UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number: 0-25074
WELLINGTON PROPERTIES TRUST
(Exact name of registrant as specified in its
charter)
Maryland
(State or other jurisdiction of incorporation)
39-6594066
(I.R.S. Employer Identification Number)
18650 West Corporate Drive, P.O. Box 0919,
Brookfield, Wisconsin 53008-0919
(Address of principal executive offices)
Issuer's telephone number: 414-792-8900
Fax number: 414-792-8930
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 the
filing requirements for the past 90 days. Yes X No
As of July 31, 1999, 1,352,361 shares of the
issuer's common shares of beneficial interest were
outstanding.
Transitional Small Business Disclosure Format
(Check one): Yes ;No X
(Added by Exch Act Rel No. 31905, eff 4/26/93.)
This report contains 20 pages. There is one exhibit.
<PAGE>
WELLINGTON PROPERTIES TRUST
TABLE OF CONTENTS
PART I. Financial Information
Consolidated Balance Sheet-June 30, 1999 (unaudited) Page 3
Consolidated Statements of Operations-six months ended
June 30, 1999 and June 30, 1998 (unaudited) Page 4
Consolidated Statements of Operations -three months ended
June 30, 1999 and June 30, 1998 (unaudited) Page 5
Consolidated Statement of Cash Flows-six months
ended June 30, 1999 and June 30, 1998 (unaudited) Page 6
Notes to Consolidated Financial Statements Page 7
Management's Discussion and Analysis of Financial
Condition of Operations Page 14
PART II. Other Information
Other Information Page 20
Signatures Page 20
<PAGE>
<TABLE>
Wellington Properties Trust
Consolidated Balance Sheet
June 30, 1999
(Unaudited)
<CAPTION>
<S> <C>
Assets
Real Estate Property
Land 9,009,936
Building 41,540,143
Tenant improvements 43,809
Appliances and equipment 976,096
51,569,984
Accumulated depreciation (2,319,925)
49,250,059
Cash 98,397
Escrowed cash 680,511
Accounts receivable 32,458
Prepaid expenses 23,550
Investment in unconsolidated subsidiary 90,000
Deferred financing costs, net 815,662
Other assets 25,000
Total Assets 51,015,637
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable 32,049,484
Line of credit 190,000
Accts payable & accrued liabilities 1,336,559
Related party payable 3,926,878
Deferred rental revenue 66,648
Tenant security deposits 158,744
Dividends/distributions payable 871,100
Total liabilities 38,599,413
Minority interests in consolidated
subsidiary 8,755,376
Shareholders' equity
Common shares-100,000 authorized;
1,351,935 shares issued and
outstanding; par value $0.01 13,519
Preferred Stock-10,000,000 authorized;
no shares issued and outstanding;
par value $0.01 --
Additional paid in capital 9,069,682
Accumulated deficit (5,422,353)
Total shareholders' equity 3,660,848
Total Liabilities & Shareholders'
Equity 51,015,637
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<TABLE>
Wellington Properties Trust
Consolidated Statements of Operations
(Unaudited)
For the Six Month Period Ended
<CAPTION>
June 30, June 30,
1999 1998
<S> <C> <C>
Revenue:
Rental revenue and tenant reimbursements 3,414,376 1,516,511
Interest and other 30,513 273
Total revenue 3,444,889 1,516,784
Expenses:
Property operating and maintenance 822,468 295,608
Real estate taxes and insurance 596,233 219,290
Depreciation and amortization 681,103 293,879
Interest expense 1,295,213 633,928
General and administrative 387,480 147,745
Management fees 170,015 74,515
Termination of advisory agreement 950,000 --
Nonrecurring expenses 2,613,383 --
Total expenses 7,515,895 1,664,965
Loss before minority interests (4,071,006) (148,181)
Less: Minority interests 2,664,093 --
Loss allocated to Common Shares (1,406,913) (148,181)
Loss per share: Basic and diluted (1.04) (0.13)
Weighted average number of shares: Basic
and diluted 1,350,730 1,144,793
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Wellington Properties Trust
Consolidated Statements of Operations
(Unaudited)
For the Three Month Period Ended
<CAPTION>
June 30, June 30,
1999 1998
<S> <C> <C>
Revenue:
Rental revenue and tenant reimbursements 1,756,158 750,581
Interest and other 16,076 210
Total revenue 1,772,234 750,791
Expenses:
Property operating and maintenance 450,153 135,118
Real estate taxes and insurance 279,368 109,645
Depreciation and amortization 357,526 148,283
Interest expense 650,225 319,511
General and administrative 192,721 74,598
Management fees 87,390 36,907
Termination of advisory agreement 950,000 --
Nonrecurring expenses 2,613,383 --
Total expenses 5,580,766 824,062
Loss before minority interests (3,808,532) (73,271)
Less: Minority interests 2,491,018 --
Loss allocated to Common Shares (1,317,514) (73,271)
Loss per share: Basic and diluted (0.97) (0.06)
Weighted average number of shares:
Basic and diluted 1,351,891 1,144,793
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Wellington Properties Trust
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Month Period Ended
<CAPTION>
June 30, June 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net Loss (4,071,006) (148,181)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 681,103 293,879
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and
prepaid expenses 71,604 (50,861)
Decrease in deferred costs 1,723,255 --
Decrease in accounts payable and accrued
