income Per Share:
Income Before Net Gain on Sale of Investments . . . . . . . $.05 $.03
Net Gain on Sale of Investments . . . . . . . . . . . . . . .06 --
------------- -------------
Net Income Per Share . . . . . . . . . . . . . . . . . . . . . $.11 $.03
============= =============
Weighted Average Number of Shares Outstanding . . . . . . . . 11,019,978 11,019,978
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 6
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Period Ended Period Ended
March 27, 1996 March 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES (000) (000)
-------------- --------------
<S> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,163 $ 333
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Possible Losses . . . . . . . . . . . . . . -- 400
Net Gain on Sales of Investments (630) --
Changes in Other Assets and Liabilities . . . . . . . . . (122) 368
------------- -------------
Net Cash Provided by Operating Activities . . . . . . . 411 1,101
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Building Improvements . . . . . . . . . . . . . . . . . . . -- (4)
Transaction Fees . . . . . . . . . . . . . . . . . . . . . . (220) --
Principal Repayments on Marketable Securities--REMICs . . . -- 55
Proceeds From Sale of Investment--Plaza del Amo . . . . . . 11,923 --
Proceeds From Sale of Investment--Oakcreek . . . . . . . . . 9,194 --
Marketable Securities Sold . . . . . . . . . . . . . . . . . 1,824 --
------------- -------------
Net Cash Provided by Investing Activities . . . . . . . . . 22,721 51
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . . . (20) (25)
Repayment of Mortgage Loan--Plaza del Amo . . . . . . . . . (2,261) --
------------- -------------
Net Cash Used In Financing Activities . . . . . . . . . (2,281) (25)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . 20,851 1,127
CASH AND CASH EQUIVALENTS--Beginning of Period . . . . . . . . 15,584 3,478
------------- -------------
CASH AND CASH EQUIVALENTS--End of Period . . . . . . . . . . . $36,435 $4,605
============= =============
</TABLE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
<TABLE>
<CAPTION>
Shares of
Beneficial Interest Undistributed Total Shareholders'
Number Amount Net Income Equity
(000) (000) (000)
------------------------------------------------------------------------
<S> <C>
Balance: January 1, 1996 . . 11,019,978 $28,884 $6,284 $35,168
Net Income for the Period . 1,163 1,163
Less Liquidating Distributions (28,884) (5,829) (34,713)
------------------------------------------------------------------------
Balance: March 27, 1996 . . . 11,019,978 -- $1,618 $1,618
========================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS
1. On December 12, 1994, the Fund's Board of Trustees adopted a Plan of
Liquidation and Termination (the "Liquidation Plan"). The Fund's Declaration of
Trust initially contemplated the liquidation of all of the Fund's investments
after a period of approximately seven to twelve years following completion of
its initial public offering, or between June 30, 1994, and 1999, respectively.
The Trustees' decision to adopt the Liquidation Plan at this point in the
Fund's initially contemplated liquidation period was driven by several factors,
including real estate market conditions affecting each investment in the Fund's
portfolio, and tax considerations affecting real estate investment trusts. The
Liquidation Plan provides that the Fund will dispose of all of its assets, wind
up its affairs, pay or adequately provide for the payment of all of its
liabilities, and distribute for the benefit of its shareholders all of the
Fund's assets over 24 months, in complete cancellation of all issued and
outstanding shares of beneficial interest.
As of March 27, 1996, all of the Fund's real estate investments have
been sold and the Fund expects to complete the remaining liquidation activities
contemplated by the Liquidation Plan by May 31, 1996. The Fund has declared a
liquidating distribution of $3.15 per share payable April 30, 1996, to
shareholders of record on April 22, 1996, and intends to make a final
liquidating distribution, currently estimated to be $.12 per share, on or about
May 31, 1996, in complete cancellation of all issued and outstanding shares of
beneficial interest. As of April 30, 1996, the Fund's shares will no longer
trade on the American Stock Exchange since the liquidating distribution payable
on that date represents a majority of the Fund's remaining net assets.
