SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended:
SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to __________________.
Commission File Number 33-22805
MASTER REALTY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 48-1056392
(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
712 Broadway, Suite 700
Kansas City, Missouri 64105
(Address of principal offices) (Zip Code)
Registrant's telephone number, including area code:(816) 474-9333
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 for the preceding 12 months (or 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 No X_
As of September 30, 1998, the Registrant had 46,350 shares of preferred
stock and 1,175,775 shares of common stock outstanding. The aggregate book
value of all shares of the Registrant, based on the September 30, 1998
unaudited financial statements was $14,587,877.
MASTER REALTY PROPERTIES, INC.
SEPTEMBER 30, 1998 FORM 10Q
INDEX
Part I: Financial Statements
Financial Statements*
A. Balance Sheets as of September 30, 1998 and December 31, 1997
B. Statement of Operations for the three months Ended
September 30, 1998 and 1997
C. Statement of Operations for the Nine months Ended
September 30, 1998 and 1997.
D. Statement of Changes in Shareholders' Equity for the
Nine months ended September 30, 1998 and 1997
E. Statement of Cash Flows for the Nine months ended
September 30, 1998 and 1997
Notes to Unaudited Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Signatures
* All financial statements, except the balance
sheet as of December 31, are unaudited
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
September 30, December 31,
1998 1997
A S S E T S
CASH $ 903,185 $ 2,348,692
RESTRICTED CASH 309,184 294,866
MORTGAGE NOTES RECEIVABLE,
net of allowance for loan losses 1,296,164 2,829,615
NOTE RECEIVABLE 197,556 193,460
PROPERTY HELD FOR INVESTMENT 1,000,000 1,000,000
INVESTMENT IN REAL ESTATE PARTNERSHIPS 233,514 188,938
ACCOUNTS RECEIVABLE 1,176,695 1,155,214
INDUSTRIAL REVENUE BONDS 0 276,452
PROPERTY AND EQUIPMENT,
at cost less accumulated depreciation 43,642,760 37,638,765
OTHER ASSETS 1,306,916 1,267,660
----------- -----------
TOTAL ASSETS $50,065,974 $47,193,662
=========== ===========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1998 and December 31, 1997
September 30, December 31,
1998 1997
L I A B I L I T I E S
NOTES PAYABLE $ 34,040,020 $ 30,842,693
OTHER LIABILITIES 919,054 2,037,553
------------ -------------
TOTAL LIABILITIES $ 34,959,074 $ 32,880,246
============ =============
MINORITY INTEREST IN SUBSIDIARIES 519,023 515,960
COMMITMENTS AND CONTINGENCIES (Note 16)
S T O C K H O L D E R S' E Q U I T Y
CAPITAL CONTRIBUTED
Convertible preferred stock, par
value $.01, liquidation preference
up to 5% of the Company's net assets. 464 24,916
Common stock, par value $.01,
authorized 45,000,000 shares 11,758 291,814
Additional paid-in capital 41,769,651 40,926,229
----------- -----------
TOTAL CAPITAL CONTRIBUTED 41,781,873 41,242,959
RETAINED DEFICIT (27,178,660) (27,430,167)
TREASURY STOCK, 67,990 shares of common
stock, and 475 shares of preferred
stock (15,336) (15,336)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 14,587,877 13,797,456
------------ ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,065,974 $ 47,193,662
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 1998, and 1997
1998 1997
REVENUES
Rental income $ 930,809 $ 739,206
Hotel Income 630,000 556,071
Interest and fees on mortgage loans 42,041 33,077
Other income (loss) 3,935 9,182
------------ -----------
TOTAL REVENUES $ 1,606,785 $ 1,337,356
============ ===========
EXPENSES
Loan Servicing Fees $ 7,372 8,714
Rental expenses 457,278 365,687
General and administrative expenses 41,889 108,033
Legal and accounting 31,869 32,510
Payroll and employee benefits 122,645 118,783
Depreciation and amortization 516,049 303,247
