Item 1. Business (continued): - -------- ---------------------- Financing and Leverage: - -----------------------
The Trust believes that the use of borrowed funds in purchasing properties can help to maximize the Trust's investments. As of September 30, 1995 two of the Trust's investments were leveraged with long-term non-recourse individual mortgage financing and one property was leveraged with a $2,146,000 loan of which the first $750,000 is recourse and the balance is non-recourse. As of September 30, 1995 six of the Trust's remaining improved properties served as collateral for the Trust's bank notes payable. See Note E of the Notes to the Financial Statements presented in Part II, Item 8 of this report.
Effective November 30, 1994 the Trust and two banks, National City Bank of Cleveland ("NCB") and Manufacturer's and Traders Trust Company of Buffalo ("M & T") signed a revolving line of credit agreement for up to $25,000,000 (but is limited by the value of the collateral provided). Of this amount a maximum of $15,000,000 is currently available and $10,000,000 will be available at the Trust's discretion upon payment of an activation fee of 3/4 of 1% on the $10,000,000. This loan is for an initial term of three years. The banks will review the loan annually, and if satisfied, they will extend the loan for an additional year at that time. Therefore, the Trust will have an annually renewed three year loan or two years in which to replace the loan. At the Trust's option interest on any loan will be at any of the following rates (i) the prime lending rate plus 1/4 of 1%; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed rate of interest in effect from time to time. It is the Trust's present intention to use this revolving line to finance the purchase of suburban office buildings and invest in real estate companies' securities.
Real Estate Market Conditions: - ------------------------------
Investments in real estate equities tend to be long term investments, and accordingly, tend to limit the ability of the Trust to vary its portfolio of real estate owned promptly in response to changing economic, financial and investment conditions, such as overbuilding in certain markets and the resulting intense competition for tenants. Although the Trust requires leases from all tenants occupying space in its properties, in the event of a default by a tenant, the Trust may modify the lease terms or evict the tenant. Tenant evictions result in increased expenses and the possibility of lost rents until the space is re-leased.
It should be noted that the largest tenant occupying space in any of the Trust's Properties currently pays rent totaling $974,000 or 9.5% of the Trust's 1995 revenues. This tenant has a lease which matures September 30, 2005 but the lease contains six 10-year option provisions at the tenant's discretion which, if exercised, would extend the maturity date to September 30, 2065. The rent paid by this tenant is subject to an annual adjustment based on the increase or decrease in operating expenses of the property.
The Trust, in order to remain competitive, leases space at its properties at rates which are dictated by the market in which the property exists. The market rates, which are quoted to both new tenants and tenants who are renewing their leases, were at their highest levels in the early 1980's. These rates began to decline at most of the properties in 1984 and continued to decline through 1988. At that time, the market rates at all of the Trust's properties were at their lowest levels. Since 1989, the market rates have tended to increase. In 1995 the market rates at the majority of the properties were higher than those in 1988 but have not returned to the high rates that existed in 1983. The Trust is encouraged by the current trends in rates. Additionally, the majority of leases at the Properties include provisions for the tenant to pay additional rent if operating expenses of the property increase.
PART I -------
Item 1. Business (continued): - ------- --------------------- Taxation: - ---------
Through fiscal 1992 the Trust operated so as to qualify as a real estate investment trust (a "REIT") as defined by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Effective April 1, 1993 the Trust automatically failed to qualify as a REIT under the Code as on such date more than 50% in value of the Trust's shares (after the application of certain constructive ownership rules) were owned by five or fewer individuals.
Although the Trustees had the right pursuant to Section 8.5 of the Declaration of Trust to prevent the transfer, and/or call for the redemption of, securities of the Trust sufficient in the opinion of the Trustees to meet requirements for REIT status, the Trustees in their discretion determined that maximizing proceeds from the December 1992 rights offering (the "1992 Rights Offering") outweighed the benefits of REIT status. The primary impact on the Trust as a result of the failure to qualify as a REIT is that the Trust is now required to file its federal and state income tax returns as a corporation and is subject to taxation as a corporation. As a result, distributions to shareholders will be subject to double taxation to the extent of current and accumulated earnings and profits of the Trust. Additionally, the Trust will not be able to re-qualify as a REIT until fiscal year 1998. Loss of REIT status should not have a materially adverse tax effect on the shareholders because as of September 30, 1995 the Trust has net operating loss carry forwards (NOL's) of approximately $6.4 million available to offset taxable income. As the Trust has failed to qualify as a REIT as a result of five or fewer individuals acquiring 50% or more in value of the Trust's Shares, the Trust is also subject to Section 382 of the Code which limits the amount of NOL's available to the Trust on an annual basis. In future years, the Trust can use approximately $298,000 per year of NOL's plus any prior year's unused portion (limited by carryforward periods) for NOL's generated prior to December, 28, 1992. The Trust can also use NOL carryforwards generated after December 28, 1992. These carryforwards of approximately $5.4 million expire through 2009. The remaining carryforwards of $1.0 million may be recognized for a period through fiscal 1998 against gains on sales of properties, if any, to the extent that fair market values of these properties exceeded their tax bases as of December 28, 1992.
Competition and Limited Resources: - ----------------------------------
The Trust's Properties will be subject to competition from similar types of properties in the vicinities in which they are located. The areas in which the Trust intends to acquire properties have experienced a softening of their real estate markets. This is due in part to overbuilding, slower growth in certain local economics, and a decline in the energy industry which causes increased competition for tenants. Such increased competition is continuing and may adversely affect the ability of the Trust to renew existing leases as they expire or to attract new tenants for vacant space. Such competition will have an adverse effect on the levels of rents which the Trust will be able to realize on new leases and has had an adverse effect on property values in the markets being targeted by the Trust.
The Trust is relatively small in comparison to many of its competitors. This size limits the Trust's resources and may limit its ability to compete effectively in the geographic markets in which it focuses. Also, the Trust's relative size limits its ability to diversify its portfolio selections, which may also limit its ability to compete effectively.
PART I -------
Item 2
Item 2 . Properties. - ------- -----------
General: - --------
At September 30, 1995 the Trust had a total invested assets of $41,245,000. The invested assets included $40,942,000 of investments in real estate and $303,000 of real estate mortgage loans.
The Trust's $40,942,000 of investments in real estate as of September 30, 1995 included the following: seven office buildings with a carrying value of $20,751,000; six commercial properties with a carrying value of $19,941,000; three single family units with a carrying value of $47,000; and one investment in land with a carrying value of $203,000. Carrying value represents amounts included in the Trust's Statement of Financial Condition as of September 30, 1995 after depreciation. Although Management will from time to time undertake a major renovation of a Property in order to keep it competitive within its market, at this time Management has no plans for a major renovation of any of its Properties. During fiscal 1994 and 1995, the Petroleum Club Building located in Tulsa, Oklahoma underwent major reconstruction and repair work as a result of a fire which occurred in January, 1994. The Trust and its insurance company agreed to a settlement for the repair of the property in July, 1994. All repairs and building improvements were paid for from the insurance proceeds.
In the opinion of Management, all Properties in the Trust's portfolio are adequately covered by insurance. Additionally, all properties are suitable and adequate for their intended use.
The amount of leverage varies among the Properties which the Trust presently owns. At September 30, 1995 two of the Trust's Properties were leveraged with long-term non-recourse individual mortgage financing and one property is leveraged with a $2,146,000 loan of which the first $750,000 is recourse and the balance is non-recourse. Additionally, as of September 30, 1995 six of the Trust's remaining investments serve as collateral for the Trust's bank notes payable.
At September 30, 1995 the Trust owned two real estate mortgage loans with a total balance of $303,000. Both loans are purchase money mortgages received by the Trust in connection with sales of vacant land in Akron, Ohio. The first was a $290,000 loan received in connection with the $834,000 March, 1994 sale of 70 acres. The second was a $212,000 loan received in connection with the $212,000 May, 1994 sale of 17.7697 acres.
PART I ------
Item 2. Properties (Continued): - ------ -----------------------
Investments in Real Estate: - ---------------------------
The following table analyzes the investments in real estate as of September 30, 1995 by type of property.
