ITEM 1. BUSINESS.
Metropolitan Realty Corporation (the "Company") is a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Tax Code"). The Company was incorporated under Michigan law on November 13, 1986. In November 1988, the Company issued 4,512,169 shares of common stock in an initial public offering and received net proceeds of $43,200,851.
As a REIT, the Company is required to invest most of its assets in real estate assets, cash and government securities. The Company intends to invest substantially all of its assets in mortgage loans to real estate projects located in southeastern Michigan in the counties of Wayne and Macomb. At December 31, 1994, the Company's total mortgage loan portfolio is invested 74% in projects located in the City of Detroit, 11% in projects located in the County of Macomb, and 15% in projects located in the County of Wayne outside of the City of Detroit.
The Company's mortgage loans include financing for industrial and mixed-use facilities, office buildings, and retail and residential centers. The Company has favored investments that will provide a competitive return and permanent financing for projects which were constructed with union labor. All mortgage loans to date are collateralized by a first lien on real property. At December 31, 1994, the Company's largest loan approximates 10% of its total assets and the carrying value of all mortgage loans approximates 62% of its total assets.
Funds that have not yet been invested in mortgage loans are primarily invested in marketable mortgage-backed securities until needed for the Company's operations or investments in mortgage loans. As of December 31, 1994, approximately 26% of the Company's net assets remained invested in marketable mortgage-backed securities. The Company believes that its mortgage loans and marketable mortgage-backed securities will provide a competitive economic return to its shareholders while protecting their capital.
The Company continues to evaluate real estate projects and intends to liquidate its remaining marketable securities to make additional mortgage loans to qualified projects located in southeastern Michigan. Although the Company has competed and is competing with financial institutions such as banks, insurance companies, savings and loan associations, mortgage bankers, pension funds and other real estate investment vehicles with investment objectives similar to those of the Company, the Company believes it has targeted a market niche which is underserved.
During 1994, the Company had one full-time administrative employee. The day-to-day operations of the Company are administered by the Executive Vice President who serves on a part- time basis under the direction of the President and the Executive Committee. Members of the Board of Directors serve without pay as officers and committee members and devote a considerable amount of time to the administration and operations of the Company.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's executive offices are located at Suite 748, 535 Griswold, Detroit, Michigan 48226. The Company rents this office space under a month-to-month lease which provides for a monthly rental of approximately $1,426, which is comparable to prevailing rentals for similar facilities. The Company's offices are suitable and adequate for the current operations of the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending or, to the knowledge of the Company, threatened, to which the Company is a party or by which its property may be bound.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders since the Annual Meeting of Shareholders held June 10, 1994.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the American Stock Exchange (the "Exchange"). The Company is listed for trading on the Exchange under the symbol "MET". The following table sets forth the high and low sales prices on the Exchange and dividends paid per share during each quarter of the years ended December 31, 1994 and 1993:
As of March 15, 1995, 4,532,169 shares of common stock were issued and outstanding and the number of shareholders of record was 53.
The Company intends to continue to pay cash dividends to shareholders on a quarterly basis in aggregate amounts sufficient to distribute at least 95% of its "real estate investment trust taxable income" in order to maintain its status as a REIT under the Tax Code. The Company will continue to furnish annually to each shareholder a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gain.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data as of December 31, 1994, 1993, 1992, 1991 and 1990 and for the years then ended:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
During fiscal year 1994, one of the Company's mortgage loans with an outstanding principal balance of $3,300,000 matured and was repaid. In addition, one of the Company's mortgage loans with an outstanding principal balance of approximately $1,200,000 was prepaid with prepayment penalties approximating $114,000. The Company's net investment in mortgage loans to real estate projects represented 62% of its assets, or $25,393,979, at December 31, 1994 and 71% of its assets, or $29,587,662, at December 31, 1993. The yields on the Company's outstanding mortgage loans range from 8% to 12.25%. The weighted average yield of earning mortgage loans is 10.58% at December 31, 1994, as compared to 10.33% at December 31, 1993. The weighted average term of outstanding mortgage loans is 9.1 years. At December 31, 1994, the Company had no outstanding loan commitments. The amount of foreclosed property held for sale, net of valuation allowance, represents 2% of the Company's assets, or $900,000, at December 31, 1994 and 5% of its assets, or $1,960,000, at December 31, 1993. The amount of marketable mortgage-backed (Federal National Mortgage Association and Federal Home Loan Mortgage Corporation) securities held by the Company during 1994 averaged $8,164,000 and earned an average yield of 4.6%, as compared to average marketable mortgage-backed security holdings of $8,101,000 which earned an average yield of 5.1% during 1993. The average yield on all performing interest earning assets was 8.9% for the year ended December 31, 1994 and 9.1% for the year ended December 31, 1993.