Interest expense 661,894 496,265
Provision for loan losses (recoveries) 24,218 (736,131)
----------- ------------
TOTAL EXPENSES $ 1,863,214 $ 697,108
----------- -----------
MINORITY INTEREST IN LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES (59,629) 303,247
----------- -----------
NET INCOME $ (196,800) $ (640,428)
=========== ============
BASIC EARNINGS PER SHARE (0.1610) (0.5240)
DILUTED EARNINGS PER SHARE (0.1437) (0.4676)
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 1998, and 1997
1998 1997
REVENUES
Rental income $ 2,664,716 $ 2,092,086
Hotel Income 2,022,000 1,697,489
Interest and fees on mortgage loans 148,370 73,278
Other income (loss) 26,599 54,314
Gain on sale of assets 81,884
------------ -----------
TOTAL REVENUES $ 4,943,569 $ 3,917,167
============ ===========
EXPENSES
Loan Servicing Fees $ 24,993 26,707
Rental expenses 1,345,062 1,020,593
General and administrative expenses 293,527 475,852
Legal and accounting 190,664 185,903
Payroll and employee benefits 399,371 365,581
Depreciation and amortization 1,255,719 969,865
Interest expense 1,927,210 1,688,248
Provision for loan losses (recoveries) (691,840) (1,060,384)
----------- ------------
TOTAL EXPENSES $ 4,744,716 $ 3,672,365
----------- -----------
MINORITY INTEREST IN LOSS (INCOME) OF
CONSOLIDATED SUBSIDIARIES (52,644) 6,112
----------- -----------
NET INCOME $ 251,507 $ 238,690
=========== ============
BASIC EARNINGS PER SHARE 0.2058 0.2171
DILUTED EARNINGS PER SHARE 0.1836 .1743
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended September 30, 1998 and 1997
PREFERRED PREFERRED COMMON COMMON
STOCK STOCK STOCK STOCK
SHARES AMOUNT SHARES AMOUNT
Balances, December 31, 1996 2,491,622 24,916 15,554,669 155,546
Debenture Conversion to Stock 6,273,500 62,735
Net Income for the Period
Treasury Stock
--------- ------- ---------- -------
Balances, September 30, 1997 2,491,622 24,916 21,828,169 218,281
========= ======= ========== =======
Balances, December 31, 1997 2,491,622 24,916 29,181,486 291,814
Debenture Conversion to Stock 959,067 9,591
Unsecured Director's Fees
converted to stock 229,738 2,827
Pension Plan Stock Conversion 863,095 8,631
Stock Bonus 2,147,362 21,474
Reverse Stock Split (2,445,272) (24,452) (32,257,973)(322,579)
Net income for the period
---------- ------- ---------- -------
Balances, June 30, 1998 46,350 464 1,175,775 11,758
========== ======= ========== =======
CAPITAL IN TOTAL
EXCESS OF PAR UNDISTRIBUTED TREASURY SHAREHOLDER'S
VALUE EARNINGS (DEF) STOCK EQUITY
Balances, Dec. 31, 1996 38,587,104 (28,937,294) 9,830,272
Debenture Conversion
to Stock 1,342,549 1,405,284
Net Income for the Period 238,690 238,690
Treasury Stock (15,336) (15,336)
---------- ------------ --------- -----------
Balances, Sept 30 1997 39,914,317 (28,698,604) 11,458,910
========== =========== ========= ===========
Balances, Dec. 31, 1997 40,926,229 (27,430,167) (15,336) 13,797,456
Debenture Conversion
to Stock 227,641 237,232
Unsecured Director's Fees
converted to stock 16,173 19,000
Pension Plan Stock Conversion 49,369 58,000
Stock Bonus 459,535 481,009
Reverse Stock Split 90,704 (256,327)
Net Income for the Period 251,507 251,507
---------- ------------ --------- ----------
Balances, Sept 30 1998 41,769,651 (27,178,660) (15,336) 14,587,877
========== =========== ========= ===========
MASTER REALTY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 251,507 $ 238,690
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Minority interest 3,063 (6,112)
Interest receivable 5,425
Accounts receivable (21,481) 1,316,500)
Prepaid Expenses (3,002)
Other assets, net (39,256) 1,398,144
Increase (decrease) in
operating liabilities
Other liabilities (479,407) (13,361)
Prepetition liabilities (12,690) ( 3,069)
Interest payable 147,277 (62,461)
------------ ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (150,987) 237,754