liabilities (70,809) (13,423)
Increase in accounts payable related party 2,182,455 41,883
Increase in tenant security deposits and
deferred rents 3,409 5,308
Net cash provided by operating activities 520,011 128,605
Cash flows from investing activities:
Capital expenditures paid (93,380) (40,806)
Investment in unconsolidated subsidiary (90,000) --
Decrease (increase) in escrowed cash 163,357 (45,137)
Net cash flow used in investing activities (20,023) (85,943)
Cash flows from financing activities:
Proceeds from mortgage loans payable -- 2,750,000
Loan fees -- (436,285)
Payments on mortgage note (455,668) (2,376,180)
Payments on line of credit (10,000) --
Dividends paid (89,824) (125,794)
Net cash flow used in financing activities (555,492) (188,259)
Net decrease in cash (55,504) (145,597)
Cash at beginning of period 153,901 113,945
Cash at end of period 98,397 (31,652)
Supplemental Data:
Interest paid 1,318,972 641,035
Dividends paid through issuance of
Common Shares (62,383) (124,287)
Issuance of Common Shares 62,383 124,287
-- --
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE A - ORGANIZATION
Wellington Properties Trust ("Company") is a real
estate investment trust ("REIT") organized in the
state of Maryland. The Company was formed on March
15, 1994 to acquire, develop, own, and operate
investment real estate. As of June 30, 1999, the
Company owned two residential and three commercial
properties that contain a total of 376 apartment
units and 247,546 commercial rentable square feet.
The Company's interest in the commercial properties
is held through Wellington Properties Investments,
LP (the "Operating Partnership"), a Delaware
limited partnership formed in 1998. The Company is
the general partner of, and as of June 30, 1999,
owns an approximately 8.8% interest in the
Operating Partnership. On March 4, 1999, the Company acquired
an 8% interest in Highlander Acquisition Company, LLC
("Highlander") which owns a 154 unit apartment community.
NOTE B - BASIS OF PRESENTATION
The consolidated financial statements have been
prepared by the Company without audit pursuant to
the rules and regulations of the Securities and
Exchange Commission. Certain information and
footnote disclosures normally included in the
financial statements prepared in accordance with
generally accepted accounting principles have been
condensed or omitted pursuant to such rules and
regulations, although the Company believes that the
included disclosures are adequate to make the
information presented not misleading. In the
opinion of the Company, all adjustments (consisting
solely of normal recurring matters, except with
respect to the nonrecurring expense) necessary to
fairly present the financial position of the
Company as of June 30, 1999, the results of its
operations for the six month periods and three
month periods ended June 30, 1999 and 1998, and its
cash flows for the six month periods ended June 30,
1999 and 1998 have been included. During the second quarter of
1999, the Company concluded that costs incurred and deferred in
1998 in connection with the potential acquisition of twenty-eight
(28) properties had no future value because such potential acquisitions
would not occur. Such costs approximated $2.6 million and were
expensed in the second quarter along with the costs to terminate
the advisory agreement of $950,000 (See Note H). The results of
operations for such interim periods are not
necessarily indicative of the results for a full
year. For further information, refer to the
Company's consolidated financial statements and
footnotes included in the Annual Report of Form 10-KSB/
Amendment No. 1 for the year ended December 31,1998.
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE C - ACQUISITION OF PROPERTIES
On March 4, 1999, the Company acquired an 8%
interest in Highlander at a cost of $90,000 funded
in cash. The Company believes that cost
approximates fair value.
On November 20, 1998, the Company through the
Operating Partnership, acquired two office
properties and one light industrial property in the
Minneapolis, Minnesota metropolitan area. The
combined purchase price of such properties totaled
approximately $31.1 million, including closing
costs. Such purchase price was funded through the
issuance of an aggregate of 2,557,707 limited
partnership units ("Units") in the Operating
Partnership (valued at $5.37 per Unit, or an
aggregate value of approximately $13.7 million) and
the assumption of certain third-party indebtedness
of approximately $17.1 million secured by such
properties The Units are exchangeable, under certain
circumstances, on a one-for-one basis for common
shares of beneficial interest, $.01 par value per
share from and after the one-year anniversary of
the date of issuance. (See Note H).
NOTE D - MORTGAGE NOTES PAYABLE AND OTHER FINANCING
Maple Grove
The mortgage payable with respect to Maple Grove is
collateralized by Maple Grove and an assignment of
rents and had a principal balance as of June 30,
1999 of $12,680,308. The interest rate is fixed at
8.095%. Payments are due in monthly installments of
principal and interest of $95,517 with a final
balloon payment due June 1, 2004. (See Note I).