Investment income from marketable mortgage-backed securities decreased $51,851 to $370,725 for the year ended December 31, 1994 from $422,576 for the year ended December 31, 1993. Of the decrease, $9,508 was the result of a decrease in the average amount invested in marketable securities and $42,343 was the result of a decrease in the average yield earned.
Investment income from mortgage loans decreased $40,646 to $3,073,230 for the year ended December 31, 1994 from $3,113,876 for the year ended December 31, 1993. Of the decrease, $210,745 was the result of a decrease in average mortgage loans offset by a $45,326 increase in the stated average yield on all mortgage loans, and a $124,773 increase in interest income from loans which were non-earning at December 31, 1993.
Operating expenses increased 25% to $1,270,478 for the year ended December 31, 1994 from $1,015,087 for the year ended December 31, 1993. The majority of this increase is due to a $957,717 increase in net loss from foreclosed property held for sale, which was largely attributable to an increase in the provision for valuation allowance, offset by a $461,500 decrease in the allowance for loan losses. Other operating expenses decreased $240,826 to $436,562 for the year ended December 31, 1994 from $677,388 for the year ended December 31, 1993. This decrease is due to a $147,363 reduction in general and administrative expenses, primarily as a result of decreased professional service fees, and a $93,463 reduction in amortization of organization costs, which became fully amortized in 1993.
Two mortgage loans with net carrying values aggregating $3,709,891 at December 31, 1994, collateralized by shopping centers in Detroit, Michigan and personal guarantees aggregating approximately $498,000, were in default at December 31, 1991 for nonpayment of principal, interest and late charges. The mortgagors are affiliated through a common borrower. In 1991, the Company established a loan loss reserve to reduce the carrying value of these loans to their estimated net realizable value. During 1992, the Company entered into loan modification agreements with these borrowers, pursuant to which the borrowers agreed to bring the loans current by December 31, 1992 and agreed to have the deeds to the properties placed in escrow. The Company also exercised its right to receive rental payments directly from the tenants. All events of default were cured on February 1, 1993 and the loans are now current. The Company continues to exercise its right to receive assigned rents directly from the tenants and the deeds to the properties remain in escrow. Both of these notes are classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying value of these loans to their estimated net realizable value.
A mortgage loan with a carrying amount of $1,369,349 at December 31, 1994, collateralized by an apartment building located in Detroit, Michigan, was in default at December 31, 1992 for nonpayment of principal, interest and late charges. During 1993, the Company entered into a loan modification agreement with the borrower which cured the events of default. Pursuant to this agreement the interest rate has been reduced, effective April 1, 1993, from 11.125% to 8% through April 1, 1995 and to 9.5% thereafter until maturity. This agreement also deferred payments until November 1993, when monthly installments of interest only commenced and continued through April 1994. Commencing May 1994, varying installments of principal and interest are due monthly until maturity, at which time the remaining unpaid principal and accrued interest is due. This agreement also includes personal guarantees aggregating approximately $570,000 at December 31, 1994. This loan is now current and is classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying amount of the loan to its estimated net realizable value. The Company also has three additional loans, which are carried at an aggregate value of approximately $1.9 million at December 31, 1994, to entities affiliated with this borrower through common ownership which are all current and are classified as mortgage notes, earning at December 31, 1994.
Management reviews, on a regular basis, factors which may adversely affect its mortgage loans, including occupancy levels, rental rates and property values. It is possible that economic conditions in southeastern Michigan and the nation in general may adversely affect certain of the Company's other loans. The Company believes that the allowance for loan losses of $1,000,000 at December 31, 1994 is adequate to reflect mortgage loans at their estimated net realizable value.