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease mortgage notes receivable 1,529,355 112,319
Decrease in real estate partnerships (44,576) (1,090,360)
Decrease in industrial revenue bonds 276,452
Increase in fixed assets (6,003,995) (493,999)
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES $ (4,242,764) $(1,472,040)
CASH FLOW FROM FINANCING ACTIVITIES
Decrease in equity due to
reverse stock split (328,549)
Increase in notes payable $ 3,291,111 $ (397,217)
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 2,962,562 $(397,217)
------------ ----------
NET INCREASE (DECREASE) IN CASH (1,431,189) (1,631,503)
CASH, BEGINNING OF PERIOD 2,643,558 3,855,754
CASH, END OF PERIOD $ 1,212,369 $2,224,251
(1) Restricted cash and escrows
The Company entered into a Cash Management, Collateral and Security Agreement
(Cash Collateral Agreement), on December 19, 1997, as part of the First
Mortgage Note and Mezzanine Note transactions. As a result, all cash
received from the operations of the collateral pledged for the First Mortgage
Note, after December 19, 1997, is deposited into a central operating account.
A monthly sweep of this account is used to fund, in priority, certain
reserves and sub-accounts created pursuant to the Cash Collateral Agreement.
All remaining funds, if any, are paid to the Company. The following reserves
were established under this agreement.
September 30, 1998 December 31, 1997
Debt service reserve $151,181 $146,000
Capital expenditure reserve 119,362 91,035
Impound costs sub-account 38,641 57,831
-------- --------
Total restricted cash and escrows $309,184 $294,866
======== ========
Debt service reserve - This account was created to fund the First Mortgage
Note debt service to the extent necessary. Withdrawals from this account
occur only when there are insufficient funds in the central operating account
to fully fund the First Mortgage Note debt service.
Capital expenditure reserve - This account was created to fund the payment of
replacement expenditures, furniture, fixtures and equipment replacement
expenditures and leasing expenditures. Funding is provided in monthly
deposits from the central operating account. Withdrawals may be made from
this account for approved expenditures.
Impound costs sub-account - This account was established to pay impound
costs. These impound costs are defined as all taxes of the First Mortgage
Note borrowers and insurance (if insurance not otherwise provided for by the
Company) for the pledged collateral of the First Mortgage Note. Funding is
provided in monthly deposits from the central operating account. Withdrawals
may be made from this account for approved costs.
The Cash Collateral Agreement is secured by a pledge of the central operating
account and all income derived from the investment of that account. The
First Mortgage Note and Mezzanine Note are also cross-collateralized and
cross-defaulted with the Cash Collateral Agreement.
(2) Mortgage notes receivable
September 30, 1998 December 31, 1997
Mortgage notes receivable,
partially-earning $2,988,746 $6,521,108
Allowance for losses (1,692,582) (3,691,493)
---------- ---------
Net mortgage notes receivable $1,296,164 $2,829,615
========== ==========
Mortgage notes receivable are collateralized by real estate, assignment of
rents, certain future earnings of borrowers, other borrower assets, investor
notes and borrower personal guarantees. The collateralized real estate is
located at various geographical locations, with a concentration in a downtown
area of Kansas City, Missouri. A substantial portion of the Company's
debtors' ability to honor their contracts is dependent upon the real estate
economy. Effective February 1, 1998, the Company converted its partially-
earning mortgage note receivable with a net carrying value of $1,748,633 into
a partnership investment (see Note 13).