PART I -------
Item 2. Properties (Continued): - ------ -----------------------
Investments in Real Estate: (Continued): - -----------------------------------------
(A) At September 30, 1995 the Trust had 512 tenants under lease in its office buildings, shopping centers and retail centers (excluding the mini warehouses at Triangle Square). These tenants are under leases of one year or more. Additionally, the Trust had 168 month-to-month leases for mini-warehouse spaces at Triangle Square.
(B) The following lists individually those tenants who occupy 10,000 square feet or more, and whose original lease terms expire five years or more from September 30, 1995. Eleven (11) other tenants who occupy less than 10,000 square feet and have leases which expire five years or more from September 30, 1995 are grouped together and shown as Others on the table below:
* Leases marked with an asterisk have additional rent provisions to be paid based on a percentage of the gross sales over a base sales figure.
All leases listed on the table are subject to an annual adjustment in rent based on the increase or decrease in the operating expenses of the Property.
The annual base rents of the tenants listed in the table equal 28% of the total 1995 rental income, and these tenants occupy 386,000 square feet (33%) of the total 1,178,000 square feet currently occupied. The remaining 792,000 square feet are occupied by 491 tenants. These tenants' leases expire during the next five years. The loss of rentals from any one of these leases, which the Trust would not be able to renew or replace, would not have a significant effect on the Trust's operations.
(C) The following is a list of those tenants who occupy 50% or more of a Property:
Englewood Bank Building -- Bank One, Denver -- 108,000 sq. ft. (83%) Littleton Bank Building -- Norwest -- 35,000 sq. ft. (61%)
PART I -------
Item 2. Properties (Continued): - ------ -----------------------
Investments in Real Estate: (Continued): - -----------------------------------------
(D) The Trust owns the improvements subject to a ground lease which expires January 31, 2024. The Trust has four, eleven year options to extend the ground lease. The current lease rent is $105,545 per year. The rent can be increased to 7 1/2 % of the land value, not to exceed 110% of the previous year's rent. This increase is allowed every ten years. The next time an increase could be made is 2002. At the end of the lease and any extension exercised, the improvements become the property of the land owner, Bank One, Denver, which is a tenant in the building. In September, 1995 the Trust and Bank One executed an Option Purchase Agreement. The Trust has paid Bank One an Option Deposit of $40,000 which gives the Trust the option to purchase the land under lease for a purchase price of $1,260,000. The Trust currently anticipate that the closing of the purchase will take place around February 1, 1996.
(E) The Trust owns the improvements subject to a ground lease which expires December 31, 2026. The lease rent is $10 per year through 2006, $26,000 per year for the years 2007 through 2016 and $30,000 per year for the years 2017 through 2026. At the end of the lease, the improvements become the property of the land owner, Norwest, which is a tenant in the building.
(F) Office Alpha. Office Alpha is located in the North-Dallas LBJ-East office market of Dallas, Texas. Office Alpha contains five stories and is suitable and adequate for its use as an office building.
Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market.
Presently, the Trust has no plans for any significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, style, condition and quality that directly compete with Office Alpha. Leasing proposals for both new and renewal tenants in this submarket are highly competitive. Many of the Trust's competitors in this submarket have substantially greater capital and resources than the Trust.
Occupancy for the fiscal years ended September 30, 1991 through 1995 was as follows: 91% for 1991, 73% for 1992, 84% for 1993, 83% for 1994 and 91% for 1995. The Property's average rental rates per occupied square foot for the same period were: $9.95 in 1991, $9.61 in 1992, $8.91 in 1993, $9.00 in 1994 and $9.52 in 1995.
At September 30, 1995 Jewish Family Services of Dallas, Inc., a non-profit organization which performs social services primarily for the Jewish community in Dallas, was the only tenant occupying 10% or more of the space in Office Alpha. This tenant's annual rent is $96,000. Its lease expires September 30, 1996.
PART I -------
Item 2. Properties (Continued): - ------- -----------------------
Investments in Real Estate: (Continued) - ----------------------------------------
Based upon leases in place at September 30, 1995 lease expirations for the next ten fiscal years ended September 30, 2005 are as follows:
Office Alpha is depreciated for tax purposes using the straight line basis with the building and improvements having a 15 year life. The depreciable tax basis was $2,261,000 at September 30, 1995. The 1994 real estate taxes for the Property were $94,960 based on a millage rate of $2.70 per $1,000 of assessed value. The 1995 real estate taxes are not yet known.
(G) Englewood Bank Building. The Englewood Bank Building is located in Englewood, Colorado. The building contains 10 stories and is suitable and adequate for its use as a bank and office building.
The main tenant is Bank One, Denver which occupies 83% of the building. The balance of the building is primarily leased to small service or professional organizations for use as general offices. The Trust's policy is to sign leases of three to five years in order to take advantage of changes in the market.
The Trust has no plans for any significant renovations of the Property other than normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
The Englewood Bank Building is subject to limited direct competition from comparable office projects in the general vicinity. There is only one competing high-rise office building in the area of similar size, quality, condition and location to the Englewood Bank Building. Other competing projects consist of low-rise office buildings and converted retail space generally considered to be of lesser quality.
The occupancy rates for the fiscal years ended September 30, 1991 through 1995 were as follows: 97% in 1991, 89% in 1992, 91% in 1993, 98% in 1994 and 97% in 1995. The Property's average rental rate per occupied square foot for the same period was $6.55 in 1991, $6.65 in 1992, $6.69 in 1993, $6.80 in 1994 and $6.63 in 1995.
PART I -------
Item 2. Properties (Continued): - -------- -----------------------
Investments in Real Estate: (Continued) - ---------------------------------------
Bank One, Denver is the only tenant occupying over 10% of the rentable space. Its annual rent is currently $974,000 but is subject to an annual adjustment based on increases or decreases in property expenses. This lease expires September 30, 2005 and has six, ten year renewal options available.
Lease expirations based upon base rents of leases in place at September 30, 1995 for the ten years ended September 30, 2005 are as follows:
The Englewood Bank Building is depreciated for tax purposes using the straight line method over 40 years for the building and improvements. The depreciable tax basis was $2,018,000 at September 30, 1995. The 1994 real estate taxes for the Property were $101,857 based on a millage rate of $8.1046 per $1,000 of assessed value. The 1995 real estate taxes are not yet known.
(H) EXECUTIVE CLUB BUILDING. The Executive Club Building is located in Denver, Colorado. The building contains eleven floors and has a health club, which includes a swimming pool, located in the basement. The building is suitable and adequate for its use as an office building.
Space in the building is leased to service and professional organizations for use as general offices. The Trust's policy is to sign new leases with new and renewal tenants for periods of three to five years in order to take advantage of changes in the market.
Presently, the Trust has no plans for any significant renovations of the property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
There are numerous office buildings in the direct vicinity, some of higher quality, and numerous projects of similar age, condition and quality that directly compete with the Executive Club Building. The Trust believes that the advantage that this building has is that the building caters to small tenant users, while the majority of the properties in the area prefer larger tenants.
PART I -------
Item 2. Properties (Continued): - -------- ----------------------
Investments in Real Estate: (Continued) - ----------------------------------------
Occupancy for the fiscal years ended September 30, 1991 through 1995 was as follows: 88% in 1991; 92% in 1992; 97% in 1993 and 1994 and 93% in 1995. The Property's average rental rates per occupied square foot for the same periods were: $9.45 in 1991; $9.69 in 1992; $9.55 in 1993; $10.15 in 1994 and $11.63 in 1995.
There are no tenants in this property occupying 10% or more of the space.
Based upon leases in place as of September 30, 1995 lease expirations for the next ten fiscal years ended September 30, 2005 are as follows:
The Executive Club Building is depreciated for tax purposes using the straight line method with the building and improvements having a 40 year life. The depreciable tax basis was $1,827,000 at September 30, 1995. The 1994 real estate taxes for the Property were $75,396 based on a millage rate of $8.0741 per $1,000 of assessed value. The 1995 real estate taxes are not yet known.
(I) CANNON WEST SHOPPING CENTER. The Cannon West Shopping Center is a grocery-anchored neighborhood strip center located in Austin, Texas. Cannon West's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
The Trust owns this Property in fee simple, subject to a first mortgage loan, at a rate of 9.5%, which matures May 1, 1997. At September 30, 1995 the balance of this loan was $5,852,000. By maturity $181,000 of scheduled amortization payments are required and therefore a balance of $5,671,000 will be due at maturity. There is a prepayment penalty of 4.5% effective May 28, 1995 which decreases 1/2 of 1% per year to a minimum of 4% until maturity.