At December 23, 1992, the Company obtained an apartment building located in Detroit, Michigan through a foreclosure sale. This property was the collateral for a construction loan under which the borrower defaulted during 1992. Under Michigan law, title passed to the Company on June 23, 1993 at the expiration of a six month redemption period. The carrying value of the property was written down to its estimated fair value at the time of foreclosure of $2,100,000, which resulted in a $639,000 writeoff against the allowance for loan losses. The fair value was determined based upon a July 1992 independent appraisal of the property. A valuation allowance of $140,000 was also established at the time of foreclosure for the estimated costs to sell the property. At December 31, 1994, the carrying value of the property has been reduced to $900,000 to reflect an updated property valuation based on the results of the Company's marketing efforts to locate a buyer for the property. The Company intends to continue to actively market this property for sale during 1995.
During 1994, the Company reached settlements with the guarantors of the foreclosed loan aggregating $320,000. These settlements are payable over four to eight years, with interest rates ranging from non-interest bearing to 7.5%. Income from settlements is recorded as miscellaneous income when received and totalled $43,000 for the year ended December 31, 1994. The property's operating income and expenses from the date of foreclosure are reflected in the statement of operations as net loss from foreclosed property held for sale and total $1,295,416 for the year ended December 31, 1994.
Net investment income decreased by 4% to $2,587,550, or $.57 per share, for the year ended December 31, 1994 from $2,700,898, or $.60 per share, for the year ended December 31, 1993. The decrease is attributable to a $957,717 increase in net loss from foreclosed property held for sale, offset by a $461,500 reduction in the allowance for loan losses, a $147,363 reduction of general and administrative costs, a $93,463 reduction in amortization of organization costs, and a $142,043 increase in total income.
Investment income from FNMA marketable securities decreased $245,920 to $422,576 for the year ended December 31, 1993 from $668,496 for the year ended December 31, 1992. Of the decrease, $134,519 was the result of a decrease in the average amount invested in marketable securities and $111,401 was the result of a decrease in the average yield earned.
Investment income from mortgage loans increased $105,192 to $3,113,876 for the year ended December 31, 1993 from $3,008,684 for the year ended December 31, 1992. Of the increase, $354,411 was the result of an increase in average mortgage loans offset by a $38,918 decrease in the stated average yield on all mortgage loans, a $54,381 decrease in interest income due to property received in foreclosure and a $155,920 decrease in interest income due to the Company's decision to discontinue accruing interest on certain loans.
Operating expenses decreased 41% to $1,015,087 for the year ended December 31, 1993 from $1,716,288 for the year ended December 31, 1992. The majority of this decrease is due to a $900,000 decrease in the allowance for loan losses offset by a $337,699 net loss from foreclosed property held for sale. Other operating expenses, consisting primarily of general and administrative expenses, decreased $138,900 as a result of decreased professional fees.
Net investment income increased by approximately 28% to $2,700,898, or $.60 per share, for the year ended December 31, 1993 from $2,112,662, or $.47 per share, for the year ended December 31, 1992. The increase in net investment income from 1992 to 1993 is primarily attributable to a $900,000 decrease in the allowance for loan losses expense offset by a $112,965 decline in total income.
Investment income from marketable securities decreased $480,229 to $668,496 for the year ended December 31, 1992 from $1,148,725 for the year ended December 31, 1991. Of the decrease, $275,932 was the result of a decrease in the average amount invested in marketable securities and $204,297 was the result of a decrease in the average yield earned.
Investment income from mortgage loans increased $341,369 to $3,008,684 for the year ended December 31, 1992 from $2,667,315 for the year ended December 31, 1991. Of the increase, $390,501 was the result of an increase in average investment in mortgage loans and $50,074 was the result of an increase in average yield offset by a $99,206 decrease in average yield due to the Company's decision to discontinue accruing interest on loans in default.
During 1992, the Company increased its allowance for loan losses by $900,000. Operating expenses other than the allowance for loan losses decreased 3.7% from $846,733 for the year ended December 31, 1991 to $816,288 for the year ended December 31, 1992. Operating expenses other than the allowance for loan losses during both 1992 and 1991 consisted primarily of general and administrative expenses.