Due to the uncertainty of future collections and possible foreclosures, it is
not practicable to estimate the scheduled maturities of mortgage notes
receivable over the next five years and thereafter.
(3) Property held for investment
September 30, 1998 December 31, 1997
Non-earning, land in New Mexico $1,000,000 $1,000,000
========== ==========
The carrying amount of the land in New Mexico is based on an estimate of
value established at the time the contractual right to the property was
acquired in foreclosure on collateral for a note receivable. The estimate
was based on prior appraisals, studies of the development possibilities for
the property, and local economic conditions. The land is in a remote part of
New Mexico and access to the property is limited. There is limited real
estate sales activity in this region to determine the likelihood of realizing
the carrying value of this investment. Because of these factors, it is
possible that the estimate of the realizable value of this land may change
materially.
(4) Investment in real estate partnerships
Investment in real estate partnerships consists of the following:
Ownership %
Ownership at
Interest 9/30/98 12/31/97
OPP IX, Limited Partnership Limited 25.12% 24.9%
OPP X, Limited Partnership Limited 2.3% 2.3%
Historic Suites of America - KC Limited 19.8% 19.8%
The Company acquired an additional 10 limited partnership units in OPP IX on
January 7, 1998.
(5) Accounts receivable - related party
Amounts due from Embassy Hotel Management, Inc. are in connection with the
leases and funds advanced for operations of the following hotel properties:
September 30, 1998 December 31, 1997
Ramada Inn - Phoenix, Arizona $ 287,955 $ 353,085
Ramada Inn - Euless, Texas 420,035 525,755
Historic Suites - Kansas City, Missouri 90,398 114,479
Holiday Inn - Wichita, Kansas 348,825 118,824
-------- --------
Total $ 1,142,213 $1,112,143
========== ==========
(6) Industrial revenue bonds
As disclosed in Note 12 the Company is contingently liable as a guarantor on
Industrial Revenue Bonds (Soho Office Center Project) Series 1996 between the
Land Clearance for Redevelopment Authority of Kansas City (the Issuer) and
Soho Office Center, L.P. (the Borrower). The Company owned the bonds, which
totaled $2,655,000 as part of a note receivable, and distributed $2,345,000
in 1996, and $33,548 in 1997 in satisfaction of certain notes payable
obligations. The Company sold all of its remaining bonds in April 1998 at
their face value however, the closing on $91,743 of the bonds was delayed into
the third quarter of 1998.
(7) Property and equipment
September 30, 1998 December 31, 1997
Cost
Land and land improvements $ 7,208,108 $ 6,880,699
Building and building improvements 36,973,880 30,750,746
Furniture and equipment 3,193,120 2,840,758
----------- -----------
Total Cost $47,375,108 $40,472,203
Accumulated depreciation (3,732,348) (2,833,438)
----------- -----------
Net property, plant and equipment $43,642,760 $37,638,765
=========== ===========
Expenditures for maintenance, repairs and improvements which do not
materially extend the useful life of the asset are expenses. The aggregate
depreciation charged to operations for the period ended September 30, 1998 and
1997 was $1,081,323 and $353,775, respectively.
(8) Notes payable
September 30, 1998 December 31, 1997
Salomon Brothers mortgage note $19,489,126 $19,675,000
Salomon Brothers Mezzanine note 1,190,000 930,000
Midland Bank mortgage note 7,249,997 7,249,997
Hillcrest Bank 3,568,783
Convertible subordinated debentures 1,461,616 1,646,534
Unsecured alternative treatment note 833,121 994,430
Unsecured non-interest bearing note payable 128,333 174,406
Real estate tax notes 98,860 147,890
Hotel van loan 20,184 24,436
----------- ----------
Total notes payable $34,040,020 $30,842,693
Salomon Brothers mortgage note - Mortgage note payable (First Mortgage Note)
of December 19, 1997 with monthly principal and interest payments of $145,397
based on an interest rate of 7.5% and a 25-year amortization period. The
initial payment of accrued interest only through January 31, 1997 was paid on
February 1, 1998. The outstanding principal and interest are due at maturity
on January 1, 2008. The nonrecourse First Mortgage Note is collateralized by
commercial, residential and hotel properties in Kansas City, Missouri, a
hotel in Phoenix, Arizona and a hotel in Euless, Texas. This note is also
cross-collateralized and cross-defaulted with the Mezzanine Note and the Cash
Collateral Agreement.