The Cannon West Shopping Center is subject to a limited amount of direct competition in its immediate trade area. Although there are a number of grocery anchored shopping centers located in South Austin serving the south-side communities that are located along William Cannon Drive-- a major East-West highway serving the South Austin area -- Cannon West Shopping Center is the only retail shopping center located at the intersection of William Cannon Drive and Westgate Boulevard that serves the immediate surrounding neighborhoods.
PART I -------
Item 2. Properties (Continued): - -------- ----------------------
Investments in Real Estate: (Continued) - ----------------------------------------
Occupancy for the fiscal years ended September 30, 1991 through 1995 was as follows: 84% in 1991; 88% in 1992; 93% in 1993; 75% in 1994; and 82% in 1995. The average rental rate, including percentage rents, per occupied square foot during the same period was $6.28 in 1991; $7.44 in 1992; $7.05 in 1993; $8.38 in 1994; and $9.01 in 1995.
Cannon West has one tenant that occupies more than 10% of the Property, H.E. Butt Grocery Store ("HEB"). Their annual base rent is $250,000. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. For 1995 the percentage rent paid was $104,000. This lease expires October 5, 2001 and has four, five year renewal options. In September, 1995 the Trust was notified by HEB that they had purchased a parcel of land approximately one mile from Cannon West. Should HEB build a store and/or a shopping center on this parcel of land, it could effect Cannon West.
Lease expirations based on leases in place at September 30, 1995 for the ten years ended September 30, 2005 are as follows:
The building and improvements are depreciated for tax purposes using the straight line method over 18 years. The depreciable tax basis was $3,949,000 at September 30, 1995. The 1994 real estate taxes were $160,468 based on a millage rate of $2.51 per $1,000 of assessed value. The 1995 real estate taxes are not yet known.
(J) SPRING VILLAGE SHOPPING CENTER. The Spring Village Shopping Center is a grocery-anchored neighborhood strip center located in Davenport, Iowa. Spring Village's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
PART I -------
Item 2. Properties (Continued): - -------- ----------------------
Investments in Real Estate: (Continued) - ----------------------------------------
The Spring Village Shopping Center is subject to direct competition in its immediate trade area. There are several grocery anchored shopping centers located on Kimberly Road, the major retail East-West road servicing Davenport. At September 30, 1995 Spring Village was 100% occupied primarily due to the attractiveness of the center's grocery store which was recently remodeled and expanded at the cost of the Store.
Occupancy for the fiscal years ended September 30, 1991 through 1995 was as follows: 97% in 1991; 98% in 1992; 99% in 1993; 98% in 1994; and 100% in 1995. The average rental rate, including percentage rents, per occupied square foot during the same period was $7.60 in 1991; $8.00 in 1992; $8.00 in 1993; $8.26 in 1994; and $7.89 in 1995.
Spring Village has two tenants that occupy more than 10% of the Property. The first is Eagle Food Centers, whose annual base rent is $204,000. Their lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1995. This lease expires June 30, 2005. The second is the Walgreen Company, which operates a drug store, and pays annual base rent of $67,000. Its lease also calls for tax, insurance and maintenance escalations. This lease expires November 30, 2010.
Lease expirations based on leases in place at September 30, 1995 for the ten years ended September 30, 2005 are as follows:
The building and improvements are depreciated for tax purposes using the straight line method over 31-1/2 years. The depreciable tax basis was $3,383,000 at September 30, 1995. The 1995 real estate taxes are $137,668 based on a millage rate of $3.59 per $1,000 of assessed value.
(K) WARREN PLAZA SHOPPING CENTER. The Warren Plaza Shopping Center is a grocery-anchored neighborhood strip center located in Dubuque, Iowa. Warren Plaza's main tenants operate retail businesses. The Property is suitable and adequate for its use as a strip shopping center.
The Trust has no plans for significant renovations of the Property beyond normal maintenance and repairs and tenant improvements done in conjunction with the leasing of space within the Property.
PART I -------
Item 2. Properties (Continued): - -------- ----------------------
Investments in Real Estate: (Continued) - ----------------------------------------
In addition to the 90,000 square feet owned by the Trust, there is a 97,000 square foot Target discountstore attached to the property, which is not owned by the Trust. The Property is subject to direct competition in its immediate trade area. There are several grocery anchored shopping centers located on both Dodge Street and John F. Kennedy Blvd. (this Property is located on the corner of these two streets). Across the street from the Property is a mall, which the Trust does not consider competition. Additionally, there is both a K-Mart and Wal-mart in the area which compete with the Target store. For both 1994 and 1995 this Property has been 100% occupied. The Trust attributes this to both the grocery store and the Target Store. Both of these stores have been recently remodeled and expanded at the cost of the stores.
Occupancy for the fiscal years ended September 30, 1991 through 1995 was as follows: 92% in 1991; 92% in 1992; 99% in 1993; 100% in 1994; and 100% in 1995. The average rental rate, including percentage rent, per occupied square foot during the same period was $8.83 in 1991; $8.86 in 1992; $8.60 in 1993; $9.67 in 1994; and $9.24 in 1995.
Warren Plaza has one tenant that occupies more than 10% of the Property, HY-VEE Food Store. Its annual base rent is $259,000. The lease also calls for tax, insurance and maintenance escalations and has a percentage rent clause. There was no percentage rent due for 1995. The lease expires June 30, 2013.
Lease expirations based on leases in place at September 30, 1995 for the ten years ended September 30, 2005 are as follows:
The building and improvements are depreciated for tax purposes using the straight line method over 31-1/2 years. The depreciable tax basis was $3,721,000 at September 30, 1995. The 1995 real estate taxes are $102,102 based on a millage rate of $3.29 per $1,000 of assessed value.
PART I -------
Item 2. Properties (Continued): - ------- -----------------------
Geographic Distribution: - ------------------------
The Trust's properties are located in seven states. The table below demonstrates the geographic distribution of the Trust's properties at September 30, 1995:
PART I -------
Item 3.
Item 3. Legal Proceedings - -------- -----------------
The Trust is involved in a number of legal proceedings arising in the usual course of its business activities, none of which in the opinion of the management, is expected to have a material adverse effect on the Trust.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------- ----------------------------------------------------
No matters were submitted to a vote of the Trust's Shareholders during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant - ------------------------------------
The following information regarding executive officers of the Trust is provided pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART II --------
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - ------- ----------------------------------------------------------------- Matters -------
Market Price Range: - -------------------
The shares of the Trust are traded in the Over-the-Counter market, NASDAQ National Market System, (symbol CTRIS). The table below contains the quarterly high and low closing bid prices for such Shares.
The bid prices for the Trust's Shares shown in the table above are interdealer prices and do not reflect retail mark ups, mark downs, or commissions and may not be representative of actual transactions. As of December 1, 1995, there were approximately 1,225 record holders of the Shares.
Distributions to Shareholders: - ------------------------------
At their July 25, 1995 meeting, the Trustees declared a quarterly cash distribution of $.04 per Share of Beneficial Interest payable October 20, 1995 to shareholders of record as of October 6, 1995. At their October 24, 1995 meeting, the Trustees declared a quarterly cash distribution of $.04 per Share payable January 19, 1996 to shareholders of record as of January 5, 1996.
For a discussion of the tax classification of cash distributions see Management's Discussion and Analysis of Financial Condition and Results of Operations - Dividends.
Distributions are subject to a bank convenant which require a minimum Shareholders' Equity. At September 30, 1995 the amount of required Shareholders' Equity was $20,000,000 and the amount free from this restriction was approximately $5,126,000.
PART II -------- Item 6.
