U.S. SECURITIES AND EXCHANGE COMMISSION Exhibit Index
Washington, D.C. 20549 on Page E-1
FORM 10-KSB
[X]ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscial year ended December 31, 1996
Commission file No. 1-13080
GROVE PROPERTY TRUST
(Name of Small Business Issuer in Its Charter)
Maryland 06-1391084
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
598 Asylum Avenue, Hartford, Connecticut 06105
(Address of Principal Executive Offices) (Zip Code)
(860) 520-4789
(Issuer's Telephone Number)
GROVE REAL ESTATE ASSET TRUST
(Former Name)
Securities registered under Section 12(b) ofthe Exchange Act:NONE
Title of Each Class: Name of Each Exchange on Which Registered:
Common Shares of Beneficial Interest, American Stock Exchange, Inc.
$.01 par value Boston Stock Exchange, Inc.
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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:
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. __
The issuer's revenues for the 1996 fiscal year were $2,082,239.
The aggregate market value of voting stock held by non-affiliates as of March
14, 1997 was $38,981,458.
The number of Common Shares of Beneficial Interest outstanding as of March 14,
1997 was 3,953,463.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive proxy statement for 1997 Annual Meeting of Shareholders
- Part III of Form 10-KSB
PART I
Item 1. Business
Introduction
Grove Property Trust (formerly Grove Real Estate Asset Trust, "GREAT") (the
"Company") is a self-administered real estate investment trust ("REIT") formed
pursuant to the Maryland Real Estate Investment Trust Act, engaging in
multifamily property management, acquisition and redevelopment. Since the end of
1996, the Company has undergone significant changes in its business and
operations, as described below under "Consolidation Transactions," in order to
seek to maximize future growth potential.
The Company owned and operated three multifamily properties (the "Original
Properties") since its inception and acquired a fourth property ("Cambridge") in
January of 1996 (collectively, the "GREAT Properties"). The GREAT Properties are
comprised of the Dogwood Hills Apartments comprising 46 multifamily apartment
homes on Evergreen Avenue in Hamden, Connecticut, the Hamden Center Apartments
comprising 65 multifamily apartment homes on School Street in Hamden,
Connecticut, the Baron Apartments comprising 54 multifamily apartment homes on
Queen Street in Southington, Connecticut, and Cambridge Estates, comprising 92
multifamily apartment homes located in Norwich, Connecticut. The GREAT
Properties had an aggregate weighted average occupancy rate of 97.6% during
1996.
The Company was formed in 1994 to continue the multifamily property acquisition,
management and marketing operations and related business objectives and
strategies of Grove Investment Group, Inc., a Southern New England real estate
company formed in 1980 by Damon and Brian Navarro, and the three limited
partnerships from which the Company acquired the Original Properties upon
completion of the Company's initial public offering in June 1994.
Consolidation Transactions
On March 14, 1997, the Company completed the "Consolidation Transactions"
described below. As a result of the Consolidation Transactions, the Company is
now a self-administered and self-managed REIT which management believes to be
one of the largest public owners of multi-family residential properties in
Southern New England. The Company is the sole general partner of Grove
Operating, L.P. (the "Operating Partnership"), a newly formed limited
partnership organized in Delaware. The Operating Partnership was formed to act
as the vehicle for the Consolidation Transactions and is the entity through
which the Company conducts substantially all of its business and owns (either
directly or indirectly through subsidiaries) all of its assets. The Company
currently holds approximately 66% of the Operating Partnership partnership units
(the "Common Units"). This structure is commonly referred to as an umbrella
partnership REIT or UPREIT. The Operating Partnership is governed by the
Operating Partnership Agreement.
The Company owns, directly or indirectly, 100% of the interests in the four
GREAT Properties and in each of eight properties acquired from certain limited
partnerships through the Consolidation Transactions. Further, the Company
controls twelve additional properties as general partner or through ownership of
100% of the general partner of the limited partnerships that own such
properties, also as a result of the Consolidation Transactions. All such
properties are collectively referred to as the "Properties", all such limited
partnerships are collectively referred to as the "Property Partnerships", and
all the properties owned by such Property Partnerships are collectively referred
to as the "Partnership Properties". The Company provides property management
services to the Properties and other real property controlled by certain
companies and individuals which are affiliated with the Company (the "Grove
Companies") using the certain acquired assets and liabilities of Grove Property
Services, L.P. ( "GPS"). National Realty Services, L.P., an affiliate of the
Company, is the exclusive provider of real estate brokerage services to the
Company.
An exchange offer was made ("the Exchange Offer") by the Operating Partnership
for the tender of any or all of the limited partnership interests of each
Property Partnership (the "Property Partnership Units") in exchange for limited
partnership units in the Operating Partnership (the "Common Units"). These
Common Units are redeemable commencing one year after their issuance for cash,
based on the fair market value of the Company's Common Shares, or, at the
Company's option, it may exchange Common Shares for Common Units on a
one-for-one basis, subject to certain antidilution adjustments and exceptions.
The Company declared a 5% stock dividend to shareholders of record March 10,
1997, payable March 28, 1997 and declared a 1.125 to 1.0 stock split with
respect to all Common Shares outstanding on March 10, 1997, effective March 14,
1997, (together, the "Stock Split"). As a result of the Stock Split, the Company
issued, on a pro rata basis, a total of 95,130 Common Shares to the holders of
the issued and outstanding 525,000 Common Shares. The Company did not issue
fractional shares in connection with the Stock Split, but rather paid cash in
lieu of fractional shares.
A private placement of equity securities (the "New Equity Investment") took
place, pursuant to which the Company sold to a group of investors (the "New
Equity Investors") Common Shares totaling, in the aggregate, 3,333,333 Common
Shares, in exchange for total gross proceeds to the Company of $30.0 million.
The Company contributed to the Operating Partnership: (a) the GREAT Properties
and related assets in exchange for a partnership interest in the Operating
Partnership represented by 620,130 Common Units; and (b) the gross proceeds of
the New Equity Investment received by the Company, in exchange for a number of
Common Units equal to the number of Common Shares issued by the Company in the
New Equity Investment.
The Grove Companies, pursuant to a contribution agreement among the Company,
certain individuals including affiliates of the Company and the Operating
Company (the "Contribution Agreement"), then contributed to the Company and/or
the Operating Partnership certain assets and liabilities of GPS arising from or
used in connection with property management related services, and their general
and limited partnership interests in each Property Partnership (or the assets
thereof), in exchange for an aggregate of 904,867 Common Units issued by the
Operating Partnership and the payment of $177,669 by the Company to the Grove
Companies.
In conjunction with the above transactions, the Company and certain Property
Partnerships have entered into two new credit facilities (together, the "Credit
Facility") consisting of (a) a three-year secured revolving acquisition and
working capital facility of approximately $25.0 million and (b) an approximately
$15.1 million ten-year term mortgage loan. The Operating Partnership used the
net proceeds of the New Equity Investment and borrowings under the Credit
Facility to refinance the outstanding mortgage indebtedness of certain of the
Property Partnerships and to acquire certain minority interests in certain of
the Property Partnerships.
In connection with the Consolidation Transactions, the Company changed its
distribution policy. The Board concluded that enhancement of Shareholder value
could better be achieved through growth in the Company's asset value, which
management believes will be reflected in the market price of the Common Shares,
rather than by maintaining or increasing the distribution yield on the Common
Shares. Therefore, the Board has voted to reduce the annual cash distributions
to Shareholders, from $.92 per Common Share to $.74 per Common Share ($.63 per
Common Share after giving effect to the Stock Split). The Company intends to
continue to comply with the REIT requirements under the Internal Revenue Code of
1954 or 1986, as amended, (the "Code") that 95% of the Company's REIT taxable
income be distributed annually, while retaining for reinvestment in the Company
the maximum amount permitted under the Code.
Persons receiving Common Units in the Exchange Offer or pursuant to the
Contribution Agreement (including the Grove Companies) are restricted from
transferring such Common Units for a period of one year from the completion of
the Consolidation Transactions (March 14, 1997). Each Common Unit is redeemable
following the first anniversary of the completion of the Consolidation
Transactions, for cash (based on the fair market value of the Common Shares at
the time of such redemption) or, at the Company's option, it may exchange Common
Shares for Common Units on a one-for-one basis, subject to certain antidilution
adjustments and exceptions. The Company has granted certain entities and
individuals receiving Common Units in connection with the Consolidation
Transactions certain registration rights with respect to the Common Shares which
such holders of Common Units may receive upon the exchange of their Common
Units. Pursuant to a registration rights agreement with holders of Common Units,
the Company has agreed to file and generally keep continuously effective,
beginning one year after the completion of the Consolidation Transactions, a
registration statement covering the issuance of Common Shares upon exchange of
Common Units and the resale of such Common Shares.
Business Objectives and Operating Strategies
The Company's primary business objective is to pursue a growth strategy which
centers on acquisitions and property redevelopment in the Northeastern United
States. This growth strategy, in turn, is intended to increase shareholder value
through maximizing investment returns with the use of retained cash in
connection with acquisitions to be made by the Company. Toward this end, the
Company's distribution policy was changed as described above. The Company plans
to reinvest the retained balance of its cash flow in its properties, including
property redevelopment and additional property acquisitions, the reduction of
outstanding indebtedness and, when appropriate, the repurchase of outstanding
Common Shares. The Company's decision to reduce its quarterly cash distribution
to Shareholders is not in response to a reduction in earnings (the Company has
experienced no such reduction), nor is such decision in response to any other
adverse occurrence with respect to the business or operations of the Company.
Rather, the Company believes that focusing its distribution and investment
philosophy on total return to shareholders, rather than focusing principally on
the amount of periodic cash distributions to shareholders, will enhance
long-term shareholder value and could reduce the volatility of the market price
of the Common Shares.
Management intends to implement its growth strategy by acquiring additional
properties which offer solid and steady growth opportunities from affiliates of
the Grove Companies or from third party sellers. Management intends to implement
its growth strategy by acquiring properties at prices below estimated
replacement cost which can generate increased cash flow and long-term investment
value from pre-acquisition levels through strategic capital improvements and
aggressive property management. It will seek to acquire properties that (i) meet
an identified market demand; (ii) are well located and under-performing in
improving rental markets; and (iii) are capable of producing a high component of
current income through value added/return oriented capital improvements to
individual apartment units and property sites, such as adding new amenities,
including fitness centers and community rooms, upgrading landscaping and signage
and improving the overall curb appeal of the property.