It is contemplated that the Fund can satisfactorily complete its
liquidation and dissolution in accordance with the Liquidation Plan by May 31,
1996. However, if the Fund has not disposed of all of its assets or made
provision for all of its liabilities by December 12, 1996, the Fund will form a
liquidating trust, the beneficiaries of which will be the shareholders of the
Fund. All assets and liabilities of the Fund not previously disposed of and
discharged would be transferred to the liquidating trust. Beneficial interests
in the liquidating trust would not be readily transferable.
2. The Fund's balance sheets, income statements, and statements of cash
flows and of changes in shareholders' equity as of and for the period ended
March 27, 1996 contained in these financial statements have been prepared on
the basis of a going concern using historical cost. In December 1994, upon
adoption of the Liquidation Plan, the Fund considered all of its remaining
investments as held for sale and reduced the carrying value of such investments
to the extent that each investment's then-current carrying value exceeded its
estimated net realizable value, defined as estimated fair market value less
selling costs. As of March 27, 1996, the Fund obtained binding agreements of
sale and simultaneously completed the sales of its two remaining real estate
investments. Accordingly, the Fund began to account for its assets and
liabilities on a liquidation basis as of March 28, 1996. The principal effect
of adopting the liquidation basis of accounting is that (i) all remaining
assets, including an estimate for interest income to be earned on short-term
investments held through the expected date of the Fund's liquidation, are
stated at their estimated net realizable value and (ii) liabilities, including
a provision for all estimated expenditures necessary to liquidate and dissolve
the Fund pursuant to the Liquidation Plan, are stated at their estimated
amounts. These financial statements include a statement of net assets as of
March 31, 1996, and a statement of changes in net assets, to reflect the Fund's
adoption of the liquidation basis of accounting. These financial statements
should be read in conjunction with the financial statements and notes thereto
contained in the Fund's Annual Report to Shareholders for the year ended
December 31, 1995.
6
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (continued)
3. On March 22, 1996, the Fund sold its Plaza del Amo Shopping Center
("Plaza") for a contract price of $13,100,000. The sale generated a net gain to
the Fund of $720,000, after satisfaction of a $2,261,000 mortgage loan secured
by the property and a shared-appreciation payment of $1,044,000 to the former
owner of Plaza. In connection with the sale, and in accordance with the terms
of the Fund's amended advisory agreement, the Fund also incurred a disposition
fee of $261,000, payable to its Adviser.
In late September 1994, the Fund exercised its call right with respect
to its former shared-appreciation, wrap-around mortgage loan investment secured
by Plaza. As a result, the entire balance of the loan, less the unpaid balance
of the senior mortgage on the Plaza property, was due and payable in late March
1995. The borrower failed to tender payment of the outstanding loan balance on
the due date, resulting in a default under the terms of the loan. On August 1,
1995, the borrower transferred title to the property, in lieu of foreclosure,
to the Fund with the borrower retaining a residual interest in the
shared-appreciation feature of the mortgage.
Under the original loan terms, upon repayment of the loan, both the
borrower and the Fund were entitled to a share of the property's appreciation,
if any, equal to 50% of Plaza's fair market value in excess of the original
wrap-around loan balance of $10,646,000. In consideration for the borrower
agreeing to transfer title to the Fund in lieu of foreclosure, the transfer
agreement provided that, upon the Fund's ultimate sale of Plaza, the Fund would
pay the borrower the greater of 2% of Plaza's net sales proceeds, as defined,
or a share of Plaza's net sales proceeds in excess of the original wrap-around
mortgage loan balance such that the borrower and the Fund share in the
property's appreciation equally as contemplated in the original mortgage loan
agreement.
Upon transfer of title, the Fund recorded the property at its
estimated fair market value less selling costs. Such costs included an
estimated minimum shared-appreciation obligation guaranteed the borrower
pursuant to the transfer agreement, of which $110,000 was paid to the borrower
on the transfer date. Since the then-estimated net realizable value of the
property received approximated the carrying value of the Fund's mortgage loan
investment, no gain or loss was recorded during the year ended December 31,
1995, as a result of the Fund obtaining title to Plaza.