Item 6. Selected Financial Data - ---------------------------------
PART II ---------
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - -------- --------------------------------------------------------------- Results of Operations. ----------------------
Financial Condition - -------------------
During the three-year period ended September 30, 1995 the Trust's total assets decreased 14% to $43,076,000. In 1994 the Trust applied the allowance for possible investment losses to three previously foreclosed properties for which it had been previously provided. This application was done in connection with the Trust's regular evaluation of its portfolio of properties. The evaluation concluded that it was unlikely that these properties would recover in value and, therefore, they were written down to their net realizable value. During this three-year period the carrying value of the Trust's invested assets after the allowance for possible investment losses decreased 13% or $6,162,000 to $41,245,000. In fiscal 1995 the Trust sold three improved properties. The first was the sale of the 197 room Quality Hotel in St. Louis, Missouri for $2,650,000 which resulted in a gain of $452,000. The second was the sale of the 124 unit Parkwood Place Apartments in Greeley, Colorado for $2,595,000 which resulted in a gain of $1,859,000. The third was the sale of the 51,000 square foot Walnut Hill West office building in Dallas, Texas for $800,000 which resulted in a gain of $97,000. In fiscal 1994 the Trust purchased a 104,000 square foot office building located in Dallas, Texas for $3,918,000. Of this amount, $2,170,000 was provided by a first mortgage loan on the property which the Trust obtained at the time of the purchase. In fiscal year 1993 the Trust sold four single-story, office-warehouse buildings containing 42,162 square feet on 2.68 acres of land within the Walnut Stemmons Office Park in Dallas, Texas for $950,000 which resulted in a gain of $337,000. Additionally, the Trust sold four vacant land parcels during this three-year period. The result of all the sales during this three year period was a decrease of approximately $4,174,000 to the carrying value of the Trust's portfolio of invested assets. Additionally, the recording of $5,967,000 of depreciation, a non-cash adjustment, reduced the carrying value during this three-year period. Also, during this three-year period, the Trust made improvements to its existing properties of $2,176,000 and received payments on real estate mortgage loan totaling $2,349,000.
During the three-year period ended September 30, 1995 the Trust's mortgage notes payable decreased 51% or $9,541,000 to $9,266,000. This resulted from amortization payments of $1,280,000, the repayment of a $7,689,000 maturing loan, and additional repayments/paydowns which reduced the mortgage notes payable $2,404,000. Of this $2,404,000, the actual cash outlay by the Trust was $2,066,000 with $338,000 representing discounts obtained by the Trust. Additionally, the Trust obtained a $2,170,000 first mortgage loan in connection with its purchase of a 104,000 square foot office building, as referenced above. The Trust's bank notes payable were reduced $9,026,000 during the three-year period ended September 30, 1995 to $6,600,000. The Trust borrowed $7,689,000 to repay the above referenced maturing mortgage loan and made principal amortization and repayments of $16,715,000.
During the three-year period ended September 30, 1995 the Trust's shareholders' equity increased 83% or $11,412,000 to $25,126,000. This increase was primarily the result of the Trust receiving $4,231,000 from its 1992 rights offering, which expired December 28, 1992, $5,929,000 from its 1993 rights offering, which expired January 28, 1994, net of $1,358,000 to repurchase 253,553 of the Trust's Shares in fiscal 1995 and 103,210 of the Trust's Shares in fiscal 1994, $4,585,000 of net income and $2,002,000 of distributions to shareholders during this three-year period. As a result of the Trust's total debt being reduced approximately $18,567,000 and total shareholders' equity increasing $11,412,000, the Trust's debt to shareholders' equity ratio has decreased to .63-to-1.00 at September 30, 1995 from 2.51-to-1.00 at September 30, 1992.
PART II ---------
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations - (Continued) ---------------------
Liquidity and Capital Resources - -------------------------------
For each of the fiscal years ended September 30, 1995, 1994 and 1993, the Trust's portfolio of invested assets generated sufficient revenues to cover all operating expenses (excluding depreciation, a non-cash expense), required mortgage notes amortization payments, required bank amortization payments, capital improvements to existing properties, and distributions to shareholders. During this three-year period the year end occupancy of the Trust's portfolio has been 80% at September 30, 1993, 79% at September 30, 1994, and 81% at September 30, 1995, while the average rental rates per square foot have increased from $8.22 for the year ended September 30, 1993 to $8.47 for the year ended September 30, 1994 to $8.61 for the year ended September 30, 1995. The Trust's estimate for the fiscal year 1996 is that operating revenues should be sufficient to cover all operating expenses (excluding depreciation, a non-cash expense), required monthly mortgage amortization payments, anticipated improvements (primarily tenant improvements estimated at approximately $500,000), and distributions to shareholders.
Management has from time to time undertaken a major renovation of a property in order to keep it competitive within its market. During fiscal 1994 and 1995 the Petroleum Club Building located in Tulsa, Oklahoma underwent major reconstruction and repair as a result of a fire which occurred in January, 1994. The cost of the work was covered by insurance settlement proceeds. In July, 1994 the Trust and its insurance company arrived at a settlement for the repair of this property. Included in the work that was done was $253,000 for building improvements made as part of the building restoration. The Trust has capitalized these as building improvements. No other major renovation projects are currently contemplated or in process.
The Trust's cash flow from operating activities increased $116,000 (6%) when comparing 1995 to 1994. This increase was primarily due to the net activity of the following items:
* In 1995 the Trust had an operating income of $596,000 compared to an operating loss of $115,000 in 1994, or an improvement of $711,000. The improvement was largely the result of income from real estate operations being $357,000 higher in 1995 than in 1994, primarily due to the Trust's purchase in August, 1994 of a 104,000 square foot office building in Dallas, Texas. Also the Trust's interest expense was $343,000 less in 1995 than 1994 primarily as a result of the Trust reducing its outstanding debt by $6,425,000 during 1995.
* In 1995 the Trust's accrued expenses and other liabilities decreased $134,000. In 1994 the accrued expenses and other liabilities increased $351,000 due primarily to an increase in the accrual for operating payables. Therefore there was a decrease of $485,000 for 1995 compared to 1994.
* In 1995 the Trust's depreciation expense was $126,000 less than in 1994 because of property sales in 1995.
For 1995 the net cash from investing activities totaled $5,522,000. As previously discussed, in 1995 the Trust sold three improved properties and a vacant land parcel. The proceeds from these sales totaled $5,545,000. Additionally, at the completion of the renovation and repair project on the Tulsa, Oklahoma Petroleum Club Building the insurance settlement proceeds exceeded the expenditures for the work by $738,000. The Trust also received $145,000 in real estate loan repayments. The only net cash outflow was
PART II --------
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations - (Continued) ---------------------
Liquidity and Capital Resources - (Continued) - -------------------------------
the $666,000 (primarily tenant improvements) spent on improvements to existing properties and the $240,000 which the Trust invested in the purchase of 14,000 shares in a real estate company. During 1994 the Trust used $3,435,000 in investing activities. As previously discussed above, in 1994 the Trust purchased a 104,000 square foot office building in Dallas, Texas for $3,918,000. This purchase plus the $853,000 (primarily tenant improvements, in addition to the previously discussed $253,000 for items capitalized in connection with the restoration work at the Petroleum Club Building in Tulsa, Oklahoma) spent on improvements to existing properties exceeded the proceeds of $879,000 from sales of properties, the net insurance proceeds of $253,000 and $204,000 of repayments on real estate mortgage loans.
In 1995 net cash used in financing activities totaled $7,809,000, while in 1994 net cash from financing activities was $1,263,000, a variance of $9,072,000. Mortgage notes payable amortization payments were $330,000 in 1995 and $496,000 in 1994. Principal prepayments were $1,463,000 in 1995, as the Trust repaid a $498,000 first mortgage loan and settled a $1,017,000 first mortgage loan for $965,000 (the settlement resulted in a $52,000 extraordinary income item). In 1994 the repayments were $7,689,000 as the Trust paid off a maturing first mortgage loan on September 30, 1994. Bank notes payable principal payments totaled $4,549,000 in 1995 and $5,162,000 in 1994. In 1995 the Trust paid off its $3,460,000 1986 loan and paid down the 1994 Credit (defined below) $1,089,000. In 1994 the Trust made a $666,000 principal payment on its 1986 loan. Also, in 1994 the Trust repaid the $4,496,000 balance on its 1990 Credit which was subsequently canceled December 31, 1994. In 1995 the Trust repurchased and retired 14,000 of its shares for a cost of $48,000 and through a tender offer made to all shareholders of the Trust repurchased and retired 239,553 of its shares for a cost of $1,014,000. In 1994 the Trust repurchased and retired 103,210 of its shares at a cost of $296,000. In 1994 the Trust received $5,929,000 as a result of the sale of shares in the 1993 rights offering. In 1995 the Trust cashed in a $500,000 certificate of deposit. In 1995 the Trust made four distributions of $.04 per share to shareholders of the Trust for a total of $874,000. In 1994 the Trust made four distributions (one for $.03 per share and three for $.04 per share) for a total of $735,000.
