Item 1. Business
General
MGI Properties (the "Trust" or "MGI") is an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts. MGI commenced operations in 1971 as a real estate investment trust. Since that time, the Trust has elected to be treated as a real estate investment trust (a "REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and expects to continue to operate in a manner which will entitle the Trust to be so treated. For each taxable year in which the Trust qualifies as a REIT under the Internal Revenue Code, taxable income distributed to the holders of its shares will not be taxable to the Trust (other than certain items of tax preference which are subject to minimum tax in the hands of the Trust). See "Investment and Operating Policies" and "Portfolio" below and the description of dividend policy included under Item 5 of this Annual Report on Form 10-K for the year ended November 30, 1994 (the "Report").
References herein to the Trust include its wholly-owned subsidiaries.
Narrative Description of Business
The Trust, which is a self-administered and self-managed equity REIT, owns and manages a diversified portfolio of income-producing real estate assets. The Trust's portfolio consists of investments in multi-use industrial facilities (such as warehouses and research and development buildings), apartment complexes, shopping centers and office buildings. The primary investment objective of the Trust is to make diversified equity and equity-oriented investments in existing properties believed to be capable of producing stable and rising income streams and having long-term capital appreciation potential. The Trust also believes that its active managing and leasing practices can enhance rental income, funds from operations and long-term capital appreciation. These investments have typically taken the form in recent years of a direct equity ownership interest.
The Trust employs twelve persons.
Investment and Operating Policies
The investment policy of the Trust in its broadest aspect is to seek income of the types permitted to a REIT under Section 856 of the Internal Revenue Code, consistent with its Declaration of Trust. Under its Declaration of Trust, the Trust is permitted to invest in a broad range of real estate and mortgage investments, including among other things equity interests, full or participating interests in securities, whether or not secured by mortgages, interests in rents and any other interests related to real property. The Trust's policies are subject to ongoing review by the Board of Trustees and may be modified from time to time to take into consideration changes in business or economic conditions or otherwise as circumstances warrant.
The Trust's investment focus with respect to type of property has, during the last several years, been directed to equity and equity-oriented investments in existing income-producing properties, principally multi-use industrial facilities, apartment complexes, shopping centers and office buildings. MGI continues to believe it is beneficial to diversify its assets by location and type of real estate, although it periodically changes its emphasis from one sector to another in accordance with its perception of market opportunities. Over the past several years, MGI has increased its emphasis on acquisitions in the northeastern region of the United States, particularly industrial and office properties.
Although the principal investment emphasis is on the direct ownership of income-producing equity real estate, MGI was historically an equity-oriented or "hybrid" (equity and mortgage) trust. MGI's focus turned from mortgage loans with equity participations toward equity investments in which the Trust becomes the sole owner of the property and realizes all of the property's future benefits and risks. Management believes that this evolution has given the Trust greater control over the direction of its portfolio and the opportunity to increase its capital gains potential.
In making new investments, MGI's investment focus has been primarily directed to acquiring quality income-producing properties. Over the last several years, MGI's investment philosophy has been to seek what management believes to be value-creating opportunities by acquiring quality properties that have not met their full potential at a cost believed to be below or near replacement value. Management believes that its investments can be managed to create a total return which includes current income and appreciation. The Trust seeks to implement its investment objectives through selective acquisitions of quality properties, leasing and property management in accordance with its defined long term goals, investment in property improvements and periodic sales of selected properties. The Trust has recently operated with an individual investment parameter of below $20,000,000, but has exceeded and may occasionally exceed this parameter. The decision to sell specific properties or investments involves a number of factors, including the economic climate (giving effect also to the impact of tax laws and other regulatory factors), future potential and reinvestment alternatives. As indicated above, the investment focus may change, based upon the ongoing review of the Trust's policies by the Board of Trustees.
As is common with any real estate owner or lender investing in equity real estate, partnerships, mortgage loans and other investments, the Trust from time to time may restructure its financial arrangements with partners, tenants or borrowers who encounter financial or other difficulties. Accordingly, the Trust, as circumstances warrant, has modified and will modify a lease, partnership, loan or other agreement if, after investigation, it is established that such modification would be economically feasible and in the best interests of the Trust. Protection of the Trust's investments may require foreclosure or other action leading to acquisition of title to properties underlying its mortgage loans or investments.
The Trust's business is limited to investments in real estate, direct or indirect, including investments in and possible future acquisitions of real estate companies. To the extent that the Trust has assets not otherwise invested in real estate, the Trust may invest such assets in other securities, including United States government obligations and commercial paper, so long as, in the opinion of the Trustees, such securities may be held without jeopardizing the Trust's qualification as a REIT under the Internal Revenue Code.
Funds necessary to conduct operations are provided from rental and interest income, mortgaging of equity investments, lines of credit, corporate borrowings, sale of marketable securities and loan repayments and amortization. Such operations include the Trust's continuous incurrence of costs, reimbursed and unreimbursed, for improvements and renovations of its existing properties in order to maintain and enhance their value. From time to time, as conditions warrant, the Trust may operate on a leveraged basis by incurring indebtedness in order to increase its capital available for investment when, in the Trustees' judgment, the Trust will benefit thereby. There is no assurance at any given time that borrowed funds will be available or that the terms and conditions of such borrowings will be acceptable. The Trust may employ short-term borrowings to fund some of its investments. Reference is made to Note 4 of the Notes to Consolidated Financial Statements included in Item 14 below.
Portfolio
The Trust's real estate portfolio as of November 30, 1994 consisted of interests in forty-eight properties, forty-four of which are wholly-owned, two are owned by partnerships in which the Trust has an equity interest, one is a property sold by the Trust in a prior year transaction which did not meet the conditions for a completed sale and is still carried as a real estate investment for financial accounting purposes and one is a mortgage loan that is accounted for as real estate owned. For tax purposes, the property sold and the property accounted for as real estate owned are treated as mortgage loans receivable.