Lake Pointe
As of June 30, 1999, the Company was liable on a
mortgage note payable of $2,722,891. The note
requires monthly payments of $19,417 including
interest at 7.6%. The mortgage is due March 2008
and is secured by Lake Pointe and an assignment of
rents.
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE D-MORTGAGE NOTES PAYABLE AND OTHER FINANCING-Continued
Thresher Square East
The financing consists of Commercial Development
Revenue Refunding Bonds - Series 1996A issued by
the City of Minneapolis, Minnesota; interest
payable semi-annually at variable rates ranging
from 5.25% to 7.25%; principal payable annually on
or before May 1 in amounts ranging from $140,000 to
$395,000 with a final payment due May 1, 2015;
collateralized by a letter of credit, the Thresher
Square East Office Complex, equipment and an
assignment of rents. As of June 30, 1999 the
principal balance was $3,955,000.
Thresher Square West
The financing consists of Commercial Development
Revenue Refunding Bonds - dated October 1, 1992
issued by the City of Minneapolis, Minnesota;
interest payable semi-annually at variable rates
ranging from 6.50% to 7.60%; principal payable
annually on or before June 1 in amounts ranging
from $170,000 to $375,000 with a final payment due
June 1, 2010; collateralized by a letter of credit,
the Thresher Square West Office Complex and an
assignment of rents and security agreement. As of
June 30, 1999 the principal balance was $2,965,000.
Cold Springs
The financing consists of a note payable to Bremer
Bank, N.A. in monthly installments of $51,518
including interest at a variable rate (effective
rate of 9.25% at June 30, 1999) with a final
balloon payment due on October 1, 2000; and
collateralized by the Cold Springs Office Complex
and fixtures. As of June 30, 1999 the principal
balance was $5,533,491.
Additionally there is a note payable to Bremer
Business Financial Corp., interest payments due
monthly at a variable interest rate (effective rate
of 10.75% at June 30, 1999) with principal balance
due on September 30, 2000; and collateralized by the
Cold Springs Office Complex and fixtures. As of
June 30, 1999 the principal balance was $1,875,000.
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE D-MORTGAGE NOTES PAYABLE AND OTHER FINANCING-CONTINUED
Nicollet VI
The financing consists of a 7.00% mortgage note
payable to GMAC Commercial Mortgage Corporation in
monthly installments of $15,635 including interest;
final balloon payment due February 1, 2008; and
collateralized by the Nicollet Business Campus VI
Complex and an assignment of rents and security
agreement. As of June 30, 1999 the principal
balance was $2,317,794.
Line of Credit
During 1998, the Company obtained a line of credit
for $300,000 with Milwaukee Western Bank. Payments
of $5,000 of principal plus interest are due
monthly with the final principal payment due on
September 30, 1999. The interest rate is at 0.5%
above the bank's reference rate (effective rate at
June 30, 1999 of 8.75%). At June 30, 1999, the
outstanding balance was $190,000. The line of credit is
collateralized by the guarantee of Wellington
Management Corporation ("WMC").
NOTE E - EQUITY
During 1998, the Company entered into agreements
with American Real Estate Equities, LLC ("AREE") and
WMC. Pursuant to the agreements the Company
entered into transactions with AREE and WMC related
to issuance of warrants, issuance of Common Shares
and contribution agreements for various properties.
On November 16, 1998, the Company issued warrants
to acquire up to 791,667 Common Shares to each of
AREE and WMC. The Warrants were to become
exercisable one year after the date of issuance
(November 16, 1999) and would be exercisable for a
nine-year period thereafter, at an exercise price
of $5.37 per Common Share with respect to 395,833
Warrants held by each of AREE and WMC, $6.47 per
Common Share with respect to 197,917 Warrants held
by each of AREE and WMC, $7.74 per Common Share
with respect to 118,750 Warrants held by each of
AREE and WMC and $9.32 per Common Share with
respect to 79,167 Warrants held by each of AREE and
WMC. Effective June 30, 1999, all such warrants
were returned to the Company and canceled. (See
Note H).
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE F - DISTRIBUTIONS
On March 16, 1999, the Board of Trustees declared a
split of 4.75 Common Shares for each 3.00 Common
Shares effective on March 24, 1999 to shareholders
of record as of March 22, 1999 ("Stock Split").
The Operating Partnership simultaneously declared a
split of 4.75 Units for each 3.00 Units effective
on March 24, 1999 to unitholders of record as of
March 22, 1999. All amounts herein have been
adjusted to give effect to the Stock Split.
On March 30, 1999, the Board of Trustees declared a
cash distribution of $0.11 per share totaling
approximately $148,679 to shareholders of record as
of March 31, 1999. The Operating Partnership
simultaneously declared a $0.11 per unit cash
distribution to holders of Units. Such
distribution totals $189,127. (See Note H).