On November 30, 1994 the Trust and National City Bank of Cleveland, Ohio and Manufacturer's and Traders Trust Company of Buffalo, New York executed a revolving line of credit agreement for a maximum of $25,000,000 (limited by the value of the collateral provided) ("1994 Credit"). The 1994 Credit is for an initial term of three years. Each year the lenders will review the 1994 Credit with the option of extending the credit for one additional year. If the lenders do not extend the credit then the Trust will have two years in which to repay all borrowings outstanding under the 1994 Credit. The loans will bear interest at the Trust's option at any of the following rates: (i) 1/4 of 1% over the prime lending rate; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed interest rate available from time to time. The primary reason the Trust obtained the 1994 Credit was to aid in the purchase of improved real estate, primarily suburban office buildings. The Trust now also contemplates using the 1994 Credit to purchase real estate companies' securities, although the 1994 Credit currently limits investments of this type to a maximum of $2,000,000.
In addition to the required monthly amortization payments under the terms of the three first mortgage loans the Trust currently has (see Note D to the financial statements), during the next five fiscal years the Trust's major debt maturities are (i) in fiscal 1998 the 1994 Credit, which currently has a balance of $6,600,000
PART II --------
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations - (Continued) ---------------------
Liquidity and Capital Resources - (Continued) - -------------------------------
outstanding; (ii) on May 7, 1997 a $5,852,000 first mortgage loan; and (iii) on August 19, 2000 a $2,146,000 first mortgage loan.
Although the 1994 Credit is for an initial term of three years, it is the Trust's belief that the credit will be extended for an additional year each year on its anniversary by the lenders. Therefore, at this time the Trust does not anticipate the necessity of looking for a replacement loan for the $6,600,000 of bank borrowings which currently would be due in fiscal 1998, since the 1994 Credit has not reached its first anniversary. Currently, it is Management's intention to repay the $5,852,000 first mortgage loan which matures May 7, 1997 with funds from the 1994 Credit and also to repay the $2,146,000 first mortgage loan which matures August 19, 2000 with funds from the 1994 Credit.
Results of Operations - ---------------------
FISCAL YEAR COMPARISON:
Income from real estate operations in 1995 increased $357,000 (13%) and $652,000 (27%) as compared to 1994 and 1993, respectively. The increases related primarily to higher rental income in 1995 compared to both 1994 and 1993 and lower depreciation expense in 1995 compared to both 1994 and 1993. Rental income was $495,000 (5%) higher in 1995 than 1994, and $797,000 (8%) higher in 1995 than 1993. Depreciation expense in 1995 was $126,000 (6%) and $303,000 (14%) lower than in 1994 and 1993, respectively. However, real estate operating expenses were $264,000 (5%) higher in 1995 than 1994, and $448,000 (9%) higher in 1995 than 1993. The reasons for these variances in rental income, real estate operating expenses and depreciation expense are described below.
The Trust considers the cyclical nature of real estate markets a normal part of portfolio risk. The performance of the various real estate markets and economies of the Southwest remains mixed. Improvement in the Trust's operations will depend partially upon further economic recovery of the Southwest and, in specific, local markets and properties, especially Dallas, Texas.
1995 - 1994
Income from real estate operations increased $357,000 (13%) from 1994 to 1995. Rental income increased $495,000 (5%) from 1994 to 1995. Real estate operating expenses were $264,000 (5%) higher in 1995 compared to 1994. The increase in rental income and real estate operating expenses were primarily due to the Trust's purchase in August, 1994 of a 104,000 square foot office building located in Dallas, Texas. Additionally, depreciation expense was $126,000 (6%) lower in 1995 than 1994. The $343,000 (16%) decrease in interest expense was primarily due to lower outstanding balances. In March, 1995 the Trust repaid a $498,000 first mortgage loan on its shopping center located in Ardmore, Oklahoma. In May, 1995 the Trust settled at a discount a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado. In February and March, 1995 the Trust repaid the $3,460,000 1986 loan it had with a bank. Additionally, the Trust reduced the 1994 Credit balance from $7,689,000 to $6,600,000 (a reduction of $1,089,000) during 1995.
In 1995 the Trust recorded gains totaling $2,499,000 as the result of four property sales. The sales and gains were as follows: (i) February, 1995 $2,650,000 sale of the 197 room Quality Hotel located in St. PART II --------
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations - (Continued) ---------------------
Results of Operations - (Continued) - ---------------------
Louis, Missouri, which resulted in a gain of $452,000; (ii) March, 1995 $2,595,000 sale of the 124 unit Parkwood Place Apartments located in Greeley, Colorado which resulted in a gain of $1,859,000; (iii) March, 1995 $800,000 sale of the 51,000 square foot Walnut Hill West office building located in Dallas, Texas which resulted in a gain of $97,000; and (iv) May, 1995 $212,000 sale of 17.7697 acres of vacant land located in Akron, Ohio which resulted in a gain of $91,000. In 1994 the Trust recorded gains on the sales of both a 69 acre and a 17 acre vacant land parcel located in Akron, Ohio which resulted in total gains of $445,000.
In 1995 the Trust settled at a discount a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado. This settlement resulted in an extraordinary income item of $52,000. In January 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. The Trust has completed all necessary repairs and building improvements. Upon completion of the work there was $738,000 of the settlement which had not been expended. The Trust has recorded this $738,000 as an extraordinary income item in fiscal 1995. In addition $253,000 was the cost of building improvements made as part of the building restoration. This $253,000 was capitalized as building improvements and also was recorded as an extraordinary income item in fiscal 1994.
1994 - 1993
Income from real estate operations increased $295,000 (12%) from 1993 to 1994. Rental income increased $302,000 (3%) from 1993 to 1994 primarily due to the average rents per occupied square foot being $.25 per square foot higher in 1994 compared to 1993. Real estate operating expenses were $184,000 (4%) higher in 1994 compared to 1993. Additionally, depreciation expense was $177,000 (8%) lower in 1994 than 1993.
The $187,000 (71%) decrease in interest income was primarily the result of the Trust's sale of a $2,000,000 real estate mortgage loan in July, 1993.
The $474,000 (52%) decrease in interest on bank notes payable for 1994 compared to 1993 was primarily due to reduced principal balances. In January and February, 1994 the Trust repaid the $4,508,000 balance of the 1990 Credit. Additionally, in March, 1994 the Trust made a $666,000 payment on its 1986 loan. Also, the Trust made $147,000 of amortization payments on its loans. The September 30, 1994 funding by National City Bank did not effect the interest expense for 1994.
In 1994 the Trust recorded gains on the sales of real estate of $445,000 on the sales of a 69 acre and a 17 acre vacant land parcel. In 1993, as previously discussed, the Trust recorded a $337,000 gain on the sale of four single-story office-warehouse buildings in Dallas, Texas. Also in 1993, the Trust recorded a $226,000 gain on the sale of a 46 acre vacant land parcel.
PART II ---------
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations - (Continued) ---------------------
Results of Operations - (Continued) - ---------------------
As previously discussed, in January, 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. In connection with the restoration $253,000 was the cost of building improvements which were capitalized and also was recorded as an extraordinary income item. In 1993 the Trust settled a second mortgage on one of its properties at a discount. Also, the Trust settled a first mortgage on the same property, at a discount. These settlements resulted in the cancellation of the mortgages and extraordinary gains totaling $286,000.
Dividends: - ----------
For 1993 the Trust paid distributions to its shareholders totaling $393,000 or $.12 per share. For the shareholders $.06 per share of these distributions were classified for tax purposes as dividends and $.06 per share were classified as return of capital.
For 1994 the Trust paid distributions to its shareholders' totaling $735,000 or $.15 per share. For the shareholders $.07 per share of these distributions were classified for tax purposes as dividends and $.08 per share were classified as return of capital.