Salomon Brothers Mezzanine note - Mortgage note payable (Mezzanine Note) of
December 19, 1997 with interest payable monthly based upon the one-month
London Interbank Offered Rate (LIBOR) plus 4.95%. The Company received an
additional $260,000 advance on this note in May, 1998. The interest rate at
September 30, 1998 was 10.59% with the initial payment due February 1, 1998.
Monthly principal payments begin in January 1999 based upon a monthly
calculation using the outstanding principal balance, the interest rate from
the preceding month and a 48-month amortization period less the months
elapsed since January 1, 1999. The outstanding principal and interest are
due at maturity on January 1, 2003. The Mezzanine Note is secured by the
pledge of the Company's general partner interest in New Historic Suites
Partners, L.P. and a full payment guaranty by the Company. The Mezzanine
Loan Agreement requires that the monthly aggregated Adjusted Property Net
Cash Flow for the properties securing the First Mortgage Note to at least
equal the monthly calculation of the Debt Service Coverage Threshold. The
Debt Service Coverage Threshold is defined as 1.05 times the sum of the
annual debt service on the First Mortgage Loan plus the debt service payable
on the Mezzanine Loan at an assumed principal and interest constant of 27%.
This note is cross-collateralized and cross-defaulted with the First Mortgage
Note and the Cash Collateral Agreement.
Midland Bank mortgage note - Mortgage note payable of October 1, 1997 with
interest payable monthly at an initial rate of 7% until April 1, 1999. The
rate then increases to 8% through March 31, 2001 and to 8.5% from April 1,
2001 until maturity. Interest only is payable monthly through October 5,
1998. The interest payments are based on the Deemed Balance (as defined)
determined annually beginning on April 1, 1999. The initial Deemed Balance
is the face amount of the note. From November 5, 1998 through October 5,
2000, monthly payments of principal and interest are based on a 30-year
amortization of the outstanding principal balance. Beginning on November 5,
2000, the monthly principal and interest payments are based on a 25-year
amortization of the outstanding principal balance. The outstanding principal
and interest are due at maturity on April 1, 2004. The note is
collateralized by a hotel in Wichita, KS and the Disbursement Account
(required reserve account to fund property improvements).
Hillcrest Bank mortgage note -Mortgage note payable of February, 1998 with
interest and principal payable monthly at an interest rate of 9.25%.
Principal is amortized based on a twenty year amortization. All unpaid
principal and interest is due in February, 2000. The Company has guaranteed
payment under this note. The note may be renewed for an additional year.
Convertible subordinated debentures - Convertible Subordinated Debentures
issued January 1994. The securities were issued in the initial aggregate
principal amount of $9,127,752, and bear interest at the rate of 6% per
annum. Interest accrues semiannually on January 1 and July 1 of each year.
The securities mature December 2003. At any time prior to maturity, the
securities are convertible into shares of common stock of the Company, unless
the securities are called for redemption. The number of shares issuable upon
conversion is based on the Company's book value of $.224/share as of the
December 31, 1993 financial statements. Related accrued interest expense is
not subject to conversion to common stock and the liability is eliminated
upon conversion of the debenture principal. Accrued interest eliminated upon
conversion of debentures during the periods ended September 30, 1998 and 1997
amounted to $48,275 and $109,547, respectively. The securities are
subordinate and junior in right of payment to all senior indebtedness of the
Company (which includes all collateralized debt of the Company). Senior
Indebtedness is to be paid in full before holders of the Subordinated
Debentures are to be paid any principal or interest.