Net investment income increased by approximately 9% to $2,112,662, or $.47 per share, for the year ended December 31, 1992 from $1,934,853, or $.43 per share, for the year ended December 31, 1991. The increase in net investment income from 1991 to 1992 was primarily attributable to a $440,500 decrease in the allowance for loan losses expense offset by a $306,236 decline in total income.
The Company intends to continue to invest its available funds at competitive market rates in mortgage loans to real estate projects located in southeastern Michigan. Cycles in the local and national economy have affected and could continue to affect the Company's ability to invest its remaining funds in mortgage loans and the yields attainable on such investments. Decreases in market interest rates may result in lower returns on future mortgage loans than on the mortgage loans closed to date. The Company expects to have the balance of its available assets fully invested in mortgage loans by the end of 1995.
Liquidity and Capital Resources
Funds that have not yet been invested in mortgage loans are primarily invested in marketable mortgage-backed securities until needed for the Company's operations or investments in mortgage loans. Income and principal received with respect to the Company's investments in mortgage loans are also invested in marketable mortgage backed securities pending distribution to shareholders in the form of dividends or reinvestment in mortgage loans. At December 31, 1994, the Company had $26,393,979 invested in mortgage loans, $2,034,134 invested in real estate owned, $10,783,048 invested in marketable mortgage-backed securities and approximately $3,298,886 invested in money market funds.
At December 31, 1994, the Company had no outstanding loan commitments. The Company anticipates that its sources of cash are more than adequate to meet its liquidity needs.
On March 14, 1995, the Company's Board of Directors announced its preliminary approval for the private placement of asset-backed bonds through a wholly owned subsidiary to be formed. The Company expects to generate proceeds of approximately $50 million. At December 31, 1994, $131,000 of professional fees have been incurred and deferred in connection with this transaction.
Net cash generated by operating activities during 1994 aggregated $2,957,011 including $3,087,188 in net investment income adjusted for noncash depreciation and amortization expense, the valuation provisions for mortgage loans and foreclosed property held for sale, and amortization of net loan origination fees.
Net cash provided by investing activities during 1994 aggregated $1,090,650 and consisted primarily of loan repayments and collections of principal from marketable securities offset by loan disbursements and purchases of marketable securities. The Company collected $4,876,191 of loan repayments and net commitment fees and purchased $4,767,232 of marketable securities with the proceeds. Collections of principal from marketable securities totalled $1,093,691. Loan disbursements of $150,000 represent a final disbursement to a current borrower.
Financing activities in 1994 consisted of dividend payments to shareholders of $2,855,266 which represented $.63 per outstanding share.
The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" (SFAS 115), on January 1, 1994. Under SFAS No. 115, marketable securities available for sale are carried at market value and unrealized gains and losses are included in a separate component of shareholders' equity. At December 31, 1994, shareholders' equity includes net unrealized holding losses on marketable securities of $356,949. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle.
The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments," and SFAS 114, "Accounting by Creditors for Impairment of a Loan", which was amended by SFAS 118, "Accounting by Creditors for Impairment of Loan Income Recognition and Disclosures". These pronouncements require the disclosure of the fair value of financial instruments along with the valuation method and significant assumptions used, and the measurement of the impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, respectively. The FASB requires adoption of these pronouncements in 1995. Based on current information available, management does not believe these pronouncements will have a significant impact on the Company's financial statements.
The Company's policy is to declare and pay cash dividends on a quarterly basis. The Company declared and paid dividends aggregating $.63 per share during the year ended December 31, 1994, compared to $.54 per share during the year ended December 31, 1993 and $.70 per share during the year ended December 31, 1992. The Company declared a dividend of $.13 per share of common stock to its shareholders of record on March 21, 1995 which will be paid on March 31, 1995 from the Company's money market funds.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company, consisting of balance sheet, statement of operations, statement of shareholders' equity, statement of cash flows and the notes to financial statements, are set forth in the separate financial section which begins on page and is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in the Company's independent public accountants during the past two fiscal years and the Company does not disagree with such accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item 10 has been omitted as the Company intends to file with the Securities and Exchange Commission (the "SEC") not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the captions "Election of Directors" and "Executive Officers and Executive Compensation" is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 has been omitted as the Company intends to file with the SEC not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the caption "Executive Officers and Executive Compensation" is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 has been omitted as the Company intends to file with the SEC not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the caption "Principal Shareholders" is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 has been omitted as the Company intends to file with the SEC not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. Documents Filed as part of Report. The following documents are filed as part of this Report.