Management believes that its operating strategy will result in growth in
Shareholder value through: (i) maximizing investment returns as quickly as
possible; (ii) maximizing investment returns through rigorous on-site management
which implements an individualized marketing plan for each property responsive
to the character of each site, on both a short and long term basis; and (iii)
increasing investment yields by making return-oriented capital improvements,
which upgrade individual apartment units and property sites and, in turn,
promote stable occupancy rates and justify increased rents. Management believes
that the use of retained cash in connection with acquisitions to be made by the
Company will enhance Shareholder value and return on equity.
Acquisition and Development Strategy
Management believes that the Company, through its common management with the
Grove Companies, has available to it an established network of relationships
with real estate owners, developers, brokers, lenders, and other institutions,
which may provide the Company with access to potential acquisitions prior to
them being widely marketed.
An acquisition target should furnish the Company with significant opportunity
for increasing property value through rental increases, reducing expenses or a
combination of such strategies. Local demographics and economics in the target
location should be stable and strong or showing continuing improvement. When
analyzing acquisition targets, the Company conducts market surveys consisting of
a study of the region, community and trading area. A physical inspection, a
review of the resident mix, an assessment of the current vacancies, and a
complete rental analysis is performed.
Properties held by affiliates of the Company may satisfy the economic and other
criteria which form the basis for the Company's acquisition strategy. The
Company expects from time to time to seek to acquire one or more of such
properties at such time as it is able to negotiate a fair price.
Redevelopment
The Grove affiliates that previously owned the Original Properties renovated and
upgraded such Properties at the time of the purchase, and the Company has since
completed additional renovations. The exterior of Hamden Center Apartments has
been upgraded, including landscaping, window shutters and the renovation of the
entrances to all six buildings. Some building and entrance way roofing was also
replaced at Hamden. At Baron Apartments, the landscaping at the entrance of the
Property and at the front two buildings was upgraded, and a new rental office
was added. New energy efficient lighting was installed in all common areas of
Baron Apartments. At all of the Properties, unit interiors are renovated as
apartments turn over, including carpet and appliance replacement and new
lighting fixtures as necessary. Additionally, at some of the Partnership
Properties amenities have been added, including fitness centers, community rooms
with large screen televisions and kitchen facilities for entertaining residents
and guests, and billiard rooms. The Company intends to undertake and/or continue
similar renovations and upgrades in connection with the Partnership Properties.
Future Acquisitions
In the pursuit of its growth strategy, the Company intends to engage in
preliminary discussions with potential sellers of multifamily properties,
whether affiliates of the Company or third-party sellers.
Management believes that an important strategic target for growth opportunities
in the Company's primary market are portfolios of multi-unit apartment
communities owned and operated by individuals. The Company believes that a
significant portion of New England's multi-unit housing properties is older, and
that ownership is very fragmented. Owners of 75- to 150-unit complexes in the
Company's market area have advised management of the Company that they would be
interested in selling their properties, but they have little or no tax bases
remaining in such properties, and such owners have concluded that the potential
tax liability which may be incurred by them upon outright sale is prohibitive.
By utilizing the Operating Partnership structure, the Company can offer
competitive purchase prices to such owners and make payment of such purchase
prices in Common Units, thereby deferring all or a portion of an owner's federal
income tax liability.
In the event the Company desires to purchase a property from an affiliate, the
Company's investment policies require majority approval of the proposed purchase
by the Trust Managers independent of the Company (i.e., those who are neither
executive officers of the Company nor affiliates of the Grove Companies, the
"Independent Trust Managers"). The Charter requires a majority of Independent
Trust Managers on the Board at all times.
There can be no assurance that the Company will be able to identify acquisition
opportunities, that definitive contracts will be entered into with respect to
any prospective acquisitions, or that the Company will acquire any property as
to which it enters into a definitive contract.
Cambridge Acquisition
The Company purchased a ninety-two unit multifamily apartment complex known as
Cambridge Estates Apartments in Norwich, CT on January 12, 1996 from Grove
Cambridge Associates Limited Partnership for $4,250,000.
The acquisition was financed by a first mortgage of $4,500,000 from a Bank. The
mortgage is secured by a blanket first mortgage lien on the Cambridge property,
and the Dogwood Hills and Hamden Center properties. The transaction provided
approximately $220,000 of cash after the purchase of Cambridge and payment of
financing costs of approximately $50,000.
Grove Cambridge Associates Limited Partnership is owned 99% by Grove
Norwich Associates Limited Partnership, and 0.5% each by Grove Investment Group,
Inc. and Springfield Development Corporation. Grove Norwich Associates Limited
Partnership is owned 50% by Messrs. Damon, Brian and Edmund Navarro and 50% by
individuals who are not affiliates of the Company. Grove Investment Group, Inc.
is owned 100% by Messrs. Damon, Brian and Edmund Navarro. Springfield
Development Corporation is owned 100% by individuals who are not affiliates of
the Company.
Markets
The Company believes that the existing conditions in the Northeast market
present a substantial barrier to new development. The Northeast is defined to
include the New England and Mid-Atlantic states. The existing density in the
Northeast marketplace limits the amount of developable land. In addition, zoning
is administered at the local level, thereby allowing the individual localities
to impose their own often restrictive policies within the existing zoning and
environmental laws. The lack of developable land as well as the current zoning
environment contribute to the overall high cost of construction of apartment
communities and corresponding low level of multi-family development.
The Company's Properties are located in in-fill locations which have experienced
occupancy rates 200 basis points better than the regional average and
approximately 300 basis points better than the national average for 1994 and
1995. The Company expects that the very low vacancy rate of the Properties,
combined with relatively low vacancy rates in its markets as a whole, will
enable the Company to raise rents at the rate of inflation or higher over the
next several years. The rental revenues of the Company's Properties on a pro
forma basis, increased 3.5% for the twelve months ended December 31, 1996 as
compared with the same period in 1995 and 4.4% for the year ended December 31,
1995 as compared to the year ended December 31, 1994. The following table shows
the 1994, 1995 and 1996 vacancy rates of the Company's Properties as compared
with the Northeast and the United States.
VACANCY RATES
Company
Properties Northeast * United States *
1994 3.8% 7.1% 7.2%
1995 3.6% 6.9% 7.5%
1996 3.0% 7.1% 7.7%
* Source: Hanley-Wood, U.S. Housing Markets
The Company believes that occupancy levels at its Properties are increasing
principally because few new apartment communities are being built in its
markets. For the year ended December 31, 1995, the occupancy rate of the
Properties was 96.4%, and the rate increased to 97.0% for the year ended
December 31, 1996. The Company believes that the lack of new multi-unit housing
properties, the low ratio of rental costs relative to income in two of its
primary markets and its high occupancy rates should result in higher rental
rates and increased appreciation in the value of the Company's assets over the
next several years.
Multi-Family
Management believes that the real estate capital shortage resulting from the
national and regional banking crisis and from residential property over-building
in the 1980's has severely limited the supply of new multi-family properties
entering the Northeast marketplace since 1991. The Company expects that the high
land costs and high construction costs experienced by many Northeast residential
property developers and owners will continue to inhibit new construction in the
near term. The Company's resident leases are generally for a one-year term, so
that the Company is in a position to increase rents annually if the market is
favorable.
Rental Rates and Occupancy
The average physical occupancy rate of the Company's multi-family Properties for
the twelve months ended December 31, 1996 was 97.0%. The average monthly rental
rate for the multi-family Properties has increased to $.73 per square foot per
month for the twelve months ended December 31, 1996 from an average of $.72 per
square foot per month for the twelve months ended December 31, 1995. The total
commercial rentable space associated with the Properties is 94,255 square feet.
The average physical occupancy of the Company's commercial Properties for the
twelve months ended December 31, 1996 was 98.0%. The average rent per square
foot per month for the Company's commercial Properties has increased to $0.98
per square foot per month for the twelve months ended December 31, 1996 from an
average of $0.78 per square foot per month for the twelve months ended December
31, 1995.
Competition
There are numerous housing alternatives that compete with the Properties in
attracting residents. The Properties compete directly with other multi-family
properties and single family homes that are available for rent in the markets in
which the Properties are located. The Properties also compete for residents with
the new and existing home market. In addition, the Company competes with other
investors for acquisitions and redevelopment projects, and some of these
competitors have greater resources than the Company.
Property Management Services
In connection with the Consolidation Transactions, the Company has succeeded to
the property management activities of GPS, and the Operating Partnership has
acquired all of the assets and liabilities of GPS related to property management
activities and the assets utilized to carry them out, constitute the "Management
Division" of the Company. Edmund F. Navarro, Vice President/Property Management
of the Company, heads the Company's property management team, and substantially
all of the employees of GPS have become employees of the Operating Partnership
in connection with the Consolidation Transactions.
The Management Division generates all of its fee income from the Properties and
those properties owned by the Grove Companies but excluded from the
Consolidation Transactions (the "Excluded Properties"). In addition to managing
the 1,752 multi-family apartment units and the commercial space in the
Properties, the Management Division manages the Excluded Properties, pursuant to
management services contracts between the Company and the affiliated limited
partnerships that own the Excluded Properties. These properties include 1,507
apartments in 15 multi-family residential projects, and 8 properties consisting
of 113,300 square feet of commercial space. The management services agreements
provide that the Operating Partnership receives in exchange for its provision of
property management services, with respect to each Property or Excluded
Property, a fee equal to from 4% to 6% of collected income (excluding interest
income). Such management services agreements have terms of one year, and will
automatically renew for successive one-year terms if neither party thereto gives
notice of termination within 90 days prior to the end of the then current term.
Management Division Operations
The Management Division manages properties utilizing its staff of professional
and support personnel, including certified regional property managers, apartment
managers, apartment maintenance technicians and leasing agents, and the services
of the Accounting Division of the Management Division. As of December 31, 1996,
the Management Division's property management personnel consisted of
approximately 170 employees. The depth of the Management Division's organization
is intended to enable it to deliver quality services on an uninterrupted basis,
thereby promoting resident satisfaction and improving resident retention. The
services of GPS are important to the Company's implementation of its objective
to overhaul management procedures of prior owners of the properties acquired
pursuant to its growth strategy. The Management Division has developed, and
continues to improve, on-site management programs, accounting systems, marketing
systems and resident quality control and retention procedures.
The Management Division's property management staff are employees of the
Operating Partnership. The property management team for each Property includes
on-site management and maintenance personnel as well as off-site support staff.
Property management teams perform leasing and rent collection functions and
coordinate resident services. Substantially all personnel are trained
extensively and are encouraged, and in certain cases required, to continue their
education through Company-designed in-house courses and participation in outside
seminars. The focus of the Management Division's on-site management program is
to provide prompt, courteous and responsive service to its residents. The
Management Division monitors the responsiveness of its on-site management
through various resident surveys. Service request response cards are left in
residents' apartments after any maintenance is performed, soliciting resident
feedback of the service provided.