On July 15, 1999, the Board of Trustees declared a
cash distribution of $0.11 per share totaling
approximately $148,679 to shareholders of record as
of June 30, 1999. The Operating Partnership
simultaneously declared a $0.11 per unit cash
distribution to holders of Units. Such
distribution totals $189,127. (See Note H).
The Board of Trustees further voted to defer
payment of both 1999 cash distributions.
NOTE G - LOSS PER COMMON SHARE
Net loss per Common Share is computed based on the
weighted average number of Common Shares
outstanding for the period. Common share
equivalents, consisting of outstanding warrants and
options, are not included in the diluted loss per
Common Share as they would be anti-dilutive.
NOTE H - RELATED PARTY TRANSACTIONS
Reimbursement of Certain Expenses by Related
Parties
The Operating Partnership has been in negotiations
with AREE regarding the reimbursement by the
Operating Partnership to AREE of certain expenses
incurred by AREE in the potential acquisition of
properties and certain administrative expenses.
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE H-RELATED PARTY TRANSACTIONS-CONTINUED
In connection with the negotiations during 1998 by
the Company of the contribution agreement between
AREE and the Operating Partnership, a $240,000
advance was paid to WMC by AREE for the benefit of
the Operating Partnership. As of December 31, 1998,
this amount was reflected as an advance to related
party in accompanying financial statements, with a
related liability recorded due to AREE. Under the
terms of the contribution agreement, the advance
was to be repaid to AREE in the event certain
transactions closed before December 31, 1998. Due to the uncertainty
of the collectibility of the advance, the entire amount was
reserved as uncollectible as of December 31, 1998 an in
connection with the agreement discussed below, has been written
off as of June 30, 1999.
Of the thirty-one properties to be acquired, three properties have
been acquired as of June 30, 1999. Further, in connection
with the agreements discussed below, WMC will retain cash
received totaling $550,000 as partial consideration for termination
of the advisory agreement.
Management Fees
The Company has entered into Property Management
Agreements with WMC Realty, Inc. ("WRI"), a wholly-owned subsidiary of
WMC, an affiliate of the Company in which Arnold Leas (Chairman of
the Board of Trustees) is President and Chief Executive
Officer, and Hoyt Properties Inc. ("Hoyt"), an
entity controlled by Steve Hoyt (a trustee of the
Company) to serve as Property Managers of
properties owned by the Company. The Property
Managers manage the day to day operations of
properties owned by the Company and receive a
management fee for this service. Management fees
for the period January 1, 1999 through June 30,
1999 totaled $95,112 to Hoyt and $74,903 to WRI.
Management fees for the period January 1, 1998
through June 30, 1998 totaled $0 to Hoyt (management agreement
commenced November 1998) and $74,515 to WRI.
Advisor Fees
On August 2, 1994, the Company contracted to retain
WMC to serve as Advisor to the Company. In payment
for these services, the Advisor receives a fee
equal to 5% of the gross proceeds of the public
offering of common shares, which terminated October
1995. No advisor fees have been paid during 1999.
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE H-RELATED PARTY TRANSACTIONS-CONTINUED
Incentive Advisory Fee equal to 10% of the realized
gain with respect to each sale or refinancing of
property owned by the Company. In the event a
property is sold at a loss, no Incentive Advisory
Fees will be paid until the amount of the loss has
been offset by gains from other sales. No
Incentive Advisory Fees have been paid during 1999.
In addition, the Advisor is entitled to recover
certain expenses including travel, legal,
accounting, and insurance. Fees for services, such
as legal and accounting, provided by the Advisor's
employees, in the opinion of the Advisor, may not
exceed fees that would have been charged by
independent third parties. The initial term of the
agreement ended on December 31, 1995 and had been
renewed automatically each year. The agreement was
subject to termination without cause, by either
party, on 60 days written notice and by the Company
for cause immediately upon written notice.
Termination of Advisory Agreement
In connection with the purchase of properties by
the Operating Partnership, the Company terminated
the advisory agreement with WMC on November 20,
1998. The termination fee, payable to WMC, was estimated
at $1.6 million and was to
be determined by taking 1% of the first $150,000,000
of the aggregate gross purchase price for properties
acquired by the Operating Partnership plus 0.25% of
the aggregate gross purchase price for properties
acquired in excess of $150,000,000. See agreement as of June
30, 1999 discussed below.
Agreements: June 30, 1999
In the second quarter of 1999, due primarily to the fact
that the Operating Partnership was able to acquire only
three properties since November 1998, the Company entered
into discussions with AREE and WMC. As a result of these
discussions, effective as of June 30, 1999:
Recipients of 838,372 Units, received in the November 1998
acquisitions as described in Note C, have returned such
Units to the Company for cancellation.