The Trust's real estate investments can be classified by type of property and market region. As of November 30, 1994, the Trust's real estate investments were diversified by type of property as follows:
Type of Property Number of Cost Percent of Properties Total Industrial 24 $ 72,388,000 27% Apartment 9 71,575,000 27 Office 9 64,729,000 24 Retail 6 58,838,000 22 Total 48 $267,530,000 100%
As of November 30, 1994, the Trust's real estate investments were diversified by geographic region as follows:
Region Number of Cost Percent of Properties Total Northeast 17 $ 88,505,000 33% Midwest 15 89,192,000 33 Southeast 11 66,445,000 25 Mid-Atlantic 4 23,163,000 9 Other 1 225,000 * Total 48 $267,530,000 100%
* Less than 1%
Terms under leases to tenants at the Trust's properties range from tenancies-at-will up to eighteen years. The Trust leases commercial space to approximately 240 commercial tenants, including 115 office tenants, 70 retail tenants and 55 industrial tenants.
Additional information concerning the Trust's mortgage and real estate investments is set forth under Item 2
Item 2. Properties.
The following table sets forth certain information concerning the Trust's properties.
SUMMARY OF PROPERTIES AT NOVEMBER 30, 1994
Net Carrying Value Apartment Units Dollars Per Unit Percentage Leased Metairie, LA 516 $10,746,000 $20,826 97% Harrison Township, MI 376 7,290,000 19,388 98% Bloomfield, MI 346 14,810,000 42,803 98% Tampa, FL 264 7,866,000 29,795 93% Laurel, MD 237 11,692,000 49,333 95% Tampa, FL 112 4,948,000 44,179 94%
Total 1,851 $57,352,000 $30,984 97%
Net Percentage Partnership Units Carrying Value Leased Washington, DC (4%) 778 $ 16,000 92% San Bruno, CA (2%) 430 225,000 94%
Total 1,208 $241,000
Item 2. Properties. (continued)
Note: See Note 2 of the Notes to Consolidated Financial Statements included under Item 14 of this Report.
Reference is made to Notes 1, 2 and 3 in the Notes to the Consolidated Financial Statement and Schedules XI and XII of the Financial Statement Schedules for descriptions of the Trust's investments and properties.
Executive Office.
The Trust's headquarters, at 30 Rowes Wharf, Boston, Massachusetts, includes approximately 5,400 square feet and is occupied under a lease expiring April 30, 1995.
Item 3.
Item 3. Legal Proceedings.
The Trust is not a party to any material legal proceedings as to which it does not have adequate insurance coverage.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information and Dividends.
The principal market on which the Trust's common shares are traded is the New York Stock Exchange, under the symbol MGI. The table below sets forth, for the fiscal quarters indicated, the high and low sales prices on the New York Stock Exchange of the Trust's common shares and dividends paid per common share.
Fiscal Sales Price 1994 High Low Dividends
First Quarter 15 5/8 13 1/8 $ .21 Second Quarter 16 5/8 14 3/8 $ .21 Third Quarter 16 14 3/8 $ .22 Fourth Quarter 16 13 5/8 $ .22
Fiscal Sales Price 1993 High Low Dividends
First Quarter 15 3/4 11 $ .20 Second Quarter 16 1/2 13 $ .20 Third Quarter 13 3/8 12 $ .20 Fourth Quarter 15 1/8 12 3/4 $ .21
Future dividends will be determined by the Trust's Board of Trustees and will be dependent upon the earnings, financial position and cash requirements of the Trust and other relevant factors existing at the time. The Trust must distribute at least 95% of the Trust's taxable income in order to enable it to qualify as a real estate investment trust for tax purposes. So long as the Trust continues to qualify as a REIT, shareholders will, therefore, receive in the form of dividends at least 95% of the taxable income of the Trust.
(b) Approximate Number of Holders of Common Shares.
Approximate Number of Holders (as of Title of Class January 29, 1995)
Common Shares, $1.00 3,038 par value
Item 6.
Item 6. Selected Financial Data (a)
Notes: (a) Reference is made to the Index to Consolidated Financial Statements filed as part of this report under Item 14. Item 6, Selected Financial Data, should be read in conjunction with the Consolidated Financial Statements and the related notes appearing therein. (b) The assumed conversion of outstanding options results in dilution of less than 3%.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
At November 30, 1994 financial liquidity was provided by $13.5 million in cash and investment securities and by unused lines of credit of $23.0 million. Shareholders' equity of $176.1 million at November 30, 1994, when compared to $171.0 million at November 30, 1993, primarily reflects net income in excess of distributions.
Principal sources of funds in fiscal 1994 included property operations, the sale of eight industrial properties and an apartment complex, mortgage loan proceeds, and the sale of a partnership interest. During 1994, these resources were used to pay dividends of $9.8 million, to repay $10.4 million of indebtedness, to fund capital and tenant improvements of $2.1 million and $1.1 million, respectively, and to acquire seven industrial properties -- six industrial buildings totaling 578,400 square feet, located in Massachusetts, for an aggregate price of $22.2 million and one 200,600 square-foot industrial property, located in Missouri, for a price of $4.1 million.
Additionally, in October 1994, the Trust signed a commitment to acquire a newly constructed department store of approximately 100,000 square feet located in Peabody, Massachusetts for a price of $11.1 million. The facility, now under construction, is being funded by MGI subject to a construction loan agreement which is reflected as an investment in real estate for financial reporting purposes. The building will be leased in its entirety by Bradlees, which is traded on the New York Stock Exchange, under a twenty-year net lease. The purchase is anticipated to occur in mid-1995 upon the satisfactory completion of construction of the building. As of November 30, 1994, the Trust has advanced $5.5 million of the construction loan.