Accounting Services
The Accounting Division of the Management Division is managed by Steven Splain,
Controller of the Company. The accounting staff audits and monitors each
property's financial records, including monthly income and expense reports, bank
statement reconciliations, rent rolls and economic occupancy reports and budget
compliance. Staff members visit each site on a regular basis to conduct on-site
audits and supervise on-site bookkeeping. The information generated during these
visits is used by the Management Division's on-site management staff at each
site to set personal and team goals which relate to budget and fiscal matters,
on a weekly and monthly basis, subject to the supervision of the Management
Division.
Property Marketing
The rental marketing personnel of the Management Division are trained to assure
that each property is marketable, priced realistically and promoted
aggressively. The Management Division uses a full range of promotional tools in
its marketing programs: point-of-purchase materials, high quality curb appeal,
targeted advertising and resident referrals. Instead of waiting until vacancies
occur, the Management Division markets the properties in its management
portfolio on a continuous basis. It takes steps necessary to avoid move-outs by
quality residents, which include quality customer service throughout the lease
term and renewal incentives.
The Management Division has established specific reporting requirements and
management guidelines to be applied at each of the Properties. Marketing reports
are prepared by on-site property management staff to track each Property's
occupancy, lease expiration, prospective resident traffic, unit availability,
renewal and rental rates and resident profile information. The Management
Division's on-site staff, which consists of property managers, leasing agents,
service technicians, porters and landscapers, participates in weekly goal
setting sessions to evaluate these marketing reports and examine issues relating
to resident underwriting, to evaluate progress, to set the next week's goals and
to review financial results. These sessions are supervised by the Management
Division's marketing director and regional managers. In this way, the Management
Division encourages customer service and team empowerment.
Marketing and leasing procedures established by the Management Division are
designed to ensure compliance with all federal, state and local laws and
regulations. Individual property marketing plans have been structured by the
Management Division to respond to local market conditions. Resident underwriting
guidelines for prospective residents comply with the FHA and ADA regulations and
are designed to stabilize service levels and cash flow through lower resident
turnover. None of the Properties are currently subject to rent control or rent
stabilization regulation or deed restrictions. The Company's standard 12-month
lease contracts facilitate uniform lease administration relating to rent
collections, security deposit dispositions, evictions, repairs and renewals.
Construction Services
An employee of the Operating Partnership functions as a general contractor,
supervising the various sub-contractors who perform construction and related
services in connection with the redevelopment of the Properties and the Excluded
Properties.
Credit Facilities
Initial Credit Facility
The Company entered in June 1994 into a secured an initial credit facility with
the Rhode Island Hospital Trust National Bank, which provided the Company with
up to $3,000,000 of available credit. The credit facility was not drawn upon,
and was terminated in January, 1996 concurrent with the acquisition of the
Cambridge Property.
Credit Facility
As part of the Consolidation Transactions, $39.3 million of mortgage
indebtedness of 17 of the Properties was refinanced with the Credit Facility. On
a pro forma basis as of December 31, 1996, after giving effect to the
Consolidation Transactions, including the application of the proceeds from the
New Equity Investment and borrowings under the Credit Facility, the aggregate
indebtedness of the Properties was approximately $29.3 million, bearing interest
at a fixed rate or an effective fixed rate after giving effect to the "Interest
Swaps" (as defined below).
The Credit Facility consists of two separate loans: (i) a revolving, acquisition
mortgage loan facility of up to $25.0 million (the "Revolving Credit Facility")
and (ii) a ten-year term mortgage loan of approximately $15.1 million (the
"Long-Term Facility"), each of which is more fully described below. The
Revolving Credit Facility is recourse to the Operating Partnership, the Company
and the Property Partnerships.
Revolving Credit Facility
On March 26, 1997 a three-year term, Revolving Credit Facility for $25.0 million
was entered (subject to a maximum of 60% of the appraised value of the
collateral, to be determined from time to time during the term), secured by
cross-defaulted first mortgages on nine of the Properties, a collateral
assignment of the leases and rents associated with such Properties, a first
priority security interest in all personal property located at such properties
related to the operation of the real property, and a full guarantee of the
Company. Borrowings under the Revolving Credit Facility will bear interest at a
floating rate equal to 1.20% per annum above the 30-, 60- or 90-day LIBOR rate.
Interest under the Revolving Credit Facility is payable monthly. The Operating
Partnership is required to maintain Debt Service Coverage (as defined in the
Revolving Credit Facility) of at least 1.60 to 1.0 on the properties that
constitute the collateral for the Revolving Credit Facility and to maintain
aggregate minimum occupancy for the collateral pool of 90%, with not less than
80% occupancy for any single property. All of the Revolving Credit Facility will
be available to supplement net cash generated from the operations of the
Operating Partnership to fund future property acquisitions, and up to $4.0
million is expected to be available to fund working capital requirements. The
Revolving Credit Facility was not drawn upon at the closing of the Consolidation
Transactions. During the term of the Revolving Credit Facility, the Company (as
a guarantor thereunder) will be required to maintain a Debt to Tangible Net
Worth Coverage (as defined in the Revolving Credit Facility) of less than 1.25
to 1.0 and to distribute to Shareholders not more than 95% of Funds From
Operations ("FFO"). Amounts outstanding from time to time under the Revolving
Credit Facility may be prepaid without penalty or premium. The loan documents
entered into in connection with the Revolving Credit Facility contain such other
representations and warranties, conditions and covenants as are customarily
found in similar financing documents.
Long-Term Facility
On March 14, 1997, a ten-year term mortgage loan in the approximate amount of
$15.1 million, secured by first mortgages on eight of the Properties, collateral
assignments of the leases and rents associated with such Properties and a
security interest in all personal property and improvements associated with such
Properties, was obtained. The Long-Term Facility is cross-collateralized and
cross-defaulted, but is non-recourse to the Company and the Operating
Partnership except for recourse with respect to waste, misapplication of rents,
insurance proceeds and/or condemnation proceeds, environmental problems and
liabilities, failure to use property income to pay property expenses and fraud.
Under the terms of the Long-Term Facility, neither the borrowers nor any general
or limited partners of the borrowers will be permitted to obtain secondary
financing or pledge their equity interests in the Properties constituting the
collateral toward any other debt. The Long-Term Facility bears interest at a
rate equal to the one-month LIBOR rate plus 114 basis points, and interest only
is payable monthly throughout the term. The borrowers will not be permitted to
prepay amounts outstanding under the Long-Term Facility during the first three
years of the term; thereafter, prepayment is permitted without penalty or
premium. The Long-Term Facility provides that each Property which constitutes
collateral thereunder must be managed by the Company or an affiliate, except
that the lender may compel the Company to engage a new manager for any Property
if such Property fails to maintain a certain minimum debt service coverage
ratio. The loan documents entered into in connection with the Long-Term Facility
contain such other representations and warranties, conditions and covenants as
are customarily found in similar financing documents.
Interest Rate Protection
In connection with the Long-Term Facility which bears interest at a variable
rate, the Operating Partnership entered into two interest rate swaps (the
"Interest Swaps") with a third-party lender for a "notional" principal amount
equal, in the aggregate, to $15.2 million, to hedge the risk of an increase in
interest rates to a variable rate index (one-month LIBOR). The Interest Swaps
are separate, stand alone agreements pursuant to which the borrowers and the
third party lender have exchanged net future interest payments so that, in
effect, the borrowers have fixed their interest rate at a fixed rate. The
Interest Swaps, in effect, (i) have fixed $7.6 million of the post-Consolidation
Transactions indebtedness of the borrowers at an interest rate of 7.67% for the
period from October 1, 1997 through October 1, 2007, and (ii) have fixed an
additional $7.6 million of the post-Consolidation Transactions indebtedness of
the borrowers at an interest rate of 7.68% from October 1, 1997 through January
4, 2005.
Employees
The Company employs approximately 120 persons, 92 of whom are "on-site"
employees. The remaining employees are located at the Company's headquarters in
Hartford, Connecticut.
Policies with Respect to Certain Activities
The Company's policies with respect to the following activities have been
determined by the Board of Trust Managers and may be amended or revised from
time to time at the discretion of the Board of Trust Managers without a vote of
the shareholders of the Company. No assurance can be given that the Company's
investment objectives will be attained or that the value of the Company will not
decrease.
Investment Objectives and Policies
The Company's investment objective is to provide quarterly distribution of a
portion of cash available for distribution and achieve long-term capital
appreciation through increases in cash flow from operations, reinvestment of
retained cash and growth of the Company's portfolio through acquisitions and
redevelopment. For a discussion of the Company's growth strategy of property
acquisition and redevelopment and related business strategies, see "Business
Objectives and Operating Strategies" under this Item 1. The Company's policy is
to acquire assets primarily for generation of current income and appreciation in
long-term value.
The Company may purchase or lease income-producing multifamily, mixed use, or
specialty retail properties for long-term investment, expand and improve the
Properties acquired, or sell such Properties, in whole or in part, when
circumstances warrant. Any financing or indebtedness of the Properties, or any
properties to be acquired by the Company in the future, may be secured by a
first mortgage. Any such financing or indebtedness will have a priority over the
Common Shares in the event of a forced sale or upon liquidation of any property
in the Company's portfolio.
While the Company emphasizes equity real estate investments in multifamily
properties, it may, at the discretion of the Board of Trust Managers, invest in
shoreline or coastal mixed use buildings, equity real estate investments in
other type of properties, mortgages (including participating or convertible
mortgages), stock of other REIT's and other real estate interests. The Company
does not presently intend to invest in mortgages or stock of other REIT's. The
investment by the Company in securities of other REIT's, other concerns engaged
in real estate activities or other issuers is subject to the percentage of
ownership limitations and gross income tests necessary for REIT qualification.
Dispositions
Management periodically will review the assets in the Company's portfolio. The
Company has no current intention to dispose of any Property, or any property
that may be acquired in the future, unless the Board of Trust Managers, based in
part upon management's periodic reviews, determines that the disposition of such
property is in the best interests of the Company.
Financing Policies
The Company intends to maintain a conservative debt-to-total-capitalization
ratio of 60% or less. Such ratio presents total debt of the Company as a
percentage of the market value of the Common Shares plus consolidated debt. At
March 14, 1997, the Company had a debt-to-total market-capitalization ratio of
approximately 32% (based on the closing price per Common Share on the American
Stock Exchange on such date of $10.05 ($11.875 prior to giving effect to the
Stock Split)). The debt-to-total-capitalization ratio will fluctuate with
changes in price of the Common Shares (and the issuance of additional Common
Shares, or other forms of capital, if any). The Company believes that
debt-to-total-capitalization ratio provides an appropriate indication of
leverage for a company whose assets are primarily operating real estate. The
Company's Declaration of Trust and Bylaws, however, do not limit the amount or
percentage of indebtedness that the Company may incur. In addition, from time to
time, the Company may modify its debt policy in light of current economic
conditions, relative costs of debt and equity capital, market values of its
properties, general conditions in the market for debt and equity securities,
fluctuations in the fair market prices of the Common Shares, growth and
acquisition opportunities and other factors. Accordingly, the Company may
increase or decrease its debt-to-total-capitalization ratio beyond the limits
described above.