Unsecured note - 9% unsecured note payable to previous participants in the
alternative treatment plan, with interest only payable quarterly until maturity
in August, 2000.
Unsecured non-interest bearing note payable - Note due September 2000,
payable in an installment of $75,000 on January 31, 1996 and 60 monthly
payments of $7,333 with the remaining unpaid principal due at maturity.
Interest has been imputed at a rate of 9%.
Real estate tax note - Unsecured note payable consisting of an agreement with
the taxing authorities for delinquent real estate taxes on a foreclosed
property with interest imputed at 9% and monthly payments of $3,220.30 until
maturity on August 15, 2002. On March 31, 1998 the Company sold a property
which was the subject of an unsecured real estate tax note. This note was
paid off as part of the closing of this sale.
Hotel van loan - 9.25% note payable, collateralized by a vehicle, payable in
monthly installments of $646 until maturity in September 2001.
(9) Other liabilities
Other liabilities consist of the following:
September 30, 1998 December 31, 1997
Interest payable $ 147,277 $ -
Accounts payable 55,825 169,550
Accrued bonus pool 198,380 1,324,113
Due to affiliates - 367,707
Other liabilities 517,572 176,183
---------- ----------
$ 919,054 $2,037,553
========== ==========
At September 30, 1998 and December 31, 1997, other liabilities includes the
accrued bonus pool liability. The Company's bonus pool became effective June
15, 1994 to provide additional compensation to Company employees. Bonus pool
expense charged to operations for the period September 30, 1997, was $178,000.
(10) Common and Preferred Stock and Paid in Capital.
The Company completed both a twenty five hundred (2,500) to (1) reverse stock
split effective April 30, 1998 and a seventy five (75) for (1) forward stock
split effective June 30,1998. Both of these stock splits were approved by the
stockholders of the Company.
(11) Treasury stock
During the year ended December 31, 1996, the Company acquired 67,990 shares
of preferred stock and 475 shares of common stock. These shares were
obtained under a provision in the Company's Plan of Reorganization which
allowed holders of convertible debentures over 65 years old to convert their
debentures into alternative treatment debt. Since no value was assigned to
the treasury stock, management has used $.224 per share as the cost of the
treasury stock acquired.
(12) Business segment information
Description of the types of activities for reportable segments - The Company
has three reportable segments: hotel leasing, residential/mixed use
properties, and assets held for restructure. The hotel leasing segment
realizes rent income on Hotel properties leased to operators. The
residential/mixed use properties segment realizes income from residential and
commercial real estate properties. The assets held for restructure are
assets recovered as collateral on notes receivable for which the Company has
no long-term objective of owning and operating.
Revenue from segments below the quantitative thresholds are reported as all
other. Those activities are predominantly non-recurring gains and losses.
The assets in all other are predominantly administrative assets, intangible
assets, and assets held for long-term capital appreciation.
Measurement of segment profit or loss and segment assets - The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company does not have intersegment sales
and transfers.
Factors management used to identify the enterprise's reportable segments -
The Company's reportable segments are strategic business units that are in
distinct markets consistent with the Company's long-range strategic business
plan. They are managed separately because each business requires different
management practices.