AREE has returned the warrant covering 791,667 Common Shares to
the Company. Further, the Company has agreed to issue 254,800 Class B
Junior Cumulative Convertible Preferred Shares
("Class B Preferred Shares") to AREE in the third
quarter of 1999 as consideration for an aggregate
of $2,548,000 representing advances to the Company
for working capital purposes and costs incurred in
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
JUNE 30, 1999
NOTE H-RELATED PARTY TRANSACTIONS-CONTINUED
connection with the 1998 Transactions. The Class B
Preferred Shares will bear the same rights, terms
and preferences as the Class A Preferred Shares
(defined below), but will rank junior as to payment
of dividends and distributions upon liquidations.
Of the total Class B Preferred Shares to be issued
to AREE, 135,600 will be redeemable by the Company
for $1 if certain conditions are not met prior to
June 30, 2002.
As consideration for the Termination of the
Advisory Agreement between the Company and WMC, WMC has returned
the warrant covering 791,667 Common Shares to the Company, the
Company has agreed to issue 95,000 Class B
Preferred Shares to WMC in the third quarter of
1999 and WMC will retain cash payments of $550,000
received during 1998.
The obligation by the Company to issue the Class B
Preferred Shares has been reflected as a liability
aggregating $3,498,000 on the Company's balance
sheet as of June 30, 1999.
Listing Agreement
In January 1998, the Company entered into a listing
agreement with WRI. The agreement provides that
WRI would receive a fee equal to 3% of the sales
price in the event of a sale of either of the
Company's residential properties. In connection
with the pending contract for the sale of Maple Grove
Apartments, discussed below, WRI is expected to
receive a fee totaling $501,000 upon consummation
of the sale.
NOTE I - SUBSEQUENT EVENTS
The Company anticipates filing a Preliminary
Registration Statement in August 1999 under the
Securities Act of 1933 on Form SB-2 in order to
commence the sale of 1,200,000 Class A Cumulative
Convertible Preferred Shares ("Class A Preferred
Shares") to the public ("Preferred Offering"). The
Class A Preferred Shares will bear a liquidation
value of $10.00 per share and will accrue a
dividend equal to $0.475 per share, with such
dividend payable every six months. The Class A
Preferred Shares will be convertible into the
number of Common Shares equal to the quotient
obtained by dividing (1) $10.00 plus any dividends
then accrued but unpaid on the Class A Preferred
<PAGE>
WELLINGTON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
JUNE 30, 1999
NOTE I-SUBSEQUENT EVENTS - CONTINUED
Shares, by (2) a price equal to 110% of the average
closing bid price of Common Shares over the 10
trading days preceding the effective date of the
registration statement covering the Class A
Preferred Shares. The Company will have the right
to redeem the Class A Preferred Shares, under
certain circumstances, after the two year
anniversary date of the initial closing of the
Preferred Offering.
The Company expects to use the net proceeds from
the Preferred Offering to fund the continued growth
of the Company.
Maple Grove is presently under contract for sale to
an independent third party. The contract is
subject to normal closing conditions and
contingencies and provides for a purchase price of
$16,700,000 to be paid by assuming the first
mortgage of approximately $12,680,000 and paying
the balance in cash at closing.
No assurance can be given that the Preferred
Offering or the sale of Maple Grove will be
consummated and if consummated, would be on terms
described above or otherwise.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OF OPERATIONS
The following discussion should be read in
conjunction with the financial statements appearing
elsewhere herein. This Form 10-QSB contains
forward-looking statements for purposes of the
Securities Act of 1933 and the Securities Exchange
Act of 1934 and as such may involve known and
unknown risks, uncertainties and other factors that
may cause the actual results, performance or
achievements of the Company to be materially
different from future results, performance or
achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, there can be no assurance that these
expectations will be realized. Factors that could
cause actual results to differ materially from
current expectations include, but are not limited
to, changes in general economic conditions, changes
in interest rates, legislative and regulatory
changes, changes in monetary and fiscal policies of
<PAGE>
the U.S. government, including policies of the U.S.
Treasury and the Federal Reserve Board, changes in
local real estate conditions (including rental
rates and competing properties), changes in
industries in which the Company's principal tenants
compete, the failure to timely lease unoccupied
space, the failure to timely re-lease occupied
spaced upon expiration of leases, the inability to
generate sufficient revenues to meet debt service
payments and operating expenses, the unavailability
of equity and debt financing, unanticipated costs
associated with the Company's acquisitions,
potential liability under environmental or other
laws and regulations, the failure of the Company to
manage its growth effectively and the other risks
identified in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998.
Overview
Wellington Properties Trust is a real estate
investment trust. As of June 30, 1999, the Company
owned a portfolio of two residential and three
commercial properties. The residential properties
are located in Wisconsin and contain an aggregate
of 376 units. The commercial properties are
located in Minnesota and contain an aggregate of
247,546 square feet.
The Company's interest in the commercial properties
is held through Wellington Properties Investments,
LP (the "Operating Partnership"). The Company is
the sole general partner of the Operating
Partnership and, as of June 30, 1999, the Company
held a 8.8% interest in the Operating Partnership.