4. On March 27, 1996, the Fund sold its Oakcreek Village Shopping Center
investment ("Oakcreek") for a contract price of $9,400,000, generating a net
loss to the Fund of $82,000. This loss was in addition to previously recognized
provisions for possible losses in the aggregate amount of $700,000 to write
down the carrying value of Oakcreek to its then-estimated net realizable value.
In connection with the sale, and in accordance with the terms of the Fund's
amended advisory agreement, the Fund incurred a disposition fee of $138,000,
payable to its Adviser.
5. On January 12, 1996, the Fund sold its investments in marketable
securities (REMICs) for net proceeds of $1,824,000, generating a realized loss
of $8,000.
7
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS
Vanguard Real Estate Fund I, A Sales-Commission-Free Income Properties Fund
(the "Fund"), a Massachusetts business trust established in 1987, is a
qualified finite-life real estate investment trust ("REIT') under the Internal
Revenue Code of 1986. On December 12, 1994, the Fund's Board of Trustees
approved a Plan of Liquidation and Termination (the "Liquidation Plan"). The
Fund's Declaration of Trust initially contemplated the liquidation of all of
the Fund's investments after a period of approximately seven to twelve years
following completion of its initial public offering, or between June 30, 1994,
and 1999, respectively. The Trustee's decision to adopt the Liquidation Plan
at this point in the Fund's initially contemplated liquidation period was
driven by several factors, including real estate market conditions affecting
each investment in the Fund's portfolio and tax considerations affecting real
estate investment trusts. The Liquidation Plan provides that the Fund will
dispose of all of its assets, wind up its affairs, pay or adequately provide
for the payment of all of its liabilities and distribute for the benefit of its
shareholders all of the Fund's assets over 24 months, in complete cancellation
and redemption of all issued and outstanding shares of beneficial interest.
As of March 27, 1996, all of the Fund's real estate investments have been sold
and the Fund expects to complete the remaining liquidation activities
contemplated by the Liquidation Plan by May 31, 1996. The Fund paid a
liquidating distribution of $3.15 per share on April 30, 1996, to shareholders
of record on April 22, 1996, and intends to make a final liquidating
distribution, currently estimated to be $.12 per share, on or about May 31,
1996, in complete cancellation of all issued and outstanding shares of
beneficial interest. As of April 30, 1996, the Fund's shares ceased trading on
the American Stock Exchange, since the liquidating distribution payable on that
date represented a majority of the Fund's remaining net assets.
It is contemplated that the Fund can satisfactorily complete its liquidation
and dissolution in accordance with the Liquidation Plan by May 31, 1996.
However, if the Fund has not disposed of all of its assets and made provision
for all of its liabilities by December 12, 1996, the Fund will form a
liquidating trust, the beneficiaries of which will be the shareholders of the
Fund. All assets and liabilities of the Fund not previously disposed of and
discharged would be transferred to the liquidating trust. Beneficial interests
in the liquidating trust would not be readily transferable.
The Fund's balance sheets, income statements, and statements of cash flows and
of changes in shareholders' equity as of and for the period ended March 27,
1996 contained in the first quarter 1996 financial statements have been
prepared on the basis of a going concern using historical cost. In December
1994, upon adoption of the Liquidation Plan, the Fund considered all of its
remaining investments as held for sale and reduced the carrying value of such
investments to the extent that each investment's then-current carrying value
exceeded its estimated net realizable value, defined as estimated fair market
value less selling costs. As of March 27, 1996, the Fund obtained binding
agreements of sale and simultaneously completed the sales of its two remaining
real estate investments. Accordingly, the Fund began to account for its assets
and liabilities on a liquidation basis as of March 28, 1996. The principal
effect of adopting the liquidation basis of accounting is that (i) all
remaining assets, including an estimate for interest income to be earned on
short-term investments held through the expected date of the Fund's
liquidation, are stated at their estimated net realizable value and (ii)
liabilities, including a provision for all estimated expenditures necessary to
liquidate and dissolve the Fund pursuant to the Liquidation Plan, are stated at
their estimated amounts. The first quarter 1996 financial statements
8
<PAGE> 10
include a statement of net assets as of March 31, 1996, and a statement of
changes in net assets, to reflect the Fund's adoption of the liquidation basis
of accounting.