Mortgage and other loans payable totaled $71.0 million at November 30, 1994 (74% fixed rate and 26% floating rate), a net increase of $4.1 million compared to $66.9 million at November 30, 1993. During 1994, the Trust executed mortgages totaling $22.7 million with an average interest rate of 8.1%. In addition, the Trust retired $19.2 million of debt related to maturing notes and properties sold. Scheduled payments of loan principal amortization totaled $1.4 million. In 1994, MGI entered into a $15.0 million, two-year, floating rate, secured line of credit facility, which increased the total lines of credit to $25.0 million. At November 30, 1994, the Trust had $2.0 million outstanding on its lines. Mortgage and other loans payable are collateralized by thirteen of MGI's properties having an aggregate carrying value of $119.6 million, $3.2 million of investment securities and MGI's guarantees of $4.5 million. Scheduled loan principal payments due within twelve months of November 30, 1994 total $1.5 million. MGI believes it will continue to be able to extend or refinance maturing mortgage loans upon satisfactory terms.
In December 1994, the Trust acquired a 38,000 square-foot office building located in Boston, Massachusetts for a price of $1.8 million. In January 1995, the Trust agreed to acquire a 190,000 square-foot industrial building located in Tewksbury, Massachusetts for a price of $5.75 million, subject to the satisfactory completion of certain conditions including due diligence and the execution with a publicly-traded company of a fifteen-year lease for the entire building. The lease would commit the Trust to tenant and capital improvements totaling approximately $6.3 million. Other cash requirements in 1995 are distributions to shareholders, capital and tenant improvements and other leasing expenditures required to maintain MGI's occupancy levels and other investment undertakings. During the period 1992 through 1994, annual expenditures for capital and tenant improvements averaged approximately 1.3% of net real estate investments. In 1995, budgeted capital and tenant improvements, which are based on assumed leasing activity, completion of discretionary capital projects and estimated costs, approximates 2.9% of net real estate investments, excluding any commitments associated with the purchase of the 190,000 square-foot industrial building. The budgeted increase in 1995 over the average of previous years is primarily due to proposed capital and tenant improvements in the office segment, which reflects budget leasing assumptions for the year. Included in the 1995 budget is $1.5 million of tenant improvements related to a signed 61,000 square-foot office lease at its Michigan office building. Additionally, the Trust has budgeted $.8 million of interior and exterior improvements for its apartment complexes and $.5 million for paving and roof replacements at certain industrial buildings.
Principal sources of funds in the future are expected to be from operations of properties, including those acquired in the future, mortgage or refinancing of existing mortgages on properties and MGI's portfolio of investment securities. Other potential sources of funds include the proceeds of offering of additional equity or debt securities or the sale of real estate investments. In this regard, the Trust sold an industrial property located in Nashville, Tennessee for $4.8 million and will recognize a gain of approximately $1.4 million in the quarter ending February 28, 1995. The cost of new borrowings or issuances of equity capital will be measured against the anticipated yields of investments to be acquired with such funds. The purchase of additional properties in 1995 may require the use of funds from MGI's lines of credit, new borrowings, or the issuance of securities. MGI believes the combination of cash and investment securities, the value of MGI's unencumbered properties and other resources are sufficient to meet its short and long-term liquidity requirements.
RESULTS OF OPERATIONS 1994 COMPARED TO 1993
Net income for 1994 of $14.5 million, or $1.26 per share, exceeded net income of $8.0 million, or $.75 per share, in 1993. Included in net income in 1994 was a net gain of $4.5 million, or $.39 per share, which resulted from the sale of real estate investments for an aggregate sales price of $25.2 million. Income before net gains increased 25% to $10.0 million for 1994, compared to $8.0 million in 1993. The increase in income before net gains when comparing 1994 to 1993 resulted principally from the increase in properties owned.
Funds from operations in 1994 totaled $17.7 million, or $1.54 per share, compared to $15.0 million, or $1.42 per share, in 1993. MGI defines funds from operations as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring, sales of property and similar non-cash items, depreciation and amortization charges and equity method partnership losses. MGI believes funds from operations is an appropriate supplemental measure of operating performance. The change in funds from operations is attributable to the same factors that affected income before net gains with the exception of depreciation and amortization expense.
A primary component of the change in income before net gains is property operating income which is defined as rental and other income less property operating expenses and real estate taxes. Property operating income increased by $4.2 million (20%) to $25.6 million in 1994 from $21.4 million in 1993. This increase is largely due to the 1993 and 1994 acquisitions which contributed $4.2 million and $1.1 million to the increase, respectively. These properties consist of seventeen industrial and two office buildings totaling over 1.9 million square feet (50% of the total non-residential portfolio) and are 97% leased as of November 30, 1994. Properties sold during 1994 reduced property operating income by less than $0.3 million. Property operating income for the balance of the portfolio, which the Trust owned as of the beginning of fiscal 1993, has increased by $0.2 million to $16.1 million without consideration of $1.0 million income received during 1993 in connection with the amendment and assignment of a lease at Yorkshire Plaza located in Aurora, Illinois.
With respect to this group of properties, which the Trust owned throughout all of 1993 and 1994, apartment property operating income has improved by 6% largely due to increases in rental rates, with average occupancy at 94% for both 1993 and 1994. Industrial property operating income has improved 20% due to an increase in occupancy. Overall, average occupancy for all industrial properties owned has improved by 2% to 98% during 1994. The increases in property operating income from comparable apartment and industrial buildings are offset, however, by a $0.5 million decline from comparable office buildings. Average occupancy in office buildings has declined from 94% in 1993 to 88% in 1994, primarily due to increased average vacancy at the suburban Chicago, Illinois and Somerset, New Jersey buildings during 1994. Retail property operating income is largely unchanged, excluding the $1.0 million lease amendment income received in 1993, and average occupancy has increased modestly from 92% to 93% from 1993 to 1994.