In the event that the Board of Trust Managers determines to raise additional
equity capital, the Board has the authority, without approval of the
Shareholders, to issue additional Common Shares or Preferred Shares in any
manner (and on such terms and for such consideration) it deems appropriate,
including exchange for property.
Indebtedness incurred by the Company may be in the form of bank borrowings,
purchase money obligations to the sellers of properties, such as the Southington
Note, publicly or privately placed debt instruments or financing from
institutional investors or other lenders, any of which indebtedness may be
unsecured or may be secured by mortgages or other interest in the property owned
by the Company. The recourse of the holders of such indebtedness may be to all
or any part of the property of the Company or may be limited to the particular
property to which the indebtedness relates. The proceeds from any borrowings by
the Company must be loaned, on the same terms, to the Operating Partnership
Other Policies
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
to (i) invest in the securities of other issuers for the purpose of exercising
control over such issuer, (ii) underwrite securities of other issuers or (iii)
actively trade in loans or other investments.
The Company may make investments other than as previously described, although it
does not currently intend to do so. The Company has authority to purchase or
otherwise acquire Common Shares or any of its other securities in the open
market or otherwise may engage in such activities in the future. Except in
connection with the Consolidation Transactions, the Company has not issued
Common Shares or any other securities in exchange for property or any other
purpose. The Board of Trust Managers has authorized the repurchase of 100,000
Common Shares; any such repurchase would be taken only in conformity with
applicable Federal and state laws and the requirements for qualifying as a REIT
under the Code.
The Company has not made any loans to third parties, although it may in the
future make loans to third parties, including, without limitation, to the
Property Partnerships or other joint ventures in which it participates. The
Company has not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers, and the Company does not intend to do so in the
future. The Company's policies with respect to such activities may be reviewed
and modified from time to time by the Board of Trust Manages without the vote of
the Shareholders.
At all times, the Company intends to make investments in such a manner as to be
consistent with the requirements of the Code to qualify as a REIT unless,
because of circumstances or changes in the Code, the Board of Trust Managers,
determines to revoke the Company's REIT election.
Regulation
General
Apartment community properties are subject to various law, including regulations
relating to recreational facilities such as swimming pools, activity centers and
other common areas. The Company believes that under present laws, ordinances and
regulations, it has the necessary permits and approvals to operate the
Properties.
Americans with Disabilities Act
The Properties and any newly acquired properties must comply with Title III of
the ADA to the extent that such properties are "public accommodations" and/or
"commercial facilities" as defined by the ADA. Compliance with the ADA
requirements could require removal of structural barriers to handicapped access
in certain public areas of the Properties where such removal is readily
achievable. The ADA does not, however, consider residential properties, such as
multifamily properties, to be public accommodations or commercial facilities,
except to the extent portions of such facilities, such as a leasing office, are
open to the public. Although the Company believes that the Properties
substantially comply with all present requirements under the ADA and applicable
state laws, final regulations under the ADA have not yet been promulgated.
Noncompliance could result in imposition of fines or an award of damages to
private litigants. If required changes involve greater expenditures than the
Company currently anticipates, or if the changes must be made on a more
accelerated basis than it anticipates, the Company's ability to make expected
distributions could be adversely affected. The Company believes that its
competitors face similar costs to comply with requirements of the ADA.
Fair Housing Amendments Act of 1988
The FHAA requires multifamily properties first occupied after March 13, 1990 to
be accessible to the handicapped. Noncompliance with the FHAA could result in
the imposition of fines or an award of damages to private litigants. The Company
believes that the Properties that are subject to the FHAA are in compliance with
such law.
Rent Control Legislation
State and local rent control laws in certain jurisdictions limit a property
owners' ability to increase rents and to recover from residents increases in
operating expenses and costs of capital improvements. Enactment of such laws has
been considered from time to time in other jurisdictions, although such laws
have not been adopted in jurisdictions where the Company's Properties are
located. The Company does not presently intend to acquire multifamily properties
in markets that are either subject to rental control or in which rent limiting
legislation exists.
Environmental Matters
Under various Federal, State and local environmental laws, regulations, and
ordinances, a current or previous owner of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at such property, and may be held liable to a governmental entity or to
third parties for property damage and for investigation and cleanup costs
incurred by such parties in connection with the contamination. Certain federal,
state and local laws, regulations and ordinances govern the removal,
encapsulation or disturbance of asbestos-containing material ("ACMs") when such
material are in poor condition or in the event of building remodeling,
renovation or demolition. In connection with its ownership and operation of the
Properties, the Company may be potentially liable for costs in connection with
the matters discussed above.
All of the Properties were subject to Phase I environmental assessments at the
time of their acquisition by the respective Grove Companies, which Phase I
assessments were intended to discover information regarding, and to evaluate the
environmental condition of, the surveyed Properties and surrounding properties.
A Phase II Limited Subsurface Investigation was performed at Southington. The
Phase I assessments and the Limited Phase II assessment generally included an
historical review, a public record review, a preliminary investigation of the
site and surrounding properties, screening for presence of ACMs and equipment
containing polychlorinated biphenyl's , and underground storage tanks and the
preparation and issuance of a written report, but did not include soil sampling
or subsurface investigations. In all cases where Phase I assessments resulted in
specific recommendation for remedial actions, or maintenance recommendation, the
recommended action, or action preferable to the recommended action in the case
of Southington, was promptly taken or will be taken. Specifically, and as an
example, although the Phase I assessment at Southington recommended that only
fittings on two underground fuel oil storage tanks be replaced and removed,
Management determined that it is cost-efficient on a long term basis to remove
and replace both tanks. The removal of the tanks in was completed in December
1995.
Although the Company is not aware of any environmental liability revealed by the
assessments, it is possible that these assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
that the Company is unaware of. Moreover, no assurances can be given that (i)
future laws, ordinances or regulations will not require or impose any material
expenditures or liabilities in connection with environmental conditions by or on
the Company or its Properties, (ii) the current condition of properties in the
vicinity of the Properties (such as the presence of underground storage tanks)
or actions (or inaction) by third parties unrelated to the Company did not
create environmental problems of which the Company is not aware. The Phase I
site assessments for the Original Properties indicated that certain amounts of
friable (easily crumbled or reduced to powder) ACMs were present at Dogwood
Hills, although none were present at Hamden Center or Southington. The site
assessment for Dogwood Hills indicated that the ACMs were in such conditions
that it did not mandate removal or installation of an operational maintenance
program unless renovations were to be undertaken that would disturb such ACMs.
The Company has no plans to renovate the interiors of Dogwood Hills which relate
to such ACMs, except for painting, which Management believes will improve the
encapsulation recommended by the Phase I assessment.
The Company believes that the Properties are in compliance in all material
respects with all Federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances, petroleum products and lead paint
levels. The Company has not been notified by any governmental authority, and is
not otherwise aware, of any material noncompliance, liability or claim relating
to hazardous or toxic substances or petroleum products in connections with any
of the Properties.
Insurance
The Company carries comprehensive liability, fire, extended coverage insurance
with respect to all of the Properties, with policy specifications, insured limit
and deductibles customarily carried for similar properties. There are, however,
certain types of losses that are not generally insured because they are either
uninsurable or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could lose its capital invested in
the affected property, as well as the anticipated future revenues from such
property and would continue to be obligated on any mortgage indebtedness or
other obligations related to the property. Any such loss would adversely affect
the Company. Management believes that the Properties are adequately insured in
accordance with industry standards.
Item 2. Properties
The Company's executive offices are located at 598 Asylum Avenue, Hartford,
Connecticut.
The GREAT Properties
The GREAT Properties consist of four multifamily apartment complexes located in
Hamden, Norwich and Southington, Connecticut, with a total of 257 residential
apartments. Tenant leases are generally for one year or less, and require
security deposits. The GREAT Properties averaged a 97.6% occupancy rate in 1996.
No single tenant accounts for more than 10% of the GREAT Properties' total
revenues.
In connection with the purchase of the Southington Apartments, the Company
assumed a mortgage note which is secured by the Southington Apartments. The
acquisition of the Cambridge property was financed by a first mortgage from a
Bank which is secured by a blanket first mortgage lien on the Cambridge
property, the Dogwood Hills and Hamden Center properties.
Weighted Occup-
Approx. Average 1996 ancy Rental Rental
Number Rental Unit Avg. at Rates Rates
Location and of Area Year Size Occup- Feb. Per Per Sq.
( Sq ancy 28, Unit Ft.
Property Name Units (Sq.Ft.) Built Ft.) (%) (%) 1997($) ($)
- - ------------- ----- -------------- -------- --- ------- ---
Norwich, CT
Cambridge Estates
Apts ................ 92 78,684 1977 855 98.3 100.0 682.27 0.80
Hamden, CT
Dogwood Hills ........ 46 35,512 1978 772 98.2 97.8 724.16 0.94
Apartments
Hamden Center ........ 65 49,140 1968 756 96.7 93.9 639.23 0.85
Apartments
Southington, CT
Baron Apartments ...... 54 48,600 1970 900 96.8 98.2 686.25 0.76
- - --------------------------- ------- ----- ---- ---- ---- ---- ----
Total/Weighted Average 165 211,936 825 97.6 97.8 680.22 0.83
=== ======= === ==== ==== ====== ====
The following is a summary by apartment type for each of the GREAT Properties:
1 Bedroom 2 Bedroom Total
--------- --------- -----
Cambridge Estates Apartments 42 50 92
Dogwood Hills Apartments 23 23 46
Hamden Center Apartments 31 34 65
Baron Apartments 16 38 54
-- -- --
Total 112 145 257
=== === ===
New Acquisitions
The Consolidation Transactions resulted in the consolidation of the holdings
and/or control by the Company of 19 multi-family residential properties and one
neighborhood shopping center, and certain assets and liabilities of GPS.