1. A list of the financial statements required to be filed as part of this Form 10-K are shown in the "Index to the Financial Statements and Schedule" filed herewith.
2. The financial statement schedule required to be filed as a part of this Form 10-K is shown in the "Index to the Financial Statements and Schedule" filed herewith.
3. A list of the exhibits required by Item 601 of the Regulation S-K to be filed as a part of this Form 10-K are shown in the "Index to Exhibits" filed herewith.
b. Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last quarter of 1994.
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.
Dated: March 25, 1995 METROPOLITAN REALTY CORPORATION
By: /s/ Jay B. Rising ---------------------------------- Jay B. Rising, President (Principal Executive Officer and Principal Financial Officer)
And By: /s/ Russell P. Flynn ----------------------------------
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 dates indicated.
Signature Title Date --------- ----- ----
/s/ Jay B. Rising Attorney-In-Fact March 25, 1995 -------------------------- *Jay B. Rising
* Director March 25, 1995 -------------------------- Daniel L. Boone
* Director March 25, 1995 -------------------------- David M. Diegel
* Director March 25, 1995 -------------------------- Wayne S. Doran
* Director March 25, 1995 -------------------------- Russell P. Flynn
* Director March 25, 1995 -------------------------- David B. Hanson
* Director March 25, 1995 -------------------------- Kenneth L. Hollowell
* Director March 25, 1995 -------------------------- Robert G. Jackson
* Director March 25, 1995 -------------------------- Richard P. Kughn
* Director March 25, 1995 -------------------------- F. Thomas Lewand
* Director March 25, 1995 -------------------------- Ernest Lofton
* Director March 25, 1995 -------------------------- Daniel F. McNamara
* Director March 25, 1995 -------------------------- Robert H. Naftaly
* Director March 25, 1995 -------------------------- Timothy L. Nichols
Director March 25, 1995 -------------------------- Joel A. Schwartz
* Director March 25, 1995 -------------------------- Oliver H. Smith
Signature Title Date --------- ----- ----
* Director March 25, 1995 -------------------------- Frank D. Stella
* Director March 25, 1995 -------------------------- Marc Stepp
Director March 25, 1995 -------------------------- James M. Tervo
* Director March 25, 1995 -------------------------- Samuel H. Thomas, Jr.
* Director March 25, 1995 -------------------------- R. Douglas Trezise
* Director March 25, 1995 -------------------------- Ronald C. Yee
INDEX TO THE FINANCIAL STATEMENTS AND SCHEDULE ____________
PAGES
REPORT OF INDEPENDENT ACCOUNTANTS
BALANCE SHEET, DECEMBER 31, 1994 AND 1993
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTES TO FINANCIAL STATEMENTS -
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Metropolitan Realty Corporation:
We have audited the financial statements and the financial statement schedule of Metropolitan Realty Corporation listed on page of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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 Metropolitan Realty Corporation as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan March 10, 1995
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS ____________
1. ORGANIZATION:
Metropolitan Realty Corporation (the "Company"), incorporated November 13, 1986, was organized to qualify as a real estate investment trust under the provisions of the Internal Revenue Code.
2. ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115), effective January 1, 1994. Under SFAS No. 115, marketable securities available for sale are carried at market value and unrealized gains and losses are included in a separate component of shareholders' equity. Shareholders' equity at December 31, 1994 includes net unrealized holding losses on marketable securities of $356,949. In accordance with the provisions of SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting the provisions of SFAS No. 115 was not significant. Prior to January 1, 1994, marketable securities were carried at the lower of cost or market. Marketable securities at December 31, 1994 and 1993 consist of Federal National Mortgage Association and Federal Home Loan Mortgage Corporation mortgage backed securities. Realized gains or losses on sales of securities are determined based upon specific identification. The realized net loss on marketable securities, included in investment income in the accompanying statement of operations, resulted from called securities and aggregated $16,557 for the year ended December 31, 1994 and $24,223 for the year ended December 31, 1993. At December 31, 1994, all marketable securities are considered available for sale.