On November 20, 1998, pursuant to the Master
Contribution Agreement with American Real Estate
Equities, LLC ("AREE"), the Company , through the
Operating Partnership acquired three commercial
properties (the "1998 Acquisition Properties" or
the "Commercial Properties") in exchange for
issuance by the Operating Partnership of 2,557,707
limited partnership units ("Units") and the
assumption of debt aggregating $17,066,000. In
connection with these acquisitions, the Company
issued 166,666 common shares of beneficial interest
("Common Shares") to AREE in exchange for
$1,000,000 and further issued warrants (the
"Warrants") for 791,667 Common Shares each to AREE,
and representatives thereof, and to Wellington
Management Corporation ("WMC"). Simultaneously,
WMC received a termination fee and the advisory
agreement between the Company and WMC was
terminated. (Collectively, these transactions are
referred to herein as the "1998 Transactions").
<PAGE>
The Company accounted for the 1998 Acquisition
Properties under purchase accounting requirements;
therefore, the operating results of the Company for
the six month and three month periods ended June
30, 1999 are not directly comparable to 1998.
Results of Operations
Comparison of the Six Month Period Ended June 30,
1999 and 1998: Rental revenue increased by
approximately $1,897,865 or 125% for the six month
period ended June 30, 1999 compared to the six
month period ended June 30, 1998. The increased
revenue was primarily a result of the Company's
consummation of the 1998 Acquisition Properties.
Interest and other income increased by $30,240
during these same periods, primarily due to
interest earned on escrowed funds relating to the
1998 Acquisition Properties.
Total expenses increased from $1,664,965 for the
six month period ended June 30, 1998 to $7,515,895
for the six month period ended June 30, 1999, an
increase of $5,850,930 of which $3,563,383
represents non-recurring charges related to the
termination of the advisory agreement and write off of
deferred costs associated with 1998 expected acquisitions.
The remaining $2,287,547 was attributable to increased
property expenses of $903,803, increased management fees of
$95,500, increased depreciation and amortization of $387,224,
increased interest expense of $661,285, and
increased general and administrative expenses
of $239,735, primarily as a result of the 1998
Transactions.
Depreciation and amortization increased from
$293,879 for the six month period ended June 30,
1998 to $681,103 for the comparable period in 1999,
an increase of 132%, primarily as a result of the
Company's consummation of the 1998 Acquisition
Properties. Interest expense increased from
$633,928 for the six month period ended June 30,
1998 to $1,295,213 for the comparable period in
1999, an increase of 104%, primarily as a result of
additional borrowings associated with the 1998
Acquisition Properties.
General and administrative expenses increased from
$147,745 for the six month period ended June 30,
1998 to $387,480 for the comparable period in 1999,
an increase of 162%. In November 1998, the Company
converted from an externally advised REIT to a
self-administered REIT and commenced administrative
operations and, as a result incurred payroll
expenses of $150,000 for the six month period ended
June 30, 1999 not incurred in the previous
comparable period.
<PAGE>
As a result of the above, net loss before
minority interests increased from ($148,181) for
the six month period ended June 30, 1998 to a loss
of ($4,071,006) for the six month period ended June
30, 1999. Net loss increased from ($148,181) for
the six month period ended June 30, 1998 to
($1,406,913) for the six month period ended June
30, 1999 attributable primarily to the existence of
minority interests resulting from the new structure
of the Company following the 1998 Transactions, as
well as the factors described above.
Comparison of the Three Month Period Ended June 30,
1999 and 1998: Rental revenue increased by
approximately $1,005,577 or 134% for the three
month period ended June 30, 1999 compared to the
three month period ended June 30, 1998. The
increased revenue was primarily a result of the
Company's consummation of the 1998 Acquisition
Properties. Interest and other income increased by
$15,866 during these same periods, primarily due to
interest earned on escrowed funds relating to the
1998 Acquisition Properties.
Total expenses increased from $824,062 for the
three month period ended June 30, 1998 to
$5,580,766 for the three month period ended June
30, 1999, an increase of $4,756,704 of which
$3,563,383 represents non-recurring charges related
to the termination of the advisory agreement and write off
of deferred costs associated with 1998 expected acquisitions.
The remaining $1,193,321 was attributable to increased
property expenses of $484,758, increased management fees of
$50,483, increased depreciation and amortization of $209,243,
increased interest expense of $330,714, and
increased general and administrative expenses of
$118,123, primarily as a result of the 1998 Transactions.
Depreciation and amortization increased from
$148,283 for the three month period ended June 30,
1998 to $357,526 for the comparable period in 1999,
an increase of 141%, as a result of the Company's
consummation of the 1998 Acquisition Properties.
Interest expense increased from $319,511 for the
three month period ended June 30, 1998 to $650,225
for the comparable period in 1999, an increase of
104%, primarily as a result of additional
borrowings associated with the 1998 Acquisition
Properties.
