<PAGE>
Registration No. 33-34930
Rule 424(b)(3)
B.F. SAUL REAL ESTATE INVESTMENT TRUST
SUPPLEMENT DATED APRIL 11, 1994
TO PROSPECTUS DATED JANUARY 28, 1994
AND SUPPLEMENT TO PROSPECTUS DATED MARCH 16, 1994
The following supplements the information in the Prospectus under the
headings "SUMMARY," "THE TRUST" and "RISK FACTORS AND OTHER CONSIDERATIONS."
Please read this Supplement carefully and retain it for future reference.
On March 30, 1994, B.F. Saul Real Estate Investment Trust (the "Trust")
consummated the sale of $175,000,000 principal amount of its 11 5/8% Senior
Secured Notes due 2002 (the "Senior Secured Notes") in a private offering to
institutional investors. The Trust has applied certain of the net proceeds
received from the sale of the Senior Secured Notes to repay mortgage
indebtedness and a working capital loan. The Trust will use the balance of the
net proceeds for other general corporate purposes, which may include repayment
of other mortgage indebtedness and acquisition of income-producing properties
and certain other investments. Management believes that the sale of the Senior
Secured Notes will have a positive effect on the liquidity of the Trust.
Pursuant to a contractual obligation described below, the Trust has agreed
to use its best efforts to register with the Securities and Exchange Commission
(the "Commission") an exchange offer pursuant to which holders of the Senior
Secured Notes would receive the Trust's 11 5/8% Series B Senior Secured Notes
due 2002 (the "New Senior Secured Notes") in exchange for the outstanding Senior
Secured Notes. The form and terms of the New Senior Secured Notes will be
identical in all material respects to the form and terms of the outstanding
Senior Secured Notes, except that the New Senior Secured Notes will be
registered under the Securities Act of 1933 (the "Securities Act") and will not
bear legends restricting the transfer thereof.
TERMS OF SENIOR SECURED NOTES
The Senior Secured Notes have been issued pursuant to an Indenture dated as
of March 30, 1994 (the "Indenture") between the Trust and Norwest Bank
Minnesota, National Association, as trustee (the "Trustee"). The Senior Secured
Notes will mature on April 1, 2002. On or after April 1, 1998, the Senior
Secured Notes will be redeemable at any time at the option of the Trust, in
whole or in part. Upon the occurrence of an event that is deemed to result in a
change of control of the Trust, each holder of the Senior Secured Notes may
require the Trust to repurchase all or a portion of such holder's Senior Secured
Notes at 101% of the principal amount thereof.
The Senior Secured Notes are secured, general obligations of the Trust
ranking pari passu with all other unsubordinated obligations of the Trust,
including the Notes offered by this Prospectus (the "Notes"). The Senior Secured
Notes are secured by a first priority perfected security interest in 80% (8,000
shares) of the issued and outstanding common stock (the "pledged stock") of
Chevy Chase Bank, F.S.B. ("Chevy Chase" or the "Bank"), all of which is owned by
the Trust, and by certain other assets of the Trust. The Trust may substitute
$25,000 of cash or U.S. Government securities for each share of pledged stock
(adjusted for stock splits and combinations), provided the Senior Secured Notes
are secured at all times by at least 66 2/3% of the issued and outstanding
shares of both voting stock and common stock of the Bank. In addition, the
Senior Secured Notes must be secured by cash, U.S. Government securities,
certificates of deposit or "margin securities" (as defined by the Board of
Governors of the Federal Reserve System) in an account (the "liquidity
maintenance account") maintained with the Trustee. At the time of issuance of
the Senior Secured Notes, the collateral value of the liquidity maintenance
account was $25.8 million, which equalled the sum of (a) one year's interest
payments on the Senior Secured Notes and (b) one year's estimated interest
payments on the amount of Notes then outstanding. Each quarter after the
issuance of the Senior Secured Notes, such liquidity maintenance requirement
will be recalculated based on the estimated amount of one year's interest
payments on the amount of the Senior Secured Notes and Notes then outstanding
and the then-current collateral value of the collateral on deposit in the
liquidity maintenance account.