Allowance for Loan Losses
The Company provides for possible losses on its portfolio of mortgage notes receivable based on an evaluation of each mortgage note. In determining the allowance for possible losses, the Company has considered various indicators of value, including market evaluations of the underlying collateral, the cost of money, operating cash flow from the property during the projected holding period and expected capitalization rates applied to the stabilized net operating income of the specified property.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
2. ACCOUNTING POLICIES, continued:
The allowance is based upon management's estimates and ultimate losses may vary from the current estimates. These estimates are periodically reviewed, and as adjustments become necessary, they are reported in the statement of operations in the period in which they become known.
Foreclosed Property Held for Sale
Property acquired through loan foreclosure is initially recorded at the lesser of mortgage loan balance or fair value at the date of foreclosure. Losses, if any, attributable to the excess of the recorded investment including accrued interest over fair value are charged to the allowance for loan losses on mortgage loans at the time of foreclosure. A valuation allowance is also established at the time of foreclosure for the estimated costs to sell the property as the Company is dependent on the liquidation of the property for the recovery of its investment in foreclosed real estate. Subsequent to foreclosure, the property is carried at the lower of cost or fair value less estimated costs to sell. The property's operating income and expenses from the date of foreclosure are reflected in the statement of operations. Depreciation of the property commences one year from the date of foreclosure. Income from guarantor settlements is recognized when received.
Organization Costs
Certain costs related to the organization of the Company were capitalized at cost and amortized on a straight-line basis over 60 months. Organization costs became fully amortized in fiscal 1993.
Income Taxes
The Company intends to operate at all times to qualify as a real estate investment trust under the provisions of the Internal Revenue Code. In general, each year qualification is met, income is not subject to federal income tax at the Company level to the extent distributed to shareholders.
Revenue Recognition
Loan origination fees received from the borrower, in excess of loan origination costs paid, are amortized to interest income using the effective interest method over the life of the mortgage loan.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
2. ACCOUNTING POLICIES, continued:
Interest income is accrued when earned. The Company discontinues the accrual of interest income when circumstances exist which cause the collection of interest to be doubtful. The determination to discontinue accruing interest is made after a review by the Company's management of all relevant facts, including delinquency of principal and/or interest, and financial stability of the borrower. Loans classified as nonearning are loans on which the accrual of interest has been discontinued.
Other
Certain prior year accounts have been reclassified to conform with current year presentations.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE:
Mortgage notes receivable as of dates indicated are summarized as follows:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, continued:
A reconciliation of the carrying value of mortgage notes receivable for the years ended December 31, 1994, 1993 and 1992 is as follows:
During the year ended December 31, 1994, the Company earned approximately $395,000 or 10.2% of its total income on one mortgage note with a carrying value of approximately $4,238,000.
Two mortgage notes carried at an aggregate carrying value of approximately $3,700,000 and four mortgage notes carried at an aggregate carrying value of approximately $3,200,000 at December 31, 1994 made with entities affiliated through common ownership earned the Company $448,941 and $321,079, respectively, during the year ended December 31, 1994.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, continued:
Two mortgage loans with net carrying values aggregating $3,709,891 at December 31, 1994, collateralized by shopping centers in Detroit, Michigan and personal guarantees aggregating approximately $498,000, were in default at December 31, 1991 for nonpayment of principal, interest and late charges. The mortgagors are affiliated through a common borrower. In 1991, the Company established a loan loss reserve to reduce the carrying value of these loans to their estimated net realizable value. During 1992, the Company entered into loan modification agreements with these borrowers, pursuant to which the borrowers agreed to bring the loans current by December 31, 1992 and agreed to have the deeds to the properties placed in escrow. The Company also exercised its right to receive rental payments directly from the tenants. All events of default were cured on February 1, 1993 and the loans are now current. The Company continues to exercise its right to receive assigned rents directly from the tenants and the deeds to the properties remain in escrow. Both of these notes are classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying value of these loans to their estimated net realizable value.