General and administrative expenses increased from
$74,598 for the three month period ended June 30,
1998 to $192,721 for the comparable period in 1999,
an increase of 158%. In November 1998, the Company
<PAGE>
converted from an externally advised REIT to a
self-administered REIT and commenced administrative
operations and, as a result incurred payroll
expenses of $75,000 for the three month period
ended June 30, 1999 not incurred in the previous
comparable period.
As a result of the above, net loss before
minority interests increased from ($73,271) for the
three month period ended June 30, 1998 to a loss of
($3,808,532) for the three month period ended June
30, 1999. Net loss increased from ($73,271) for
the three month period ended June 30, 1998 to
($1,317,514) for the three month period ended June
30, 1999 attributable primarily to the existence of
minority interests resulting from the new structure
of the Company following the 1998 Transactions, as
well as the factors described above.
Liquidity and Capital Resources
Short Term and Long Term Liquidity
Cash provided by operations and borrowings from
affiliates and lending institutions have generally
provided the primary sources of liquidity to the
Company. Historically, the Company has used these
sources to fund operating expenses, satisfy its
debt service obligations and fund distributions to
shareholders.
On March 16, 1999, the Board of Trustees declared a
split of 4.75 Common Shares for each 3.00 Common
Shares effective on March 24, 1999 to shareholders
of record as of March 22, 1999 ("Stock Split").
The Operating Partnership simultaneously declared a
split of 4.75 Units for each 3.00 Units effective
on March 24, 1999 to unitholders of record as of
March 22, 1999. All amounts herein have been
adjusted to give effect to the Stock Split.
On March 30, 1999, the Board of Trustees declared a
cash distribution of $0.11 per share totaling
approximately $148,679 to shareholders of record as
of March 31, 1999. The Operating Partnership
simultaneously declared a $0.11 per unit cash
distribution to holders of Units. Such
distributions total approximately $189,127.
On July 15, 1999, the Board of trustees declared a
cash distribution of $0.11 per share totaling
approximately $148,679 to shareholders of record as
of June 30, 1999. The Operating Partnership
simultaneously declared a $0.11 per unit cash
distribution to holders of Units. Such
distributions total approximately $189,127.
<PAGE>
The Board of Trustees further voted to defer
payment of both 1999 cash distributions.
In the second quarter of 1999, due principally to
the fact that the Operating Partnership was able to
acquire only three properties since November 1998, the
Company entered into discussions with AREE and WMC.
As a result of these discussions, effective
as of June 30, 1999:
AREE and WMC have returned the warrants, each
covering 791,667 shares, to the Company
Recipients of 838,372 Units, received in the November
1998 acquisitions as described in Note C, have returned such
Units to the Company for cancellation
The Company has agreed to issue 254,800 Class B
Junior Cumulative Convertible Preferred Shares
("Class B Preferred Shares") to AREE in the third
quarter of 1999 as consideration for an aggregate
of $2,548,000 representing advances to the Company
for working capital purposes and costs incurred in
connection with the 1998 Transactions. The Class B
Preferred Shares will bear the same rights, terms
and preferences as the Class A Preferred Shares
(defined below), but will rank junior as to payment
of dividends and distributions upon liquidations.
Of the total Class B Preferred Shares to be issued
to AREE, 135,600 will be redeemable by the Company
for $1 if certain conditions are not met prior to
June 30, 2002.
As consideration for the Termination of the
Advisory Agreement between the Company and WMC, the
Company has agreed to issue 95,000 Class B
Preferred Shares to WMC in the third quarter of
1999 and WMC will retain cash payments of $550,000
received during 1998.
The Company anticipates filing a Preliminary
Registration Statement in August 1999 under the
Securities Act of 1933 on Form SB-2 in order to
commence the sale of 1,200,000 Class A Cumulative
Convertible Preferred Shares ("Class A Preferred
Shares") to the public ("Preferred Offering"). The
Class A Preferred Shares will bear a liquidation
value of $10.00 per share and will accrue a
dividend equal to $0.475 per share, with such
dividend payable every six months. The Class A
Preferred Shares will be convertible into the
number of Common Shares equal to the quotient
obtained by dividing (1) $10.00 plus any dividends
then accrued but unpaid on the Class A Preferred
Shares, by (2) a price equal to 110% of the average
closing bid price of Common Shares over the 10
trading days preceding the effective date of the
registration statement covering the Class A
Preferred Shares. The Company will have the right
to redeem the Class A Preferred Shares, under
certain circumstances, after the two year
anniversary date of the initial closing of the
Preferred Offering.
<PAGE>
The Company expects to use the net proceeds from
the Preferred Offering to fund the continued growth
of the Company.
Maple Grove is presently under contract for sale to
an independent third party. The contract is
subject to normal closing conditions and
contingencies and provides for a purchase price of
$16,700,000 to be paid by assuming the first
mortgage of approximately $12,680,000 and paying
the balance in cash at closing. In connection
with the pending contract for the sale of Maple
Grove Apartments, WRI is expected to receive a fee
totaling $501,000 upon consummation of the sale.