<PAGE>
The Indenture contains covenants that restrict the ability of the Trust
and/or its subsidiaries (excluding, in most cases, the Bank and the Bank's
subsidiaries) to (i) incur additional indebtedness; (ii) pay dividends and make
other distributions to holders of the Trust's capital stock, repurchase or
redeem any capital stock of the Trust or any parent company of the Trust, make
payment on indebtedness subordinated to the Senior Secured Notes, guarantee
indebtedness of certain Trust affiliates, or make investments in any person;
(iii) engage in transactions with certain Trust affiliates; (iv) sell assets;
(v) transfer assets to Trust subsidiaries; (vi) create new Trust subsidiaries;
(vii) agree to limitations on the ability of the Trust's subsidiaries to pay
dividends or make other distributions to the Trust, pay indebtedness owed to the
Trust or other Trust subsidiaries, make loans or other advances to the Trust or
other Trust subsidiaries, or guarantee any indebtedness of the Trust or other
Trust subsidiaries; (viii) permit capital stock of any Trust subsidiary to be
issued to any person other than the Trust or a wholly owned subsidiary of the
Trust; (ix) dispose of capital stock of the Bank; (x) create or permit to exist
any liens on the pledged stock or the collateral in the liquidity maintenance
account other than liens under the Indenture; or (xi) (in the case of the Trust)
merge or consolidate with or into any other person or sell, assign, transfer,
lease or otherwise dispose of all or substantially all of the Trust's assets to
any person.
The Trust's ability to pay interest on the Senior Secured Notes will depend
in significant part on its receipt of dividends from the Bank and tax sharing
payments from the Bank pursuant to a tax sharing agreement dated June 28, 1990,
as amended, among the Trust, the Bank and their subsidiaries. The availability
and amount of dividends and tax sharing payments in future periods, however, is
uncertain and dependent upon, among other things, the Bank's operating
performance and income, regulatory and contractual restrictions on such payments
and (in the case of tax sharing payments) the continued consolidation of the
Bank and the Bank's subsidiaries with the Trust for federal income tax purposes.
The Trust currently anticipates that in order to pay the principal amount of
the Senior Secured Notes at maturity or upon the occurrence of an event of
default under the Indenture, to redeem the Senior Secured Notes or to repurchase
the Senior Secured Notes upon a deemed change of control of the Trust, it will
be required to borrow funds, sell equity securities, sell assets or seek capital
contributions from affiliates. There can be no assurance that any of such
actions could be effected on satisfactory terms or that any of the foregoing
actions would enable the Trust to make any of the foregoing payments on the
Senior Secured Notes. None of the affiliates of the Trust will be required to
make any capital contributions or other payments, whether by loan or the
purchase of equity securities or assets, to the Trust in respect of the Trust's
obligations on the Senior Secured Notes, nor is there any assurance that any of
the affiliates of the Trust would have the financial, legal or contractual
ability to do so.
2
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USE OF PROCEEDS
The following table summarizes the estimated sources and uses of the
proceeds from the sale of the Senior Secured Notes:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Sources:
Sale of Senior Secured Notes................................... $175.0
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------
Uses:
Repayment of third-party mortgage indebtedness (1)............. $ 74.1
Repayment of affiliate indebtedness............................ 8.9
General corporate purposes (2)................................. 83.2
Offering expenses.............................................. 8.8
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Total.................................................. $175.0
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<FN>
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(1) Includes prepayment costs of $4.0 million.
(2) Includes proceeds of $25.8 million deposited into the liquidity
maintenance account to satisfy the initial liquidity maintenance
requirement with respect to the Senior Secured Notes.