The $7.3 million increase in rental and other income in 1994 compared to 1993 was principally the result of $1.5 million from the properties acquired in 1994, $6.8 million due to the partial year ownership of properties acquired in 1993, offset by a decrease of $0.5 million due to the sale of properties in 1994 and a decrease of $0.5 million from the balance of the portfolio. Included in 1993 rental and other income, however, was $1.0 million of income received in connection with the lease amendment, mentioned above. Exclusive of this income, revenue in the group of properties which the Trust owned throughout all of 1993 and 1994 has increased $0.5 million. Rental income from the comparable portfolio of apartments and industrial buildings has increased while revenue in the office segment has declined due to factors similar to those affecting property operating income.
The $2.0 million increase in property operating expenses and the $1.2 million increase in real estate taxes in 1994 as compared to 1993, reflect primarily (i) $0.2 million and $0.3 million, respectively, attributable to the properties acquired in 1994, (ii) $1.7 million and $0.9 million, respectively, due to the buildings acquired in 1993 and (iii) $0.2 million and $0.1 million, respectively, from the balance of the portfolio, which are offset by the decreases of $0.1 million and $0.1 million, respectively, due to buildings sold in 1994. The $0.7 million increase in depreciation and amortization expense for 1994 when compared to 1993 was mostly due to partial year ownership of the properties acquired in 1994 and 1993.
Three additional factors also contributed to the change in income before net gains and funds from operations when 1994 is compared to 1993. Interest income in 1994 reflects a decrease in the average outstanding balance of short-term investments. General and administrative expenses increased in 1994 primarily reflecting an increase in personnel and shareholder-related items. Interest expense increased reflecting a higher average level of debt outstanding.
At November 30, 1994, scheduled 1995 lease expirations for non-residential space approximates 433,000 square feet, or 11% of the entire commercial portfolio, which is similar to the percentage of scheduled expiration for fiscal 1994. Of these scheduled expirations, 319,000 square feet is industrial space, 75,000 square feet is office and 39,000 square feet is retail. During 1994, the Trust signed leases totaling 530,000 square feet with lease commencement dates in 1994 and 1995.
1993 COMPARED TO 1992
Net income for 1993 of $8.0 million, or $0.75 per share on the greater number of shares outstanding, exceeded net income of $7.2 million, or $0.77 per share, in 1992. Included in net income in 1992 was a net gain of $1.6 million, or $.17 per share.
The increase in income before net gains when comparing 1993 to 1992 resulted principally from the increase in properties owned and the receipt of a non-recurring fee. As a result, rental and other income, property operating expenses, real estate tax expense, depreciation and amortization expense increased and mortgage interest income decreased in 1993. The $8.2 million increase in rental and other income in 1993 compared to 1992 was principally the result of (i) $3.6 million from the properties acquired in 1993, (ii) $2.4 million related to the reclassification of MGI's investment in a Metairie, Louisiana apartment complex to owned real estate from a mortgage receivable, (iii) $1.0 million of non-recurring income received in connection with the assignment and amendment of a lease at Yorkshire Plaza, Aurora, Illinois, (iv) $0.8 million due to the partial year ownership of properties acquired in 1992 and (v) the $0.4 million increase from the balance of the portfolio.
The $2.4 million increase in property operating expenses and the $0.9 million increase in real estate taxes in 1993 as compared to 1992, reflect primarily (i) $1.0 million and $0.1 million, respectively, related to the Metairie, Louisiana apartment complex, (ii) $0.8 million and $0.6 million, respectively, from the properties acquired in 1993, (iii) $0.2 million and $0.1 million, respectively, due to the buildings acquired in 1992 and (iv) $0.4 million and $0.1 million, respectively, from the balance of the portfolio. The $1.0 million increase in depreciation and amortization expense for 1993 when compared to 1992 was mostly due to partial year ownership of the properties acquired in 1993 and 1992 ($0.4 million) and the Louisiana apartment complex ($0.5 million).
The $1.6 million decrease in mortgage interest income in 1993 is due the reclassification of the Metairie, Louisiana investment to real estate owned and the acquisition by MGI of the four properties that secured a $6.6 million MGI wrap-around mortgage loan. Three additional factors also contributed to the increase in income before net gains and funds from operations when 1993 is compared to 1992. Interest income in 1993 reflects a decrease in the average outstanding balance of short-term investments and lower interest rates. General and administrative expenses increased in 1993 primarily reflecting an increase in personnel. Lower average levels of debt outstanding, combined with lower interest rates on variable rate debt, resulted in deceased interest expense of $0.5 million when 1993 is compared to 1992.
Real estate investments and operations are subject to a number of factors, including changes in general economic climate, local conditions (such as an oversupply of space, a decline in effective rents or a reduction in the demand for real estate), competition from other available space, the ability of the owner to provide adequate maintenance, to fund capital and tenant improvements required to maintain market position and control of operating costs. In certain markets in which the Trust owns real estate, overbuilding and local or national economic conditions have combined to produce lower effective rents and/or longer absorption periods for vacant space. As the Trust re-leases space, certain effective rents may be less than those earned previously. Management believes its diversification by region and property type reduces the risks associated with these factors and enhances opportunities for cash flow growth and capital gains potential, although there can be no assurance thereof.
During the past three fiscal years, the impact of inflation on MGI's operations and investment activity has not been significant.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included under Item 14 of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
The information required by Items 10, 11, 12 and 13 of this Part III has been omitted from this Report since the Registrant intends to file with the Securities and Exchange Commission a definitive proxy statement which involves the election of Trustees not later than 120 days after the close of the Registrant's last fiscal year.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Independent Auditors' Report Financial Statements: Consolidated Balance Sheets, November 30, 1994 and 1993 Consolidated Statements of Earnings, Years ended November 30, 1994, 1993 and 1992 Consolidated Statements of Changes in Shareholders' Equity, Years ended November 30, 1994, 1993 and 1992 Consolidated Statements of Cash Flows, Years ended November 30, 1994, 1993 and 1992 Notes to Consolidated Financial Statements
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules (as of or for the year ended November 30, 1994): Schedule XI, Real Estate and Accumulated Depreciation Schedule XII, Mortgage and other Loans on Real Estate
Exhibit XI - Computation of Net Income Per Share Assuming Full Dilution Exhibit XXVII - Financial Data Schedule for year ended November 30, 1994 (EDGAR filing only)
Other schedules are omitted for the reasons that they are not required, are not applicable, or the required information is set forth in the financial statements or notes thereto.