The following table sets forth certain information with respect to the
Partnership Properties acquired, controlled, directly or indirectly, by the
Company and the Operating Partnership, as a result of the Consolidation
Transactions:
No. of Apartments
and/or Commercial Occupancy at
Name of Property Location Square Footage December 31,
1996
- - ---------------- -------- -------------- -------
Avonplace Condominiums Avon, CT 145 95.8%
Burgundy Studios Apartments Middletown, CT 102 99.0%
Arbor Commons Ellington, CT 28/4,016 sq. ft. 100.0%
Fox Hill Apartments Enfield, CT 168 95.2%
The Longmeadow Shops Longmeadow, MA 79,012 sq. ft. 100.0%
208-210 Main Street Manchester, CT 28/9,597 sq. ft. 96.4%
Loomis Manor West Hartford, CT 43 100.0%
Dean Estates II Apartments Cranston, RI 48 95.8%
Woodbridge Apartments Newington, CT 73 97.3%
Royale Apartments Cranston, RI 76 94.7%
Colonial Village Apartments Plainville, CT 104 98.1%
Bradford Commons Newington, CT 64 92.2%
Dean Estates Apartments Taunton, MA 58 96.6%
Fox Hill Commons Vernon, CT 74 94.6%
Park Place West West Hartford, C 63 96.8%
Van Deene Manor West Springfield, MA 109/1,630 sq. ft. 100.0%
Security Manor Westfield, MA 63 100.0%
Westwynd Apartments West Hartford, CT 46 97.8%
Ocean Reef Apartments New London, CT 163 93.9%
Sandalwood Apartments New London, CT 39 89.7%
================
Total 1,752/113,320 sq.ft.
===============
Item 3. Legal Proceedings
Neither the Company nor the Properties are presently subject to any material
litigation nor, to the Company's knowledge, is material litigation threatened
against the Company or the Properties, other than routine litigation arising in
the ordinary course of business and which is expected to be covered by liability
insurance.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered by
this Report to a vote of security holders, through the solicitation of proxies
or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Common Shares have traded on the American Stock Exchange ("AMEX") under the
symbol "GRE" since June 23, 1994. The Common Shares are also registered on the
Boston Stock Exchange. On February 10, 1997, the Company declared the Stock
Split. See Item 1, Consolidation Transactions. Amounts indicated below have not
been restated to reflect these changes in capital structure. The following table
sets forth for the periods indicated the high and low sale prices as reported on
the AMEX and the dividends declared by the Company per Common Share for each
such period:
1995 Quarter Ending
Dividend per
High Low Common Share
March 31, 1995 $8.875 $7.75 $0.2225
June 30, 1995 $8.750 $8.50 $0.2275
September 30, 1995 $8.375 $8.00 $0.2275
December 31, 1995 $8.875 $7.25 $0.2275
1996 Quarter Ending
Dividend per
High Low Common Share
March 31, 1996 $10.125 $8.375 $0.2275
June 30, 1996 $10.000 $9.000 $0.2300
September 30, 1996 $9.500 $8.875 $0.2300
December 31, 1996 $9.625 $8.250 $0.2300
Dividends
During 1996, the Company declared dividends totaling $0.9175 per Common Share,
or approximately 76.1% of its funds from operations during the year. For 1995
the Company declared dividends totaling $0.9050 per Common Share, or
approximately 80.6% of its funds from operations during the year. The payment of
dividends by the Company will be at the discretion of the Board of Trust
Managers and will depend on numerous factors, including the actual cash flow of
the Company, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors that the Board of Trust Managers deems relevant. See "Business
Objectives and Operating Strategies" in Item 1 of this report for a discussion
of the Board's recent change in the Company's distribution policy.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for Federal income tax purposes generally will be taxable
to shareholders as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits (return of capital) will be treated as a
non-taxable reduction of a shareholder's basis in the Common Shares to the
extent thereof, and thereafter as taxable gain. Dividends that are treated as a
reduction of a shareholder's basis in its Common Shares will have the effect of
deferring taxation until the sale of such shareholder's Common Shares.
Approximately $0.0233 (or 2.5%) of the $0.9175 of dividends declared for 1996
represented a return of capital. Approximately $0.1519 (or 16.8%) of the $0.9050
of dividends declared for 1995 represented a return of capital.
On February 10, 1997, the Company declared the Stock Split. See Item 1,
Consolidation Transactions. Per share amounts stated above have not been
restated to reflect these changes in capital structure.
See Item 1, Consolidation Transactions, for a discussion of the Company's
current distribution policy.
Holders
The approximate number of holders of record of the Company's Common Shares was
39 on December 31, 1996. The Company's transfer agent estimates that the Company
has 400 beneficial owners of the Common Shares.
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
The following discussion should be read in conjunction with all of the financial
statements and notes thereto included elsewhere herein.
On February 10, 1997, the Company declared the Stock Split. Number of shares
outstanding, Net income per Common Share, Funds from operations per Common
Share, and Cash available for distribution per Common Share have been restated
to reflect the Stock Split. Dividends per Common Share have not been restated as
it reflects the Company's historical payout rate.
Selected Financial Data
The following table sets forth financial data for the Company for the years
ended December 31, 1996 and 1995 on an historical basis. The following data
should be read in conjunction with all of the financial statements and notes
thereto included elsewhere in this Report. The historical operating results of
the Company may not be indicative of future operating results of the Company.
Please see table set forth on next page.
1996 1995
---- ----
OPERATING DATA
Revenues:
Rental income $ 2,046,390 1,287,013
Other income 35,849 29,902
--------------- -------------
Total revenues 2,082,239 1,316,915
--------------- -------------
Expenses:
Property operating and maintenance 655,821 406,227
Related party management fees 108,731 66,781
General and administrative 66,798 56,363
Real estate taxes 208,302 147,770
Interest expense 394,657 85,103
Depreciation and amortization 386,641 216,413
--------------- -------------
Total expenses 1,820,950 978,657
=============== =============
Net income $ 261,289 338,258
=============== =============
Net income per Common Share (after Stock Split) $ 0.42 0.55
Dividends per Common Share (prior to Stock Split) 0.92 0.91
Number of shares outstanding (after Stock Split) 620,130 620,130
PROPERTY DATA
Number of properties (at end of period) 4 3
Number of units (at end of period) 257 165
OTHER DATA (after Stock Split)
Funds from operations ("FFO") $633,031 551,987
FFO per share 1.02 .89
Cash available for distribution ("CAD") 557,031 526,398
CAD per share .90 .85
BALANCE SHEET DATA
Real estate assets $ 9,798,136 5,392,699
Accumulated depreciation (1,049,815) (694,215)
Total assets 9,520,610 5,241,173
Total debt 6,038,109 1,538,273
Shareholders' equity 3,482,501 3,702,900
Industry analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. FFO is defined as net income (computed in
accordance with generally accepted accounting principals), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization and other non-cash items. FFO does not represent cash generated
from operating activities in accordance with generally accepted accounting
principles, and is not necessarily indicative of cash available to fund cash
needs. FFO should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to cash
flow as a measure of liquidity.
CAD is defined as FFO (as defined above) plus depreciation on personal property,
less mortgage principal payments and recurring capital improvements. Recurring
capital improvements include, but are not limited to, carpet and flooring
replacement, appliance replacements, and electrical and plumbing fixture
replacement. CAD does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, and is not necessarily
indicative of cash available to fund cash needs. CAD should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
Results of Operations
Results of operations for the Company for the year ended December 31, 1996,
compared to the year ended December 31, 1995.
Rental and other income increased $765,324 from $1,316,915 to $2,082,239 for the
years ended December 31, 1995 and 1996, respectively. Approximately $733,000 of
such increase was due to the operations of Cambridge, and the remainder is
attributable to the Original Properties. The Original Properties experienced a
small decrease in occupancy offset by increases in rental rates, which resulted
in increased revenues. The weighted average rental rates increased to $678 for
the year ended December 31, 1996 from $660 for the year ended December 31, 1995.
Physical occupancy decreased to an aggregate weighted average occupancy of 97.6%
for the year ended December 31, 1996 from an aggregate weighted average of 97.8%
for the year ended December 31, 1995. Physical occupancy at December 31, 1996
was 98.2%.
Property operations and maintenance expenses increased $249,594 from $406,227
for the year ended December 31, 1995 to $655,821 for the year ended December 31,
1996. Approximately $233,000 of the increase is due to the operations of
Cambridge. Additionally, the Original Properties experienced an increase in
operating and maintenance expenses due primarily to the harsh winter experienced
in the New England area in 1996 compared to the more mild winter experienced in
1995.
General and administrative expenses increased $10,435 from $56,363 to $66,798
for the years ended December 31, 1995 and 1996, respectively. The increase was
primarily due to additional expenses related to the acquisition of Cambridge and
increased overhead expenses.
Real estate taxes increased $60,532 from $147,770 to $208,302 for the years
ended December 31, 1995 and 1996, respectively. Related party management fees
increased $41,950 from $66,781 to $108,731 for the years ended December 31, 1995
and 1996, respectively. These increases were due primarily to the acquisition of
Cambridge.
Interest expense increased $309,554 from $85,103 to $394,657 for the years ended
December 31, 1995 and 1996, respectively. This increase is due to the $4,500,000
mortgage note payable used to finance the acquisition of Cambridge. Depreciation
and amortization increased $170,228, primarily as a result of the acquisition of
Cambridge.
The Company's net income decreased $76,969 from $338,258 to $261,289 for the
years ended December 31, 1995 and 1996, respectively. Approximately $54,000 of
the decrease was due to a loss experienced by Cambridge, primarily due to
depreciation and amortization associated with Cambridge. The decrease in net
income for the Original Properties of approximately $23,000 was due to an
increase in property operating and maintenance expenses as discussed above.
Liquidity and Capital Resources
Cash and cash equivalents totaled $381,340 as of December 31, 1996. The
Company's long-term debt-to-market capitalization on December 31, 1996 was
approximately 55% based on total market capitalization of $10,918,578 and
long-term debt of $5,668,578.
Cash provided by operating activities increased $133,375 from $585,144 to
$718,519 for the years ended December 31, 1995 and 1996, respectively, primarily
due to the increase in depreciation and amortization of $170,228 upon the
acquisition of Cambridge and from the operations of Cambridge.
Cash used in investing activities increased $203,425 from $99,002 to $302,427
for the years ended December 31, 1995 and 1996, respectively, due primarily to
the costs associated with the Consolidation Transactions of $174,079.
Net cash used in financing activities decreased $99,952 from $518,429 to
$418,477 for the years ended December 31, 1995 and 1996, respectively. On
January 12, 1996 Cambridge was purchased from Grove Cambridge Associates Limited
Partnership for $4,250,000. The acquisition was 100% financed by a first
mortgage of $4,500,000 from a bank. The transaction provided the Company with
approximately $220,000 of cash after the purchase of Cambridge and payment of
financing and other closing costs of $50,000. This increase in cash was offset
by repayments of the associated mortgage payable of $58,961 and the increase in
payments to affiliates of $55,409.