A mortgage loan with a carrying amount of $1,369,349 at December 31, 1994, collateralized by an apartment building located in Detroit, Michigan, was in default at December 31, 1992 for nonpayment of principal, interest and late charges. During 1993, the Company entered into a loan modification agreement with the borrower which cured the events of default. Pursuant to this agreement the interest rate has been reduced, effective April 1, 1993, from 11.125% to 8% through April 1, 1995 and to 9.5% thereafter until maturity. This agreement also deferred payments until November 1993, when monthly installments of interest only commenced and continued through April 1994. Commencing May 1994, varying installments of principal and interest are due monthly until maturity, at which time the remaining unpaid principal and accrued interest is due. This agreement also includes personal guarantees aggregating approximately $570,000 at December 31, 1994. This loan is now current and is classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying amount of the loan to its estimated net realizable value. The Company also has three additional loans, which are carried at an aggregate value of approximately $1.9 million at December 31, 1994, to entities affiliated with this borrower through common ownership which are all current and are classified as mortgage notes, earning at December 31, 1994.
The Company evaluates its portfolio of mortgage loans on an individual basis, comparing the amount at which the investment is carried to its estimated net realizable value. In making its evaluations, the Company has assumed that it will be able to acquire property collateralizing mortgage loans by foreclosure, if deemed appropriate, and hold and dispose of such assets and real estate currently owned in the ordinary course of business to maximize the return to the Company. The evaluations and related assumptions are dependent upon current estimates of future operations, proceeds, costs, events and general market and economic conditions all of which are influenced by many unpredictable factors. Accordingly, the ultimate realizations of the Company's investments, including future income, may differ from amounts presently estimated. The Company believes that the allowance for loan losses of $1,000,000 at December 31, 1994 is adequate to properly reflect the portfolio of mortgage loans at estimated net realizable value.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. REAL ESTATE OWNED:
At December 23, 1992, the Company obtained an apartment building located in Detroit, Michigan through a foreclosure sale. This property was the collateral for a construction loan under which the borrower defaulted during 1992. Under Michigan law, title passed to the Company on June 23, 1993, at the expiration of a six month redemption period. The carrying value of the property was written down to its estimated fair value at the time of foreclosure of $2,100,000, which resulted in a $639,000 writeoff against the allowance for loan losses. The fair value was determined based upon a July 1992 independent appraisal. A valuation allowance of $140,000 was also established at the time of foreclosure for the estimated costs to sell the property. At December 31, 1994, the carrying value of the property has been reduced to $900,000 to reflect an updated property valuation based on the results of the Company's marketing efforts to locate a buyer for the property.
During 1994, the Company reached settlements with the guarantors of the foreclosed loan aggregating $320,000. These settlements are payable over four to eight years, with interest rates ranging from non-interest bearing to 7.5%. The settlements bear interest at an average rate of 6%. Income from the settlements is recognized by the Company when received and is recorded as miscellaneous income on the statement of operations. Settlement income totalled $43,000 for the year ended December 31, 1994.
The property's operating income and expenses from the date of foreclosure are reflected in the statement of operations. The net loss from foreclosed property held for sale, totalling $1,295,416 for the year ended December 31, 1994 and $337,699 for the year ended December 31, 1993, consisted of the following:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
5. FEDERAL INCOME TAX:
A real estate investment trust is not subject to federal income tax on taxable income distributed to its shareholders during its fiscal year and subsequent year, but prior to filing its federal tax return. If, however, the real estate investment trust has retained income within the limits allowed under the federal tax laws, it must pay tax at corporate rates on its undistributed income. Furthermore, if the real estate investment trust fails to distribute, during the fiscal year, an amount equal to 85% of its taxable income for that year, it is subject to a 4% excise tax on the shortfall. The excise tax is not deductible for federal income tax purposes. Income for tax and financial reporting purposes is reconciled as follows:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
6. RELATED PARTY TRANSACTIONS:
The Company was involved in various transactions with affiliates as follows:
o One of the Company's legal counselors is also a member of the Company's Board of Directors. Fees for legal services provided by the director's law firm amount to $153,296, of which $70,076 are deferred by the Company (see Note 8), $57,599 and $186,285 for the years ended December 31, 1994, 1993 and 1992, respectively. Accrued legal fees of $22,524 and $3,087 are included in accounts payable in the accompanying balance sheet at December 31, 1994 and 1993, respectively.
o Fees aggregating $19,831, $19,261 and $23,176 for the years ended December 31, 1994, 1993 and 1992, respectively, were earned by a shareholder of the Company for providing various investment and other services to the Company.
o Consulting fees under a contractual agreement aggregating $42,400, $40,000 and $56,442 were earned by an officer of the Company in 1994, 1993 and 1992 respectively. Accrued consulting fees of $1,667 are included in accounts payable in the accompanying balance sheet at December 31, 1993.