3. EXHIBITS
Sequentially Numbered Page
3(a) Second Amended and Restated Declaration of Trust, incorporated by reference to Exhibit 3 of the Trust's Annual Report on Form 10-K for the fiscal year ended November 30, 1981 (the "1981 10-K").
(b) Certificate of First Amendment of Second Amended and Restated Declaration of Trust, incorporated by reference to Exhibit 3 of the 1981 10-K.
Sequentially Numbered Page (c) Certificate of Second Amendment of Second Amended and Restated Declaration of Trust, incorporated by reference to the Trust's Report on Form 8-K, filed on January 13, 1983.
(d) Certificate of Third Amendment of Second Amended and Restated Declaration of Trust, incorporated by reference to Exhibit 3(d) to Amendment No. 1 to the Trust's Registration Statement on Form S-2 filed on June 7, 1985.
(e) Certificate of Fourth Amendment of Second Amended and Restated Declaration of Trust, dated October 17, 1986, incorporated by reference to the Trust's Annual Report on Form 10-K for the year ended November 30, 1986.
(f) Certificate of Fifth Amendment of Second Amended and Restated Declaration of Trust, dated March 25, 1987, incorporated by reference to Exhibit 3(f) of the Trust's Annual Report on Form 10-K for the fiscal year ended November 30, 1987.
(g) Certificate of Sixth Amendment of Second Amended and Restated Declaration of Trust, dated February 10, 1988, incorporated by reference to Exhibit 4(g) of the Trust's Registration Statement on Form S-8 filed on May 3, 1988.
(h) Certificate of Seventh Amendment of Second Amended and Restated Declaration of Trust, dated June 30, 1988, incorporated by reference to Exhibit 4.8 of the Trust's Registration Statement on Form S-4 filed on November 10, 1988 (Reg. No. 33-25495).
(i) Certificate of Eighth Amendment of Second Amended and Restated Declaration of Trust, dated March 27, 1989, incorporated by reference to Exhibit 3(i) of the Trust's Annual Report on Form 10-K for the fiscal year ended November 30, 1989 (the "1989 10-K").
(j) By-Laws, incorporated by reference to the Trust's Report on Form 8-K, filed on January 12, 1983.
(k) Certificate of Amendment of By-Laws, dated March 21, 1989, incorporated by reference to the Trust's Report on Form 8-K dated March 21, 1989.
(l) Rights Agreement, dated as of June 21, 1989 between the Trust and The First National Bank of Boston as Rights Agent, incorporated by reference to Exhibit 1 to the Trust's Registration Statement on Form 8-A, filed on June 27, 1989.
(m) Certificate of Vote of the Trustees Designating a Series of Preferred Shares, dated June 21, 1989, incorporated by reference to Exhibit 3(m) of the 1989 10-K.
10(a) Mortgage Growth Investors Incentive Stock Option Plan for Key Employees, incorporated by reference to the Trust's Definitive Proxy Statement dated March 15, 1982.
(b) Mortgage Growth Investors Stock 1982 Option Plan For Trustees, incorporated by reference to the Trust's Definitive Proxy Statement dated March 15, 1982.
(c) MGI Properties 1988 Stock Option and Stock Appreciation Rights Plans for Key Employees and Trustees, incorporated by reference to the Trust's Definitive Proxy Statement, dated February 19, 1988.
(d) Amendment to MGI Properties' 1982 Incentive Stock Option Plan for Key Employees, dated as of December 19, 1989, incorporated by reference to Exhibit 10(d) of the 1989 10-K.
(e) Amendment to MGI Properties' 1982 Stock Option Plan for Trustees, dated as of December 19, 1989, incorporated by reference to Exhibit 10(e) of the 1989 10-K.
(f) Amendment to MGI Properties' 1988 Stock Option and Stock Appreciation Rights Plan for Key Employees, dated as of December 19, 1989, incorporated by reference to Exhibit 10(f) of the 1989 10-K.
(g) Amendment to MGI Properties' 1988 Stock Option Plan for Trustees, dated as of December 19, 1989, incorporated by reference to Exhibit 10(g) of the 1989 10-K.
(h) Amended and Restated Severance Compensation Plan, dated as of December 19, 1989, incorporated by reference to Exhibit 10(i) of the 1989 10-K.
(i) Amended and Restated MGI Properties Long Term Share Bonus Plan, dated December 18, 1991, incorporated by reference to Exhibit 10(i) of the 1991 10-K.
(j) Purchase Agreement, dated December 29, 1992, among West Port Park, Inc., a Massachusetts corporation, those persons named on Schedule A thereto, MGI Properties and MGI West Port, Inc., a Delaware corporation, incorporated by reference to the Trust's Report on Form 8-K, filed on February 14, 1994 (the "1994 8-K")
(k) Agreement of Sale, dated as of May 7, 1993, among MGI Properties and Continental Bank, National Association, as successor trustee, and Jesse B. Morgan and Thomas E. Meador, as co-trustees, incorporated by reference to the Trust's 1994 8-K.
(l) Agreement of Purchase and Sale, dated as of April 6, 1993, between MGI Properties and Hexalon Real Estate, Inc., incorporated by reference to the Trust's 1994 8-K.
(m) Contract of Sale, effective June 1, 1993, between Nationwide Life Insurance Company and MGI Properties, incorporated by reference to the Trust's 1994 8-K.
(n) Real Estate Sale Agreement, dated as of July 16, 1993, between The Travelers Insurance Company and MGI Properties, incorporated by reference to the Trust's 1994 8-K.
(o) Agreement to Purchase Real Property, dated July 23, 1993, between Bedford Property Investors, Inc. and MGI Properties, incorporated by reference to the Trust's 1994 8-K.