On March 22, 1996, the Fund sold its Plaza del Amo Shopping Center ("Plaza")
for a contract price of $13,100,000. The sale generated a net gain to the Fund
of $720,000, after satisfaction of a $2,261,000 mortgage loan secured by the
property and a shared-appreciation payment of $1,044,000 to the former owner of
Plaza. In connection with the sale, and in accordance with the terms of the
Fund's amended advisory agreement, the Fund also incurred a disposition fee of
$261,000, payable to its Adviser. In late September 1994, the Fund exercised
its call right with respect to its former shared-appreciation, wrap-around
mortgage loan investment secured by Plaza. As a result, the entire balance of
the loan, less the unpaid balance of the senior mortgage on the Plaza property,
was due and payable in late March 1995. The borrower failed to tender payment
of the outstanding loan balance on the due date, resulting in default under the
terms of the loan. On August 1, 1995, the borrower transferred title to the
property, in lieu of foreclosure, to the Fund with the borrower retaining a
residual interest in the shared-appreciation feature of the mortgage. Under
the original loan terms, upon repayment of the loan, both the borrower and the
Fund were entitled to a share of the property's appreciation, if any, equal to
50% of Plaza's fair market value in excess of the original wrap-around loan
balance of $10,646,000. In consideration for the borrower agreeing to transfer
title to the Fund in lieu of foreclosure, the transfer agreement provided that,
upon the Fund's ultimate sale of Plaza, the Fund would pay the borrower the
greater of 2% of Plaza's net sales proceeds, as defined, or a share of Plaza's
net sales proceeds in excess of the original wrap-around mortgage loan balance,
such that the borrower and the Fund share in the property's appreciation
equally as contemplated in the original mortgage loan agreement. Upon transfer
of title, the Fund recorded the property at its estimated fair market value
less selling costs. Such costs included an estimated minimum
shared-appreciation obligation guaranteed the borrower pursuant to the transfer
agreement, of which $110,000 was paid to the borrower on the transfer date.
Since the then-estimated net realizable value of the property received
approximated the carrying value of the Fund's mortgage loan investment, no gain
or loss was recorded during the year ended December 31, 1995 as a result of the
Fund obtaining title to Plaza.
On March 27, 1996, the Fund sold its Oakcreek Village Shopping Center
investment ("Oakcreek") for a contract price of $9,400,000, generating a net
loss to the Fund of $82,000. This loss was in addition to previously
recognized provisions for possible losses in the aggregate amount of $700,000
to write down the carrying value of Oakcreek to its then-estimated net
realizable value. In connection with the sale, and in accordance with the
terms of the Fund's amended advisory agreement, the Fund incurred a disposition
fee of $138,000, payable to its Adviser.
On January 12, 1996, the Fund sold its investment in marketable securities
(REMICs) for net proceeds of $1,824,000, generating a realized loss of $8,000.
9
<PAGE> 11
RESULTS OF OPERATIONS
PERIOD ENDED MARCH 27, 1996 VS. THREE MONTHS ENDED MARCH 31, 1995
The Fund had net income of $1,163,000, or $.11 per share, for the period ended
March 27, 1996, as compared to net income of $333,000, or $.03 per share for
the three months ended March 31, 1995. Included in 1996's net income was a
$630,000 net gain on sales of investments resulting from the first quarter
sales of Plaza del Amo, Oakcreek Shopping Center, and the Fund's investment in
mortgage backed securities (REMICs). Included in 1995's net income was a
$400,000 provision for possible losses to write down the carrying value of the
Fund's Minnesota Portfolio to its then-estimated net realizable value less
selling costs. Excluding the 1995 provision for possible losses and the 1996
net gain on sales of investments, net income decreased $200,000 for the period
ended March 27, 1996 as compared to net income in the three months ended March
31, 1995. This decrease, as more fully described below, reflects a smaller
real estate asset base and corresponding decreases in net rental income and
mortgage interest income, primarily offset by decreases in mortgage interest
expense, administrative expenses, and an increase in short-term investment
income, in each case as compared to such items in 1995.