7. DIVIDEND DECLARATION:
Under pertinent provisions of the Internal Revenue Code, a real estate investment trust may consider a dividend declared in a subsequent year to be a distribution of income of the immediately prior year and thus reduce income subject to income tax. On March 10, 1995, the Board of Directors of the Company declared a cash dividend of $.13 per share of common stock to its shareholders of record on March 21, 1995, payable on March 31, 1995. Of this dividend, $.06 will be paid from income earned by the Company in 1994. This dividend will be taxable to shareholders as ordinary income.
8. SUBSEQUENT EVENT:
On March 14, 1995, the Company's Board of Directors announced its preliminary approval for the private placement of asset-backed bonds through a wholly-owned subsidiary to be formed. The Company expects to generate proceeds of approximately $50 million. At December 31, 1994 $131,000 of professional fees have been incurred and deferred in connection with this transaction.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
9. INTERIM FINANCIAL INFORMATION (unaudited):
Continued
Continued
INDEX TO EXHIBITS
Page Exhibit Incorporated Herein Filed Number No. Description by Reference to Herewith Herein ------------------------------------------------------------------------------- 3.1 Second Restated Exhibit 3.1 to the Articles of Company's Form 10-K for Incorporation the fiscal year ended December 31, 1988 ------------------------------------------------------------------------------- 3.2 Amendments to ByLaws Exhibit 3.2 to 1991 10-K adopted May 17, 1991 ------------------------------------------------------------------------------- 3.3 Restated ByLaws adopted Exhibit 3.3 to 1991 10-K July 19, 1989, as amended October 27, 1989, May 15, 1990 and May 17, 1991 ------------------------------------------------------------------------------- 10.1 Investment Management Exhibit 10.2 to 1988 Service Agreement 10-K dated February 15, 1989 between the Company and NBD Bank, N.A. (formerly National Bank of Detroit) ------------------------------------------------------------------------------- 10.2 Agency and Consulting Exhibit 10.2 to 1990 Agreement dated as of 10-K November 15, 1989 between the Company and Walters & Associates, Inc. ------------------------------------------------------------------------------- 10.3 Letter agreement dated Exhibit 10.1 to 1990 July 1990 between the 10-K Company and Acquest Capital Management, Inc. ------------------------------------------------------------------------------- 10.4 Buhl Building Lease Exhibit 10.4 to 1991 dated April 25, 1991 10-K between the Company and Buhl Realty Company ------------------------------------------------------------------------------- 10.5 Agency and Consulting Exhibit 10.5 to 1992 Agreement dated as of 10-K February 4, 1993 between the Company and Mattar Consulting Services, Inc. ------------------------------------------------------------------------------- 10.6 First lease amendment Exhibit 10.6 to 1992 to Buhl Building Lease 10-K dated May 14, 1992 between the Company and Buhl Realty Company ------------------------------------------------------------------------------- 10.7 Letter agreement dated Exhibit 10.7 to 1993 March 8, 1994 between 10-K the Company and Mattar Consulting Services, Inc. ------------------------------------------------------------------------------- 10.8 Second lease amendment Exhibit 10.8 to 1993 to Buhl Building Lease 10-K dated May 14, 1992 between the Company and Buhl Realty Company ------------------------------------------------------------------------------- 10.9 Minutes of Executive Committee of the Board of Directors meeting dated X E-2 March 3, 1995 modifying Agency and Consulting Agreement dated as of February 4, 1993 between the Company and Mattar Consulting Services, Inc. ------------------------------------------------------------------------------- 25 Powers of Attorney X E-3 -------------------------------------------------------------------------------
E-1