</TABLE>
Concurrently with the application of the net proceeds of the sale of the
Senior Secured Notes, the terms of certain of the loans that were repaid in part
were modified to waive deferred interest, reduce interest rates and extend
maturities. After the application of such net proceeds and the modification of
such loans, the final maturity of loans with total balances of $111.1 million
was 12 years and the final maturity of a loan with a balance of $15.1 million
was 15 years. The following table presents, at December 31, 1993, certain
information regarding the loans repaid with the net proceeds of the sale of the
Senior Secured Notes, the application of such proceeds and, on a PRO FORMA basis
after giving effect to such application and the concurrent modification of the
related loan agreements, the principal balance, weighted average maturity and
accrual rate of such loans.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIOR TO SALE OF SENIOR SECURED NOTES
--------------------------------------
WEIGHTED OFFERING DEFERRED
LOAN AVERAGE ACCRUAL PROCEEDS INTEREST
BALANCE MATURITY (1) RATE (2) APPLIED ADJUSTMENTS (3)
----------- ------------ -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Third-Party Lenders........... $234,295 3 yrs 2 mos 12.26% $74,093 $8,706
Affiliated Lenders............ 8,900(5) 1 mo 7.06% 8,900 --
----------- -------- -------- -------
$243,195 12.07% $82,993 $8,706
----------- -------- -------- -------
----------- -------- -------- -------
<CAPTION>
AFTER SALE OF SENIOR SECURED NOTES
----------------------------------
WEIGHTED
LOAN AVERAGE ACCRUAL ECONOMIC
BALANCE MATURITY (1) RATE (2) BENEFIT (4)
-------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Third-Party Lenders........... $151,496 9 yrs 10 mos 7.61% $17,196
Affiliated Lenders............ -- -- -- 628
-------- --- -----------
$151,496 7.61% $17,824
-------- --- -----------
-------- --- -----------
<FN>
- ------------------------------
(1) Weighted Average Maturity represents (i) the sum of the products of
scheduled principal payments on each loan and the period between (a)
December 31, 1993, in the case of Prior to Sale of Senior Secured Notes,
and (b) the date of issuance of the Senior Secured Notes, in the case of
After Sale of Senior Secured Notes, and the date such scheduled payment is
to be made, divided by (ii) the sum of the applicable Loan Balances.
(2) Accrual Rate represents (i) the sum of the products of the interest rate
of each loan and the outstanding Loan Balance of such loan divided by (ii)
the sum of the outstanding Loan Balances of all loans.
(3) Represents the waiver of deferred interest in the amount of $11.7 million
resulting from the modification of loans with a single lender, PLUS the
application of $1.0 million of cash held in escrow by such lender, LESS
costs of $4.0 million related to the prepayment in full of a loan to
another lender.
(4) Economic Benefit represents the difference between (i) the product of Loan
Balance Prior to Sale of Senior Secured Notes and Accrual Rate Prior to
Sale of Senior Secured Notes and (ii) the product of Loan Balance After
Sale of Senior Secured Notes and Accrual Rate After Sale of Senior Secured
Notes.
(5) Reflects aggregate payments of $2.0 million made by the Trust to an
affiliated lender after December 31, 1993 and before the sale of Senior
Secured Notes.
</TABLE>
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CAPITALIZATION
The following table sets forth the capitalization of the Trust at December
31, 1993 and as adjusted to give effect to (i) the sale of the Senior Secured
Notes and (ii) the application of the net proceeds of the sale of the Senior
Secured Notes to payment of certain outstanding indebtedness of the Trust.
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED (1)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
Real Estate
Senior Secured Notes........................................................................ $ -- $ 175,000
Mortgage notes payable...................................................................... 264,914 190,411
Notes payable -- unsecured.................................................................. 39,887 39,887
Working capital loan........................................................................ 3,900 --
Deferred interest........................................................................... 16,796 3,500
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Total Real Estate....................................................................... 325,497 408,798
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Banking
Capital Notes -- subordinated............................................................... 160,000 160,000
--------- --------------
Minority Interest............................................................................. 110,953 110,953
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Shareholders' Equity (Deficit)
Preferred shares of beneficial interest..................................................... 516 516
Common shares of beneficial interest........................................................ 6,642 6,642
Paid-in-surplus............................................................................. 92,943 92,943
Deficit..................................................................................... (134,287) (138,576)
Net unrealized holding gains................................................................ 6,581 6,581
--------- --------------
(27,605) (31,894)
Less cost of common shares of beneficial interest in treasury................................. (41,848) (41,848)
--------- --------------
Total shareholders' equity (deficit)........................................................ (69,453) (73,742)(2)
--------- --------------
Total capitalization.......................................................................... $ 526,997 $ 606,009
--------- --------------
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<FN>
- ------------------------
(1) Does not include a deferred gain of $11.7 million which will result from
the modification of loans from one lender with aggregate balances at
December 31, 1993 of $145.9 million, accounted for in accordance with
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings." The amount of this
deferred gain will be recognized using the level-yield interest method
over the lives of the affected loans.