(p) Agreement for Purchase and Sale of Property, dated as of October 21, 1993, between New York Life Insurance Company, MGI Properties and Sherburne, Powers & Needham, P.C., as escrow agent, incorporated by reference to the Trust's 1994 8-K.
(q) Purchase and Sale Agreement, dated as of October 1, 1993, between The Boston Finance Company and MGI Properties, incorporated by reference to the Trust's 1994 8-K.
(r) Real Estate Sale Contract, dated as of November 1993, between The Prudential Insurance Company of America and MGI Properties, incorporated by reference to the Trust's 1994 8-K.
(s) MGI Properties 1994 Stock Option and Stock Appreciation Rights Plan for Key Employees and Trustees incorporated by reference to the Trust's Definitive Proxy Statement, dated February 18, 1994.
(t) The Dividend Reinvestment and Share Purchase Plan of MGI Properties incorporated by reference to the Trust's Report on Form S-3, filed on July 1, 1994.
11 Computation of Net Income Per Share, Assuming Full Dilution, included under Item 14 of this Report.
24 Auditors' consent (b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended November 30, 1994. -------------------------
MGI Properties (the "Trust") is a Massachusetts business trust and all persons dealing with the Trust must look solely to the property of the Trust for the enforcement of any claims against the Trust. Neither the Trustees, officers, agents nor shareholders of the Trust assume any personal liability in connection with its business or assume any personal liability for obligations entered into in its behalf.
POWER OF ATTORNEY
MGI Properties and each of the undersigned do hereby appoint W. Pearce Coues and Phillip C. Vitali and each of them severally, its or his true and lawful attorneys to execute on behalf of MGI Properties and the undersigned any and all amendments to this Report and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Each of such attorneys shall have the power to act hereunder with or without the other.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 31, 1995 MGI PROPERTIES (Registrant)
By: /s/ W. Pearce Coues
W. Pearce Coues, Chairman of the Board of Trustees
Pursuant to the requirements of the Securities 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 date indicated.
Signature Title Date
/s/ W. Pearce Coues _________________ Chairman of the Board of Trustees January 31, 1995 W. Pearce Coues and Chief Executive Officer
/s/ Phillip C. Vitali _________________ Principal Financial Officer January 31, 1995 Phillip C. Vitali
/s/ David P. Morency _________________ Principal Accounting Officer January 31, 1995 David P. Morency
/s/ Herbert D. Conant _________________ Trustee January 31, 1995 Herbert D. Conant
/s/ Francis P. Gunning _________________ Trustee January 31, 1995 Francis P. Gunning
/s/ Colin C. Hampton _________________ Trustee January 31, 1995 Colin C. Hampton
/s/ George M. Lovejoy, Jr. _________________ Trustee January 31, 1995 George M. Lovejoy, Jr.
/s/ Rodger P. Nordblom _________________ Trustee January 31, 1995 Rodger P. Nordblom
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS November 30, 1994
MGI PROPERTIES
MGI PROPERTIES
Index to Consolidated Financial Statements and Schedules
Page
Independent Auditors' Report 1
Financial Statements: Consolidated Balance Sheets, November 30, 1994 and 1993 2 Consolidated Statements of Earnings, Years ended November 30, 1994, 1993 and 1992 3 Consolidated Statements of Cash Flows, Years ended November 30, 1994, 1993 and 1992 4 Consolidated Statements of Changes in Shareholders' Equity, Years ended November 30, 1994, 1993 and 1992 5 Notes to Consolidated Financial Statements 6-11
Schedules (as of or for the year ended November 30, 1994): Schedule XI - Real Estate and Accumulated Depreciation Schedule XII - Mortgage and Other Loans on Real Estate
Exhibit XI - Computation of Net Income Per Share, Assuming Full Dilution Exhibit XXVII - Financial Data Schedule for year ended November 30, 1994 (EDGAR filing only)
Other schedules are omitted as they are not required, are not applicable, or the required information is set forth in the consolidated financial statements or notes thereto.
Independent Auditors Report
The Board of Trustees and Shareholders MGI Properties:
We have audited the consolidated financial statements of MGI Properties and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MGI Properties and subsidiaries as of November 30, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended November 30, 1994 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. (Signature of KPMG Peat Marwick LLP) KPMG Peat Marwick LLP
Boston, Massachusetts December 30, 1994
MGI PROPERTIES
Consolidated Balance Sheets
November 30, 1994 and 1993
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
MGI PROPERTIES
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
MGI PROPERTIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a) Consolidation The consolidated financial statements of the Trust include the accounts of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Income Taxes The Trust intends to continue to qualify to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code of 1986 and the related regulations. In order to qualify as a real estate investment trust for tax purposes, the Trust, among other things, must distribute to shareholders at least 95% of its taxable income. It has been the Trust's policy to distribute 100% of its taxable income to shareholders; accordingly, no provision has been made for Federal income taxes.
(c) Income and Expense Recognition Income and expenses are recorded using the accrual method of accounting for financial reporting and tax purposes. Income or loss from real estate partnerships is accounted for according to generally accepted accounting principles using either the cost method or the equity method.
(d) Depreciation and Amortization Real estate investments, excluding land costs, are depreciated using the straight-line method over estimated useful lives of 20 to 40 years. Tenant improvements are amortized over the shorter of their estimated useful lives or lease terms ranging from 2 to 10 years. Equipment is depreciated over a range from 5 to 20 years. Maintenance and repairs are charged to expense as incurred; major improvements are capitalized.
(e) Statements of Cash Flows For purposes of the statements of cash flows, all short-term investments with a maturity, at date of purchase, of three months or less are considered to be cash equivalents.
During 1994, the Trust sold seven industrial properties for $14.9 million in a single transaction. The properties were secured by a $10.2 million loan payable which was assigned to the purchaser at closing. Only the cash portion of the sale is reflected in the accompanying consolidated statement of cash flows.