The following table illustrates information concerning segment profit or loss
and segment assets:
Residential/ Assets
Hotel Mixed Use For All
Period ended 6-30-98 Leasing Properties Restructure Other Total
Revenues from
external customers $2,022,000 $2,477,460 $199,050 $ 43,395 $4,741,905
Interest revenue 9,727 1,158 114,712 46,827 172,424
--------- --------- -------- -------- ---------
Total revenues $2,031,727 $2,478,618 $ 313,762 $ 90,222 $4,914,329
Percentage of segment
revenues to total 41% 51% 6% 2 % 100%
Interest expense 1,015,636 679,956 8,572 223,046 1,927,210
Depreciation and
amortization 961,992 144,668 18,813 130,247 1,255,720
Segment profit (loss) 15,120 419,354 146,214 (329,181) 251,507
Percentage of segment
profit (loss) to total 6% 166% 58% (130%) 100%
Other significant non-
cash items:
Convertible sub-
ordinated debentures
converted to
common stock - - - 237,232 237,232
September 30, 1998
Segment assets 28,374,212 16,758,413 2,183,798 2,749,551 50,065,974
Percentage of segment
assets to total 57% 33% 4% 6% 100%
Expenditures for
segment assets 499,518 5,481,541 19,418 3,518 6,003,995
In addition to the above measures for business segments, the Company monitors
Funds from Operations (FFO) as defined by National Association of Real Estate
Investment Trusts (NAREIT). Real Estate Investment Trusts use FFO as a
standard measure of operating performance. FFO is defined by NAREIT as net
income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. The calculation of FFO for
the Company for each operating segment is as follows:
Residential/ Assets
Hotel Mixed Use For All
Period ended 6-30-98 Leasing Properties Restructure Other Total
Net income $ 15,120 $ 419,354 $146,214 $(329,181) $251,507
Add minority interest 52,644 - - - 52,644
Add partnership
investment loss 9,249 9,249
--------- --------- -------- -------- ---------
Income before
minority interest $ 67,764 $419,354 $146,214 $(319,932) $313,400
Add: Depreciation and
amortization of
real estate assets 961,992 144,668 18,813 - 1,125,473
Less: Gain on sales
of assets - - - (81,884) (81,884)
--------- --------- -------- -------- ---------
Funds from operations$1,029,756 $564,022 $165,027 $(401,816)$1,356,989
========= ======== ======== ========= ==========
(13) Commitments and contingencies
Guaranty:
The Company is contingently liable as a guarantor on Industrial Revenue Bonds
(IRB's) (Soho Office Center Project) Series 1996 between the Land Clearance
for Redevelopment Authority of Kansas City (the Issuer) and Soho Office
Center, L.P. (the borrower) in the amount of $2,655,000. The Series 1996
bonds were reissued to pay amounts due to the Company on Series 1984 Bonds.
The Company entered into the Guarantor Agreement to effectuate the
transaction whereby these funds would be available to the Company. The
Company has pledged collateral to secure the guaranty. The collateral
consists of the Company's Deed of Trust and Security Agreement executed by
the borrower in favor of the Company on the Series 1984 Bonds, and assignment
on a ratable basis of General Partnership Interest of River Market Venture,
Inc. (a wholly owned subsidiary of the Company) in River Market Venture I,
L.P.
Minimum rents:
The Company receives income on commercial and residential properties under
noncancelable operating lease agreements expiring through 2001 in connection
with its rental operations. Future minimum rental payments under these
leases as of December 31, 1997 are as follows:
Years Ended December 31
1998 $1,391,344
1999 380,903
2000 150,984
2001 50,610
2002 40,204
Thereafter 37,225
----------
Total $2,051,270
==========
(14) Acquisitions
On February 1, 1998, the Company acquired a 90% managing general partnership
interest in Soho West III, L.P. by converting its note receivable from the
partnership and contributing an additional real estate asset to an ownership
interest. The Company is to receive all of the partnership's distributions
until certain returns to the Company have been attained. The Company attributes
no value to the minority interest in this partnership.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (dollars in thousands, unless otherwise stated):
Background:
The following discussion compares historical results of operation for
the period ended September 30, 1998 and 1997. The discussion should be read in
conjunction with the financial statements and notes thereto included
elsewhere in this report.
The Company:
The Company is a public real estate investment trust that is primarily
engaged in the acquisition, development and operation of mixed use
apartment/commercial properties and the acquisition and development of hotel
properties. The Company operates these leases either directly or through
subsidiaries or partnerships.