For 1995 the Trust paid distributions to its shareholders of $874,000 or $.16 per share. For the shareholders preliminary analysis indicates that all of these distributions will be classified for tax purposes as dividends.
Income Taxes: - -------------
Commencing with fiscal 1993 the Trust no longer qualified as a REIT. With the change in status to a taxable entity the Trust adopted the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" the effect of adoption of this statement had no cumulative effect on the Trust's operations. At September 30, 1995 the Trust had net deferred tax assets of approximately $2,567,000. As was the case at both September 30, 1993 and 1994 the Trust has established a valuation allowance equal to its net tax assets as there is doubt as to whether the net deferred tax asset will be realized.
Other: - ------
Inflation, which has been at relatively low rates for the past three years, has had an immaterial impact on the Trust's operations during the three-year period ended September 30, 1995.
PART II --------
Item 8.
Item 8. Financial Statements and Supplementary Data. - ------- --------------------------------------------
The response to this Item is submitted in a separate section of this report. See Item 14 of this report for information concerning financial statements and schedules filed with this report. The quarterly financial data required by this item is included as Note L of the Notes to Financial Statements filed in Part IV, Item 14 (a) (1) and (2).
Item 9.
Item 9. Disagreement on Accounting and Financial Disclosure. - ------- ----------------------------------------------------
There has not been any change in the Trust's independent auditors, nor have there been any disagreements concerning accounting principles, auditing procedures, or financial statement disclosure within the twenty four (24) months prior to the date of the most recent financial statements presented in this report.
PART III ---------
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - --------- ---------------------------------------------------
Except as set forth under "Executive Officers of the Registrant" following Item 4 of Part I, which is incorporated by reference, all information required by this Item is incorporated by reference to the material under the caption "Election of Trustees" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
Item 11.
Item 11. Executive Compensation. - --------- -----------------------
All information required by this Item is incorporated by reference to the material under the caption "Executive Compensation" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - --------- ---------------------------------------------------------------
All information required by this Item is incorporated by reference to the material under the caption "Beneficial Ownership of Principal Holders and Management" of the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
Item 13.
Item 13. Certain Relationships and Related Transactions. - --------- -----------------------------------------------
Information required by this Item with respect to certain relationships and related transactions is incorporated by reference to the material under the caption "Certain Transactions" to be contained in the definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this report.
PART IV --------
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------- ------------------------------------------------------------------
(a) The following documents are filed as a part of this Report:
(1) The Financial Statements listed on the List of Financial Statements and Financial Statement Schedules are filed as a separate section of this Report.
(2) The Financial Statement Schedules listed on the List of the Financial Statements and Financial Statement Schedules are filed as a separate section of this Report.
(3) The exhibits required by Item 601 of Regulation S-K and identified on the Exhibit Index at sequential Page 51 of this Report.
(b) No Reports on Form 8-K were filed during the last quarter of the period covered by this Report.
(c) The exhibits being filed with this Report are identified on the Exhibit Index at sequential Page 51 of this Report.
(d) The Financial Statement Schedules are filed as a separate section of this Report.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEVETRUST REALTY INVESTORS Dated: December 13, 1995 By: /s/ Michael R. Thoms ---------------------------- Michael R. Thoms Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated:
ANNUAL REPORT ON FORM 10-K
PART IV, ITEM 14(a)(1) and (2) and ITEM 14(d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED SEPTEMBER 30, 1995
CLEVETRUST REALTY INVESTORS
WESTLAKE, OHIO Form 10-K --Part IV, Item 14(a)(1) and (2)
CLEVETRUST REALTY INVESTORS
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
The following financial statements of CleveTrust Realty Investors are included in Part II, Item 8:
Statement of Financial Condition -- September 30, 1995 and 1994
Statement of Operations -- Years ended September 30, 1995, 1994 and 1993
Statement of Cash Flows -- Years ended September 30, 1995, 1994 and 1993
Statement of Changes in Shareholders' Equity -- Years ended September 30, 1995, 1994 and 1993
Notes to Financial Statements
Financial Statement Schedules:
The following financial statement schedules of CleveTrust Realty Investors are included in Part IV, Item 14(d):
Schedule XI -- Real Estate and Accumulated Depreciation.
Schedule XII -- Mortgage Loans on Real Estate.
All other schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
LOGO ERNST & YOUNG LLP 1300 Huntington Building Phone: 216 861 5000 925 Euclid Avenue Cleveland, Ohio 44115-1405
Report of Independent Auditors
Trustees and Shareholders CleveTrust Realty Investors Westlake, Ohio
We have audited the accompanying statement of financial condition of CleveTrust Realty Investors as of September 30, 1995 and 1994, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and 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 financial statements referred to above present fairly, in all material respects, the financial position of CleveTrust Realty Investors at September 30, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Ernst & Young LLP November 14, 1995
STATEMENT OF FINANCIAL CONDITION
CLEVETRUST REALTY INVESTORS
See notes to financial statements.
STATEMENT OF OPERATIONS
CLEVETRUST REALTY INVESTORS
See notes to financial statements.
STATEMENT OF CASH FLOWS
CLEVETRUST REALTY INVESTORS
See notes to financial statements.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
CLEVETRUST REALTY INVESTORS
Years Ended September 30, 1995, 1994, and 1993
NOTES TO FINANCIAL STATEMENTS
CLEVETRUST REALTY INVESTORS
Years Ended September 30, 1995, 1994 and 1993
NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME RECOGNITION: Rental income from improved properties is generally recorded as it accrues. Interest on mortgage loans is recognized as income as it accrues during the period the loans are outstanding except where collection of interest is considered doubtful. Contingent rents and interest are recognized as income when determinable. Accrual of income is suspended on any investment when the collection of rent, principal, or interest is doubtful.
INVESTMENTS IN REAL ESTATE: Real estate acquired by the Trust for investment purposes pursuant to normal real estate purchase transactions is recorded at cost. Real estate acquired by foreclosure, deed in lieu of foreclosure, or cancellation of land leases is recorded at estimated fair value at the date of acquisition, but not in excess of the unpaid balance of the related loan or land lease plus costs of securing title to and possession of the property.
The Trust has adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 121 requires a review of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If, based on this review, the sum of expected future cash flows from an asset is less than the carrying amount, an impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Based on an evaluation of the Trust's assets in accordance with SFAS No. 121, no adjustment for impairment of assets is required at September 30, 1995.
Prior to adoption of SFAS No. 121, the Trust regularly evaluated the recoverability of each investment in the portfolio. When appropriate, an allowance for possible investment losses was provided for properties acquired through foreclosure or deed in lieu of foreclosure. In fiscal 1994 the Trust applied the allowance for possible investment losses to three previously foreclosed properties for which it had been provided. The Trust concluded that it was unlikely that the value of these properties would recover. Therefore, they were written down to their net realizable value through application of the allowance.
DEPRECIATION: Depreciation on equity investments is computed by the straight-line method at rates based upon the expected economic lives of the assets which range from 31 to 40 years for buildings, 5 to 40 years for other property and the specific length of the tenant lease for tenant improvements. Additionally, one building and its permanent improvements are depreciated over a life of 55 years.
REPAIRS AND CAPITAL IMPROVEMENTS: Expenditures for repairs and maintenance which do not add to the value or prolong the useful life of property owned are charged to expense as incurred; those expenditures for improvements which do add to the value or extend the useful life are capitalized.
CASH AND CASH EQUIVALENTS : The Trust defines cash and cash equivalents as cash in bank accounts and investments in marketable securities, primarily short-term commercial paper with original maturities of three months or less.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE A - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - - CONTINUED
INVESTMENTS IN SECURITIES: The Trust has adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The Trust has classified its investments in equity securities as available for sale and as a result these are stated at fair value at September 30, 1995. The effect of the unrealized gains (losses) are included as a component of Shareholders' Equity. There was no cumulative effect adjustment as a result of adoption.
INCOME TAXES: Commencing with fiscal 1993 the Trust no longer qualified as a REIT. Therefore, with the change in status to a taxable entity for fiscal 1993, the Trust adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes".
NET INCOME PER SHARE: Net income per Share of Beneficial Interest has been computed using the weighted average number of Shares of Beneficial Interest outstanding each year.
RECLASSIFICATION: Certain items in previously issued financial statements have been reclassified to conform to 1995 presentations.