Cash interest payments of $5.8 million, $5.3 million and $5.5 million were made for the years ended November 30, 1994, 1993 and 1992, respectively.
(f) Fair Value of Financial Instruments The Trust estimated the fair values of its financial instruments at November 30, 1994 using dis-counted cash flow analysis and quoted market prices. Such financial instruments include short-term investments, U.S. Government securities, mortgage and other loans payable and mortgage notes receivable which were received in connection with transactions not qualifying as sales for financial accounting purposes and accordingly not reflected in the TrustOs consolidated balance sheet. The excess of the aggregate fair value of the TrustOs financial instruments over their aggregate carrying amounts is not material.
(g) Net Income Per Share Net income per share is computed based on the weighted average number of common shares outstanding. (Continued)
MGI PROPERTIES
Notes to Consolidated Financial Statements
(2) Investments
(a) Real Estate A summary of real estate investments follows:
A discussion of certain real estate investments follows:
In October 1994, the Trust signed a commitment to acquire a newly constructed department store of approximately 100,000 square feet located in Peabody, Massachusetts for a price of $11.1 million. The facility, now under construction, is being funded by the Trust subject to a construction loan agreement which requires interest at 9% per annum and is secured by a first mortgage, an assignment of the lease and guarantees of the borrower. Additionally, the tenant has guaranteed the completion of construction and the funding of cost overruns exceeding a specified dollar amount. The building is leased in its entirety to Bradlees, a NYSE company, subject to a twenty-year net lease. The purchase of the building is expected to occur in mid 1995 upon satisfactory completion of construction. The construction loan is reflected as an investment in real estate for financial reporting purposes.
In 1982, the Trust sold its investment in a Michigan apartment complex and received a $15.5 million purchase money mortgage in a transaction that did not meet the conditions for a completed sale for financial accounting purposes. The loan, which matures in February 1995, has an interest rate of 7% and provides for the Trust to receive at least 50% but not more than 60% of the shared appreciation value in excess of the outstanding note balance. In addition, the Trust has a 35% ownership interest, direct and indirect, in the partnership owning this complex. The Trust's purchase option expires in February 1995 and allows it to obtain a maximum equity interest of 67.5%. At November 30, 1994, the Trust carried this asset as a real estate investment at a net carrying value of $7.3 million, which excludes the gain from the sale.
(Continued)
MGI PROPERTIES
Notes to Consolidated Financial Statements
At November 30, 1992, the Trust began to account for its loan on a Metairie, Louisiana apartment complex as real estate owned. The Trust had been recognizing interest income ($1.1 million in 1992) on the related mortgage loan as received. During 1994 and 1993, the Trust has recognized property income and expenses as if it owned the property. For tax purposes, at November 30, 1994, this investment is reflected as a $14.1 million, 8.5% mortgage loan receivable.
With respect to a San Bruno, California partnership investment, the Trust is entitled to receive 50% of property cash flow and residuals through a 2% limited partnership interest (carrying value of $225,000) and has an option to increase its equity interest. In addition, the Trust has a loan receivable from the partnership with a $3.1 million tax basis. Such loan is not recorded in the accompanying financial statements.
(b) Net Gains In 1994, the Trust sold nine properties and one real estate partnership interest with an aggregate net carrying value of $20.7 million for an aggregate net sales price of $25.2 million resulting in gains totalling $4.5 million.
In 1992, the Trust recognized a gain of $3.7 million and deferred an additional gain of $3.7 million, which was effectuated by the December 1991 repayment of approximately $18.8 million of financing it had provided to the partnership owning the San Bruno, California apartment complex. Prior to the completion of the December 1991 transaction, a 1976 sale had not met the conditions for a completed sale and the Trust carried this property as a real estate investment for financial accounting purposes. In addition, in 1992, the Trust recognized a $2.1 million write-down of the Metairie, Louisiana investment discussed above.
(3) Leases
All leases relating to real estate investments are operating leases; accordingly, rental income is reported when earned.
Future minimum lease payments on noncancelable operating leases at commercial properties at November 30, 1994 are: $23.7 million in 1995, $21.4 million in 1996, $17.7 million in 1997, $13.5 million in 1998, $10.0 million in 1999, and $30.5 million thereafter.
The above amounts do not include contingent rental income which is received under certain leases based upon tenant sales, ad valorem taxes, property operating expenses and/or costs to maintain common areas. Contingent rental income was $5.4 million in 1994, $3.4 million in 1993 and $2.6 million in 1992.
Operating leases on apartments generally have a term of one year or less.
(Continued)
MGI PROPERTIES
Notes to Consolidated Financial Statements (4) Mortgage and Other Loans Payable Mortgage and other loans payable at November 30 follow:
These loans payable are nonrecourse and are collateralized by certain real estate investments having a net carrying value of $119.6 million and the Trust's guarantee of $4.5 million. Loans require monthly principal amortization and/or a balloon payment at maturity.
The Trust has lines of credit of $10.0 million and $15.0 million maturing September 1996 and June 1996, respectively. Both credit agreements contain restrictive covenants which, among other things, require the Trust to maintain certain financial ratios and restrict the incurrence of certain indebtedness and the making of certain investments. Borrowings under the lines are secured by mortgage and security interests in real estate and are subject to a variable interest rate. A fee in the amount of .25% per annum is charged on the unused amounts.
The housing revenue bond is tax exempt and is secured by real estate having a net carrying value of $4.9 million. The bond is also secured by a letter of credit which is collateralized by $3.2 million of short-term investments and U.S. Government securities. The Trust has also guaranteed $3.0 million of the debt. The base interest rate floats weekly and was 3.5% at November 30, 1994 (an effective interest rate of 5.4% due to the payment of fees).
Principal payments on mortgage and other loans payable due in the next five years and thereafter are as follows: $1.5 million in 1995, $13.5 million in 1996, $17.3 million in 1997, $1.4 million in 1998, $10.5 million in 1999, and $26.8 million thereafter.