On December 16, 1996 the Company declared a dividend of $0.23 per share. The
dividend was paid on January 15, 1997 to Shareholders of record on December 24,
1996. On September 13, 1996, the Company declared a dividend of $0.23 per share,
payable on October 17, 1996 to Shareholders of record on September 25, 1996. On
May 17, 1996, the Company declared a dividend of $0.23 per share, payable on
July 17, 1996 to Shareholders of record on June 26, 1996. On March 21, 1996 the
Company declared a dividend of $0.2275 per share payable of April 16, 1996 to
Shareholders of record on March 26, 1996. Dividends declared during the year of
$0.9175 per Common Share resulted in a 76.1% payout of FFO for the year ended
December 31, 1996.
The Company intends to meet its short term liquidity requirements through cash
flow provided by operations. The Company considers its ability to generate cash
to be adequate, and expects it to continue to be adequate to meet operating
requirements and pay shareholder dividends in accordance with REIT requirements.
The Company expects to finance acquisitions using the Revolving Credit Facility.
Additionally, the Company may also use other sources of capital to finance
additional acquisitions including, but not limited to, the selling of additional
equity interest in the Company, non-distributed Funds From Operations, the
issuance of debt securities, and exchanging Common Shares or Common Units for
properties or interest in properties. See Item 1, Credit Facility, for a
discussion of the new financing related to the Consolidation Transactions.
Funds from Operations
Industry analysts generally consider FFO an appropriate measure of performance
of an equity REIT. FFO is defined as net income (computed in accordance with
generally accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of properties, plus depreciation and amortization and
other non-cash items. The Company believes that in order to facilitate a clear
understanding of its operating results, FFO should be examined in conjunction
with net income as presented in the audited financial statements and information
included elsewhere in this Report. FFO do not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs. FFO
should not be considered as an alternative to net income as an indication of the
Company's performance or as an alternative to cash flow as a measure of
liquidity.
FFO increased $81,044 from $551,987 in 1995 to $633,031 in 1996. Dividends
declared for the year ended December 31, 1996 were $481,688, representing 76.09%
of funds from operations. Dividends declared for the year ended December 31,
1995 were $475,125, representing 87.5% of funds from operations. The increase in
FFO is primarily due to the operations of Cambridge.
Cash Available for Distribution
CAD is defined as FFO (as defined above) plus depreciation on personal property,
less mortgage principal payments and recurring capital improvments. Recurring
capital improvements include, but are not limited to, carpet and flooring
replacement, appliance replacements, and electrical and plumbing fixture
replacement. The Company believes that in order to facilitate a clear
understanding of its operating results, CAD should be examined in conjunction
with net income as presented in the audited financial statements and information
included elsewhere in this Report. CAD does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
and is not necessarily indicative of cash available to fund cash needs. CAD
should not be considered as an alternative to net income as an indication of the
Company's performance or as an alternative to cash flow as a measure of
liquidity.
CAD increased $30,633 from $526,398 in 1995 to $557,031 in 1996. Dividends
declared for the year ended December 31, 1996 were $481,688, representing 86.47%
of cash available for distribution. Dividends declared for the year ended
December 31, 1995 were $475,125, representing 90.26% of cash available for
distribution. The increase in CAD is primarily due to the operations of
Cambridge.
Inflation
Substantially all of the leases at the GREAT Properties are for a term of one
year or less which may enable the Company to seek increased rents upon renewal
or reletting. Such short-term leases generally lessen the risk to the Company of
the potential adverse effects of inflation.
Item 7. Financial Statements
Financial statements and supplementary financial information are contained on
pages F-1 to F-18 of this report.
Item 8. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
The Company dismissed BDO Seidman, LLP as its independent public accountants
effective August 16, 1996.
During the Company's two fiscal years ended December 31, 1995 and the subsequent
interim period from January 1, 1996 to August 16, 1996, there were no
disagreements with the former accountants on any matter of accounting principle
or practice, financial statement disclosure, or auditing scope or procedure. The
former accountants' report on the financial statements of the Company for each
of the two fiscal years ended December 31, 1995 was unqualified.
The Company engaged Ernst & Young, LLP as its new independent public accountants
effective with the dismissal of it former accountants. During the Company's two
fiscal years ended December 31, 1995 and the subsequent interim period form
January 1, 1996 to August 16, 1996, there were no consultations with the newly
engaged accountants with regard to either the application of accounting
principles as to any specific transaction, either completed or contemplated, the
type of audit opinion that would be rendered on the Company's financial
statements, or any matter of disagreements with the former accountants.
The decision to change accountants was approved by all members of the Board of
Trust Managers of the Company.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item 9 will be incorporated by reference from
the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A promulgated under the
Securities and Exchange Act of 1934, which proxy statement is anticipated to be
filed within 120 days after the end of the Company's fiscal year ended December
31, 1996.
Item 10. Executive Compensation
The information required by this Item 10 will be incorporated by reference from
the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A promulgated under the
Securities and Exchange Act of 1934, which proxy statement is anticipated to be
filed within 120 days after the end of the Company's fiscal year ended December
31, 1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 11 will be incorporated by reference from
the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A promulgated under the
Securities and Exchange Act of 1934, which proxy statement is anticipated to be
filed within 120 days after the end of the Company's fiscal year ended December
31, 1996.
Item 12. Certain Relationships and Related Transactions
The information required by this Item 12 will be incorporated by reference from
the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A promulgated under the
Securities and Exchange Act of 1934, which proxy statement is anticipated to be
filed within 120 days after the end of the Company's fiscal year ended December
31, 1996.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
(a) (1) Financial Statements:
The financial statements listed in the accompanying Index to Financial
Statements and Supplementary Data at page F-1 are filed as part of this Report.
(a) (2) Financial Statement Schedules:
No schedules are required.
(a) (3) Index to Exhibits:
See Index to Exhibits on page E-1 and E-2
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
GROVE PROPERTY TRUST
Date: March 31, 1997 By:/s/ Joseph R. LaBrosse
----------------------
Name: Joseph R. LaBrosse
Title: Chief Financial Officer,
Secretary, Treasurer, and
Trust Manager
In accordance with the Exchange Act, of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Name Title Date
Chairman of the Board of Trust Managers,
/s/ Damon D. Navarro President, and Chief Executive Officer
Damon D. Navarro (Principal Executive Officer) March 31, 1997
Chief Financial Officer, Secretary,
Treasurer, and Trust Manager
/s/ Joseph R. LaBrosse (Principal Financial and
Joseph R. LaBrosse Accounting Officer) March 31, 1997
/s/ James F. Twadell Trust Manager March 31, 1997
- - --------------------
James F. Twaddell
/s/ J. Joseph Garrahy Trust Manager March 31, 1997
- - ----------------------
J. Joseph Garrahy
/s/ Harold Gorman Trust Manager March 31, 1997
- - ------------------
Harold Gorman
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant and its subsidiaries
required to be included in Item 13(a)(1) are listed below:
GROVE PROPERTY TRUST
Page
----
Report of Independent Certified Public Accountants F-2 - F-3 Balance Sheet as
of December 31, 1995 F-4 Income Statements for the years ended December 31,
1996 and 1995 F-5 Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1995 F-6
Statements of Cash Flows for the years ended December 31, 1996
and 1995 F-7
Notes to Financial Statements F-8 - F-14
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Trust Managers
Grove Property Trust
We have audited the accompanying balance sheet of Grove Property Trust
as of December 31, 1996 and the related statements of income, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurances about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above fairly, in all
material respects, the financial position of Grove Property Trust at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/Ernst & Young
- - -----------------------------------
Ernst & Young, LLP
Hartford, Connecticut
February 28, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders and Board of Trust Managers of
Grove Property Trust
Hartford, Connecticut
We have audited the accompanying statements of income, shareholders' equity, and
cash flows for the year ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurances about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above fairly, in all
material respects, the results of its operations and cash flows of Grove
Property Trust for the year ended December 31, 1995 in conformity with
generally accepted accounting principles.
/S/BDO Seidman
- - --------------
BDO Seidman, LLP
January 30, 1996
New York, New York
F-3
<PAGE>
GROVE PROPERTY TRUST
BALANCE SHEETS
December 31,
1996
ASSETS
Real estate assets:
Land ................................................. $ 920,293
Buildings and improvements ........................... 8,528,075
Furniture, fixtures and equipment .................... 349,768
-----------
9,798,136
Less - accumulated depreciation ...................... (1,049,815)
-----------
Net real estate assets ....................... 8,748,321
Cash and cash equivalents .................................... 381,340
Cash - resident security deposits ............................ 157,537
Deferred charges, net of accumulated amortization
of $5,762 and $11,736, respectively ..................... 222,930
Other assets ................................................. 10,482
-----------
Total assets ................................................ $ 9,520,610
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ............................... $ 5,668,578
Accounts payable, accrued expense and other .......... 72,054
Due to affiliates .................................... 19,190
Resident security deposits ........................... 157,537
Dividends payable .................................... 120,750
-----------
Total liabilities ............................................ 6,038,109
-----------
Commitments and subsequent event ............................. --
Shareholders' equity:
Preferred shares, $.01 par value per share,
4,000,000 shares authorized; no shares
issued or outstanding ............................ --
Common shares, $.01 par value per share,
10,000,000 shares authorized; 525,000
shares issued and outstanding .................... 5,250
Additional paid-in capital ........................... 3,913,176
Distributions in excess of earnings .................. (435,925)
-----------
Total equity ................................................. 3,482,501
-----------
Total liabilities and shareholders' equity ................... $ 9,520,610
===========
F-4
<PAGE>
GROVE PROPERTY TRUST
INCOME STATEMENTS
Year Ended December 31,
-------------------------------
1996 1995
Revenues:
Rental income ....................... $2,046,390 $1,287,013
Interest and other income ........... 35,849 29,902
------ ------
Total revenues .................. 2,082,239 1,316,915
--------- ---------
Expenses:
Property operating and maintenance .. 655,821 406,227
Real estate taxes ................... 208,302 147,770
Related party management fees ....... 108,731 66,781
General and administrative .......... 66,798 56,363
------ ------
Total expenses .................. 1,039,652 677,141
--------- -------
1,042,587 639,774
Interest expense ........................ 394,657 85,103
Depreciation and amortization ........... 386,641 216,413
------- -------
Net income .................. $ 261,289 $ 338,258
========== ==========
Net income per common share ............ $ 0.42 $ 0.55
========== ==========
Weighted average number of shares ....... 620,130 620,130
======= =======
F-5
<PAGE>
GROVE REAL ESTATE ASSET TRUST
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
Additional Distributions
Common Paid-in in Excess of
Shares Capital Net Income
------ ------- ----------
Shareholders' equity, January 1, 1995.... $ 5,250 3,913,176 (78,659)
Net income ...................... 338,258
Declared dividends .............. (475,125)
-------- --------- --------
Shareholders' equity, December 31, 1995 5,250 3,913,176 (215,526)
Net income 261,289
Declared dividends.............. (481,688)
-------- --------- ---------
Amounts at September 30, 1996 (unaudited) $ 5,250 3,913,176 (435,925)
========= ========= ========
See accompanying notes
F-6
<PAGE>
GROVE PROPERTY TRUST
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income ........................................... $261,2$9 $338,258
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 386,641 216,413
Imputed interest - mortgage .................... 37,508 34,892
(Increase) decrease in other assets ............ (7,670) 4,472
Increase (decrease) in accounts payable, accrued
expenses and other ..................... 40,751 (8,891)
------ ------
Net cash provided by operating activities 718,519 585,144
------- -------
Cash flows from investing activities:
Deferred charges ..................................... (174,079) --
Other ................................................ (2,714) --
Additions to real estate assets ...................... (125,634) (99,002)
-------- -------
Net cash used in investing activities .... (302,427) (99,002)
-------- -------
Cash flows from financing activities:
Net proceeds from mortgage payable on acquisition .... 220,198 --
Financing costs ...................................... (21,000) (23,000)
Repayment of mortgage payable ........................ (58,961) --
Payments to affiliates ............................... (78,338) (22,929)
Dividends paid ....................................... (480,376) (472,500)
-------- --------
Net cash used in financing activities (418,477) (518,429)
-------- --------
Net decrease in cash and cash equivalents ............. (2,385) (32,287)
Cash and cash equivalents, beginning of period ........ 383,725 416,012
------- -------
Cash and cash equivalents, end of period .............. $381,340 $383,725
======= =======
F-7
GROVE PROPERTY TRUST
Notes To Financial Statements
1. FORMATION AND BUSINESS OF THE COMPANY
Grove Property Trust (the "Company" or "GPT"), formerly Grove Real Estate
Asset Trust ("GREAT") was organized in the State of Maryland on April 4,
1994, as a Real Estate Investment Trust ("REIT"). As of December 31, 1996,
the Company operated four properties with a total of 257 residential
apartments. The Company purchased three properties, (the "Original
Properties") on June 23, 1994, and the fourth property was acquired in
January 1996 (collectively, the "Properties").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less at the time of the purchase to be cash
equivalents.