Net rental income (rental income less real estate taxes and property operating
expenses) decreased by $157,000, or 25%, from $629,000 for the three months
ended March 31, 1995 to $472,000 for the period ended March 27, 1996. This
decrease was primarily due to the dispositions of the remaining buildings in
the Minnesota Portfolio in July 1995 and the Sheffield Forest Apartment Complex
in December of 1995, which generated for the Fund net rental income of $338,000
and $67,000, respectively, during the three months ended March 31, 1995. This
decline was partially offset by $245,000 of net rental income generated for the
Fund during the period ended March 27, 1996 from the Plaza del Amo investment,
for which the Fund obtained title on August 1, 1995, as discussed in "Business"
above.
Mortgage interest income decreased by $303,000, from $306,000 for the period
ended March 27, 1995 to $3,000 for the comparable period of 1996. This
decrease was primarily attributable to the Fund obtaining title to property
securing the former Plaza del Amo mortgage loan investment in August 1995.
Investment income from short-term investments increased by $169,000, from
$56,000 for the three months ended March 31, 1995 to $225,000 for the period
ended March 27, 1996. Investment income increased in the 1996 period primarily
due to an increase in the average short-term investment balance, resulting from
the investment of net proceeds generated from the sales of the Sheffield Forest
Apartment Complex in December 1995 and the Fund's investment in mortgage backed
securities in early January 1996, as compared to such balance in the same
period of 1995. Such net proceeds were included in the April 30, 1996
distribution to the Fund's shareholders.
Administrative expenses decreased by $65,000, or 33%, from $199,000 for the
three months ended March 31, 1995 to $134,000 for the period ended March 27,
1996. This decrease was primarily due to lower advisory and administrative
fees payable in the 1996 period, which fees are based on average invested real
estate assets. The Fund's average assets invested in real estate decreased
during the latter half of 1995 due to the sale of the Minnesota and Sheffield
Forest investments.
10
<PAGE> 12
LIQUIDATION AND TERMINATION
Shareholders of the Fund as of April 22, 1996 received a liquidating
distribution in the amount of $3.15 per share, including substantially all of
the net proceeds from the sale of the Fund's Plaza del Amo and Oakcreek
investments, the final real estate assets in the Fund's portfolio. As a
result, on April 30, 1996, trading of the Fund's shares on the American Stock
Exchange terminated, and the Fund's stock transfer books were closed, except to
the extent necessary to reflect trades made through April 30. On or about May
31, 1996, the Fund anticipates distributing to shareholders all remaining net
assets of the Fund in an amount currently estimated to be approximately $.12
per share. Immediately following that distribution, the Fund will make
appropriate filings to terminate its status as a Massachusetts business trust,
and thereafter certificates representing shares of beneficial interest in the
Fund will be null and void and of no further force or effect.
11
<PAGE> 13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
A Financial Data Schedule for the three months ended March
31, 1996, was submitted in electronic format only.
(b) Reports on Form 8-K
The Fund filed no reports on Form 8-K during the first quarter
ended March 31, 1996.
12
<PAGE> 14
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.
Vanguard Real Estate Fund I,
A Sales-Commission-Free Income Properties Fund
DATE May 15, 1996 /s/ John J. Brennan
------------ ---------------
John J. Brennan
President & Chief Executive Officer
DATE May 15, 1996 /s/ Ralph K. Packard
------------ ----------------
Ralph K. Packard
Vice President & Controller
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S MARCH 31, 1996 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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<SECURITIES> 0
<RECEIVABLES> 231
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