(5) Shareholders' Equity
(a) Stock Option Plans At the 1994 annual meeting, shareholders ratified the 1994 Employee Stock Option and Stock Appreciation Rights Plan and the 1994 Trustees' Stock Option Plan. (Continued)
MGI PROPERTIES
Notes to Consolidated Financial Statements
Under the Trust's 1988 and 1994 stock option plans for key employees and Trustees (the "Plans"), incentive stock options with or without stock appreciation rights or nonqualified options and related stock appreciation rights may be granted to employees, and nonqualified options may be granted to Trustees. Under the Plans, options may be granted at an exercise price not less than fair market value of the Trust's common shares on the date of grant. Changes in options outstanding during the years ended November 30 were as follows:
1994 1993 1992
Balance at beginning of year 464,532 467,000 433,000 Granted 101,000 24,000 49,000 Exercised (15,900) (14,468) (15,000) Expired -- (12,000) -- Balance at end of year 549,632 464,532 467,000 Shares available for granting future options 590,325 121,325 140,000
The weighted average exercise price per option at November 30, 1994, 1993 and 1992 was $12.62, $12.16 and $11.88, respectively. The shares reserved expire by April 2004 and all outstanding options expire by April 2004. Subsequent to November 30, 1994, 112,000 options were granted, of which half are currently exercisable and half are exercisable in December 1995. All other options outstanding are currently exercisable.
(b) Shareholder Rights Plan
On June 21, 1989, the Board of Trustees adopted a shareholder rights plan. Under this plan, one right was attached to each outstanding common share on July 5, 1989, and one right will be attached to each share issued thereafter. Each right entitles the holder to purchase, under certain conditions, one one-hundredth of a share of Series A participating preferred stock for $60. The rights may also, under certain conditions, entitle the holders to receive common shares of the Trust, common shares of an entity acquiring the Trust, or other consideration, each having a value equal to twice the exercise price of each right ($120). One hundred fifty thousand preferred shares have been designated as Series A participating preferred shares and are reserved for issuance under the shareholder rights plan. The rights are redeemable by the Trust at a price of $.01 per right. If not exercised or redeemed, all rights expire in July 1999.
(c) Dividend Reinvestment and Share Purchase Plan
Effective August 1994, a Dividend Reinvestment and Share Purchase Plan was implemented. Under this plan, shareholders of record who own 100 shares or more will have the option of electing to receive, in full or in part, dividends in the form of MGI shares in lieu of cash. The price of shares purchased with reinvested dividends will be at a 3% discount in the case of newly issued shares. If MGI purchases shares in the open market for the plan, the price for such shares will be 100% of the average purchase price paid. Participants in the plan may make additional cash purchases of shares at the same price as shares purchased through the reinvestment of dividends.
(d) Common Stock Offering
In May 1993 the Trust sold 2,000,000 shares of common stock in a public offering for a price of $13.785 per share. The Trust received net proceeds of $25.6 million after the underwriting discount and offering costs. (Continued)
MGI PROPERTIES
Notes to Consolidated Financial Statements
(6) Cash Distributions and Federal Income Taxes
The difference between taxable income and net income reported in the consolidated financial statements is due principally to reporting certain gains for tax purposes under the installment method, use of net operating loss carryforwards available and differences in depreciation and in the basis of real estate sold as reported for tax and financial statement purposes.
The Trust made cash distributions of ordinary income and capital gains of $.86 per share ($9.8 million) in 1994, and cash distributions of ordinary income of $.81 per share ($8.5 million) in 1993 and $.80 per share ($7.5 million) in 1992.
On December 15, 1994, the Trust declared a dividend of $.22 per share payable on January 11, 1995 to shareholders of record on January 3, 1995.
(7) Subsequent Events
In December 1994, the Trust sold an industrial property located in Nashville, Tennessee for $4.8 million and will recognize a gain of approximately $1.4 million in the first quarter ending February 28, 1995.
In December 1994, the Trust acquired a 38,000 square foot office building located in Boston, Massachusetts for a price of $1.8 million. The building is 100% occupied.
(8) Quarterly Financial Information (Unaudited)
Quarterly results of operations for the years ended November 30, 1994 and 1993 follow:
Schedule XI MGI PROPERTIES
Real Estate and Accumulated Depreciation
November 30, 1994
Schedule XI (Continued) MGI PROPERTIES
Real Estate and Accumulated Depreciation
Years ended November 30, 1994, 1993 and 1992
A summary of real estate investments and accumulated depreciation and amortization for the three years ended November 30 follows:
Real Estate Investments
The aggregate cost for Federal income tax purposes of the above investments at November 30, 1994 is approximately $274.2 million.
Refer to Note 1 regarding the Trust's accounting policies on real estate investments and depreciation and amortization.
Schedule XII
MGI PROPERTIES
Mortgage and Other Loans on Real Estate
Years ended November 30, 1994, 1993 and 1992
A summary of mortgage and other loan activity for the years ended November 30 follows: 1994 1993 1992
Balance at beginning of year $ -- $ 5,880,000 (a) $19,764,000
Add: Additions and advances -- 79,000 234,000 -- 5,959,000 19,998,000 Less: Collection of principal -- -- (17,000) Other principal reductions -- (5,959,000)(a) (14,101,000)(b)
Balance at end of year $ -- $ -- $ 5,880,000 (a)
Notes: (a) The face value of this wrap-around mortgage loan was $6,613,000 and was carried net of four first mortgage loans. At November 30, 1992, the Trust had reached agreement with the borrower to purchase the four industrial properties securing this loan. The acquisition was completed on December 31, 1992.
(b) The mortgage loan related to the Metairie, Louisiana apartment complex was reclassified to real estate owned for financial accounting purposes at November 30, 1992. See note 2 to the financial statements.
Exhibit XI
MGI PROPERTIES
Computation of Net Income Per Share Assuming Full Dilution