(2) Total shareholders' deficit will increase by $4.3 million as a result of
the modification and repayment of certain loans as follows:
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Prepayment costs.................................................... $ 4,000
Write-off of unamortized debt issuance costs........................ 3,148
-------
Subtotal.......................................................... 7,148
Related income tax effect........................................... (2,859)
-------
$ 4,289
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-------
</TABLE>
4
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EXCHANGE OFFER; REGISTRATION RIGHTS
In connection with the sale of the Senior Secured Notes, the Trust agreed to
(i) file within 30 calendar days after March 30, 1994, the date of original
issue of the Senior Secured Notes, a registration statement (the "Registration
Statement") with respect to a registered offer to exchange the Senior Secured
Notes (the "Exchange Offer") for the New Senior Secured Notes, (ii) use its best
efforts to cause the Registration Statement to become effective within 160
calendar days after the date of original issue of the Senior Secured Notes and
(iii) use its best efforts to cause the Exchange Offer to be consummated within
190 days after the date of original issue of the Senior Secured Notes. The Trust
also agreed that, in the event that any changes in law or the applicable
interpretations thereof by the staff of the Commission do not permit the Trust
to effect the Exchange Offer, if for any other reason the Exchange Offer is not
consummated within 190 days after the date of original issue of the Senior
Secured Notes, or in certain other circumstances, the Trust will use its best
efforts to cause to become effective as promptly as practicable a shelf
registration statement with respect to the resale of the Senior Secured Notes
(the "Shelf Registration Statement") and to keep the Shelf Registration
Statement effective until three years after the effective date thereof or for
such shorter period that will terminate when all of the Senior Secured Notes
covered by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement.
The Trust agreed that the interest rate borne by the Senior Secured Notes
would increase by an additional one-half of one percent per annum upon each of
the following events: (i) failure of the Registration Statement to be filed with
the Commission on or prior to the 30th calendar day following the date of
original issue of the Senior Secured Notes, (ii) failure of the Registration
Statement to be declared effective on or prior to the 160th calendar day
following the date of original issue of the Senior Secured Notes or (iii)
failure of the Exchange Offer to be consummated or a Shelf Registration
Statement with respect to the Senior Secured Notes to be declared effective on
or prior to the 190th calendar day following the date of original issue of the
Senior Secured Notes. The aggregate amount of any such increases from the
original interest rate on the Senior Secured Notes may not exceed 1.5% per
annum. The Trust further agreed that, upon (x) the filing of the Registration
Statement in the case of clause (i) above, (y) the effectiveness of the
Registration Statement in the case of clause (ii) above or (z) the consummation
of the Exchange Offer or the effectiveness of a Shelf Registration Statement, as
the case may be, in the case of clause (iii) above, the interest rate borne by
the Senior Secured Notes from the date next succeeding the date of such filing,
effectiveness or consummation, as the case may be, would be reduced in each case
by one-half of one percent per annum (but, in any event, not below the original
interest rate) and after the Exchange Offer is consummated or a Shelf
Registration Statement is declared effective, the interest rate borne by the
Senior Secured Notes would be reduced to the original interest rate. The
Registration Statement was filed with the Commission on April 6, 1994, within 30
calendar days following the date of original issue of the Senior Secured Notes,
and thus no increase in the interest rate borne by the Senior Secured Notes has
been made under clause (i) above.
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