Real Estate Assets and Depreciation
The Original Properties were recorded at their historical cost due to the
controlling relationship between the principals of the entities previously
operating the Properties (the "Grove Affiliates"). The portion of the
purchase price attributable to the net assets acquired from Grove
Affiliates exceeds their amortized historical cost. Accordingly, the excess
amount is reflected as a decrease in equity for accounting purposes. All
real estate assets purchased subsequent to the initial acquisitions have
been recorded at cost. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets (7 to 27.5 years).
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of" (FAS No. 121),
which requires long-lived assets to be reviewed for impairment when events
or circumstances indicate that an impairment might exist. When an
impairment indicator is present, assets must be grouped at the lowest level
for which there are identifiable cash flows. If the sum of the undisclosed
cash flows is less than the carrying amounts of the assets, an impairment
loss must be recorded. The impairment loss is measured by comparing the
fair value of the assets with their carrying amount. To date, no losses
have been recognized.
Per Share Data
Net income per common share is based on the weighted average number of
shares outstanding during each year. Common stock equivalents (options and
warrants) did not have a dilutive effect on net income per share for any
year presented. On February 10, 1997, the Board of Trust Managers of the
Company declared a stock dividend aggregating 26,250 Common Shares and the
concurrent effectuation of a 1.125-for-one common stock split. All shares
outstanding and per share amounts have been restated to reflect these
changes in capital structure.
F-8
<PAGE>
Stock-Based Compensation
Effective in fiscal year 1996, the Company adopted Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation." This statement
defines a fair value based method of accounting for employee stock
compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans in accordance with Accounting
Principle Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Under APB No. 25, compensation cost is the excess, if any, of
the quoted market price of the stock at the grant date over the amount the
employee must pay to acquire the stock. The company has elected to continue
to account for its employee stock compensation plans under APB No. 25.
Income Taxes and Dividends
The Company has made the election to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code").
A REIT will generally not be subject to federal income tax to the extent it
distributes at least 95% of its taxable income to its shareholders and
complies with other requirements. Accordingly, no provision has been made
for federal income taxes for the Company in the accompanying financial
statements. Even though the Company qualifies for taxation as a REIT, the
Company may be subject to certain state and local taxes on its income and
property and to federal income and excise taxes on its undistributed
income, if any. Shareholders are taxed on dividends declared and must
report such dividends as either ordinary income, short term gains, long
term gains, or as a return of capital. The federal income tax
characteristics of dividends paid by the Company consisted of:
1996 1995
-------- ------
Ordinary income 97.46% 83.22%
Return of principal 2.54% 16.78%
Advertising
The Company expenses advertising costs as incurred. Advertising costs were
$24,000 and $17,000 in 1996 and 1995, respectively.
Deferred Charges
Deferred charges, consisting principally of loan costs and UPREIT costs,
are amortized on a straight line basis over the term of the related
obligation.
Rental Income
Rental income attributable to leases is recognized on a straight-line basis
over the term of the leases, which are generally for one year.
F-9
<PAGE>
3. Acquisition
On January 12, 1996, the Company purchased the assets and operations of
Grove Cambridge Associates Limited Partnership ("Cambridge"), a ninety-two
multifamily apartment complex located in Norwich, Connecticut, for
$4,250,000, which was funded with a $4,500,000 mortgage note payable. The
results of Cambridge's operations have been combined with those of the
Company since the date of acquisition.
The unaudited pro forma information for the period set forth below gives
effect to the transaction as if it had occurred at the beginning of the
period. The pro forma information is presented for informational purposes
only and is not necessarily indicative of the results of operations that
actually would have been achieved had the acquisition been consummated as
of that time. The pro forma results for 1996 are not materially different
from the reported amounts.
Pro Forma Year Ended December 31, 1995:
Revenues $2,079
Net income 278
Net income per common share $ 0.45
F-10
<PAGE>
4. MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following:
1996
Southington Apartments note $ 1,227,539
Cambridge Estates note 4,441,039
---------
Total $ 5,668,578
=========
The mortgage note on the Southington Apartments property which has a face
amount of $1,250,000, has an imputed interest rate of 7.25% due in monthly
interest payments of $4,167 through June 1997 and monthly principal and
interest payments of $8,527 through July 2013. The note is collateralized
by the property and 15% of the face amount is guaranteed by certain
executive officers and shareholders of the Company.
The Cambridge note payable had an original principal balance of $4,500,000
with interest payable at 7.04%. Monthly principal and interest payments of
$31,920 are due through January 2006. The note is collateralized by the
Cambridge property and by first mortgage liens on two additional
properties.
Aggregate annual maturities of mortgage notes payable are as follows:
Years ending December 31,
1997 $
54,512
1998 86,056
1999 92,418
2000 102,579
2001 110,951
Thereafter 5,222,062
---------
Total $ 5,668,578
==========
Interest paid was $379,666 and $84,892 in 1996 and 1995, respectively.
5. INITIAL CREDIT FACILITY
The Company entered into a Initial Credit Facility concurrent with its
initial public offering ("IPO") in 1994 (IPO). The Credit Facility, which
provided for up to $3.0 million in borrowings, was expected to be used to
finance acquisitions of properties, re-development and renovation costs and
expenses, and for working capital purposes related to future acquisitions.
The Credit Facility was not drawn upon, and was terminated in January 1996.
6. 1994 STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Plan") for key employees
and non-employees of the Company. Options are granted at the market price
of the Company's common stock on the date of grant, become exercisable in
increments of 33 1/3% per year on each of the first three anniversaries of
the date of grant and have a maximum term of ten years. At December 31,
1996, no options had been exercised. Information regarding the Company's
stock option plan is summarized below.
F-11
<PAGE>
1996 1995
-------------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding at beginning
of year 69,689 $ 9.31 66,146 $ 9.42
Granted 48,428 $ 7.29 3,543 $ 7.20
------ -------
Outstanding at end
of year 118,117 $ 8.48 69,689 $ 9.31
======= ======
Options exercisable at
end of year 45,272 $ 9.36 22,049 $ 9.42
====== ======
The Company accounts for stock option grants under its Plan in accordance
with APB No. 25. Accordingly, no compensation cost has been recognized for
stock option grants since the options have exercise prices equal to the
market value of the Company's common stock at the date of grant. The pro
forma compensation cost for the Company's Plan determined in accordance
with FAS No. 123 was not material for 1996 and 1995.
7. UNDERWRITER WARRANTS
In conjunction with the IPO, the managing underwriter was granted
Underwriter Warrants to purchase 47,248 Common Shares. The Underwriter
Warrants are exercisable at $11.31 per Common Share and expire in June
1999. No warrants have been exercised as of December 31, 1996.
8. RELATED PARTY TRANSACTIONS
Management Fee
On June 23, 1994, the Company entered into a Management Agreement (the
"Agreement") with Grove Property Services Limited Partnership ("GPS), an
affiliated company which provides operating and support functions requisite
to the operation of the Properties. The Agreeement provides for a
management fee equal to 5% of gross monthly revenues, as defined, and
expires June 30, 1997. Management fees incurred in 1996 and 1995 were
$108,731 and $66,781, respectively.
Operating Expenses and Non-Operating Expenses
Certain operating and non-operating expenses include amounts allocated to
the Company by GPS. These charges reflect an allocation of the cost of
services required by the Company, which are outside the scope of services
customarily included in the property management fees. Total costs of
$10,952 and $0 were allocated in 1996 and 1995, respectively.
F-12
<PAGE>
Rent to Related Party
The Company's executive offices are leased from an affiliated company for
$500 per month under a three year lease which expires in June 1997; rent
expense related thereto was $6,000 in 1996 and 1995.
9. FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts payable and mortgage
notes payable approximate their fair value based on anticipated cash flows and
current market conditions.
10. SUBSEQUENT EVENT
On March 14, 1997, GPT completed a series of transactions pursuant to which the
Company was transformed into a self-administered and self-managed REIT with
control over a portfolio of 23 multi-family residential projects and a
neighborhood shopping center in the Northeastern United States. A summary of the
steps involved in these Consolidation Transactions are as follows:
GPT formed an Operating Partnership to serve as the vehicle for the
consolidation of ownership and/or control of the operations and assets of
the Company.
Pursuant to an Exchange Offer, the Operating Partnership purchased from
the Limited Partners of certain Property Partnerships, the outstanding
partnership units of each of the Property Partnerships in exchange for
Common Units of the Operating Partnership, or, in certain circumstances,
cash. The number of Common Units received by a Limited Partner was
calculated based upon such partners' interest in the applicable partnership
as applied to the value of the property partnership associated therewith.