No assurance can be given that the Preferred
Offering or the sale of Maple Grove will be
consummated and if consummated, would be on terms
described above or otherwise.
The Company has no other contractual obligations
for property acquisition or material capital costs,
other than tenant improvements in the ordinary
course of business. The Company expects to meet
its long-term capital needs through a combination
of cash from operations, net cash proceeds from
sales, additional borrowings, additional equity
issuances of Common or Preferred Shares, and/or
partnership Units.
Cash Flows
During the six month period ended June 30, 1999,
the Company generated $520,011 in cash flows from
operating activities and $163,357 from decreased
escrowed cash reserves. These cash flows were used
primarily for (I) repayments of debt obligations
aggregating $465,668; (ii) payment of cash
dividends, net of the Company's dividend
reinvestment plan $89,824; (iii) investment in unconsolidated
subsidiary aggregating $90,000; and (iv)
additions to fixed assets $93,380. As a result,
the Company's cash balances decreased by $55,504 to
$98,397 at June 30, 1999 from $153,901 at December
31, 1998.
Funds from Operations
The Company considers FFO to be helpful to
investors as a measure of the financial performance
of an equity REIT. In accordance with NAREIT's
definition, FFO is defined as net income (loss)
computed in accordance with GAAP excluding gains
(or losses) from debt restructuring and sales of
property, plus real estate-related depreciation and
amortization and after adjustments for
unconsolidated partnerships and joint ventures.
<PAGE>
FFO does not represent cash generated from
operating activities determined in accordance with
GAAP and should not be considered as an alternative
to net income (determined in accordance with GAAP)
as an indication of the Company's financial
performance or to cash flow from operating
activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's
cash needs, including its ability to make cash
distributions. Other REITs may not define FFO in
accordance with the current NAREIT definition or
may interpret the current NAREIT definition
differently from the Company.
Funds from operations for the six month periods
ended June 30, 1999 and June 30, 1998 summarized in
the following table.
<TABLE>
<CAPTION>
Six Month Six Month
Period Ended Period Ended
June 30, June 30,
1999 1998
<S> <C> <C>
Loss before minority interests (4,071,006) (148,181)
Add: real estate related
depreciation and amortization 589,326 270,236
Non recurring expenses:
Termination of advisory agreement 950,000 --
Nonrecurring expenses 2,613,383 --
Funds from operations 81,703 122,055
Weighted average number of shares:
Basic and diluted(1) 3,908,437 1,144,793
</TABLE>
(1) Assumes exchange of all Units, calculated on a
weighted average basis for Common Shares, adjusted
to give effect to the Stock Split.
<PAGE>
Year 2000 Compliance
The Year 2000 issue is the result of computer
programs being written using two digits rather than
four to define the applicable year. Any of the
Company's computer programs that have time-sensitive
software may recognize a date using "00"
as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations
causing disruptions of operations, including, among
other things, a temporary inability to process
transactions, send invoices or engage in similar
normal business activities.
The Company has upgraded its current information
systems to be Year 2000 compliant. The Company
intends to review any and all purchases in this
regard to ensure Year 2000 compliance. The Company
does not believe that the impact of the recognition
of the Year 2000 by its information and operating
technology systems will have a material adverse
affect on the Company's systems.
The Company is also requiring that all vendors and,
in particular, third party property managers
upgrade their systems to be Year 2000 compliant.
Wellington Realty, Inc., which manages the
apartment properties is fully Year 2000 compliant.
Hoyt Properties, which manages the commercial
properties is in the process of acquiring new
systems to become Year 2000 compliant.
Inflation
Inflation has not generally had a significant
impact on the Company during the periods presented
because of the relatively low inflation rates in
the markets in which the Company's properties
operate. Most of the Company's tenants in the
residential properties represent short-term leases
and most of the Company's tenants in the Commercial
properties are contractually obligated to pay their
share of operating expenses thereby reducing
exposure to increases in such costs resulting from
inflation.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
Financial Data Schedule EX-27
REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange
Act, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly
authorized.
Wellington Properties Trust
By: \S\ Robert F. Rice
Robert F. Rice
President
By: \S\ Garret T. Nakama
Garret T. Nakama
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial and accounting
officer.
Date: August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 98,397
<SECURITIES> 0
<RECEIVABLES> 32,458
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 51,569,984
<DEPRECIATION> 2,319,925
<TOTAL-ASSETS> 51,015,637
<CURRENT-LIABILITIES> 1,336,559
<BONDS> 0
0
0
<COMMON> 13,519
<OTHER-SE> 3,647,329
<TOTAL-LIABILITY-AND-EQUITY> 51,015,637
<SALES> 0
<TOTAL-REVENUES> 3,444,889
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,515,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,295,213
<INCOME-PRETAX> (1,406,913)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,406,913)
<EPS-BASIC> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