NOTE B - - INCOME TAXES
As of October 1, 1992 the Trust adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The adoption of SFAS 109 had no effect on net income.
The Trust's deferred tax assets and liabilities under SFAS 109 at September 30, 1995 and 1994 are as follows:
The Trust maintains a valuation reserve equal to its net deferred tax asset as there is doubt as to whether the net deferred tax asset will be realized.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE B - - INCOME TAXES - - CONTINUED
The Trust had no income tax expense for the fiscal years ended September 30, 1995 or 1994. A reconciliation between these results and the amount of income tax expense that would result from applying Federal statutory rates to pretax income is as follows:
At September 30, 1995 the Trust had, for federal tax purposes, a net operating loss carryforward of approximately $6.4 million. The use of net operating loss carryforwards is limited by Section 382 of the Internal Revenue Code with effect for losses associated with years prior to December 28, 1992. The Trust can use approximately $ 298,000 per year of net operating loss carryforwards, plus any prior years' unused portion (limited by carryforward periods) for losses generated prior to December 28, 1992. The Trust can also use carryforwards generated post December 28, 1992. These carryforwards of approximately $5.4 million expire through 2009. The remaining carryforwards of $1.0 million may be recognized for a period through fiscal 1998 against gains on sales of properties, if any , to the extent that fair market values of these properties exceeded their tax bases as of December 28, 1992.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE C - - INVESTMENTS IN REAL ESTATE
The following is a summary of the Trust's investments in real estate and accumulated depreciation and related indebtedness at September 30, 1995:
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTES C - - INVESTMENTS IN REAL ESTATE - - CONTINUED
Following is a summary of activity in investments in real estate for the three years ended September 30, 1995:
In September, 1995 the Trust and Bank One Colorado, N. A. executed an Option Purchase Agreement. The Trust has paid Bank One an Option Deposit of $40,000 which gives the Trust the option to purchase the land under the Trust's Englewood Bank Building located in Englewood, Colorado. The purchase price for the land is $1,260,000, towards which the $40,000 Option Deposit will be applied. The Trust anticipates that the closing of the purchase will take place around February 1, 1996. The Trust currently leases this land from Bank One under the terms of a land lease which expires January 31, 2024.
On January 18, 1994 the Trust's Petroleum Club Building located in Tulsa, Oklahoma sustained a major fire. In July, 1994 the Trust and its insurance company agreed on a settlement of $6,025,000. The Trust has completed all necessary repairs and building improvements for an amount less than the settlement. The Trust has recorded $738,000 as an extraordinary income item in fiscal 1995. The cost of building improvements made as part of the building restoration was $253,000 which has been capitalized and was recorded as an extraordinary income item in fiscal 1994.
On August 26, 1994 the Trust purchased a 104,000 square foot office building located in Dallas, Texas for $3,918,000. Of this amount $2,170,000 was provided by a first mortgage loan on the property, which the Trust obtained at the time of the purchase.
NOTE D - - MORTGAGE NOTES PAYABLE
At September 30, 1995 the mortgage notes payable of the Trust are non-recourse mortgages except the first $750,000 of the $2,146,000 loan maturing August 19, 2000 which is recourse to the Trust. The following data pertains to the mortgage notes payable as of September 30, 1995.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE D - - MORTGAGE NOTES PAYABLE - - CONTINUED
Required payments on the Trust's mortgage notes payable for the succeeding five years are as follows:
On March 16, 1995 the Trust repaid a $498,000 first mortgage loan on its shopping center located in Ardmore, Oklahoma. This loan had a maturity date of June 16, 1996. On May 1, 1995 the Trust settled at a discount, a $1,017,000 first mortgage loan on its office building located in Englewood, Colorado, which had a maturity date of February 1, 1999. This settlement resulted in an extraordinary income item of $52,000. On September 30, 1994 the Trust repaid a $7,689,000 first mortgage loan on its two shopping centers located in Iowa. This loan had a maturity date of October 1, 1994. On January 28, 1993 the Trust settled a $240,000 second mortgage on one of its properties at a discount. This settlement resulted in the cancellation of the second mortgage and an extraordinary income item of $24,000. On February 10, 1993 the Trust settled a $987,000 first mortgage on the same property at a discount. This settlement resulted in the cancellation of the first mortgage and an extraordinary income item of $262,000.
Total interest expense on mortgage notes payable did not differ materially from interest paid.
NOTE E - - BANK NOTES PAYABLE
At September 30, 1995 the bank notes payable included $6,600,000 of borrowings under the 1994 Credit Agreement. At September 30, 1994 the bank notes payable included $7,689,000 of borrowings under a demand note and $3,491,000 of borrowings under a 1986 bank loan.
On September 30, 1994 the Trust borrowed $7,689,000 under the terms of a demand note from a new lender. The funds were used to repay a mortgage loan. (See Note D) This demand note, which had an interest rate of prime, was converted to a revolving line of credit ("1994 Credit") issued by National City
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE E - - BANK NOTES PAYABLE - - CONTINUED
Bank of Cleveland, Ohio ("NCB") and Manufacturer's and Traders Trust Company of Buffalo, New York ("M&T"), which was signed effective November 30, 1994. With the execution of the 1994 Credit the Trust canceled the 1990 Credit the Trust had with its previous lender (see below). The 1994 Credit is for up to $25,000,000 (but is limited by the value of the collateral provided). Of this amount a maximum of $15,000,000 is currently available and $10,000,000 will be available at the Trust's discretion upon payment of an activation fee of 3/4 of 1% on the $10,000,000. The initial term of the 1994 Credit is three years. Each year the lenders will review the 1994 Credit with the right to extend it for one additional year. Interest only payments, which is at the option of the Trust, will be at either (i) 1/4 of 1% over the prime rate; (ii) 250 basis points over the LIBOR rate; or (iii) NCB's fixed interest rate available from time to time. Additionally, a commitment fee of 3/8 of 1% is due on any funds available but not borrowed. The 1994 Credit is secured by certain of the Trust's real estate investments and contains certain covenants including a covenant for a minimum shareholders' equity. At September 30, 1995 the amount of shareholders' equity free from such restriction was approximately $5,126,000.
Effective January 1, 1994 the Trust and its former lender executed a third amendment to the December 31, 1990 Credit Agreement ("1990 Credit"). The third amendment converted the then existing five year loan to a revolving line of credit. During January and February, 1994 the Trust paid down the $4,508,000 balance of the 1990 Credit. At September 30, 1994 there were no borrowings outstanding under the 1990 Credit. This loan was canceled December 31, 1994.
The Trust also had a loan with another bank which was scheduled to mature December 25, 1993 but, had been extended to December 25, 1997. The interest rate was prime plus 1% with a minimum rate of 7.5%. The Trust was required to make monthly amortization payments based on a twenty-year amortization schedule. On January 5, 1993 the Trust made a principal payment of $722,000. This payment satisfied the required principal payments of $341,000 due December 1, 1993 and $381,000 due December 1, 1994. On March 8, 1994 the Trust made the third required payment of $666,000 which was due by December 1, 1995. On February 28, 1995 the Trust made a principal payment of $2,200,000 and on March 15, 1995 paid off the remaining balance of $1,260,000.
Total interest expense on bank notes payable did not differ materially from interest paid.
NOTE F - - SHARES OF BENEFICIAL INTEREST
On August 21, 1995 the Trust mailed an Offer to purchase for cash an aggregate of 500,000 Shares of Beneficial Interest for a price of $4.00 per share to each shareholder of the Trust. The Offer ended September 22, 1995 and at its conclusion 239,553 shares were purchased and retired by the Trust. In addition to the $4.00 per share the Trust incurred costs of $56,000 in connection with the Offer.
On April 17, 1995 the Trust repurchased 14,000 of its Shares of Beneficial Interest for $48,000 in an open market purchase. These shares were retired by the Trust.
On June 26, 1994 the Trust repurchased 103,210 of its Shares of Beneficial Interest for $296,000 in an open market purchase. These shares were retired by the Trust.