Immediately prior to the consummation of the Consolidation Transactions,
GPT declared and issued a stock dividend aggregating 26,250 Common Shares
and concurrently effected a stock split of 1.125 to 1, thereby issuing on a
pro rata basis a total of 95,130 Common Shares to the holders of the
currently issued and outstanding Common Shares.
F-13
<PAGE>
GPT issued 3,333,333 Common Shares to new equity investors in exchange for
$30 million of new equity T investments.
Pursuant to a Contribution Agreement among GPT, certain companies and
individuals affiliated with GPT (the "Grove Companies") and the Operating
Partnership, substantially all of the assets and operations of GPT, the
management services division of Grove Property Services Limited Partnership
and the Grove Companies' interests in the acquired Property Partnerships
were transferred to the Company.
In exchange for the above, the Grove Companies received an aggregate of
904,867 Common Units in the Operating Partnership and a cash payment of
$177,669 from GPT, and GPT received 620,130 Common Units in the Operating
Partnership. Additionally, GPT contributed to the Operating Partnership the
gross proceeds received from new equity investments in exchange for a
number of additional Common Units equal to the number of Common Shares
issued by GPT to the new equity investors.
In connection with the Consolidation Transactions, the Operating
Partnership entered into a three-year secured revolving acquisition and
working capital facility of approximately $25 million and an approximately
$15.1 million ten-year term mortgage loan.
The Company will use a portion of the proceeds from the new equity
investment, together with borrowings under the new credit facilities to
paydown or refinance approximately $39.3 million of mortgage indebtedness
of the Property Partnerships and to acquire certain minority interests in
certain of the Property Partnerships.
The following unaudited pro forma information for the year ended December 31,
1996 and 1995 is presented as if the Consolidation Transactions had occurred at
the beginning of 1995. The unaudited information does not purport to represent
what GPT's results of operations would have actually been if such transactions,
in fact, had occurred on January 1, 1995, nor does it purport to represent the
results of operations for future periods.
1996 1995
---- ----
Revenues $ 16,185 $ 15,120
Net income before extraordinary items 2,335 482
Earnings per share $ 0.59 $ 0.19
The following unaudited pro forma balance sheet information as of December 31,
1996 is presented as if the Consolidation Transactions occurred on that date
Real estate assets $ 63,624
Total assets 70,207
Total debt 34,094
Shareholders' equity 36,113
F-14
EXHIBIT INDEX
Exhibit
No Exhibit Page No.
- - ----- ------- -------
3.1 Third Amended and Restated Declaration of Trust of the Registrant.
Incorporated by reference from Exhibit No. 3.1 to Current
Report on Form 8-K filed March 31, 1997, File No. 1-13080.
3.2 Amended and Restated By-laws of the Registrant. Incorporated by reference
from Exhibit No. 3.2 to Current Report on Form 8-K filed March 31, 1997,
File No. 1-13080.
10.1 Securities Purchase Agreement, dated March 14, 1997, between the
Registrant and Morgan Stanley Group Inc. Incorporated by reference from
Exhibit No. 10.1 to Current Report on Form 8-K filed March 31, 1997, File
No. 1-13080.
10.2 Securities Purchase Agreement, dated March 14, 1997, between the
Registrant and ABKB/LaSalle Securities Limited. Incorporated by reference
from Exhibit No. 10.2 to Current Report on Form 8-K filed March 31, 1997,
File No. 1-13080.
10.3 Form of Securities Purchase Agreement executed by other Investors in the
Private Placement. Incorporated by reference from Exhibit No. 10.3 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.4 Registration Rights Agreement executed by the Investors. Incorporated by
reference from Exhibit No. 10.4 to Current Report on Form 8-K filed March
31, 1997, File No. 1-13080.
10.5 Multifamily Note, dated March 14, 1997, among Citicorp Real
Estate, Inc., GR-Properties III Limited Partnership,
Foxwoodburg, L.P., Grove-Westfield Associates Limited
Partnership, Grove-West Springfield Associates Limited
Partnership and GR-Westwynd Associates Limited Partnership.
Incorporated by reference from Exhibit No. 10.5 to Current
Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.6 Cash Management Agreement, dated as of March 14, 1997,
among Citicorp Real Estate, Inc., GR-Properties III Limited
Partnership, Foxwoodburg, L.P., Grove-Westfield Associates
Limited Partnership, Grove-West Springfield Associates
Limited Partnership and GR-Westwynd Associates Limited
Partnership. Incorporated by reference from Exhibit No.
10.6 to Current Report on Form 8-K filed March 31, 1997,
File No. 1-13080.
E-1
<PAGE>
10.7 Form of Multifamily Open-End Mortgage Deed, Assignment of Rents and
Security Agreement, executed by Citicorp Real Estate, Inc. and each of
GR-Properties III Limited Partnership, Foxwoodburg, L.P., Grove-Westfield
Associates Limited Partnership, Grove-West Springfield Associates Limited
Partnership and GR-Westwynd Associates Limited Partnership. Incorporated
by reference from Exhibit No. 10.7 to Current Report on Form 8-K filed
March 31, 1997, File No. 1-13080.
10.8 Pledge Agreement, dated as of March 14, 1997, between the Operating
Partnership and Citicorp Real Estate, Inc. Incorporated by reference from
Exhibit No. 10.8 to Current Report on Form 8-K filed March 31, 1997, File
No. 1-13080.
10.9 Registration Rights Agreement, dated March 14, 1997, between the
Registrant and certain partners of the Operating Partnership.
Incorporated by reference from Exhibit No. 10.9 to Current Report on Form
8-K filed March 31, 1997, File No. 1-13080.
10.10 1994 Share Option Plan. Incorporated by reference from Exhibit No. 10.16
to Registration Statement on Form SB-2, File No. 33-76732.
10.11 1996 Share Incentive Plan, dated March 14, 1997. Incorporated by
reference from Exhibit No. 10.10 to Current Report on Form 8-K filed
March 31, 1997, File No. 1-13080.
10.12 Pledge Agreement, dated March 14, 1997, among Damon Navarro, Brian
Navarro, Edmund Navarro, Joseph LaBrosse, Gerald McNamara, National
Realty Services Limited Partnership, GIG, Burgundy Associates Limited
Partnership, Grove Equity Partnership, Grove Holding Co. Inc. and the
Registrant. Incorporated by reference from Exhibit No. 10.11 to Current
Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.13 Noncompetition Agreement among the Registrant, the Operating Partnership,
National Realty Services Limited Partnership, GIG and Burgundy Associates
Limited Partnership. Incorporated by reference from Exhibit No. 10.12 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.14 Form of Noncompetition Agreement executed by each of Damon Navarro, Brian
Navarro, Joseph LaBrosse, Edmund Navarro and Gerald McNamara.
Incorporated by reference from Exhibit No. 10.13 to Current Report on
Form 8-K filed March 31, 1997, File No. 1-13080.
E-2
<PAGE>
10.15 Employment Agreement, dated March 14, 1997, between the Registrant and
Damon Navarro. Incorporated by reference from Exhibit No. 10.14 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.16 Employment Agreement, dated March 14, 1997, between the Registrant and
Brian Navarro. Incorporated by reference from Exhibit No. 10.15 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.17 Employment Agreement, dated March 14, 1997, between the Registrant and
Edmund Navarro. Incorporated by reference from Exhibit No. 10.16 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.18 Employment Agreement, dated March 14, 1997, between the Registrant and
Joseph LaBrosse. Incorporated by reference from Exhibit No. 10.17 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.19 Employment Agreement, dated March 14, 1997, between the Registrant and
Gerald McNamara. Incorporated by reference from Exhibit No. 10.18 to
Current Report on Form 8-K filed March 31, 1997, File No. 1-13080.
10.20 Form of Contribution Agreement among Grove Real Estate Asset Trust, Grove
Operating, L.P. and certain other parties. Incorporated by reference from
Exhibit No. 10.1 to Current Report on Form 8-K filed February 13, 1997,
File No. 1-13080.
10.21 Form of Agreement of Limited Partnership of Grove Operating, L.P., among
Grove Real Estate Asset Trust and the other partners named therein.
Incorporated by reference from Exhibit No. 10.2 to Current Report on Form
8-K filed February 13, 1997, File No. 1-13080.
10.22 Form of Indemnification Agreement by and between GREAT, the Trust
Managers and the Executive Officers. Incorporated by reference from
Exhibit No. 10.18 to Registration Statement on Form SB-2, File No.
33-76732.
10.23 Assumption of Mortgage Deed and Security Agreement made June 23, 1994 by
and among Southington Baron Limited Partnership, Charles D. Gersten, Ada
C. Berin, Grove Real Estate Asset Trust, Damon D. Navarro and Brian A.
Navarro. Incorporated by reference from Exhibit No. 10.22 to Annual
Report on Form 10-KSB for the year ended December 31, 1994, File No.
1-13080.
10.24 Mortgage Note from Southington Baron Limited Partnership to Charles D.
Gersten and Ada C. Berin dated June 8, 1993 in the original principal
amount of $1,250,000. Incorporated by reference From Exhibit No. 10.23 to
Annual Report on form 10-KSB for the year ended December 31, 1994, File
No. 1-13080.
10.25 Purchase and Sale Agreement between Grove Real Estate Asset Trust and
Grove Cambridge Associates Limited Partnership. Incorporated by reference
from Exhibit No. 1 to Current Report on Form 8-K filed October 30, 1995,
File No. 1-13080.
10.26 Mortgage Note from Grove Real Estate Asset Trust to First
Union Bank of Connecticut dated January 11, 1996 in the
principal amount of $4,500,000. Incorporated by reference
from Exhibit No. 10.25 to Annual Report on Form 10-KSB for
the year ended December 31, 1995, File No. 1-13080.
16.1 Letter of former Accountants. Incorporated by reference from Exhibit No.
16.1 to Current Report on Form 8-K filed August 23, 1996, File No.
1-13080.
27 Financial Data Schedule.
E-3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-01-1996
<CASH> 538,877
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 772,289
<PP&E> 9,798,136
<DEPRECIATION> 1,049,815
<TOTAL-ASSETS> 9,520,610
<CURRENT-LIABILITIES> 369,531
<BONDS> 5,668,578
0
0
<COMMON> 5,250
<OTHER-SE> 3,477,251
<TOTAL-LIABILITY-AND-EQUITY> 9,520,610
<SALES> 0
<TOTAL-REVENUES> 2,082,239
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,039,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394,657
<INCOME-PRETAX> 261,289
<INCOME-TAX> 0
<INCOME-CONTINUING> 261,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,289
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