Results of Operations:
Period Ended September 30,1998 Compared with Period Ended September 30,
1997
Rental Properties:
Revenue from rental properties increased by $572,630 for the Nine
months ended September 30, 1997 to September 30, 1998. This increase was due
to the increases in rental rates in all of the Properties, reduction in
vacancies, and the purchase of a mixed-use property in February, 1998.
Rental expenses increased from $1,060,384 at September 30, 1997 to
$1,345,062 at September 30, 1998. This increase of $284,678 was due to the
addition of an additional mixed-use property in February, 1998.
Hotel Properties:
Revenues from hotel lease income increased from $1,697,489 at June 30,
1997 to $2,022,000 for September 30, 1998. This increase was due to the
acquisition of an additional hotel property in October, 1997.
Other Revenues and Expenses:
The Company continued to receive interest income on its remaining real
estate loans and cash deposits. The amount received was $148,370 and $73,278
for September 30, 1998 and September 30, 1997, respectively.
The Company disposed of a rental property on March 31, 1998 at a gain of
$81,884.
The Company had a $182,370 decrease in general and administrative
expenses for the Nine months ended September 30, 1998 compared to September 30,
1997.
This decrease was mostly attributable to a decrease in the Company's bonus
pool for employees from September 30, 1997 to September 30, 1998.
Interest expense increased by $238,962 from $1,688,248 at September 30,
1997 to $1,927,210 at September 30, 1998. This net increase was due to the
refinancing of the Company's assets, the decline in interest attributed to
debentures and the additional expense attributable to the mixed-use property
acquired in February, 1998.
The Company has continued to recover losses previously reserved related
to the Company's former loan portfolio and assets. The recovery for September
30, 1998 was $691,840 compared to $1,060,384 for September 30, 1997.
Liquidity and Capital Resources:
The Company had deficits in cash flow from both the operating and
investing activities which represented the payment of Company liabilities and
the acquisition of additional real estate assets.
The Company had an increase in cash flows from financing activities
related to the debt financing of the acquisition of additional real estate
assets.
Funds from Operations:
FFO is defined by the National Association of Real Estate Investment
Trusts ("NAREIT") as net income (loss) (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, and distributions in excess of earnings
allocated to Minority Interest, plus depreciation/amortization of assets
unique to the real estate industry. Depreciation/amortization of assets not
unique to the industry, such as amortization of deferred financing costs and
non-real estate assets, is not added back. FFO does not represent cash flow
from operating activities in accordance with generally accepted accounting
principles (which, unlike FFO, generally reflects all cash effects of
transactions and other events in the determination of net income) and should
not be considered an alternative to net income as an indication of the
Company's performance or to cash flow as a measure of liquidity or ability to
make distributions. The Company considers FFO a meaningful, additional
measure of operating performance because it primarily excludes the assumption
that the value of real estate assets diminishes predictably over time, and
because industry analysts have accepted it as a performance measure.
Comparison of the Company's presentation of FFO, using the NAREIT definition,
to similarly title measures for other REITs may not necessarily be meaningful
due to possible differences in the application of the NAREIT definition used
by such REITs.
The following reflects the FFO of the Company for the periods ended
June, 1998 and 1997.
September 30, 1998 September 30, 1997
Net income (loss) $251,507 $ 244,802
Add partnership loss 9,249
Add minority interest 52,644 (6,112)
--------- ---------
Income before minority interest $313,400 $ 238,690
Add depreciation and amortization
of real estate assets 1,125,473 678,253
Gain on sale of assets (81,884) (61,613)
--------- ---------
Funds from operations $1,356,989 $ 855,330
======== ========
SIGNATURES
Pursuant to the requirements to 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.
Dated: _____________ 1998,
MASTER REALTY PROPERTIES, INC.
By: /S/ John J. Bennett, Chairman
(Principal Executive Officer)
By: /S/ Thomas H. Trabon, Executive Vice President
and Chief Financial Officer