On November 23, 1993 the Trust mailed a prospectus and certificate of rights to all shareholders of record as of November 12, 1993. The certificates entitled the shareholder to the right to purchase one Share of
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE F - - SHARES OF BENEFICIAL INTEREST - - CONTINUED
Beneficial Interest of the Trust for every two Shares owned at a price of $3.25 per Share. Additionally, this offering also provided for an oversubscription privilege which entitled each holder of a right to subscribe for Shares not purchased by other holders of rights. Oversubscriptions were allocated prorata based on the number of Shares owned. The offering expired on January 28, 1994. All 1,857,969 Shares available were sold. The net proceeds to the Trust totaled $5,929,000.
On November 17, 1992 the Trust mailed a prospectus and certificate of rights to all shareholders of record as of November 12, 1992. The certificates entitled the shareholder to the right to purchase one Share of Beneficial Interest of the Trust for each Share owned at a price of $ 2.50 per Share. Additionally, the offering provided for an oversubscription privilege which entitled each holder of a right to subscribe for Shares not purchased by other holders of rights. The offering also provided that shares not purchased by shareholders could be sold to third-party investors. The offering expired on December 28, 1992. The Trust sold 1,759,165 shares of the 1,956,772 shares available in the offering. The net proceeds to the Trust totaled $4,231,000.
On February 21, 1992 the shareholders of the Trust approved the amended and extended 1983 Incentive Stock Option Plan, now titled the 1992 Stock Option Plan ("1992 Plan"). Under the 1992 Plan, an additional 200,000 Shares of Beneficial Interest of the Trust are reserved and made available for issuance of options to officers and employees of the Trust at the discretion of the Board of Trustees. The original plan had reserved 100,000 Shares. The 1992 Plan is extended to October 21, 2011. The option price is the fair market value on the date of the grant and no option shall be exercisable for less than 100% of this value. Under the 1992 Plan, the share appreciation rights granted previously will be unaffected; however, no share appreciation rights will be issued with grants of the 200,000 new Shares or the 17,500 Shares remaining from the original 100,000 Shares. Share appreciation rights entitle the holder to receive the difference between the market value on the date of exercise and the option price in Shares, cash or a combination thereof, at the discretion of the Board of Trustees.
As of September 30, 1995 options and share appreciation rights granted and remaining exercisable are as follows: January 20, 1986 - 21,750 Shares at $17.88 per Share granted, 13,250 Shares exercisable; January 16, 1989 - 44,250 Shares at $5.13 per Share granted, 30,400 Shares exercisable; January 1, 1993 - 125,000 Shares at $2.625 per Share granted, 125,000 Shares exercisable; January 1, 1994 - 37,500 Shares at $3.0625 per Share granted, 37,500 Shares exercisable; and January 1, 1995 - 6,000 Shares at $3.00 per Share granted, 6,000 Shares exercisable.
NOTE G - - REAL ESTATE SALES
The fiscal 1995 gains on sales of real estate totaling $2,499,000 include the following: (i) $452,000 which represents the gain the Trust realized on its February, 1995 $2,650,000 sale of the 197 room Quality Hotel located at the airport in St. Louis, Missouri; (ii) $1,859,000 represents the gain the Trust realized on its March, 1995 $2,595,000 sale of the 124 unit Parkwood Place Apartments located in Greeley, Colorado; (iii) $97,000 represents the gain the Trust realized on its March, 1995 $800,000 sale of the 51,000 square foot Walnut Hill West office building located in Dallas, Texas; and (iv) $91,000 represents the gain the Trust realized on its May, 1995 $212,000 sale of 17.7697 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage for the total $212,000 purchase price in connection with the sale.
The fiscal 1994 gains on sales of real estate totaling $445,000 include the following: (i) $361,000 which represents the gain the Trust realized on its March, 1994 $834,000 sale of 70 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage for $290,000 of the purchase price in
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE G - - REAL ESTATE SALES - - CONTINUED
connection with the sale; and (ii) $84,000 which represents the gain the Trust realized on its August, 1994 $198,000 sale of 16.6 acres of vacant land located in Akron, Ohio.
The fiscal 1993 gains on sales of real estate totaling $563,000 include the following: (i) $337,000 which represents the gain the Trust realized on its November, 1992 $950,000 sale of four single-story office-warehouse buildings containing 42,162 square feet on 2.68 acres of land within the Walnut Stemmons Office Park, Dallas, Texas; and (ii) $226,000 which represents the gain the Trust realized on its April, 1993 $541,000 sale of 46.4 acres of vacant land located in Akron, Ohio. The Trust received a purchase money mortgage note for $150,000 of the purchase price in connection with the sale.
NOTE H - - LITIGATION
The Trust is involved in a number of legal proceedings arising in the usual course of its business activities, none of which in the opinion of Management, is expected to have a material adverse effect on the financial statements.
NOTE I - - PENSION PLAN
The Trust has a defined contribution pension plan covering all full-time employees of the Trust. Contributions are determined as a set percentage of each covered employee's annual cash compensation. Contributions by the Trust are accrued during the year and paid prior to the filing of the Trust's federal income tax return for said year. For fiscal 1995 the Trust accrued $24,000 for contributions to the pension plan (for fiscal 1994 - $31,000 and fiscal 1993 - $29,000).
NOTE J - - OPERATING LEASES
Minimum future rentals due the Trust on noncancelable leases for the succeeding five fiscal years and thereafter are as follows: 1996, $7,162,000; 1997, $5,471,000; 1998, $4,391,000; 1999, $3,340,000; 2000, $2,662,000; and $11,576,000 thereafter. Certain leases provide for contingent rentals. The Trust received $123,000 of contingent rentals for 1995 ($131,000 for 1994 and $202,000 for 1993). The Trust's carrying amount at September 30, 1995 of these real estate investments consists of land of $6,974,000 and improvements of $56,201,000, less accumulated depreciation of $22,483,000.
NOTE K - - SUBSEQUENT EVENTS
The Trustees, at their July 25, 1995 meeting, declared a quarterly cash distribution of $.04 per Share of Beneficial Interest payable October 20, 1995 to shareholders of record as of October 6, 1995. At their October 24, 1995 meeting, the Trustees declared a quarterly cash distribution of $ .04 per Share payable January 19, 1996 to shareholders of record as of January 5, 1996.
NOTES TO FINANCIAL STATEMENTS - - CONTINUED
NOTE L - - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended September 30, 1995 and 1994 is as follows:
SCHEDULE XI -- REAL ESTATE AND ACCUMULATED DEPRECIATION
CLEVETRUST REALTY INVESTORS
As of September 30, 1995
SCHEDULE XI - - REAL ESTATE AND ACCUMULATED DEPRECIATION - - CONTINUED
CLEVETRUST REALTY INVESTORS
(3) The Trust's aggregate cost for federal income tax purposes as of September 30, 1995 was $70,268,000. The Trust's federal income tax return for the year ended September 30, 1995 has not yet been filed.
(4) Depreciation lives exclude tenant improvements which are depreciated over the specific lease term involved.
(5) The Trust owns the building improvements subject to a long term ground lease.
SCHEDULE XII - - MORTGAGE LOANS ON REAL ESTATE
CLEVETRUST REALTY INVESTORS
September 30, 1995
SCHEDULE XII - - MORTGAGE LOANS ON REAL ESTATE - - CONTINUED
CLEVETRUST REALTY INVESTORS
(1) Reconciliation of carrying amount of mortgage loans:
(2) The carrying amount at September 30, 1995 of the mortgage loans for federal income tax purposes was $303,000.
(3) Interest only payments are due quarterly in the arrears on the 1st day of each March, June, September and December for all interest accrued to such date. Principal payments of $5,375.00 per lot are to be made from the proceeds of the sale of each lot of the vacant land securing this loan until all principal is paid or August, 1996 at which time all unpaid principal is due. Notwithstanding anything to the contrary, provided Borrower is not otherwise in default, this loan shall be interest free until September 1, 1995.
(4) Interest only payments are due quarterly in the arrears on the 1st day of each June, September, December, and March for all interest accrued to such date. Principal payments of $16,303.00 per lot are to be made frrom the proceeds of the sale of each lot of the vacant land securing this loan until all principal is paid or May, 1997 at which time all unpaid principal is due.
CLEVETRUST REALTY INVESTORS
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1995
EXHIBIT INDEX
CLEVETRUST REALTY INVESTORS
ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED SEPTEMBER 30, 1995
EXHIBIT INDEX
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